Quanta Services, Inc.

Greetings and welcome to the Qantas Services fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you Kip Rupp, Vice President of Investor Relations. Thank you, Kip. You may begin.

Thank you and welcome everyone to the Qantas Services fourth quarter and full year 2022 earnings conference call. This morning we issued a press release announcing our fourth quarter and full year 2022 results, which can be found in the investor relations section of our website at QantasServices.com, along with a summary of our 2023 outlook and commentary that we will discuss this morning. Additionally, we'll use a slide presentation this morning to accompany our prepared remarks, which is viewable through the call's webcast, and is also available on the investor relations section of the quantum services website. Please remember that information reported on this call speaks only as of today, February 23rd, 2023. And therefore you advise that any time sensitive information may no longer be accurate as of any replay of this call. This call will include forward looking statements intended to qualify under the safe harbor from liability established by the private securities litigation reform act of 1995. These include all statements reflecting QANAs expectations, intentions, assumptions, or beliefs about future events or performance that do not rely or do not relate solely to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or beyond QANAs control, and actual results may differ materially from those expressed or implied. For additional information concerning some of the risks, uncertainties, and assumptions, Please refer to the cautionary language included in today's press release and the presentation, along with the company's periodic reports and other documents filed with the Securities Exchange Commission, which are available on QANTA's or the SEC's website. You should not place undue reliance on forward-looking statements, and QANTA does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA, adjusted EBITDA, and free cash flow. Reconciliation of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for email alerts through the investor relations section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's president and CEO.

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services fourth quarter and full year 2022 earnings conference call. On the call today, I will provide operational and strategic commentary and will then turn it over to Jayshree Desai on a CFO to provide a review of our financial results and full year 2023 financial expectations. Following Jayshree's comments, we welcome your questions. This morning, we reported strong fourth quarter and full year results. which were built off an industry-leading operational and financial platform that delivered another year of solid, safe execution, and profitable growth. Additionally, total backlog of $24.1 billion at year-end was a record. It does not include several notable recent project awards. Driven by the dedication and operational excellence of our world-class employees and the culture of collaboration throughout Quanah, we believe our 22 2022 results also demonstrate the benefit of our diversified portfolio of solutions, our repeatable and sustainable model, and the successful execution of our strategic initiatives to drive operational excellence and total cost solutions for our clients and ultimately the consumer. Our portfolio of companies, diversity of service lines, geographic coverage, outstanding field leadership, and deep long-standing and collaborative relationships with our clients have allowed us to successfully navigate through the challenges presented by a global pandemic and manage ongoing macroeconomic uncertainty and supply chain constraints while still delivering five consecutive years of record adjusted EBITDA and six consecutive years of record earnings per share. We accomplished a great deal in 2022 through the successful implementation of our strategic initiatives and our past success positions us well for the future. Our innovative approach to our infrastructure solutions, our portfolio of services, and our passion for working collaboratively with our clients to support their success positions us to be a critical partner in enabling the energy transition for years to come. Here are some of our accomplishments in 2022. We continue to successfully advance our front-end solutions strategy, both organically and through acquisitions and strategic investments. Our focus is on strengthening our design, engineering, permitting, environmental, logistics, and program management capabilities. This strategy allows us to expand our solutions to our customers and provide them with greater certainty around cost, time to market and quality, which ultimately benefits consumers. It also enhances our risk management capabilities and increases our total adjustable market. Electric power infrastructure solution segment revenues achieve record levels, maintain margins, and increase market share despite some work delays caused by ongoing supply chain challenges. We further expanded our emergency response capabilities and supported our customers' efforts to restore power to millions of people adversely impacted by several severe weather events during the year. Our ability to quickly mobilize significant resources to support our customers in times of need is unmatched in our industry. Luma Energy, our joint venture with ATCO, which is managing Puerto Rico's more than 18,000-mile electric transmission and distribution system, continued to improve its customer service, response times, customer communication, and workforce safety, as well as overall system reliability. Additionally, LUMA restored power to more than 90% of its customers in less than two weeks following Hurricane Fiona, which was much faster than previous storm responses by the prior grid operator and was comparable to, if not better, than restoration times following major hurricanes in the mainland United States. Though many years of challenges and work remain, we continue to believe this opportunity is transformative for Quanta and the people of Puerto Rico and remain committed to supporting LUMA's mission to provide reliable electricity while building a modern and sustainable transmission and distribution system. We continue to grow our communication services business and increase revenues by approximately 30%. Contributing to the growth was further development of our wireless infrastructure solutions which expand our opportunities to capitalize on 5G network deployment and an ongoing enhancement of 4G wireless networks. We continue to make meaningful progress on growing our portfolio of services within each of our operating companies to further enhance our operating results. For example, we are leveraging our gas utility assets to perform certain aspects of underground electric power and telecom-related work. We believe the resource expansion and operating leverage we gain through these initiatives is significant opportunity for QANU to reinforce our self-perform capabilities, improve operating efficiency and profitability, and demonstrates the strength of our portfolio approach. QANU's capacity model was recognized by the National Safety Council as a finalist for its prestigious Green Cross for Safety Award, which recognizes outstanding projects and organizations working to support the National Safety Council's mission to save lives and prevent injuries from workplace to any place. The capacity model is revolutionary because it only creates a work environment that focuses on preventing an incident, but also builds the capacity to fail safely. We demonstrated our commitment to stockholder value and our confidence in Kiwanis financial strength and continued growth opportunities through the repurchase of approximately $128 million of our common stock and a 17% increase of our dividend while also increasing our liquidity. And finally, we continue to increase our efforts and dedicate resources towards implementing sustainable business practices throughout the organization. We made significant progress in our 2021 sustainability report, which discusses the company's accomplishments during that year and marks a key milestone for Quanah as we published our first consolidated set of sustainability metrics, including our scope one and two emissions. We also highlighted and discussed the important positive impact Quanta has on society in enabling the energy transition and technological development. Demand is robust for our solutions that support our customers. Efforts to modernize and harden the grid and prepare it for the impact of increased electric vehicle penetration. This activity drove our electric power segment results and backlog strength during 2022, primarily through significant multi-year master service agreements and gains through our service line expansion with utilities. Further, we continue to believe we are in the early stages of utilities undergrounding transmission and distribution lines to protect them from the effects of severe weather events and wildfires. We see this activity increasing in the western United States in high fire threat areas. But these initiatives are active in other areas of the country. Examples include electric transmission projects in the Northeast, distribution circuits along the coastlines, and electric transmission line projects for offshore wind generation. Many of these initiatives are part of a large-scale, multi-year system modernization and hardening programs. Our utility and renewable development developer customers who accounted for the majority of our 2022 revenues are leaders in the effort to reduce carbon emissions, increase electrification, and lead the energy transition with aggressive plans to expand and modernize the power grid and grow their renewable generation portfolios. Achieving these goals will require substantial incremental investment in transmission, substation, and renewable generation facilities to produce and transport clean power to ensure grid reliability due to the growth of intermittent power added to the system. For example, in December of last year, we announced Kiwana's selection by Xcel Energy as its prime constructor to manage all construction activities for Colorado's Power Pathway high voltage electric transmission project in Colorado. The approximately 610 mile high voltage electric transmission line project is designed to increase the reliabilities of the state's power grid and enable future renewable energy development in Colorado, including approximately 5,500 megawatts of new wind, solar, and other resources that Xcel Energy plans to add through 2030. While the supply chain and regulatory hurdles created challenges for the renewable industry during 2022, there is significant demand for our power grid and renewable generation solutions. A number of solar projects that were delayed in 2022 are beginning to move forward in 2023. Regulatory hurdles are easing, and the implementation of the Inflation Reduction Act, or IRA, which is considered by many to be the nation's most ambitious legislative action ever taken on climate, is expected to have meaningful positive effects on a number of our end markets, which would be additive to our strategy for at least the next decade. Our underground utility and infrastructure solution segment consistently performed at a high level through the year. Revenues grew strongly and margins significantly improved after navigating through tough operating conditions caused by the global pandemic over the prior two years. Importantly, we continue to invest in our people and strategies during those challenging times and emerge as a stronger and better company, which is reflected in our solid 2022 results. We expect to continue our focus on growing our gas utility, pipeline integrity, and industrial services businesses consistent with our strategy over the last five years, which are executing well and driven by regulatory spin to modernize systems, reduce methane emissions, ensure environmental compliance, and improve safety and reliability. Looking to the coming years, we continue to believe Kiwana has meaningful opportunities with customers, in this segment as they increasingly pursue strategies to reduce their carbon footprint and diversify their operations and assets toward greener business opportunities. Further, the RA includes incentives to support certain energy transition technologies to further encourage a broader set of current and potential traditional energy and industrial customers to accelerate their pursuit of opportunities around these technologies. In our earnings release this morning, we provided our 2023 guidance, which we believe demonstrates the strength and sustainability of our portfolio approach to the business and long-term strategy favorable in market trends, our ability to safely execute our strong and strengthening competitive position in the marketplace. Further, our ongoing investment in and commitment to workforce training continues to positively impact our performance and allow us to capitalize on future opportunities. Our expectations call for another year of meaningful growth in record revenues, improved margins, and opportunity for double-digit growth in adjusted EBITDA, cash flow, and earnings per share. Additionally, we see opportunity to achieve record levels of backlog in 2023. Jay Sri will provide additional detail about our guidance in our commentary. Juana's management team recently had the privilege of ringing the closing bell at the New York Stock Exchange to commemorate our 25-year anniversary of trading on the prestigious exchange. Standing on that balcony and reflecting on what we have built over the last 25 years and where we are heading in the future was humbling, and I couldn't be prouder. Juana's infrastructure solutions are at the tip of the spear of the energy transition in North America. At our investor day last year, we laid out a five-year financial goals we expect to achieve through 2026, which provided an organic growth strategy to generate a 10% adjusted earnings per share CAGR, and when considering the levers available to us to allocate future cash flow generation into value-creating opportunities, a platform with opportunity to deliver more than a 15% CAGR and adjusted earnings per share. With the strong results we delivered last year, our outlook for 2023, and the momentum we see building for the coming years, we are increasingly confident in our ability to meet or exceed those goals we laid out. We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance Qantas' base business and leadership position in the industry and provide innovative solutions to our customers. We believe quanta's diversity, unique operating model, and entrepreneurial mindset form the foundation that will allow us to continue to generate long-term value for our stakeholders. I will now turn the call over to Jayshree Desai, our CFO, for her review of our fourth quarter and full year results and 2023 expectations. Jayshree.

Thanks, Duke, and good morning, everyone. Today we announced record fourth quarter revenues of $4.4 billion. Net income attributable to common stock was $163 million, or $1.10 per diluted share, and adjusted diluted earnings per share was a record for the fourth quarter at $1.68. Overall, the fourth quarter closed out another year of exceptional operational performance by Quanta. Our electric segment benefited from outstanding execution and higher revenues across the segment. Additionally, our underground segment performed well in the fourth quarter, led by increased volumes and operating income from our base business operations. Our renewable segment, however, was negatively impacted by unanticipated project delays, which were primarily attributable to the changes in the solar market regulations that we discussed in the third quarter. These delays created cost absorption challenges, which pressured operating margins. Additionally, the segment's operating margin was negatively impacted by approximately 120 basis points due to impairment charges on a software implementation project at an acquired company, which commenced prior to our acquisition but was discontinued in the fourth quarter. Ultimately, in the aggregate, against a backdrop of supply chain challenges, inflationary pressures, and a complex regulatory environment, our portfolio delivered against our targets for the fourth quarter and the year, and we remain well positioned for the anticipated growth ahead. Below the line, we recorded an unrealized loss of $15 million associated with our common equity interest in fixed wireless broadband technology provider, Starry Group Holdings. which reduced the carrying value of our investment to zero. Offsetting this unrealized loss was an unrealized gain of $26 million on the sale of an investment in a non-integral unconsolidated affiliate, of which 10 million was attributable to a non-controlling ownership interest. Further commentary comparing fourth quarter 22 to fourth quarter 21 for each segment can be found in the slides accompanying this call. Our total backlog was $24.1 billion at the end of the fourth quarter, a significant increase from third quarter 22 and another record level. The increases across each of our segments are attributable to multiple new project awards, including the previously announced Colorado Power Pathway Project and extensions and increases in expected volumes under MSAs. Our 12-month backlog was also at a record level of $13.8 billion, which we believe is another indicator of the strength of our core markets and the steady growing demand for our solutions-based approach. For the fourth quarter of 2022, we generated free cash flow of $513 million, resulting in $767 million of free cash flow for the year. Contributing to our free cash flow was the collection of $101 million of insurance proceeds following a favorable arbitration ruling associated with our Peruvian subsidiaries' terminated telecommunications project. Excluding those proceeds, our fourth quarter cash flow was still in line with our expectations and included planned outflows of approximately $45 million for change of control related payments associated with the Blattner acquisition and $54 million of previously deferred payroll taxes in accordance with the CARES Act in 2020. DSO measured 75 days for the fourth quarter of 2022, which was a reduction of six days compared to the third quarter of 2022. primarily due to favorable billing arrangements related to certain projects. Regarding the Canadian Renewable Transmission Project that we've discussed in prior quarters, we continue to work with the customer to address the contract asset balance. Resolution of certainties of these amounts could extend into 2024 and currently represent five to six days of DSO at December 31st, 2022. While we remain confident in our position, our DSO will be pressured by the project in the near term. We had total liquidity of $2.4 billion at year end and a debt to EBITDA ratio of 2.1 as calculated under our credit agreement. As we mentioned in today's release, we continue to identify and make strategic investments and acquisitions. In January of 2023, we acquired three businesses for total combined consideration of approximately $588 million, approximately $465 million of which was paid in cash at the time of the acquisitions. Additionally, we repurchased approximately $128 million of our common stock during the year. Turning to our full year 2023 guidance. The growth across our end markets remains robust, and we believe the tailwinds driving our growth are long in duration and create multi-year visibility in our earnings potential. As the build-out of the infrastructure necessary for the energy transition accelerates, we believe the complementary capabilities of our operations will become even more valuable to our customers. While segment designations help investors better understand the work we're performing, we'll continue to emphasize the power of our aggregate portfolio of solutions and the earnings they generate. That said, the following remarks will speak to our expectations at a segment level for 2023. As it relates to the electric power segment, we expect 2023 revenues ranging between 10 and $10.1 billion. Our base business continues to lead the growth in the segment, driven primarily by North American utilities, outsourcing the activities required to replace, rebuild, and modernize existing infrastructure. Notably, our 2023 expectations included $250 million of emergency restoration services revenues, compared to a little over $300 million in 2022. Also included within the segment are communications operations, which we expect will generate around $900 million of revenue, in line with 2022 levels. We expect 2023 operating margins for the electric power segment to range between 10.7 and 11.3%, which includes contributions of between $43 and $48 million of earnings from our integral unconsolidated affiliates, the largest portion of which relates to the Luma joint venture in Puerto Rico. From a seasonality perspective, we expect revenues to be lowest in the first quarter with mid-single-digit growth from first quarter 22, then growing sequentially through the third quarter followed by a seasonal decline in the fourth. We expect fourth quarter operating margins will be the lowest for the year, likely around 9%, then increasing into the second and third quarters, and slightly declining in the fourth quarter. The renewable energy infrastructure solution segment full year revenues are expected to range between 4.3 and $4.5 billion, over 15% growth compared to 2022, as we believe the headwinds faced by the solar market in 22 should meaningfully improve in the second half of 2023. We think it's important to note that within our range of guidance for renewables, approximately $3 billion of our planned revenues are already in various stages of construction, giving us confidence in our ability to deliver full-year revenues at these levels. We expect 2023 operating margins for the renewable energy segment to be around 8.5% for the year, slightly lower than the 9% level that we would normally expect. We've invested meaningfully in the project leadership, specialized equipment, and administrative needs required to support the expected ramp in project activity in the second half of 23 and into 24. However, the cost of that investment weighs on margins, particularly in the first quarter. We expect margins for the first quarter to be the lowest for the year, likely between 4 and 5 percent, but should strengthen in each sequential quarter as volumes increase throughout the year. From a revenue seasonality perspective, we expect segment revenues to be between $850 and $900 million in the first quarter, the lowest for the year, then growing sequentially into the third quarter and slightly declining in the fourth. As a reminder, it's possible that as we progress through the year and gain more visibility into the nature of the work we'll be performing, there could be movements outside these initial ranges for the electric and renewable segments, depending on the type of generation our activities support. With regard to the underground utility and infrastructure solution segment, we are currently anticipating full-year revenue range to range between $4.1 and $4.3 billion, a slight decline compared to 2022. This decline is due to lower volumes of larger pipeline projects, which contributed almost $900 million of revenue in 2022, but are expected to be around $450 million in 2023. Despite the revenue reduction, operating margins for the year are expected to range between 7.25% and 7.75%, led by our base business activities in the segment. From a seasonality perspective, we expect segment revenues in the first quarter to be in line with first quarter 22 revenues, with operating margins around 5%. We then expect revenues and margins to improve in the second and third quarters, with a seasonal decline in the fourth quarter. As it stands today, we expect fourth quarter 23 revenues to be the lowest for the year. These segment operating ranges support our expectation for 2023 annual consolidated revenues of $18.4 to $18.9 billion and adjusted EBITDA of between $1.8 and $1.9 billion. This represents another record level of adjusted EBITDA with expected full-year adjusted EBITDA margins at the midpoint of over 10%. With these operating results, we estimate our range of GAAP diluted earnings per share attributable to common stock for 2023 to be between $4.67 and $5.17, and non-GAAP adjusted diluted earnings per share to be $6.75 and $7.25. Of note, we estimate our tax rate for the year will range between 26.25% and 26.75%. The first quarter rate, however, will be negligible, potentially zero, due to favorable discrete tax dynamics associated with the increase between grant date value and the vesting date value of stock-related awards under our equity compensation plan. We currently expect 2023 free cash flow to range between $750 million and $1 billion with capital expenditures of around $400 million, which should give us the ability to be within our target leverage range of 1.5 to 2 times by the end of 2023. We remain committed, however, to creating shareholder value with strategic acquisitions and opportunistic repurchase activity throughout the year while retaining our investment grade rating. Going into 2023, we have approximately $345 million of availability remaining on our current stock repurchase program. As a reminder, we've provided more guidance details in the outlook summary that was posted in connection with the earnings release. and can be found on our IR website at quantaservices.com. The strength and versatility of our portfolio give us confidence in our ability to continue driving results against an uncertain macroeconomic backdrop. The infrastructure investment required to support North America's energy transition is still in its early stages and creates opportunity for Quanta to continue providing industry-leading, comprehensive end-to-end solutions. Our relationships and the breadth of our solutions have proven to be critical in our ability to navigate the economic landscape of the last three years, and we are confident those attributes position us to continue along our expected double-digit growth trajectory. This concludes our formal presentation and we'll now open the line for Q&A. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And we ask that you please limit yourself to only one question and then re-queue. Thank you. One moment please while we poll for questions. And our first question comes from the line of Alex Rigel with B Reilly. Please proceed with your question.

Thank you. Good morning, and thank you for taking my question here. Excellent quarter. A few quick questions. Duke, backlog growth is just fantastic here. Obviously, some of that is from some of your acquisitions, but I guess what I'm trying to get at is how do you think about backlog growth over the next couple of years? And maybe if you could sort of comment on what you think your bid pipeline sort of looks like as it relates to

backlog do you see an acceleration in your bid pipeline it sounds like you might be seeing that but any thoughts there will be helpful thanks alex the backlog is really non-material when you look at the acquisition so take that out i think we had broad-based backlog growth within the company and as we look forward i think you'll continue to see that throughout 23. The dynamic of the stacking of larger projects along with what we see at our MSA levels continue to be robust, and I think it'll be broad-based on our renewables as well as our electric power and even in our UNI segment. So we see robust markets there. As we look at the bid pipelines, I think both the renewable side, you see more of elongation out. where it was just 12 months. You're seeing 24-month, 36-month type things within our backlog. So that's creating that growth as well there. But the pipeline itself, larger projects are certainly in there. But our MSA business, base business is robust as well. So just a broad base kind of look at the business at this point.

Hey, Alex, just to add and clarify that the acquisitions were done in January, so they are not in our backlog.

Fair enough. And then secondly, you referenced ongoing supply chain challenges. You know, there's a couple kind of thoughts on that topic. And one is, you know, supply chain challenges kind of hold back your ability to obviously acquire equipment to execute on projects. But also, you know, kind of when you layer into that QANTA's historical achievements in managing difficult labor supply chain challenges, and educating and training internally. Can you talk about how those supply chain challenges have allowed Quanta to gain market share kind of in this current environment right now and moving forward?

We anticipated the labor. So I think craft skill labor is still at the core of the business. We invested in it long ago and we continue to invest in it today. That was something that we were in front of. The supply chain challenges with the fleet We've done a nice job, have great partnerships in our fleet over the years, certainly leverage. I think we have the fourth largest fleet in North America. So it's something that we challenge ourselves to be in front of that as well with our suppliers in the same collaborative manner that we use with our customers, we use with our suppliers. So it certainly gives us an advantage, but also gives us a look in the future. And I just think we'll stay on top of the two things that we manage and can control is labor and fleet, and so we manage them pretty tough.

Congratulations, good luck.

Thank you, and as a reminder, we ask that you please limit yourself to one question and then re-queue. Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Hey, thank you, Tim, and congrats on a great quarter here. I wanted you to spend some time on the renewable segment, and if you could comment on first how the Inflation Reduction Act is impacting customer conversations and when you think it will start to show up in terms of either backlog in revenue. And then, Jayshree, you made some comments about operating income at the segment moving in the right direction as you think about 2023. Can you help us, give us the building blocks to think about that? Thank you.

Yeah, with the renewal segment, When we look out the R.A., certainly it's additive to anything we've talked about to get your hands around it and what it actually means. I don't think we see anything at this point that has the consequences thereof. It does give us certainty over the next 10 years within that. But as our backlog, as we're having the conversation today, it's certainly about U.S. content, how we look at labor, all those kind of things within the R.A. bill. So that's something the company's done a nice job of getting in front of, and we're proud of that. I'll let Jayshree comment on the rest of it.

Yeah, Neil, the renewable segment margin and revenues basically, as we said, will be a little down in the first quarter, but it will be picking up as we move throughout the year. And that's really driven by the fact that as the industry gets more and more comfortable with where the IRA is headed, As projects move forward with PPAs and financing, we should see a big pickup in the back half of the year. We have been prudent with our guidance, given some of the still supply chain issues and the tariff situations that are out there. However, we're seeing a lot more interest, a lot more movement, and it should start developing in the back half of the year, and especially into 2024. Thank you.

And the next question comes from the line of Justin Hawk with Robert W. Baird. Please proceed with your question.

Hi. Good morning, guys. I've got a – I guess a question just on the guidance and the acquisitions that you did post-quarter. Just the $580 million for three deals is actually a fairly large amount for you guys when you usually do kind of more smaller bolt-on deals. ones per quarter. So if you could just give a little bit of guidance around the revenue and EBITDA contribution in 2023 from that incremental M&A. Thank you.

Hi. Yeah, the revenue contribution is around $600 million for those three deals. And I would just say that from an EPS contribution, they contribute around $0.15 to $0.20.

As far as the three deals, and they're all within the strategic platform that we've set out and a regional T&D. One addresses the front end side of the solar markets and wind, so batteries, et cetera. And the other one's a supply chain contribution there. So three things that we felt like were right down the middle for us. We've always said the timing and how we deploy capital. Sometimes it's lumpy, sometimes it spreads out, so I wouldn't read anything into it.

And the next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Hi, good morning and congrats on a nice quarter. I guess just back to the renewable margins, I think you guys talked about investing in a business which is weighing on the margins, in particular the first quarter. Can you help us understand like the investments that you're making and how to think about, you know, how much that's impacting the margin guidance for the year. So I guess that's my first question. And my second question is, you know, I'm sort of struck with the guidance that we've that we're implying for 2023 you know $7 your company that typically you know, guides fairly conservatively. So trying to think about if there's upside to the numbers in 2023 or downside to the numbers, could you just calibrate where the upside or downside could be, given the good guide already? Thank you.

Yeah, thanks, Jamie. When we think about the renewable segments, it's primarily around utilization and how quickly you can get absorption early on. And as we move on to the projects that are stated, certainly You get absorption in the back half. You're a little light, and you saw it in the fourth quarter. You'll see it in the first quarter. We know the projects that we're on. We talked about $3 billion that have started. The back half, when we look at the back half, certainly there's opportunities there. We were prudent about how we looked at it. We felt like with the way that the supply chain worked this year, especially on the panels and things of that nature and how the RA comes in and how quickly it comes in, We take the same approach to guidance every year, which is prudent, and I believe we did the same this year, exactly the same way.

And the next question comes from the line of Noel Diltz with Stifel. Please proceed with your question.

Hi, thanks. I know there's been a fair amount of discussion around supply chain, but, you know, I have heard that the transformer issue remains fairly challenging with extremely long lead times. And we've talked about that before. So I was actually just curious, to what extent you think that's getting better? Are things getting a little bit more predictable as it relates to some of these components that have been in short supply, specifically as it relates to electric T&D? Thanks.

Thanks, Noelle. When we look at the supply chain, most of your larger IOUs, your larger customers have solved much of this. Not to say that the transformers And certain items are long lead times. They are. And it is issues. There is issues around it. But once we understand it, once we understand cadence, we can be much more predictable about how we deploy crews and assets. So that's helped us. I do think there's opportunity there for us and how we participate in solving these solutions with the client. That said, Transformers is going to be a while. I think the back half of the year, maybe even into the fourth quarter. before that levelizes out and we get enough capacity in the market. But with the amount of EVA penetration and the things that we see, you're going to see some shortages in transformers, and we just have to be more robust about how we deploy assets.

And the next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning. Just on the electric transmission and distribution kind of customer spending outlook, there's been some mixed data points on utility capex over the last few months, but I guess still overall positive. I'm curious what discussions you're having with the utility customers, specifically around the planning for the IIJA funds. How are they baking those into their spending patterns, and how will that ultimately flow into your bookings and backlog? Thank you.

Yeah, thanks. Here's what we see. We see North America's load growing as we look at it across our segments. So the growth of generation in North America, you have that going on. You have renewables and the way that we're looking at penetration through transmission. You have EV penetration ongoing. So all those things are coming into these CAPEX. And I've I hear that and I hear, well, you've seen something different. All I've seen is our customers move their CapEx budgets up primarily in distribution on the outer end because of penetration of EV and then all your transmission that needs to be interconnected. The way that you think about it, you think about all the things that are necessary to make this work. Yes, you can delay a bit. You can do some things, but we're already behind on just in general, if you stay flat on carbon today, you can't, we're struggling to serve the load at the customer level on the coastlines. And that's our duty, this industry's duty to the consumer is to have load. And if you have wells that are offshore, if you have things that don't allow us to build generation that's necessary to get to a carbon-free environment, we have to have more transmission. Either way you look at this, on any level, the capital necessary to transform and to make sure that this country has a resilient grid will require a significant amount of capital. Thank you.

And the next question comes from the line of Adam Thalheimer with Thompson Davis. Please proceed with your question.

Hey, good morning, guys. Great quarter, great outlook. Hey, quick question on electrical margins. So the guidance ranges from margins this year, 10.7% to 11.3%. It's the same guidance we started last year with, and we ended up at the low end, 10.7%. So my question would be, what factors drove you to the low end last year, and what could drive you to the high end this year?

Yeah, we talked about this segment, and when you look at it, I mean, I think in general – this year we took the supply chain on the way, well, you had inflation, you had fuel costs rising and a bunch of different things going on. And we talked about that early on in the first half that we thought we could operate through it in the second half. And we did. So, you know, we've got that in our system. Now we understand cadence around supply chains and things of that nature. So it gives us a great more deal of comfort that we can operate in a higher end of the range, not in the lower. So that's, That's just us understanding what markets we're in. We're still, you know, our guys at 12% EBITDA, something like that. A lot of people talk about EBITDA, so it's 12% EBITDA.

Great. Thank you, Duke.

And the next question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.

Hi. Good morning, guys. Morning. Good morning. So Duke, I want to go back to your comment, um, about your focus on front end. And my question is by how much does that greater focus on, on front end work, um, expand your TAM and then like, would you classify this as a pull from your customers versus a push from quanta? And then, uh, how are you thinking about, you know, building this out? To what extent do you plan to focus on inorganic acquisitions versus just organic building?

When we look at the market, if you take it all, it's 30% or so of total addressable market within our client base. And we continue to build that out because what was happening, it made us less efficient and also the client less efficient. And I believe from a construction standpoint, how we approach it, how we approach the front end, we can give a lot more certainty to any project. So it was necessary in my mind for us to get in that business. And yes, the customer's happy with it. The projects that we have done, the programs that we are doing ongoing are certainly something that we'll continue to build off as we move into the future. And that market's there. It makes us more efficient on the backside. A lot of reasons for us to like that piece of business. And we'll continue to invest. Got it. Okay.

And then my second question is just on the supply chain. Can you talk about what's embedded in your 23 guide in terms of improvement, maybe like versus where we are today? And then just going to the renewable segment, how much of the revenues in 23 were delayed in 22?

As far as the supply chain, what we see today, what we've seen over the past quarter is how we looked at it going forward If it gets better, certainly we'll come back and we'll talk about it. But we see intermittency in the supply chain on the utility side for the year, basically. I do think the renewable segment supply chain gets better in the second half, and we've certainly looked at that as well. But how much better, I'm not sure. And if it does, if it creates, there is some conservatism in the renewable segment due to that. We baked all that in, and I feel like hit it down the middle with prudent guidance. As far as the revenue, I'll let Jayshree talk about it.

Yeah, I would say it's a mix. It's hard to – I don't want to sit here and say how much is due to delays versus – there has been additional backlog on the renewable segment. That's starting to come in, and you've got some projects that have moved from 22 to 23. It's both. Thanks. I'll pass it on.

I'll pass it on.

Thank you, and as a reminder, please limit yourself to one question and then re-queue. Thank you. Our next question comes from the line of Michael Dudas with Vertical Research. Please proceed with your question.

Good morning, Duke, Kip, Jayshree.

Morning. Morning.

Duke, you announced several large T&D projects over the last couple of months. Can you talk about what you have in the pipeline relative to those types of projects and what your selectivity might be going forward? and maybe, you know, how that plays out over the next several years because these are much longer gestation projects than we have in your base business. Thank you.

Yeah, thanks, Michael. We talked about the stacking effect of the projects, you know, the larger projects they stack on the base. I think when we went through CREZ seven, eight years ago, the company got off the base. I would tell you today we're highly focused on our base business. roughly 85, 90% of that resilient business that we have. We'll continue to focus on that. We're bidding on every project the same. We bid the risk. We're not going to win them all. We're just not. And, you know, I've watched one recently that, you know, look at, we know our cost. We know what we're doing. We're not going to take risk. It's not something we're going to gamble on. We're just not. And it's not Vegas. We're going to get ourselves in a good position to make sure that we execute on these projects. And we don't need to necessarily take the larger projects. We can build our base. But we do see an incremental amount of larger projects coming in in 23, 24, and beyond.

Thank you. And as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. Our next question comes from the line of Brent Thielman with DA Davidson. Please proceed with your question.

Hey, great. Thank you. Hey, Duke, the expectation for reduction and large pipeline work in 23 versus 22, is that just a function of sort of project sequencing for your business? Because your backlog's up pretty nicely in underground, or is that just sort of reflective of the environment we're in. And I'd also just be curious if there's opportunities to still fill that void you're sort of talking about for the underground business late in the year.

Yeah, the backlog was primarily driven by MSA growth there. And when we look at the larger diameter pipe, we talked about it got into kind of a 450, 500 type range year over year. Certainly there's opportunities for us to do billion dollars and that opportunities out there we got it to where we're at I just for us we can make the numbers in a portfolio approach where we're at I felt comfortable with them we felt comfortable if things move let's just say solar moves or let's say large pipe went the other way the portfolio we have makes us you know what I think very predictable and that I those larger dynamics of pipe and some of our renewable projects, we took a prudent approach to guidance. We'll update you. If we get more work, we'll certainly update.

And this is the final poll for any questions. If you have any final questions, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. Once again, if there are any final questions, please press star 1 on your telephone keypad. At this time, I'm not seeing any questions coming in. I'd like to pass it back over to the quantum management team for any closing comments.

Yeah, I want to thank the men and women in the field. They're putting up the numbers every day and working safe. It allows for a great call and for us to talk about how great the company is doing. Certainly after 25 years in quanta, I think we're just getting started. So I'd like to thank everyone for participating in our conference call. We appreciate your questions and your ongoing interest in quanta services. Thank you and this concludes our call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.