This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Could you speak to, you know, how you've dealt with fuel cost increases in the quarter and the extent to which you've been able to pass them on to customers? And also sort of with labor and equipment and components, have you been able to pass that through reasonably well, or have there been instances where you've had to go back to the customer and get some relief? I'm just kind of curious, you know, what the process has been like for some of those challenges in the quarter. Thanks.
spk06: Thanks, Nora. The costs certainly have increased, but typically we're able to work through those, through scale, through collaborating with the client. We are building crews, and I do think the build is really what's causing most of our issues, as well as the inefficiencies of the supply chain. It's not necessarily the fuel or the inflation. We can usually work through those kind of pressures. We work with the client on that, and I do think It's just the culmination of all three, kind of in a quarter, you see a little bit of pressure. Actually, internally, we're on kind of where we thought we would be from a margin standpoint. It's the guide going forward that we've put it on, and I believe, in my mind, it's pressured the overall segment margins, not where we sit in the first six months. Can we operate through that in the latter half? Maybe. We'll certainly take a prudent approach to guidance. We thought we should at least acknowledge that there is some pressure. But we're not seeing the pressure and we're not going to talk about fuel and crew counts and those things on a daily basis. We can work through those through on the way that we get cost recovery as well as get more efficient as a company and scale.
spk00: Okay. And then in the past we've talked about how to think about labor costs given that you're union and you typically have some visibility issues. as it relates to the electric workforce. Any updated thoughts on how we should think about coming labor cost increases and what the conversations with the unions are like and generally how to think about overall what that looks like as we're ending this year and heading into 23?
spk06: I think when you look at the company that's our core is cross-scale labor and our ability to work with unions as well as All of our trade associations, I think, are really important. The way that we set our colleges, the way that we've done our training for the last six, seven years, the amount that we've put into this, in my mind, we're really helping and collaborating with the client and talking through any kind of escalations in the future. We've worked really nicely to collaborate on these things, even the you know, the inflationary bill that has some of the language in it. We've worked through all that. So we're sitting in a really good position there, Noel, and I think we've got those covers going forward.
spk05: Thank you. Our next question is from Michael Davis with Vertical Research. Please proceed with your question.
spk01: Good morning, gentlemen. Good morning.
spk02: Duke, can you maybe share some thoughts on the opportunities that you're seeing. I'm sure they're quite broad on the high-voltage transmission projects, the larger ones. And given where your base business is, how selective do you plan on being? What kind of room do you think you have on the EP side for those types of projects? And then even on the pipeline side, there's been quite a bit of news lately from Washington about certain pipelines and certain opportunities and change in in some regulatory aspects. Just to share your appetite on both sides, has it changed much in the last six, 12 months? Or given the cash flow issues that you may be seeing out of Canada, how selective you might be given the base business seem to be doing quite well?
spk06: No, when we look at the large transmission, certainly it's a robust environment. We're talking a lot. I do think the states have a lot of say, even if FERC has good visibility and there is a large number of projects to get stated, it's still tough on those big projects. That said, we are in the middle of quite a few, more so now than in the past. We are looking at a lot of bigger projects. I wouldn't say we're around the edges on them all. We try to collaborate with the client on these. Certainly, for us, it's about planning and helping upfront. So we have success in the future, and I think that's our job is to work with the client to be successful on these larger projects. Canada, it's always, we've been through five or six projects. It takes a little bit to get cash. We always work through those with the client. We work through one successfully in the quarter. We'll work through the next one, the southern one, the remaining this year and the next. We are executing well. We're known for Northern Climbs. Our people in the field are world-class, and that project is remarkable what we've done through COVID. So I'm highly confident where we sit there and our collectability there as well as getting our cash flow a little better than it is today. Canada was certainly impacted more so than the lower 48 when you look at COVID and things of that nature, especially with 12 camps on the job. So look, I think Both Canada, from the pipe side, even some in the lower 48, there is some projects moving around, but our base business is robust. Those are all really additive in our thinking to the future versus where we sit. Anything there would be additive the way I see it. We're really not going to chase shining objects. We're really working on our base business, and if those shiny objects happen to come in, it will only increase our guidance going forward. Thanks, Stu.
spk05: Thank you. Our next question is from Adam Thalheimer with Thompson Davis. Please proceed with your question.
spk07: Hey, good morning, guys. Nice quarter. Hey, first question, I wanted to ask about your MSAs. Did those have inflation protections baked into them coming into this year, or is that something you need to work on as you renegotiate those going forward?
spk06: They're all different, but I would say we typically have some escalations, labor escalations for sure, which is typically around 60%, 70% of the project. So normally that's in there, and some of the consumables would be in there. Again, it fuels about 2% of costs. And so it's really the buildup, your training, all the things that are necessary to put new people in the field, which we've done a nice job through the colleges and the pre-apprentices But that coupled with some of the inflationary pressures, certainly in the quarter, I would say we just took a pretty good approach in the future on guidance. We're really on target the way I see it for the quarter.
spk07: I agree. Okay. And then I wanted to ask about the EV charging opportunity. Is the big opportunity for Quanta, is it actually installing the bay, or is there substation and transformer work behind that that's more meaningful for you guys?
spk06: I think it's both, but what I would tell you is it's 100 times more meaningful on the backside than it is on the station itself or the bay itself. The reason is the load is really at the distribution level, particularly. As that happens, to get the load to the distribution level is substantial, both from the generation standpoint, through the sub, down through into the distribution side of the business. It's like, I don't know how to explain it, a big pipe going into a little pipe that doesn't have any room, so you need a bigger pipe all the way through. So in my mind, it's just a lot on the system that needs to be modernized, and we're in the early stages of starting that distribution bill across North America.
spk05: Thank you. Our next question is from Alice Regal with eRiley. Please proceed with your question. Thank you. You've been through many different economic cycles. Can you talk to us a little bit about your experiences at the beginning or an inflection point of an economic cycle and how many we might want to think about sort of the next 12 to 18 months as to how that kind of might impact your core electrical power business?
spk06: Yeah, thanks, Alex. You know, normally in other cycles, Typically, when you're looking at inflationary pressure, national gas at $8, it does impact the consumer. The consumer, in my mind, as you start increasing bills, the regulators certainly look at this. The problem, I think, this time, it's not a problem. It's what we're faced with as a country when we're going towards a carbon-free environment. and EV penetration has already left the building. There's no choice in my mind other than to put capital into these systems in order to enhance and modernize them for those impacts. The only pressure you could do is just stop and I don't believe the country is going to stop the carbon free environment at this point. I'm not seeing, there is load growth now and when you think about it, in the past there was no load growth. 5% load growth in places. And that is offsetting some of the cost of capital going into the systems as well. So the ultimate impact of the consumer for the grid build is not showing up. But the fuel cost, I do think natural gas needs to regulate a bit, get down where it should be. And I do think that'll help the bill and everything else. I don't see the real impacts that we would have seen in the past. But we're always cautionary about the inflationary pressures. They're real in places, and we should be prudent about how we think about it, but we're not seeing it show up at all yet.
spk05: And then, sorry if I missed this, but what is your backlog within the telecom segment, and what is this backlog telling you about organic growth kind of on a go-forward 12-month basis? Is it accelerating? Can we see double-digit organic growth out of that segment?
spk06: Yeah, we're about a billion dollars in backlog in telecom. We stay about a billion dollars in backlog in telecom. We could build it, Alex. It's just something I find the carriers to be more cyclical and more spontaneous than our regulated utilities as well as our developers. And so we'll be cautious about that as we grow the business. We pace that growth on purpose. I do think the margins are upper single digits going to double digits, which is really what we're after. I'm happy where we sit. We could grow. I feel comfortable that our platform will allow us. The company's really worked hard on the portfolio. You're seeing it show up in the UI margins. I know we talked a lot about electric. We talked a lot about renewables, but that portfolio, the way that we're displacing G&A and the things that we've done internally in this management team, has really bought into one single brand, one single location. You're seeing the impacts across the board at Guana as we pick up the adjusted EBITDA.
spk05: Thank you. Our next question comes from Andy Kaplowitz with Citigroup. Please proceed with your question. Good morning, everyone.
spk09: Good morning. Maybe you could give us more color regarding your negotiations with utilities. Regarding re-upping MSAs, are MSAs of the existing customers continuing to increase given the amount of electric power work your customers have? Is there evidence of them moving to more outsourcing? And are you seeing evidence of new MSAs as your customers likely are quite tight with their own labor?
spk06: I think when you look at the customer, they collaborate quite a bit. Nothing's changed there. We continue to have a robust environment, good macro markets. sit well in the marketplace um our ability to execute in the field safely on time on budget it makes an easy conversation it always has as long as we continue to execute in the field those conversations are pretty easy so duke maybe can you give us an update on what you're seeing in undergrounding whether it's the pgd project or anything else you're working on do you see undergrounding becoming a much more meaningful part of your business as you head into 2023 It's not only in the West. You're seeing undergrounding across the Gulf Coast for storm hardening. I do think undergrounding will be a big portion of the West going forward. It is moving forward. All the capital budgets, if you look back and you see where per mile what the utilities in the West are anticipating in 23, it's substantially different than in 22 early stages. The West is tough to work and there's a lot of permitting, a lot of environmental planning. I do think our front end business, we talk about it quite a bit, that the engineering permitting, all the things that we're doing on the front end is really helping us get prepared for those bills and helping us with the client, the reduced cost on that. I like where we sit there, I think it is something that you'll see in 23 show up and also you know, in the Gulf Coast.
spk09: Appreciate it.
spk05: Thank you. Our next question is from Sean Eastman with KeyBank Capital Markets. Please proceed with your question.
spk01: Hi, guys. Thanks for taking my questions. I wanted to come back to the comment about wind projects being pulled forward. What does the... sort of come back on the wind side, tell us about the anticipated margin progression in the renewables segment. Because I thought that, and correct me if I'm wrong, but a lot of this year-over-year softness in the Blattner business that we're seeing in 2022 from a margin perspective is that softer wind dynamic. So I wanted to check in on that.
spk06: I don't know if we're seeing any margin issues with Blattner, but that being said, it's down a little bit. I don't think it has anything to do with the wind or the platform, whether it's wind or solar. I think it had everything to do with us taking a prudent approach to it, worried through inflationary pressures as well as guidance, and we did that. on a go-forward basis to scale. I don't think the mix of work impacts the margins there in the segment. The segment does have large electric transmission in it, as well as substation interconnects. So those kind of things are in the segment. It's not just platinum. And I do think as we move forward, certainly the wind coming in helps, but we're every bit as happy with solar as well. I think when we see it, we thought We would have some delay in 22. We did. But we took that into account early, even when we made the acquisition. And we also reiterated a long-term 3.6 billion in 26. I do think that's pulled in. I think you'll see a significant amount of growth there in 23 as well as and beyond.
spk03: Yeah, and maybe color as well, as we commented that we thought the blotter would be able to execute a double-digit EBITDA levels and they continue to execute at those levels.
spk01: They do. Okay, great. I didn't frame that question properly. I thought it was kind of exciting to see wind coming back in the mix. I guess really it's not a margin dynamic. It's more just additive to that stronger visibility around growth for renewables into the out years.
spk06: I'm not saying we can't increase the margin on a go-forward basis in the segment. It's all scale. Look, if it's solar, wind, it doesn't matter. If you get more scale out of it and cover off DNA, we'll certainly increase the margins there.
spk01: Okay, that's really helpful, Duke. Thanks for that. And then moving over to the cash flows, just this Canadian transmission project dynamic, is this more an element of working through – the bureaucracy with the client versus some sort of point of contention with the client. Is that a fair comment, Derek?
spk06: This is Duke. I deal with them quite a bit, and we went through, we had two large projects, one just completed. No one's ever been through COVID in Canada, so it's justification of cost against where you're at for one part, and then the way the milestone billing works on the second one, We didn't anticipate the delays and winter delays that we have today. Those milestones, we have to escalate them up, work with the clients, get paid earlier. We're working through those now. There's no contention. It's really a matter of fact, going through it, justifying it, and moving forward. A lot of paper, I would say from my standpoint, a little more than normal, but look, it's We've been through this many times in Canada. We'll get through it with good documentation. We know we've taken the same approach we've taken to every other one there. I'm highly confident that we'll work through this in the coming quarters. I agree.
spk05: Thank you. Our next question is from Neil Mata with Goldman Sachs. Please proceed with your question.
spk08: Good morning, team. The first question was around the renewables legislation that's making its way through Congress right now. And I recognize it's an unbelievably dynamic environment to try to process it. But just any early observations of what that can mean for the opportunity set in your business? And clearly, it could be positive for renewable energy infrastructure solutions. But do you see a way it could also tie into the electric power infrastructure solutions as well.
spk06: Yeah, for sure. Anything renewable, I'll go backwards on the question, but anything renewable in the legislation affects the grid, no question. And so anything we're talking about impacts the backside of the grid. And so I think, yes, a substantial increase in utility spend either way, I don't think You know, look, the legislation's great. It's all incrementally positive. It's 780 pages. I don't have to comment on it other than just to say it's positive for us in many ways. And if it does pass, as stated, we're extremely happy.
spk08: That makes sense. And I just wanted to follow up on the free cash flow question. I think you provide some clarity around a specific project in Canada that But can you help us bridge between the previous free cash flow guidance and this one and how much was that specific project versus other items? Thank you.
spk06: That's why Derek came back. He's going to answer that.
spk08: All right. That's why Derek's never going to do another one of these calls again.
spk03: Well, look, I mean, the biggest portion of what drives our cash flow is the working capital demands of the business. We've talked at length about the fact that higher levels of growth put pressure on the working capital. At this stage, our organic revenue growth for the year will exceed double digits. And in the past, we've talked about when you see that, you can start to see free cash flow conversions against EBITDA probably drifting down at the 30% to 40% range. I think if you look at the math, you're going to see it running at about 35%. The uptick in the revenues for the year, about $400 million, running 10% to 11% trailing 12 months. Working capital is going to get you into about $40 million to $50 million of the uptick in or the decreasing free cash flows associated with the uptick in the revenue guidance. So I think it's all still running across the same formulas. Having said that, yeah, I think the remaining delta would largely be the individual timing of the project issues we were talking about.
spk08: All right. Thank you, sir.
spk05: Thank you. Our next question is from Gus Richard with Northland. Please proceed with your question.
spk04: Yes. Good morning. Thanks for letting me ask a question on Derek's second final farewell tour. High-powered semiconductors are kind of in limited supply. The largest supplier is in Germany. The OEMs that provide utilities with equipment are not high-volume customers, typically don't get favorable allocation. I'm seeing lead times as long as 50 weeks for IGBTs, et cetera. I'm just wondering, my question is, you know, the supply chain issues that your customers are seeing, are they getting worse? Are they getting better? What are your customers saying about this? And, you know, is it going to continue to cause, you know, disruptions in your business?
spk06: Yeah, we're seeing, you know, some of the, really, transformers, honestly, I think are the bigger thing. Distribution transformers are kind of what I see. A little stuff here and there, but That's really what we're focused on, trying to collaborate with the client on those at this point. Some transmission items, we've seen some delay in those as well, but our workforce is pretty nimble. We can move through these kind of issues and work with the client on those supply chains. The utility industry is very resilient. We're coming up with solutions on a daily basis in a collaborative manner. They collaborate quite a bit. I don't think this is long-term. We're working through all these issues. You can double shift factories. You can do a lot of different things to expedite all the minor equipment. There's always a big lag on your big HPDC transformers and turbines and those kind of things. I do think that is already in baked in the system and we're working through these minor issues with the client. It is a place where I believe Quanta can collaborate and move forward the business on that end, and certainly the front side of our business, the planning and the things that we're doing there is helping us be successful to execute in the field.
spk04: Got it. That was it for me. Thank you. Thank you.
spk05: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.
spk06: Yeah, first I want to thank Derek for stepping in here. It certainly eases the mind to have someone of his caliber here on the management team. It says a lot about the family aspect of the company. Jay Shree's doing great, and she's listening to the call. Hey, Jay Shree. We know you've done a lot here in the quarter to make this successful, so thank you. And all the men and women in the field that make our job easy and make this call easy for us. because you execute so well. We truly appreciate you and everyone that participated in the call today. Thanks for your interest in quantum.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer