Quanta Services, Inc.

Greetings, and welcome to the Quanta Services third quarter 2024 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. It is now my pleasure to introduce your host, Kip Rupp, Vice President, Investor Relations. Thank you, sir. You may begin.

Thank you, and welcome, everyone, to the Qantas Services' third quarter 2024 earnings conference call. This morning, we issued a press release announcing our third quarter 2024 results, which can be found in the investor relations section of our website at QantasServices.com. This morning, we also posted our third quarter 2024 operational and financial commentary and our 2024 outlook expectations summary on Qantas' investor relations website. While management will make brief introductory remarks during this morning's call, the operational and financial commentary is intended to largely replace management's prepared remarks, allowing additional time for questions from the institutional investment community. Please remember that information reported on this call speaks only as of today, October 31st, 2024, and therefore you advise that any time-sensitive information may no longer be accurate as of any replay of this call. This call would include forward-looking statements and information intended to qualify under the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995, including statements reflecting expectations, intentions, assumptions, or beliefs about future events or financial performance or that do not solely relate to historical or current facts. You should not place undue reliance on these statements as they 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. While we will also present certain historical and forecasted non-GAAP financial measures, reconciliations of these financial measures to their most directly comparable GAAP financial measures are included in our earnings release and operational and financial commentary. Please refer to these documents for additional information regarding our forward-looking statements and non-GAAP financial measures. Lastly, please sign up for email alerts through the Investor Relations section of QantasServices.com to receive notifications of news releases and other information, and follow Qantas IR and Qantas Services on the social media channels listed on our website. With that, I would like to now turn the call over to Mr. Duke Austin, Qantas President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quantum Services third quarter 2024 earnings conference call. Before I turn to our third quarter results, I would like to comment on Quantum's response to Hurricanes Beryl and Helene. During the third quarter, we deployed significant resources to assist power restoration and related efforts in Texas for Hurricane Beryl and in the southeast for Hurricane Helene. During these events, our employees often do more than work to get the power restored. What is not well known are the other ways that our crews, who are first responders, help people in need during these devastating events. For example, in response to Hurricane Helene, Quanta crews work with local sheriffs, law enforcement groups, and various humanitarian organizations to leverage our helicopter assets to deliver more than 200,000 pounds of cargo who impacted rural and mountain communities in North Carolina, including water, food, medical and camping supplies, pet food, hay for livestock, and more. Our pilots also aided search and rescue efforts, provided reconnaissance and roadway assessments, and performed welfare checks. These severe weather events also often impact the lives and property of Kwana employees, many of whom are away from their families for long periods restoring power to others. Quanta Cares, our employee's relief fund, provided financial support to approximately 125 employees and their families who were impacted by these damaging storms. I want to recognize and thank the thousands of Quanta employees who work tirelessly to restore power and much more for people in need during these severe weather events. Quanta delivered another quarter of double-digit growth in revenues, adjusted EBITDA, and adjusted earnings per share, as well as a number of other record financial metrics, including total backlog of $34 billion and free cash flow of $539 million. There is momentum building across our portfolio of solutions, with the increased demand for and tightening of power generation capacity and the significant power grid upgrades and enhancements required to facilitate load growth. Our collaborative, solution-based approach is valued by our clients more than ever. Guana sits at the nexus of the utility, renewable energy, and technology industries, and the convergence of these industries is gaining pace. Utilities across the United States are experiencing and forecasting meaningful increases in power demand for the first time in two decades, which is being driven by the adoption of new technologies and related infrastructure, including artificial intelligence and data centers, as well as federal and state policies designed to accelerate the energy transition and policies intended to strategically reinforce domestic manufacturing and supply chain resources. The necessity to build and modernize infrastructure is clear, and we believe Kiwana's craft-skilled labor workforce and self-performed capabilities are critical to advancing our infrastructure solutions. To that end, The integration of Cupertino Electric is progressing well, and while it is early, we have received positive customer response to our comprehensive critical path electric infrastructure solutions for the technology and data center industry that provides opportunity to improve speed to market for projects. In summary, we are executing well on our strategic plan, and while there are areas for improvement, We are pleased with where we sit. We are pacing well against our multi-year financial targets, including double-digit EPS growth and double-digit returns. We ended the quarter with record backlog. We expect adjusted EPS to grow approximately 20% at the midpoint of our guidance over last year. We expect record levels of free cash flow this year, a leverage profile below two times by year end, and over $3 billion of liquidity. Our end markets have never been better. and we see opportunity for further strength in the coming years. As I hope you can tell, we are proud of our execution and even more excited about the solutions platform we have built for the future. We are positioning Quanta for decades of expected necessary infrastructure investment and believe our service line diversity creates platforms for growth that expand our total addressable market. Our portfolio approach and focus on craft skill labor is a strategic advantage that we believe provides us the ability to manage risk and shift resources across service lines and geographies, which is increasingly important as the energy transition and new technologies add complexity to infrastructure programs. We believe our service offering, diversity, supply chain capabilities, and portfolio approach have improved our cash flow and returns profile and position us well to allocate resources to the opportunities we find most economically attractive. and achieve operating efficiencies and consistent financial results. I will now turn the call over to Jayshree Desai, Quantum CFO, to provide a few remarks about our 2024 guidance results, about 2020 results and guidance. And then we will take your questions, Jayshree.

Thanks, Duke. And good morning, everyone. This morning we reported third quarter revenues of $6.5 billion. Net income attributable to common stock, $293.2 million, or $1.95 per diluted share, and adjusted diluted earnings per share of $2.72. Adjusted EBITDA was $682.8 million, or 10.5% of revenues. Additionally, we generated healthy cash flows in the third quarter, with cash flow from operations of $739.9 million, and free cash flow of $539.5 million. During the quarter, we also successfully recapitalized the business following our acquisition of Cupertino, allowing us to address the maturity of our senior notes that were due in October. Our earnings and cash flow performance coupled with this recapitalization allowed us to end the third quarter with ample liquidity and a balance sheet that supports both our organic growth expectations and the opportunistic investment of capital to generate incremental returns for our stockholders. This morning, we also provided an update to our full-year 2024 financial expectations, which calls for another year of profitable growth with record revenues and opportunity for double-digit growth in adjusted EBITDA, adjusted earnings per share, and free cash flow. We believe our expectations demonstrate the strength of our portfolio approach to the business, our commitment to our long-term strategy, favorable end-market trends, and our competitive position in the marketplace. Additional details and commentary about our 2024 financial guidance can be found in our operational and financial commentary and outlook expectation summary, both of which are posted on our IR website. With that, we are happy to answer your questions. Operator?

Thank you. We will now be conducting a question and answer session. We ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue and those questions will be addressed, time permitting. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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. One moment please while we poll for questions. Thank you. Our first question comes from the line of Ati Modak with Goldman Sachs. Please proceed with your question.

Hi, good morning, Duke and Jayashree. You acquired some transformer manufacturing capability. Again, can you talk about that a little bit? Is the supply chain still significant of a concern going ahead, and how much of your internal needs can you now source, and are there synergies with the PTT assets, any color around that? Yeah, thank you.

We did acquire a small transformer manufacturing company in upstate New York in the quarter. It was a 100-year-old family business. When we were going through the markets, we did some things that would allow us to make this acquisition certainly beneficial to PQTI and the markets that we serve. We continue to see constraints on large transformers. This factory certainly helps us with that. Our backlog in the business has gotten longer, not shorter. We continue to see opportunities internally and find synergies with the ability to build both transformers and breakers as we move forward. So the supply chain constraints are there. They're real. We're trying to do things in the lower 48 with the load that we see. And so I think we'll continue to see ourselves get in a good position to make sure that We can have self-reformed capabilities, both from a manufacturing standpoint as well as to build on the craft skill labor on certain critical path items. So the synergies are there. We're seeing them show up. You can support the business internally. We build probably around 150 to 170 EPC subs a year. So we can support that, but that's not what we bought them for. We really believe it's to enhance the whole market And we would not do that internally, just a little supplement on some of our bills that provide synergies to some clients.

Got it. That's helpful. And then you talked about having visibility into the timing of renewable transmission projects. Can you give us a lay of the land, big picture view of how that's shaking out for the next few years here as conversations with your customers are progressing?

Yeah, I mean, I think everyone's hearing the market demand from load and in order to for loads to work, we need the transmission infrastructure. I would say that the inbounds, the bids, the proposals that we have, things in contract, things that we're talking about, record levels year over year, record levels in the 25, record levels in the 26, record levels in the 27. We continue to see more bid opportunities, more discussions on larger transmission capacity constraints. So, yeah, I mean, we've said it on the call, we've never seen the business any better, and we continue to believe that large transmission is the cheapest form of generation in many ways. So you can't do the things that we're trying to do and accomplish in the country without transmission, and we need to expedite it.

Awesome. Thank you so much.

Our next question comes from the line of Jamie Cook with Truist. Please proceed with your question.

Hi, good morning. I guess two questions for me. One, the renewable margins in the quarter obviously were pretty good, and you've made a nice improvement in margins for that business throughout the year. And then you raised guidance. I guess, Jay Shreed, is it unreasonable to think that 2025 we're finally at a place where you know, with the revenue and the performance of the business where we can expect, you know, double-digit margins because that's where we will be exiting the year. I'm just wondering if that's a reasonable expectation. And then I guess my second question, you know, Duke or Jayshree, Cupertino, just sort of an update on how that business is doing. Is there any change in your, you know, guidance for Cupertino, you know, for the year and then just potential for revenue synergies there? Thank you.

Hey, Jamie. This is Duke. I'll let Joe Street comment on some of the questions there in a minute. So when we see it, when we look at it, the renewables and margins, they were good. We did say that we could get them up in double digits. I believe we can. Over time, we've done it, and I wouldn't run it. You have seasonality in the business, so your first half will be a little bit slower, and you'll pick it up in the back half. Um, I have a transmission business that's in there today. That business has always ran in double digits to bladder businesses ran at double digits. So we consistently said we can do that. I believe that's possible going out as we move forward. Uh, Cupertino business, uh, certainly has provided synergies to us already. Uh, we continue to get inbounds on Cupertino. I think it's, uh, from our standpoint, something that will allow us a different customer base, uh, allows us to participate much in a much greater way in the data center business as, as we see it. So the electrification thereof, and it really, we haven't got the synergies like baked into anything at this point, but they're there much like Blattner they're there. And we're seeing those show up in our business today. We'll see Cupertino show up in our business in 25, 26 and beyond. And, you know, we're pretty excited about next year and what we see, but, You know, it's not a next year's story. We're delivering. We've delivered for the past five years. We continue to deliver. Next year will just be better than this year. Fisher?

Yep, you covered it. Just to remind you, Jamie, of the cadence of the renewable segment. So as Duke said, that cap is definitely usually stronger than the first half. Going into next year, I think the right way to look at it is what we said yesterday, that we have the opportunity to perform that 9% to 10% range in renewable energy.

But, Jayshree, sorry, the expectations, what's implied in the guide for 2024 for Cupertino, has that changed?

In 2024 guide? Yeah, for Cupertino, has that changed at all? Yeah, if you recall, we told you that Cupertino has the ability to perform in that one to $1.1 billion range in revenue, they're performing at the high end of that range.

Okay, thank you.

Our next question comes from the line of Steve Fleischman with Wolf Research. Please proceed with your question.

Yeah, hi, good morning, thanks. First question just on the, in the quarter, a lot of good backlog and revenue growth, but a lot of it was kind of acquisition, recent acquisitions. Could you just talk to organic growth that you're seeing and kind of why was that maybe a little slower in the quarter and how do you look at that from here?

I think, Steve, I think when you think about it, there was some backlog growth around $400 million or so in the quarter. You know, with the way the segmentation delineation of the segmentation is the segments, you know, create some issues for us when you think about just T&D, our traditional T&D business. It certainly, if you look at where we're at, it's 5% into the third quarter of growth organically. It's double-digit growth in the forecast at the midpoint of the range. So we have double-digit growth year over year at the traditional T&D business at the midpoint of the range. And we stated that going forward, we believe we'd grow that upper single digits on a go-forward basis organically.

Okay, great. And then one other question just on the data center opportunity, not just Cupertino, but also in your utilities business. I think you said recently that data center investment really hasn't even shown up in utility plans yet for the most part. Do you have a better sense when it'll show up there and then kind of filter through to your backlog.

Yeah, I mean, I think it's, you hear a lot about it. You're starting to see utilities issue equity. You're starting to see that come in. And, you know, a lot of that's the transmission growth, MISO, STP. Your RTOs are, you know, robust in the planning stages. You know, the thing is, if it's showing up three years from now, we better start today. And so I think We are seeing those discussions today from RTOs, from developers, from all of our customers. You have to start the transmission. The transformer is three years out. You're 36 months away from energization, and you need some time to build the substations. So I think it's a fallacy to think that you have to start building transmission now. And the worst thing that we can do as an industry is sit here So I don't think that sitting here works. I think everyone's moving forward. It took a little while to get this going. It took a little while to make sure that the rates are not punitive to the rate payers. And we have good rate structures across the country. You're starting to see those show up. So I'm pretty excited about where we're at as an industry, what I would consider moving forward against the big doubling of maybe tripling of generation over the next two decades. So All the transmission build and substation build behind that is substantial, and it has to get started, and I think we're in the early, very early stages of getting that started today.

Great. Thank you very much.

Our next question comes from the line of Alex Riegel with B Reilly. Please proceed with your question.

Thank you, and good morning, everyone. A couple quick questions here. Nuclear power generation has regained significant interest in small modular reactors, in particular nearing commercial deployment. Can you talk a bit about Qantas' opportunity in that generation?

Yeah, thanks, Alex. I think when you see it, you'll see it build a substation interconnection. I don't see us at SMRs in any capacity. I think they're a decade away to any kind of scale. So, yeah, nuclear will be a piece of it going forward. They'll still be back heavily renewable. Even your big reactors, you know, you're talking about a gig on the bigger plants, so the smaller ones are certainly less, and you'll see a lot of that from a standpoint of emergency generation, things of that nature, versus diesel. But I think it's an answer. It helps. Nuclear is something that's long-term. You're going to need it to come in. if we're going to grow the generation like we say we are. So, yes, but I think for us, as we sit here today, the way we see it is we'll be around the edges on the substations and all the electrification thereof.

That's helpful. And then, Dick, as the business has grown through the years, can you talk a bit about how the risk profile of projects, contracts, and the business in general has changed?

Well, anytime you have EPC, you know, you create risk. You have different kinds of risk. We stay to our knitting. I mean, I think we have a really good EPC program here where we're engineering, procuring product, and constructing. The linear part or craft skill labor is usually where people break down, and that's what we've invested in. We self-perform 85% of the business. So I think the self-perform capabilities of Quanta de-risk, our business, and we stay to that knitting, and we know the cost when we go into them, and having our own supply chains and our critical path items that we've done in the vertical supply chain really de-risked the project, and if there's risk in it, then there's more margin in it, and so I like the risk profiles that we have because we can create margin out of them, so we're in good shape, and I think you'll continue to see that type of environment going forward due to the fact that there's just not enough talent around and you're going to see EPC get built for certainty across the country.

Thank you.

Sure.

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

Thanks. Good morning. It seems clear that the big picture outlook here is developing pretty well, but maybe just to start with a couple of clarifications about some of the near-term dynamics. Just on the electric side of things, just curious what the kind of puts and takes on the revenue guidance that was unchanged for that segment in light of the extra $225 million of emergency work. Maybe that was just a shift in resources. I know that can happen with these storms sometimes. And then the 5% organic growth that you mentioned going to 10% for the year, I think you said last quarter 9%. I'm not sure if those numbers are all apples to apples. And maybe if they are, can you just remind us what's the programs that are driving the acceleration to that nice 10% for the year there? Thank you.

Thanks, Steve. Yeah, we talked about the donations of the segments, and we did have cream in it. across both segments. So you do get some of those things that show up in the way that the reports come out. When we look at it, yes, the storms are about 200 million incremental. You do with any kind of storms, for one thing, the company, you know, it's six plus, six and a half billion in revenue in a quarter. It's just, it's not that big of an impact to the company and maybe to others, it's not to us. And it does pull back off Our industrial business and the gas space during barrel, you have a lot of push out in our industrial business due to the fact that the storms came in. So you're seeing that show up in that margin profile in our industrial business. So you have a lot of turnarounds that pushed the storms. So the impacts across the company and portfolio, you can't see those things show up in the storm numbers. So there is an impact. We're pulling off transmission. We're pulling off some renewable projects There are larger flying people in from Canada to save human life, more importantly. And I think that's the struggle is to get everyone to see it's more than just a storm. We're also pulling off major, major projects to go do this, and it's necessary for the industry for us to do this. We had well over 5,000 people and continue in the mountains to restore power. So, yes, it's incremental, but it's not as big as what's being written. very, very small incremental gains there on the storm. So, yeah. And, you know, when we look at it going forward, you'll see those things show up. And I do think our renewable business is strong. The electric, like the T&D there continues to be good. And that's kind of where it sits today.

Okay. Just maybe a follow-up on the underground business. separate from the storm impact, were there any new challenges arising or is this just a continuation of kind of the same issues as before? And, you know, what's it going to take on the U.S. gas operations to get those delayed projects ramping up? Is that sort of just, you know, rate case decisions that we're waiting for?

I think when you look at it, the underground side of the business, They're building electric, they're building telecom, they're building renewables. The budgets certainly were impacted early. We talked about last quarter where if you're a utility and you could build underground electric or a gas, a lot of the gas budgets went to not a lot, but enough to cause impacts on our LDC business to move from gas to electric. And so we moved our crews along with that. We moved our crews into telecom, and you can see it show up in those segments. But, yeah, it did impact the LDC business, as well as the industrial business with the storms that pushed out there, more impacts. So we had those. We run it as a portfolio, as we've talked about before. And I think go forward, if we'll look at the portfolio in the 25, you get guidance in 25. We talk about guidance in 25. You'll see double-digit guidance at the EPS level. 15% certainly is in the realm of possibility and beyond into next year. And we're willing to say it. I just said it, into next year. So the concern may be short-term, but we see long-term growth, I mean decades worth of growth here. And that's how we're running the business in this portfolio.

Makes sense.

Thank you.

Our next question comes from the line of Julian DeMoulin-Smith with Jefferies. Please proceed with your question.

Hey, good morning, team. Thank you guys very much. Appreciate the opportunity. Look, how do you guys think about the emerging dearth of workforce driving a tighter backdrop here for the business? I mean, it's a pretty interesting backdrop for you all. You've been persistent in enabling a pipeline of labor training as a company.

Julian, we lost you.

Hello.

Hello, Mr. Dumoulin-Smith. Are you still there?

That's okay. I'll answer the question. Yeah. Okay. So the workforce, look, we have invested in it. I do think, as we stand today, we made substantial investments there early, eight, nine years ago, with both colleges and curriculum. It's well known. The craft skill labor program, As we stand today, we went from 53, 54 to begin the year. We're at 62,000 today. So that's 62,000. Some of it's organic. Some of it's acquired through Cupertino and others. But we continue to invest in curriculum. We see opportunities to look at craft skills that are getting performed along our segments and invest. And we'll continue to do that. We need to make sure that For us, that's the core of the business is that craft and 85% of that self-performed craft that we're supplementing across the country and all the service lines that we perform continue to grow. We've got to invest in that. We knew it early. We're working with our partners, our unions, and trade associations across the country to make sure that that investment for a trained, safe, dependable workforce is there, and we'll continue that as we go forward doing it.

Excellent. Can you guys hear me now?

Yep, gotcha.

Sorry, I don't know what happened there. Yeah, but just how does that impact your top-line inflation when you think about the business trajectory and what you're seeing right now? I mean, it seems like the overall sector is seeing this trend. How does that impact your potential for margin expansion and overall just top-line inflation at the same time to run with that?

Good question. You know, certainly we passed through the – we believe labor goes up about between 4% to 6%. as we move forward, let's three to five, probably four to six now. And we, those are passed through to contractually through to our, if it's not contractually, then we have it in our multi-year bids, but a four to six inflationary piece of labor has been there. It's been a long time. So that's always been a pass through or we've adjusted our portfolio and bids for those, for those labor impacts on the, on the data center business. on the inside electric piece of the business, it's certainly constrained more than our outside business. So we're also putting in training. We're also doing a lot of things with the Cupertino acquisition and that platform to enhance that labor force. And so I think you'll continue to see us. Anything we do that involves craft skill will be curriculum. We'll have college training. Credits with that will have a lot of different things where we're trying to enhance the workforces to build for the future.

Thank you, guys.

Our next question comes from the line of Gus Richard with Northland Capital. Please proceed with your question.

Yes, thanks for taking the question. Electricity demand is exceeding supply growth and delivery growth. And is there some point in time where demand overwhelms supply and there are shortages? And what's the near-term next two or three-year solution? Clearly, SMR is not the answer. And I was just wondering if you had any thoughts on that.

You're going to have to see batteries become longer duration, more batteries for the intermittency of renewables. Solar continues to get built. It's economical. Wind will be there. But gas has got to back it. You see all the gas generation that's coming online or anticipated to come online, I think, better said. That's there as well. But we've always thought gas would be 20% of the business. I still believe that's the case. Even at double growth, we'll still keep it up there just to keep the intermittency of the grid and to make sure that you can have that. The reserve margins, if you go across the country, used to have a pretty nice reserve margin across the country. I believe most of that is replenished substantially. And you can't run the grid on the edge. So you've got to get the generation in and get it in quick. to get those reserves back up on anticipated demand. And without it, you can't build. So one of the two things, you're either going to constrain the grid, constrain the keys, because you can't build generation, or you build generation. So I do believe gas is probably the most immediate thing that you'll see get built, along with solar and wind, as you see it today. But gas will certainly supplement more so than you've seen in the past.

Got it. That makes complete sense. And that feeds into sort of the next question. You know, given the hurricanes and fires and whatnot, are you seeing an increase in demand for hardening services? You know, are the utilities starting to allocate more resources, and are you seeing that benefit?

Yeah, I mean, I think the grid hardening programs, both fire and storms, are certainly there. We see it. across the board where you have multi-year type programs against fire or grid hardening per se. So, yeah, I mean, we see it quite a bit continue. It's early stages in many areas, but in other areas, Florida being one, you're in late stages or later stages. I won't say late stages, but mid to three quarters into something. in most areas. So a lot of people started with transmission hardening and you're starting in distribution hardening and undergrounding in certain areas. So I think your early stages of this and you'll continue to see violent weather impacts and demands from the client to have them up quicker. The only way you can get things up faster is you've got to harden the grid or underground it. One of the two. So that pressure against The grids that are, you know, 57 years old, you've got to do, you've got to modernize the grid. And you're doing all this while demand is doubling. So it is something that everyone's looking at from a standpoint of what do you do first? And you've got to harden the grid while you meet demand. So it is something that is unique to the industry these days.

Okay. Thanks so much. Mm-hmm.

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

Hey, good morning, guys. Good morning. So my question's on the MSA renewal process, and I know that this is an ongoing process for you guys year in and year out, but I'm just curious, how much of the business is up for renewal over the next 12 months? And then, you know, I think these contracts are, you know, three to four years in duration, so I'd love to get a sense for It's like how those conversations and how the contracts have changed versus, you know, three to four years ago from like a terms perspective. You know, if you can talk pricing, you know, like that would be very helpful.

Yeah, I mean, MSAs are really a framework for unseen work in many ways. And it allows, you know, contractual terms to be done and resources to be allocated. I would say... As it stands today, it's much more collaborative because you can see the business longer. So can our clients. And you can see capital out and plan and prepare. It's certainly more efficient and more prudent to get out in front of it. So, you know, have the labor there. The labor shortages don't show up if you talk long term. So I think they're longer in nature. They're bigger as we see it. They, you know, I can't tell you how many are up. We have, I don't know, hundreds. maybe thousands of MSAs, maybe 10,000. I don't know. A lot of MSAs that go around, we've worked off of them for 50 years. So it's very, very difficult for me to, I mean, one client could have 50 MSAs. So it's just, it's extremely difficult for me to give you those numbers. But what I would say is the base business is 85% today. And that's those MSAs typically around that for the most part. And as we see it going forward, it will be 85% as the business grows on the top line. You'll still see it at 85%. So as the business has grown, because the MSAs and our ability to bid or negotiate or collaborate with the client to continue that, the stickiness of that and supplement their current workforces is there and will continue to be there going forward.

That's helpful. Second question is on Cupertino and labor availability. So I'd love to get a better sense for how you plan to integrate that segment with your labor training program. Just trying to figure out just how much labor that can unlock over the next couple of years and how fast you can scale the business. And if you can, just how much in terms of headcount is Cupertino?

Yeah. I think Cupertino, when you look at the workforce and how it's trained, I mean, they've got very good training programs, you know, three, four year, four year training programs, I believe. So very, very good. When we look at it, can we supplement it? Yes. I think what we can do is early on our recruiting process is the way we get people into the trade. You know, some people can't climb. Some people don't want to climb so we can move people over into that segment. And it's just a, it'll be synergistic for us as well. Some won't want to stay on the ground. They want to climb. So both sides of that continue, and we're always around the edges of each other. Craft is very similar. The way we think, the company sits on top of us nicely. And so when you look at that, it just bodes well for us to recruit what I consider the top talent, Out there, they were, you know, what I, premier solution provider for the data center business for, you know, a long period of time since inception. They have capabilities across the board beyond data centers that we like a lot, both solar, wind. It's a different labor pool, but they're exceptional in what they do. So we're excited about supplementing the curriculum, supplementing the onboarding, the, you know, what I would consider pre-apprenticeship programs that we have where people are smarter and faster and more productive when they get in. So all those things will certainly benefit both us and Cupertino going forward. The count is between 4 and 6,000, somewhere in there. It varies depending on where they are.

Thanks.

Mm-hmm.

Our next question comes from the line of Drew Chamberlain with JP Morgan. Please repeat your question.

Yeah, good morning. Thank you for taking our questions. The first one on the renewable side, some positive commentary in the prepared materials on bidding activity and what you're hearing from your customers, but obviously bookings throughout the first part of the year, our first record has been a little lighter than last year, and just kind of want to hear your thoughts on maybe what's holding up some of this from converting into into backlog and maybe what are some of the headwinds and stuff that you're hearing from your customers, maybe on the election, IRA, and when this can really convert?

I expect us to, between now and the next time we get on a call, a substantial amount of LNTPs going into contract. The negotiations are robust and I'm not sure. I can't put a finger on why the backlog has not increased more there based on what the conversations are. It's just pen to paper in many ways and from LNTP to final FID. So I'm not concerned. The inbounds are as good as they've ever been in the negotiations, verbals, all the things that we're discussing on the renewable segment. I feel confident that You know, going into next year, the backlog will grow, and, you know, it'll look different the next time we have this discussion. So that piece of the business I'm not concerned with on the backlog side of it. So we see the market, you know, continuing to progress forward, the solar business, the wind business, even the power business. Batteries are growing, our fastest growing piece. But we like it all. We see it. It's coming our way, and... I think the election, yeah, I could have a little bit of a delay, but the feedback we're getting from the client is either a Harris or a Trump win. You're going to have some noise in one or the other, but the business itself and the underlying business continues forward, and I believe our customers would say the same thing.

Okay, great. Thank you. And then just on the data side, you updated the updated the market forecast that you used in the deck, calling for a 23% CAGR versus I think it was a 15% prior. What's changed quarter over quarter? Have conversations started to look materially different? And do you think that this higher growth rate is indicative of what your business is going to do and what your internal expectations are over the course of the decade?

Yeah, just as a reminder, those are third-party reports that we're putting in there. And I think what it does is just reflects the continuing optimism of how much data center growth is out there, as well as the power needs for enabling that data center growth. That's really what we were trying to show in that graph. But from our customer standpoint, I can let Duke talk about that.

Yeah, I think that the graphs are certainly indicative of what we see in the business. And when you think about the growth and then what we've done, Yes, some of it's inorganic, but you also need to look at if we've done it consistently over the last seven, eight years, we'll continue to do that going forward. And I do think the growth of the business at the midpoint staying under two of leverage, you can see it going forward. And it's basically the strategies of the company that put us in the data center business that put us in the, you know, renewable business going forward and, and, when you think about the nexus of it, it all comes together. And the need for power at a data center is substantial. Can we be a solution to all the things? Yes. Are we in the middle of the discussions on all things data? Yes. Are we in the middle of the discussion on all things power? Yes. So it allows us a unique position to help and collaborate with multi-customers. And I just think it's from east to west, and it's a lot of opportunities, and the company's pretty excited about what we can do with the growth platform that we've built and the TAM that's around it. The addressable markets are much bigger than they were yesterday. So I like where we sit, and I like our customer base.

Okay. Thank you.

Our next question comes from Brian Brophy with Steeple. Please proceed with your question.

Thanks. Good morning, everybody. I wanted to ask one on cash flow. So implied free cash flow conversion versus EBITDA for this year is now about 60%, excluding that Canadian transmission collection, which is obviously a little bit higher than some of your longer-term targets that are out there. Is there anything in free cash flow this year that's more one-time in nature, or is this a good way to think about core free cash flow conversion going forward? Thanks.

Yeah, I think... We are very pleased with where we sit with our free cash flow. It's a reflection of several things. One, of course, is the mix of work. The renewable business and the way those contracts are structured continue to be very working capital accretive, and so you're seeing the benefit of that in our free cash flow guide. We are doing better at our collections. Our DSO is improving, so those things are all factored into our free cash flow. guide for the year. I will say going forward, we've set our expectations. The right way to look at it is around a 45% to 55% conversion rate. With Cupertino now, we do believe we have opportunities to be on the high end of that range and even greater, as we've seen this year. But it really depends on the mix of work. And so we have a big storm like we had this quarter, last quarter. That can be a drag on free cash flow. depending on the mix of the MSA work and how that comes into play, that can also be a drag on working capital. So I think the right way to look at it, Brian, is continue to be in that 45% to 55% range with very good opportunities being the high end in that range.

Yeah, and I'll add, you know, the impact of Canada is certainly in the numbers. You know, we don't expect to collect that this year. So that is certainly... pressing on the number. That said, we did get some of the money in. We like the way the negotiations are going. Nothing wrong. We were highly confident in the claim. We're highly confident in what we've done from a construction standpoint, which has taken longer to get into paper in Canada to receive our money. And so I do believe you'll see it in next year. We're not going to press the business to tell you exactly when, because I think it's more important to get the right answer for what we deserve and what we've done, and so does the client. So we're just working with them to get the collections. But nothing wrong with the collections. It's taken a little longer.

Appreciate it. You answered my follow-up. I will pass it on.

Our next question comes from the line of Andy Kaplowitz with Citi. Please proceed with your question.

Good morning, everyone. Hi, Liz. Duke, I know one of the questions you get occasionally is that as SunZia ramps down, you know, in 26, given the size of the project, that it'd be tough to fill. We all know there's so much more to quantum than just large electrical transmission projects. But, you know, how do you see that environment? Do you see sort of a new wave of large projects that could come out, you know, in 25 and 26? Or how do you think about that?

Yeah, I mean, we see, you know, multi-projects and you know, whether they're a billion or 2 billion or five, 500 million, they're there. I, you know, we're probably in a, I will say it again. It's the inbound and the negotiations, the verbals, the way you build discussions are substantial. And I was somewhere the other day and I was here, I was listening to, I can't, one of the bigger manufacturers, uh, Steven Satachi or one of them, I can't remember which one it was, talking about transformers. And they said, hey, we can get there by 2030. If we said that today on the work that we did, oh, we'll get you by 2030. I would just tell you, like, that's not in our DNA. And that demand is the same for us. The demand for larger transformers. projects that are out there has never been greater. And we see it to the left, to the east. You can look at MISO. You can look at SPP. You can look at ERCOT. You can look at the 765 build. You can look at anything you want. Developers, just pick something and pick a geography within the country and see if you don't see large transmission. They're just as big as projects. If you add them together or you take one, you take three, We're not concerned with our ability to look at large construct. I do believe you'll see the stacking effect of the business going forward. We see it in 26. We see it in 27. We see it in 28. We see it in 29. We see the same thing they see.

So to that point, Duke, I mean, there's always going to be a little bit of noise, but at the investor day that you had a couple years ago, I mean, you talked about sort of this upside case of 15% plus EPS growth. That would get you with capital deployment to $11 to $12 in 26. I'm sure you don't want to give us a guy from 26. But at the same time, does it feel like you're absolutely tracking to that upside case given what you guys have done with Cupertino and Blattner and then the markets themselves?

I mean, I said just a minute ago next year, if we grow double-digit EPS, if it's 15, we certainly have the opportunity for 15 and beyond. We've grown 20. this year at the midpoint, uh, deploying capital. So I, you know, we see, you know, our ability to play capital continues. We, we believe we'll be in, you know, some part of the range will be in double digits in 25. So if it's in 25 and we're going to go to the bottom 10%, I get you to $11 and 26. If you just do the math and look, that's easy to say it comes out real quick, but, We've got to get and deliver it and execute on it, which I don't think we're a story about tomorrow. We're doing it today, and I think we'll do it in 25. I think we'll do it in 26. We certainly have the opportunity, and the markets are there.

Appreciate the color.

Our next question comes from the line of Michael Dudas with Vertical Research. Please proceed with your question.

Good morning, J.C., Kip, and Duke. How are you doing?

Good morning.

Let me follow along on allocation and capital. Given the extraordinary demand and the excitement that's within the vendors serving the electric utility and development industry, when you're talking to the various companies that you're looking to maybe bring on board in the next couple of years to solidify your long-term plans, are the industry going to need – it seems like there's going to be a lot more scale and consolidation needed, and are you know, potential sellers of their businesses, looking towards that to kind of get to the next level of their growth, and that provides opportunities for you guys to kind of get into the areas to maybe even especially maybe on the front-end engineering kind of work because it seems like the customer base is wanting a lot more of that from you given the collaboration you've been talking about.

I mean, certainly the front side of the business, as we call it, the engineering, the permitting, all those things are a big part of the business, and we need to look at those things to add to our strategies, and that's been known for a long time. We're disappointed about how we acquire, and we'll grow it organically. We'll grow it somehow, some way. If we have to partner, if we can acquire, we'll acquire. We're not going to acquire at any cost. We've said that before. we are disciplined to it and we'll stay disciplined to it. So we see that we see, you know, longterm, long, if you look at the transformer business, we acquired the a hundred year old business, a family business. It wasn't for sale. And I think when you, when you think about it, people are, they want these big longterm businesses. They want stability in their companies. They want to perpetuate the name. They see what we do. They see how we take care of people. They see, um, the culture that we have here and we're very selective. And when we look at it, I mean, you know, Cupertino is a great example of a multi-decade relationship that, you know, generationally we can provide great things for their people, great things for the managing, great things for the family. And, uh, you know, they keep the culture that they've had yesterday and the name still on the truck today. And it will be in a decade from now. So I think that's the key to it is just continue to create the culture that we have here. People, Generationally, I'm not sure why craft and the perpetuation, when you get down a lot of people that have businesses that are large in nature that provide craft skills, their kids want to go build apartments and real estate or other things. They don't really like the businesses that their families have or they're not interested in craft and things like that, which is fine. It's great. So they're looking for stability for the people, and I think that's the key for us is to find those businesses and attract them and continue to execute on the culture that's here and protect it and move forward with it while we're creating what I would consider great returns for our investors and stakeholders.

Well said, Duke. Thank you.

Our next question comes from the line of Sangeeta Jain with key bank capital markets. Please proceed with your question.

Yeah, thank you guys for taking my question. So Duke, the DOE just recently signed on to become an anchor tenant on a handful of transmission projects. Can you tell us what you think that means? Does that bring them to the front of the line? And are you already talking to some of them?

Yeah, I mean, we talked to the DOE, we talked to the people that are anchor tenants, quite a bit, you still have got permitting and some of them have transformers, some of them don't. I do think it helps, but in reality, your utilities, your IOUs that are sitting right there, if it's not an IOU, which some of them are, I'll just say it has inherent risk and more difficult. It's not that it won't happen, it's just harder. And I do think the projects that you see the DOE back are good. I mean, they're great projects, and we're all around them. And we like that anchor tenant. It's a great concept. I think, you know, when you look at Texas with the Texas Fund and the things that are happening there, same thing. But a lot of the states and the permitting states and the PDCs and things like that, it's really about a ratepayer discussion. Are we putting pressure on rates at the ratepayer level And when you look at it, T&D is not the biggest piece of a rate. And so we've got to do a better job of how we discuss that to the rate payers because gas, interest, a lot of different things are way more impactful than building T&D infrastructure. Actually, T&D infrastructure makes the rates go down through congestion and things like that in most cases. So I think all those things that you have to look at, if you can prove those things out, the projects go much faster.

Got it. So that's very helpful. And on that, can I also follow up with the recent transformer acquisition that you announced? And if that is a different type of transformer versus the PTT, or honestly, anything that you can tell us on that acquisition would be great.

Long discussions in the transformer acquisition on the one we just made as well as PTT. So we've We've been in discussions since pre-COVID on the transformer business. We like the business. It's supplemental. It's a little smaller than the class, the bigger class transformer that can be made in PTT. Not to say that the utilities they serve, the clients they serve in the areas are certainly there. We can cross-sell. We can sell internally. we're out in the 27, 28, even into 29 with these factories. And so we just got to watch it. We got to, you know, understand the market and serve our internal customers as well. And we're very, very small percentage of manufacturing. And I think for us, it's really a backstop against it. If you get terrorists in China, or in other places, transformers become difficult. And we have U.S.-based long-term transformers here. And it will allow us to move our current workforce and projects forward. And we're really de-risking the business against those things, as well as collaborating with the clients on U.S.-based manufacturing, and that's the key for us is to continue down the path and critical path items that we believe are, you know, risk to the supply chain.

Got it. Thank you so much.

Sure. Thank you.

Our next question comes from the line of Mark Bianchi with TD Cowan. Please proceed with your question.

Thanks. I guess this is a little bit of a follow-up to the prior question. There's been some concern expressed by renewable developers around labor and supply chain challenges being a bottleneck to their growth. I know you just talked about the transformer thing a little bit, talked about labor earlier, but I think that was maybe more around kind of the T&D side of the business. But could you talk about what you're seeing on the ground right now as it relates to some of these supply chain concerns? Is there anything that's maybe incrementally worse or better than it was last quarter?

I mean, you have to get into HVDC, certain kinds of HVDC, especially DC construction in your large stations to get like real bad. But besides that, I mean, I had transformers, you know, certainly a constraint breakers are certainly a constraint, but we've been able to, You know, we have a good, robust, we see it. So I think, you know, the things that we've done in our supply chain, we can help and enhance developers. Certainly, you know, our partners and the ones we collaborate with for sure move projects forward. It's certainly something that the company has been able to do and collaborate with on clients. So we like our positioning there. I don't think it's gotten any worse. It hasn't gotten any better, though. You would think it would get better. It hasn't. And so it's just kind of stayed the same. Labor, from our standpoint, I wish that manufacturing would get out of our capacity. I do. I don't believe I'll see it in my lifetime. But we've been able to outpace any kind of permitting bill, any kind of constraint. So if someone says come and build, you know, 1,000 miles of 500 KV, Tomorrow, I will tell you, if they said it three times over 5,000 miles, the answer is yes and yes and yes.

We're ready. Got it. Thanks, Duke. That's all I have. Thank you.

Thank you. We have reached the end of the question and answer session. I will now turn the floor back over to management for closing comments.

Yeah. First of all, I want to thank the 62,000 men and women out in the field and the inclement weather and what they've done in these natural disasters. You know, I would tell you their first responders, they've seen a lot. The respect that they deserve is certainly something that we see every day, and I want to thank them. They've done a hell of a job, and they're the best in the business. And I want to thank you all for participating on the conference call. We appreciate your questions and your ongoing interest in climate services. Thank you. This concludes our call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.