Title

Presentation

Quanta Services, Inc. misses on earnings expectations. Reported EPS is $1.65 EPS, expectations were $1.67.

Operator: Greetings, and welcome to the Quanta Services Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kip Rupp, Vice President of Investor Relations. Please go ahead.

Kip Rupp: Thank you, and welcome, everyone, to the Quanta Services Second Quarter 2023 Earnings Conference Call. This morning, we issued a press release announcing our second quarter 2023 results, which can be found in the Investor Relations section of our website at quantaservices.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 Quanta Services website. Please remember that information reported on this call speaks only as of today, August 3, 2023. And therefore, you’re advised 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 and including all statements reflecting expectations, intentions, assumptions or beliefs about future events or performance, but 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 Quanta’s control, and actual results may differ materially from those expressed or implied. We’ll 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 slide presentation.

Please see Slide 2 in the appendix of the slide presentation for additional information regarding our forward-looking statements and non-GAAP financial measures. Lastly, if you would like to be notified when Quanta Services publishes news releases and other information, please sign up for e-mail 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 will now turn the call over to Duke Austin, Quanta’s President and CEO. Duke?

Earl Austin: Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services Second Quarter 2023 Earnings Conference Call. On the call today, I will provide operational and strategic commentary, and we’ll then turn it over to Jayshree Desai, Quanta’s CFO, to provide a review of our second quarter results and full-year 2023 financial expectations. Following Jayshree’s comments, we welcome your questions. Our second quarter results continue our solid start to the year with strong double-digit revenue growth that resulted in record quarterly revenues exceeding $5 billion for the first time in our history as well as a record total backlog of $27.2 billion. We added approximately 3,000 employees during the second quarter due to the building momentum and increasing demand for our infrastructure solutions.

We are investing in safety and training programs for our employees expanding various service lines and advancing our supply chain and other solutions. We are positioning Quanta for decades of necessary infrastructure investment and continue to believe our operational portfolio is a strategic advantage that provides us the ability to manage risk and shift resources across service lines and geographies, which we believe will become increasingly important as the energy transition accelerates. We believe our portfolio approach positions us well to allocate resources to the opportunities we find the most economically attractive and to achieve operating efficiencies and consistent financial results. Our Electric Power Operations are performing well overall, though segment margin experienced some pressure from lower utilizations in Canada.

Demand for our Electric Power Infrastructure Solutions is strong. driven by broad-based business activity from utility grid modernization, grid security and system hardening initiatives as well as our reputation for consistent and safe execution. Accordingly, we are investing in resources ahead of the anticipated start-up of multiple multiyear utility programs and projects. Additionally, our communications operations continue to execute well from both a revenue and margin perspective. Going forward, our utility customers’ multiyear CapEx plans remain strong and we are having discussions with a number of them about capital plans and programs looking out in years. North America’s power grid continues to be challenged by a number of demands, including the need to increase the pace of modernization and increase the grid’s resiliency and reliability through system hardening, enabling new technologies, facilitating higher levels of electric vehicle penetration, meeting growing power load demand and capitalizing on favorable federal and state policies designed to accelerate the energy transition.

We believe Quanta Solutions offering and ability to safely consistently execute is industry-leading. We are uniquely positioned to collaborate with our clients on their multiyear grid operations. Renewable Infrastructure Solutions segment revenues increased significantly in the quarter as construction of renewable generation projects within the multiyear programs ramped up and high-voltage electric transmission and substation work remained active. Segment total backlog reached a record $7 billion at quarter end, driven by the addition of SunZia transmission and HPDC converter station contracts and various renewable generation, transmission and substation projects. We believe the momentum in this segment will continue, and we are making the necessary investments to scale our resources and capacity to handle multiyear renewable programs that we expect will yield record levels of new renewable generation over the coming decade, driven by the RA and acceleration of North America’s energy transition.

Additionally, we are pursuing billions of dollars of high-voltage transmission projects that are designed to support current and future renewable generation capacity growth and overall system reliability. As we have discussed on prior earnings calls and reported more recently in the media, federal and state policies designed to accelerate the energy transition and the electrification of everything, are expected to significantly increase load demand and are already pressuring the power grid. At the same time, there are significant challenges to getting regional transmission infrastructure built in a timely manner, primarily due to obtaining necessary environmental permits and regulatory approvals. The need for collaboration at all levels to ensure great reliability while minimizing cost impacts to the ratepayer remains the industry’s greatest challenge.

We remain pleased with the performance of our Underground Utility and Infrastructure Solutions segment, which delivered double-digit revenue growth and record second quarter profitability, demonstrating solid execution across our operations in this segment. Our Industrial Services Operations executed well, and we had strong demand for our gas utility and pipeline integrity operations, driven by regulated spend to modernize systems, reduced methane emissions, ensured environmental compliance and improved safety and reliability. We believe we are in the early stages of capitalizing on significant opportunities across our service lines and geographies, which are driven by our collaborative solution-based approach that is designed to ultimately benefit consumers.

Additionally, the growth of programmatic spending, with existing and new customers, increased renewable generation activity and favorable megatrends provide greater visibility into our near- and long-term growth outlook. As a result of these dynamics and our solid year-to-date financial performance, we have increased our full-year 2023 financial expectations for revenues, adjusted EBITDA and adjusted EPS. The energy transition towards a reduced carbon economy continues to progress, and we believe is gaining pace. Quanta is successfully executing on our strategic initiatives to drive sustainable and resilient operational excellence, total cost solutions for our clients and consistent profitable growth. 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 build leadership.

We will pursue opportunities to enhance Quanta’s 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 the second quarter results and 2023 expectations. Jayshree?

Jayshree Desai: Thanks, Duke, and good morning, everyone. Today, we announced record second quarter revenues of $5 billion. Net income attributable to common stock was $166 million or $1.12 per diluted share and adjusted diluted earnings per share was $1.65. Our second quarter electric power revenues were $2.4 billion and operating income margins were 10.1% consistent with our expectations for sequential revenue growth and margin expansion against our first quarter results. Our base business activities continue to lead the way for the segment of utility investments in hardening and modernization initiatives create growing demand for our comprehensive solutions. While the segment executed at a double-digit margin profile, it was negatively impacted by a lower-than-expected utilization of electric resources in Canada.

Renewable Energy Infrastructure segment revenues for second quarter ’23 were $1.4 billion, with operating income margins of 8%. The revenue strength in the quarter reflects the growing momentum behind renewable energy infrastructure and our customers’ ability to move forward with construction activities in this favorable regulatory environment. Margins improved sequentially as increased revenues contributed to better cost absorption and as we successfully executed through risks on ongoing projects. Underground Utility and Infrastructure segment revenues were $1.2 billion for the quarter, and operating income margins were 8.6%, a noteworthy second quarter performance. Both large projects and base business operations contributed to the elevated revenues with margins benefiting from improved fixed cost absorption.

For additional commentary comparing 2Q ’23 to 2Q ’22, please refer to the slides accompanying this call. Regarding backlog, with the inclusion of two of the three contracts with the previously announced SunZia award and continued robust activity in our Renewable segment we achieved another record level at quarter end. At June 30, 2023, backlog was $27.2 billion, an increase of $1.9 billion compared to March 31. Our 12-month backlog is also at a record level of $15.6 billion, approximately $1 billion higher than March 31. For the second quarter of 2023, we had free cash flow of $46 million. measured 78 days for the second quarter, lower than our historical average and aided by favorable billing arrangements associated with certain awards during the quarter.

Regarding the Canadian Renewable Transmission Project, we’ve discussed in prior quarters, based on operating conditions and our ability to achieve stakeholder targets while overcoming the COVID-19-related challenges encountered throughout the course of the project, we decided to accelerate the construction schedule into the spring and early summer. As a result, the contract asset balance grew during the quarter and continues to pressure DSO, and will do so until we finish the project. Given our successful execution in the field and the ongoing discussions with the customer regarding significant portions of the balance representing approximately six to seven days of DSO as of June 30, we remain confident in our position. As of June 30, 2023, we had total liquidity of approximately $1.8 billion and a debt-to-EBITDA ratio of 2.5 as calculated under our credit agreement.

We expect second half earnings growth and cash generation to support our ability to delever over the coming quarters while continuing to create stockholder value through opportunistic capital deployment. Turning to our guidance. We are pleased with our performance through the first half of the year and see significant strength in the back half of the year, particularly the fourth quarter. From a segment perspective, we continue to expect Electric Segment revenues between $10 billion and $10.1 billion for the year. However, we expect full-year margins will be impacted by the costs incurred this year in preparation for the anticipated growth in multiyear utility programs. That, along with pressure from our Canadian operations, is leading us to lower our full-year margin expectations for the segment to range between 10.5% and 11%.

Regarding our Renewables segment, given the performance of the second quarter and increased visibility into project activity, we are raising our full-year revenue expectations for the segment by $700 million, now ranging between $5.2 billion and $5.4 billion. We continue to expect margins around 8.5% for the year as much of the work is just getting started, and we will need to execute through project risks before margins have the opportunity to improve. After a good second quarter, we now expect revenues from our Underground segment to range between $4.4 billion and $4.5 billion, a $250 million increase at the midpoint and we continue to expect full-year margins for the segment to range between 7% and 7.5%. As Duke said, given our performance to date and improved visibility, we are raising our full-year revenue expectations, which we now expect to range between $19.6 billion and $20 billion, a $950 million increase at the midpoint of our range.

We’ve increased our expectation for full-year adjusted diluted earnings per share attributable to common stock to now range between $6.90 and $7.30 and increased our expectation for full-year adjusted EBITDA to range between $1.88 billion and $1.97 billion for the year. With regard to free cash flow, we are modestly raising our full-year expectations, primarily due to the expected increase in renewable revenues, which typically have a favorable working capital profile compared to our other segments. Therefore, we now expect free cash flow for the year to range between $800 million and $1 billion, with the highest levels in the fourth quarter as is typically the case. We slightly modified other aspects of our guidance, the details of which are included in our outlook summary, which can be found in the Financial Information Section of our IR website at quantaservices.com.

Looking ahead, we are excited by the momentum and highly visible and growing multiyear outlook behind our Electric and Renewable segments. Additionally, we are encouraged by the strength of our underground utility and infrastructure segment, which continues to grow and execute at a high level. With this core operating portfolio, we are confident in our ability to deliver comprehensive solutions to support the energy transition and to create significant shareholder value through organic growth and strategic capital investment. I’ll now turn it back to the operator for Q&A. Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Brent Thielman with D.A. Davidson. Please proceed.

Brent Thielman: Great, hey thank you. Good morning. A nice rebound in renewable margin this quarter. I was wondering if you could just provide an update on solar supply chain pressures previously seen, maybe how that may or may not still be impacting the new renewables business? And should that sort of be a factor here still for you for the rest of the year?

Earl Austin: Thank you. Good morning. We’re seeing what we thought would happen with the solar supply chain slashing in general, I think we are operating through those issues, and we had six months really where the industry stopped. And as we move forward, we thought there would be cadence to the segment to solar in general. That cadence is playing out like we thought. We’re certainly increasing guidance due to some of that. And I think as you go through ’23 and you operate through ’24, you’ll get a more balanced quarter-over-quarter type margin profile, but the margin pickups and the opportunities that we see on the other side of the year — second half of the year into ’24, ’25 and beyond are certainly what we thought are greater.

Brent Thielman: Got it. Thanks, Duke. And then just my follow-up. Can you talk about what from SunZia is reflected in bookings this quarter? Is there still more to come as you’re likely still in negotiations? Is it all represented here in the financials?

Earl Austin: No. We’re still negotiating a third contract there on the wind side of the business. So that will be — we believe we’ll have that finished up here in the second half of the year, third quarter, fourth quarter, somewhere in there.

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

Michael Dudas: Good morning, Kip, Duke, Jayshree.

Earl Austin: Good morning, Mike.

Michael Dudas: Duke, I want to follow-up on your prepared remarks, you talked about the challenges that the customers, utilities and regulators are facing. Have — I assume to date, they’ve been overcome? Are there — do you anticipate or given your discussions with your utility clients that there’s going to be much more coming ahead like in the next 12 to 18 months? Or is it sooner? And is that impacting any of the mix of what type of either wind or solar development or what — from regulators and customer base are looking at as you pace out your backlog opportunities?

Earl Austin: Yes, Mike, good question. When we look at regulation and you look at the — what’s going on at the consumer level, when you rebate EVs, the way we’re rebating and then the grid itself at the distribution level certainly needs a rebuild, a significant modernization. So that needs to get started now, not when the consumer is getting his car and bringing it to the home, and they have no way to power their vehicle or it’s inter-minute power. So I think as an industry, we’ve always been in front of what we anticipate. In those levels, we have to get in front of that. So at a federal level and state level, the collaboration with — along with utility customer is necessary and where you have states that are worried on the bill and the capital at the consumer level, which we are as well, and you have federal pushing the other direction.

We’ve just got to get a better mechanism to make sure that we can service what’s coming at us. I think when you listen to the car manufacturers, when you listen to anything that we’ve been talking about, we thought that generation would double, we’re here in triple now. There’s no question it’s moving forward. If it’s double, if it’s triple and you’re also decreasing the decarbonization of coal and gas with renewables, the impacts for interconnections for transmission, the rebuilds that are necessary are monumental and the necessary capital to go into the grid, although when you look — when you go forward and you try to net present value, total cost of energy, I think it’s the right answer. It’s just we have to get started with the capital plans and they’re greater than you may anticipate or anyone may anticipate as you move forward.

So it’s just trying to put people in front of that and make sure the industry is collaborating. When we look at our clients even with inflation, even with everything that’s going on, the capital is moving up. It’s just the pace of where we need to be five years from now. It’s not a matter of tomorrow. It’s a matter of three years from now, five years from now in the industry itself is certainly I’m talking about the need for transmission and also the modernization of distribution systems.

Michael Dudas: So I guess from a — the industry has been growing base load electricity at very slow rates. And are your customers seeing that going to be accelerating in the next five years? And again, are the plans there to that you have the ability to capacity given your three to five year outlook to execute on that?

Earl Austin: I think when you look at transmission, certainly, it’s necessary if your fuel switching and then where the load is going from data centers, AI to just about everything, you’re seeing load growth now in the industry across the board, you’ve got 110-degree heat. You had a low, what I would consider a mild winter, first quarter was pretty mild for the industry. But July into August, you’re 100 plus in many areas. It just — those impacts to the way capital is spent and where it’s necessary to spend. You start moving up deviations of temperatures on this grid from a planning standpoint, it’s exponential of load.

Operator: Your next question comes from the line of Steven Fisher with UBS. Please proceed.

Steven Fisher: Thanks. Good morning. Obviously, some of the investments you’re making for growth are weighing a little bit on the electric margins for now, but it’s not really a new concept you’ve long talked about how you need to make investments to prudently support the growth. So can you maybe just talk a little bit about some of those investments that you’ve made this year already to support the growth, if you can kind of quantify year-over-year what that impact is? And how should we think about the investments for the second half versus the first half kind of where you’re making these investments and out of frame what that might look like in ’24 relative to the investments in ’23?

Earl Austin: Yes, Steve, I think when you look at the quarter, we added from around 3,000 employees. We normally add about a 1,000. So when you start thinking through that, it does pressure where the company is capable of training, doing all the things that we need to do, the investments are already made. It’s just pressure, there’s four or five things that we could call out that’s pressuring inflation, and you can call out whether we can make all kinds of excuses about it. Really, we can operate much better in Canada than we have been operating. The transition is a little bit behind in Canada, where we can operate Canada at normalized margins. We’ve been through the pandemic there. We’ve made different levels of, I would say, balance from G&A to training, to indirect and all those kind of things in Canada.

As we move out of ’23 into ’24, you’ll get into more normalized Canadian execution, and I think you’ll see much better results that we can absorb just about anything. The portfolio that we put together in the segments, which should allow us to train, to put people in place for the foreseeable future. And still even in outward growth years, produce the type of margins that we produced in the past. I see no reason why we can. And I do believe we can operate the renewable segment in double-digits. I’ll stand by it.

Steven Fisher: Okay. And maybe just to follow-up there. Jayshree mentioned that the Renewables margins are staying in this range until you can get comfortable with, I guess, execution and some of the other risk factors. So how should we think about the timing for allowing some of that upside to be realized in the margins and when could we see that better margin come through Renewables?

Earl Austin: Yes, Steve. We’re starting quite a few large transmission projects in the segment. We’re also starting thousands of renewable-type utility scale solar win. So when we look at that and where we’re at, the cadence itself, we thought it would be back end loaded. So the start to the jobs as we operate through those contingencies, I think you’ll see a more normalized margin profile into ’24. We have to operate in double-digits in the second half or you won’t get to the numbers that you — what you see. I do think there’s opportunities all the way through for us, we took a prudent approach to it. We tried to hit it down the middle. That’s what we’ve done here. And I do think there’s opportunities into ’24 to get on a more normalized cadence.

Operator: The next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed.

Andrew Kaplowitz: Good morning, everyone.

Jayshree Desai: Good morning.

Andrew Kaplowitz: Would backlogs continue to rise in your underground utility business and revenue has actually continued to pick up. I know last quarter, you were modestly concerned. You did raise the forecast there for the year. for this year. So what are you seeing on the ground there? And how are you thinking about the business moving forward? Could it end up being more resilient even into ’24 than you expected?

Earl Austin: When we look at the UI segment, we’ve said that we thought we could get scale through some regional offices through the portfolio. I think you’re starting to see that show up in the segment. We did — we’ve operated great. We’ve had good industrial performance in the first half of the year. When you get into the back half, we do see some — we have some pipe awards that we were awarded. We have some good things going on. We don’t need those things to make the numbers. So we do see opportunity but you also have the weather impacts. We’re doing more electrical underground. And so that will shift some of our UI segment over in the Electric segment. Just the way the segment reporting works, but as far as the crews and what we’re doing from the scalability, it should rise our returns on the company. It will rise returns on the company overall. And the segment is also doing nicely in our service lines.

Andrew Kaplowitz: Duke, maybe if I could follow-up on that. You did 8.6 in that UI segment, which is basically as high as we’ve seen Quanta deliver but it’s maybe the consistency over the last few quarters that’s been interesting in that segment. So based on your comments, scale, balancing of the businesses there, could you continue to see more consistent and higher margin in that segment moving forward?

Earl Austin: I always thought we would operate in upper single-digits, and I see expectation. We are prudent about how we got in the second half due to the weather and northern climbs and things of that nature. But I do think that overall segment can operate in that upper single-digit range. We are pushing — you are getting absorptions throughout due to the fact that you’re doing electric and gas and telecom and renewables out of the same offices, you’re going to see some scale out of that. And those margins are going to rise a bit, and that’s what you’re seeing show up.

Operator: The next question comes from the line of Justin Hauke with Baird. Please proceed.

Justin Hauke: Good morning, everybody. I guess I wanted to ask a little bit in the Electric segment, the equity income contribution, which I know is multiple things, but it’s mostly LUMA. At $9.4 million this quarter, it’s — it was kind of light last quarter as well. It looks like you took your guidance down a little bit for the contribution from there. Given that last year, it was kind of running almost at double these levels, is there anything that’s kind of changed in that business that maybe we should think about that this is kind of the more appropriate run rate of the contribution from that?

Earl Austin: LUMA is performing as expected, there are some investments that we have in other businesses there that are off on the first half. We expect those to pick up in the ’23 and into ’24. But Jayshree, you can comment.

Jayshree Desai: Yes, Justin, we had a couple of outsized events from last year. We had a storm that helped our — some of those entities in that part of the segment. And we also had some catch-up in LUMA, that’s what you were seeing last year. This year, in general, the — that part of the segment is performing very well. We continue to see the operations going as we would expect, a little bit of pullback, but nothing systemic, and we believe we can operate through a lot of that and continue to perform at these levels.

Justin Hauke: Okay. And then maybe following up on Andy’s question on just the margins in underground. Obviously, they were quite strong. Usually, you would have more margin in the second half than you do in 2Q, but your guidance would imply a little bit softer than it was in 2Q. But is there anything unusual like project closeout or something like that, anything quantifiable that was in the quarter that made those margins unexpectedly high?

Jayshree Desai: No.

Earl Austin: No. I mean we said our Industrial business performed really well in the quarter as well. So that certainly was strength in the quarter. And I do think when you start to look out, you do not have great visibility in the fourth quarter in the Industrial business. So that said, the prudent guidance would be to pull it down a bit in the fourth quarter. And that’s kind of what you’re seeing show up.

Justin Hauke: Okay, fair enough. Thank you.

Operator: Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed.

Neil Mehta: Yes, thank you. A couple of big picture questions. Duke, maybe your perspective on the M&A markets here. It has clearly been a core competency for you guys, particularly as we saw with Blattner, what do you think the market looks like for M&A? And are you thinking to the extent it is opening up smaller bolt-ons versus larger strategic?

Earl Austin: Yes. M&A, we have a strategy. We have a five-year strategy to provide solutions to our customers. We see opportunities across the board really to add-on, bolt-on, provide solutions, do some things that we talked about our front-end services. There’s no shortage of opportunities out there. We’re picky about how we go about it, and we’ll follow the strategy. We’re watching our cash generation. We’re making sure we can absorb what we have, and we’ll be prudent about how we go forward. And anything that we’re doing is following the five-year plan, the strategy we laid out to our investors and we’re ahead of those plans significantly. And I feel like the company is in a great position to provide those solutions that are necessary to keep the company moving forward at the pace that we’ve seen in the past.

And we have good visibility into the next decade. And we’re known for execution. We have to keep executing in the field, while looking at the strategy to add on and deploy capital in the proper manner for our stakeholders.

Neil Mehta: Thanks, Duke. And that was the follow-up. If I go back to last April, you talked about the glide path of $6 to $6.50, I believe it was to $8 to $8.50. So like a 7% to 10% EPS CAGR. But then you talked about upside scenarios where you could get as high as $11 or $12. Just could you just give us a status update on how you think you’re tracking relative to that plan? And remind us again, what are the levers that would get you beyond the base case of that $8 to $9.50 to some of those upside scenarios?

Earl Austin: I think when you look at our guidance at the EPS level, which is what we’re measured upon, we’re ahead of the 10% guide now on a growth basis this year, relatively 13% or better. So when I think about it, we’re already doing that as we sit here today. And I do think we set all levers of the balance sheet, the opportunities that we see going forward. We’ll continue to, we hear a lot of big numbers and those kind of things. We’re executing at the local level. We’re executing across the strategy and doing the things we need to do to drive EPS. And it’s not just the top line, it’s the quality of earnings. We’re constantly talking about quality of earnings. If you look at our returns on return on invested capital and all of our returns, they are moving in the right direction as we go forward.

Operator: The next question comes from the line of Martin Malloy with Johnson Rice. Please proceed.

Martin Malloy: Good morning. Congratulations on the quarter. My first question, I wanted to ask about the outlook for CO2 pipelines related to the carbon capture and sequestration. And just following on Exxon’s acquisition of Denbury in part related to Exxon wanting to get larger in terms of the CO2 pipeline infrastructure. And just kind of curious what you’re seeing out there in terms of outlook for potential building on those kind of pipelines?

Earl Austin: Yes. We see opportunities there across the board on hydrogen and also carbon sequestration. We do see that market as being a nice market. The blinds are usually smaller that they run longer, but they’re smaller on that type of builds. But we’re in constant discussions with the operators as well as the end users of hydrogen and also carbon the way we’re looking at it. So I do think you’ll see some of those lines move forward in ’24, be some opportunities for us. The bill, the RA certainly provides economic benefit on both sides of that. And I do think that will help the market as well. So we are seeing opportunities in that area and staying in front of it. We’ve had some nice pipe awards. So we’re happy with the business. We certainly said we would be able to handle those type of things and we can, and we are. So I think it’s opportunities for us. It’s not the main stay of the business, but we certainly like it.

Martin Malloy: Okay. And then for my follow-up question, I wanted to ask about undergrounding of transmission distribution lines. And it seems like it’s appearing more in the press and utility company commentary about these multiyear programs to underground electric lines. Can you maybe talk a little bit about what your thing out there from a customer perspective, is that — is it investment in those type of programs? Is it picking up meaningfully?

Earl Austin: I mean you see it in the West, the fire hardening that’s going on and the fires out West from an insurability and what the punitive nature of a fire is to utility at this point, you have no choice but to start undergrounding. And I think you’ve seen that in the West. We’re in early stages of that. It will continue on. It’s decades of type reconstruction, but many of the lines that are out there in fire prone areas will go underground. They’re not — the insurance rates, things of that nature make it economical to underground, which you would have never said that a decade ago. And today, it’s the only way. So I do believe you’ll see the prevalent underground transmission in the corridors that we are. You have large wire constraints when you start looking at the larger transmission, the wire in Europe and things of that nature, that supply chain is tight.

I do believe when you move forward some of those bigger projects that are undergrounding transmission will come about. We’re certainly around the edges on those. But I mean, the mainstay work is overhead, long haul will still be in the air. Where in the fire prone areas, you’ll see some underground.

Operator: The next question comes from the line of Chad Dillard with Bernstein. Please proceed.

Chad Dillard: Hi, good morning guys. So my question is about the large versus small project mix, particularly for Electric Power and Renewables. Can you talk about what that mix is in the first half? What do it look like in the second half? And what did that second half exit rate mean for ’24 and ultimately margins?

Earl Austin: Yes. I don’t look at it. We don’t look at it like that from our standpoint. It’s really utilizations. The utilizations are great on all segments. You’ll see bigger work. If you want to talk about a project, it will be more in your Renewables at this point. Your bigger programs, your multi-year programs will be more in Electric. It’s just the deployment of capital, same crews, same people, cross and segments. So we’re cognizant of that. The utilizations on both sides will be at high levels. What I will say is the company itself, no matter what segment you’re in, the project starts are significant, and the cadence will start to stack versus just being a starting — on the starting line. And right now, we’re kind of in the early stages of a lot of large projects and programs.

So those early stages will as you move in out of ’23 into ’24, into ’25, you’ll start to stack on top of that, and you’ll get a normalized cadence where you’ll see it as we operate through them contingencies move out, things of that nature as long as we execute like we have the last 25 years. We’ll be in good shape, and we’ll see those contingencies flow into future earnings.

Chad Dillard: That’s helpful. And then my next question is on the Northwest Lineman’s College. Just trying to understand your ability to scale that just to meet the demand and labor if we’re looking over the next three to five years? Maybe you can talk about like what the capacity is today and where it can go over that time period? And then also the 3,000 people that you brought on what was — how much came from Northwest versus other channels?

Earl Austin: We recruit just internally across the Board, Northwest certainly is our some — there’s a lot of curriculum work, a lot of work that’s necessary to be able to scale. It’s one thing to add — it’s another thing to add 3,000 every quarter or 1,000 every quarter. And also while we’re not totally pleased with the Electric margins, it’s down 25 basis points or whatever it is on the guide. There’s opportunities to operate at the same level we thought. That said, it’s not as easy as we make it sound. They are certainly contributing to our ability to put the people in the field and execute very quickly and as we get absorption and things of that nature, that’s only — will only scale. And I do think we’ve invested in those colleges.

We’ve invested in those curriculums, and we’re not having issues with cross-skilled labor or front-end engineering. Could we use more? Yes. But we’re able to meet the demands and the foreseeable demands on any type of curve we’re looking at. We hope that supply chain catches up with us.

Operator: The next question comes from the line of Jamie Cook with Credit Suisse. Please proceed.

Jamie Cook: [Technical Difficulty].

Earl Austin: Jamie, you’re breaking up. I can’t hear you. You got to do it again.

Jamie Cook: Right. Hold on. Can you hear me now?

Earl Austin: Got you.

Jamie Cook: Okay. Sorry. So my first question, if I think about your guide for 2023 and the back half earnings trajectory, it’s $2.10 a quarter or so, which implies if we just annualize that earnings of, let’s say, a base of $8.40 million and that’s without SunZia. So I’m just trying to think about the back half of earnings in the setup and what that implies for 2024 is like can we think of an $8 base for 2024 without SunZia and that would imply upside to that? And then my second question is more to you, strategically. I understand you’re fairly comfortable with your ability to ramp labor in this environment and capitalize on the growth opportunities. But to what degree do you get concerned just with projects like the size of SunZia that you want to limit the number of big projects you want to take on just in terms of more from a risk management perspective? Thank you.

Earl Austin: Thanks, Jamie. I figured I’d get ’24 guidance. So I think when we look at it, of course. ’24, you have some seasonality in the numbers and the run rate. I do think we talked about double-digit type growth at the EPS line. I don’t see no reason why we won’t continue those kind of numbers. Can it get outward, yes. We’re not ready to guide to that. We see a great market. We’re starting on great markets. I agree with you. We’re stacking it certainly bodes well for us going into next year. When we look at the projects, the larger projects have been through that before with CREZ and other things in the company. We’re highly focused on the customer and the customer level, the baseload work, we’re still at a baseload work of 80-plus percent.

That hasn’t changed. I don’t think it will. We will get large projects as we move forward. We are in negotiations constantly around programs and projects. You have to think about some of them being multi-year, five years in nature. Some of them are short nature. So it’s just different type of projects. The company itself is focused on execution on those projects. I see both sides of it, I think we’re seeing more material content within our EPC business. So just different things that the company is capitalizing on. So when you look at a return basis, our returns go better if we’re able to sort of the material content as well. So lots of things going our way on that. And I think it’s a competitive advantage for us moving forward as we start to be a large purchaser of material.

So I like it. I like what we’re doing. I think it will only enhance — the larger products will only enhance the business and the base business as well as how we provide that solution to the client.

Operator: Our next question comes from the line of Adam Thalhimer with Thompson Davis & Company. Please proceed.

Adam Thalhimer: Hey, good morning guys. Nice quarter. Hey, Duke, what’s the outlook for large T&D projects in Canada? And if it’s not good, can you shift some of those resources back to the U.S.?

Earl Austin: Good question. We see a good market in Canada. We have some awards already that we anticipate starting on by the end of the year. We have some great clients partnering in Puerto Rico. So — and a lot of customers in Canada, we are able to move resources, engineering capacity. Some of the things that we do in Canada over in the Lower 48. I wish it was easier. I wish the border was easier. It would certainly help us from a skillset standpoint. But that said, the company has done a nice job moving resources and doing some things in Canada. In general, when I look and step back at it, COVID played a big impact much more than we had here in the Lower 48, and we forget about it a lot. And we think, oh, well, it was nothing.

It was significant. And we were in camps, we were doing some things there that were different. If we don’t see the market will downsize the market, but we do see that — what we see right now is the transition happening there as well. We’re seeing more — we’re seeing wind, solar, some hydro different things in Canada to decarbonize as well. We’re right in the middle of those things. It’s just a little bit behind the Lower 48. And as we catch up, I think you’ll see more normalized margins in Canada and a great market.

Adam Thalhimer: Okay. And then in the Renewable segment, I hate to ask about ’24. But Jamie started it. You guys kind of — yes, exactly. You guys kind of blew me away top-line for renewables for 2023. And I’m just curious if you can — or how you think you might build on that next year?

Earl Austin: I think we can continue to grow the business in the Renewable segment. We said it when we purchased Blattner kind of the cadence of that, and you’re coming off of a year where the outward, what I think pullback was primarily due to the solar panel discussions. And when that cleaned up, there was pent-up demand, but I also see a great future in a future market. You’re going to see quite a bit of wind repowering coming up as well as wind projects. And I don’t even think you’re seeing that yet. And when you start to see the programmatic spends of the wind repower on that as well, the company is positioned nicely for those things, and we’ll take advantage of that. That was what led us to the Blattner acquisition, and I think that strategy is playing out.

And we see decades of renewable switching, you have load growth as well that will go towards a renewable state. So as you see load growth double and you start to say, okay, well, how much the carbon are we going to take out of the system, while you’re getting the load growth, it’s significant. EV penetration, all those things are starting to hit the electrification of everything. And then you have the security issue of North America where you’re onshoring. All these things are happening at once, and I see really, really good markets for a long time. Can you have some blips in the radar, of course, but on a CAGR basis over time, we like what we see, and we’ll continue to execute in the field, which is our main concern is to make sure that we execute, build projects on time, on budget that are at cost that’s what we feel economic to the consumer.

Operator: [Operator Instructions]. And our next question comes from the line of Gus Richard with Northland. Please proceed.

Auguste Richard: Yes, thanks for taking the question. In terms of energy storage. Are you starting to see an increase in demand for that in the renewables segment, if so on what regions and as storage is incentivized at residential, does that have any impact on transmission and distribution?

Earl Austin: I think energy storage can certainly benefit and we’re seeing quite a bit, I would say, we’ve probably doubled in size in take it plus or minus 10, but we’re seeing quite a bit of storage projects. We’ll continue to see that to the west. And we see it all over, honestly. It’s something from a utility skill standpoint that’s necessary with the markets there. We’re participating in it, albeit we — it was a low piece of the business. So don’t take that the wrong way. It definitely is growing. We were in front of it. We’re doing nicely in the storage business. I do think it can help. It can help alleviate some transmission. But it’s not — batteries will continue to get better as you move forward. The storage capacity will get better.

We’re not there yet. It will be a small piece of the business for a foreseeable future, but growing. So like the business, like it, it fits nicely with our solar win. We’re looking for ways to even get more efficient in batteries. So as we see that, the transmission as well, it can’t alleviate a bit, but not to the point where you would see any kind of downturn in transmission at this point.

Operator: Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed.

Sean Eastman: Hi, team. I wanted to come back to the comment about adding basically 3x the normal run rate of people in the quarter? I mean, obviously, that’s pretty notable. I mean other than the obvious signal that that’s positive for underlying demand trends. What else we should take away from that? Is this showing an ability for the training infrastructure to flex up? Maybe we’ve hit a new kind of throughput level there? Any additional thoughts on this addition to the human capital story this quarter?

Earl Austin: I think, Sean, it’s just a great example of what we’ve tried to say for a long period of time that we’re able to scale the business. And a lot of people can talk about it and a lot of people can talk about scaling it. I want to see somebody at 3,000 and put the projects in there and execute at the levels we’re executing. So I think we put the infrastructure in place to be able to do this, not one quarter, but over time, and it surprised me a bit from a seasonality standpoint, we added quite a bit in Renewable segment. And their ability to scale their business to these utility scale projects as many reasons why we acquired Blattner and we have the resources that we have internally. I just can’t say enough about what we do from an execution level in the field every day to put the numbers up we put up.

And they’re just doing a really, really nice job. And we have great curriculum, great people. We’ll continue to build upon what we have. It’s exponential the way I see it in the curriculum and the things that we’re doing from technology and training and things of that nature. We’re certainly in the forefront. I look forward to us continuing down the path that we’re on.

Operator: The next question comes from the line of Marc Bianchi with TD Cowen. Please proceed.

Marc Bianchi: Hi, thank you. I wanted to ask about the renewable power growth and kind of as it relates to the CAGR that you outlined at the Analyst Day last year of 10% to 12%. It would seem like you’re well above that rate here, exceptional year in ’23. But how should we be thinking about that 10% to 12% now? Is there upside to that? And how much of a bottleneck is interconnection? Thank you.

Earl Austin: I think when you look at it, we talked about kind of a 10% de-risk at the bottom on a CAGR basis and then all levers of the balance sheet, the megatrends that we see, you’ll have some 15% outer years as you make acquisitions as you do other things or use your balance sheet with free cash. So those things are there when you look outward, if you take those things into account, if we invest the same way we’ve invested our capital in the past, I like our chances on the upper ends on the outward looks. But when you look at just organically, the business the way it sits in the queues and things of that nature, yes, there’s tightening of your queues. Your transformers are 24, 36 months out on your HVDC. So if you have a project today and you’re talking about it and you haven’t ordered your transformers to have a spot, you’re 24, 36 months out.

I don’t think it affects our clients, the clients that we work for. You’re bigger clients already have transformers or have slots. So there’s no real issue for them. But others that are looking for projects, it’s not just, hey, I need in the queue. It’s — hey, I need in the queue, but I have my transformer capacity. I have my lines, I have the things that are necessary there. So that planning and things of that nature is a piece of it. I do think you’re getting some clarity of regulation. I think the federal government, FERC and the states and the utility business, everyone is trying to collaborate here, more so than I’ve seen in my career. But I’ll say this. It’s necessary for us to do this as a group. And we need to collaborate as a group here for the next decade and beyond.

Operator: The next question comes from the line of Alex Rygiel with B. Riley Securities. Please proceed.

AlexRygiel: Thank you. A very nice quarter. DSOs have improved into the 70s from past historical ranges of the high 70s to 90s. Can you talk about the catalyst to this and whether or not mix or contract terms have been a factor? And maybe expand a little bit more on contract terms today versus a handful of years ago, and if they’ve become a little bit more favorable to the contractor?

Earl Austin: Yes. I’ll say a little bit. We’re acquiring more materials and things of that nature, Alex, so it’s helping us a bit on some of those projects from a DSO standpoint, but I think that’s the bigger piece of what you see from a term standpoint. We need to be able to order outward and you’ve seen some inventories. Our inventories move up a little bit here or there on some of those things. But that said, I think that’s the better terms. And Jayshree, you can comment on the DSOs.

Jayshree Desai: Yes. I think we’ve talked in the past about our expectations will improve on our DSOs and our working capital, and we’re starting to see that. In terms of contract terms, certain parts of our renewable projects definitely allow us to, because the materials or the way the work is performed, allow us to run in a positive working capital. And you’re seeing some of that benefit coming in now. But in general, we’re feeling good about where our DSOs are headed as well as our cash flow projections. And you see that’s why we modestly increased our cash flows for the year. It’s moving in what we expected and we’ll continue to see that improvement as our business grows in the Renewables segment.

Operator: Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the call back to management for closing remarks.

Earl Austin: Thank you. We want to thank the 52,000-plus employees of Quanta for their commitment to safe execution. It does not go un-noticed that you’re working in a 100-plus degree heat every day. Thank you. And I want to thank all the participating people in our conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.