Quanta Services, Inc. (PWR) Q2 2020 Earnings Report, Transcript and Summary

Greetings. Welcome to Quanta Services Second Quarter 2020 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. [Operator Instructions] Please note, this conference is being recorded. At this time, I’ll turn the conference over to Kip Rupp, Vice President, Investor Relations. Mr. Rupp, you may now begin.

Great. Thank you, and welcome, everyone, to the quanta services second quarter 2020 earnings conference call. This morning, we issued a press release announcing our second quarter results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2020 outlook and commentary that we will discuss this morning. Additionally, we will 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 6, 2020. 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. These include all statements reflecting Quanta’s expectations, intentions, assumptions or beliefs about future events or performance that do not solely relate to historical or current facts. Forward-looking statements 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. For additional information concerning some of these risks, uncertainties and assumptions, please refer to the cautionary language included in today’s press release, along with the company’s periodic reports and other documents filed with the Securities and Exchange Commission, which are available on Quanta’s or the SEC’s website. You should not place undue reliance on forward-looking statements, and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third-party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today’s call, including adjusted diluted EPS, backlog, EBITDA and free cash flow. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for 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 would like to now turn the call over to Mr. Duke Austin, Quanta’s President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to Quanta Services Second Quarter 2020 Earnings Conference Call. On the call today, I will provide operational and strategic commentary, and we’ll then turn it over to Derrick Jensen, Quanta’s Chief Financial Officer, who will provide a review of our second quarter results and full year 2020 financial expectations. Following Derrick’s comments, we welcome your questions. This morning, we reported solid second quarter results. Our electric power margins were exceptional due to broad-based execution. Pipeline and Industrial segment margins, adjusted EBITDA and earnings per share were all better than we expected. We continue to see opportunity for record backlog and earnings as evidenced by the signing of LUMA Energy contract. Cash flow was robust, and we ended the quarter with a strong balance sheet and ample liquidity, all of which we believe demonstrates the resiliency of our business and the operational excellence of our people during extraordinary economic and operating conditions. We believe our resilient business model and strong financial position provides us the opportunity to, not only navigate through tough times of uncertainty, but to emerge better positioned. Our pandemic health and safety procedures in the field have matured, and we have reliable access to personal protective equipment for our crews. We continue to actively communicate with our customers and believe we have adapted effectively to the unprecedented health and economic environment caused by COVID-19. We recognize the strain that the pandemic is placing on our country, and, I, again, want to recognize and thank our incredible employees for all their hard work and let our customers know that we value our collaborative relationships with them. Our electric power operations performed well in the second quarter, with solid profitability, driven by our focus on cost management and operational excellence. Demand for our electric power services remains strong with Utilities actively deploying capital into their systems to modernize, harden, expand and adapt to current and future needs. We are actively performing infrastructure work related to renewables and are seeing incremental opportunity driven by renewable power generation associated with onshore and offshore wind and solar development, including substations, transmission interconnects and battery projects. These renewable energy developments are enabled by backbone transmission, which are also providing larger transmission project opportunities, which we are well positioned for. In June, we announced that the LUMA Energy, a joint venture between Quanta and Canadian Utilities Limited and ATCO company, was selected by the Puerto Rico Public-Private Partnership Authority for a 15-year operation and maintenance agreement with the Puerto Rico Electric Power Authority, or PREPA, to operate, maintain and modernize PREPA’s more than 18,000-mile electric transmission and distribution system in Puerto Rico. LUMA’s efforts under the agreement are intended to deliver long-term social and economic benefits to the people of Puerto Rico. We believe this opportunity is transformative for Quanta and supports our ongoing strategy of providing sophisticated and valuable solutions to the utility industry that benefit consumers. Following a transition period, which is expected to last approximately one year, this arrangement is anticipated to provide a visible, repeatable and sustainable long-term earnings and cash flow stream to Quanta, with upside opportunity while requiring no additional capital investment from Quanta or LUMA. Further, we believe there is opportunity for Quanta to compete for electric power and communications work in Puerto Rico, associated with its electric T&D system modernization efforts that are separate from Quanta’s ownership interest in LUMA. Puerto Rico’s electric T&D system is a – in – at a critical juncture after the destruction caused by Hurricanes Maria and Irma. As a result, the government of Puerto Rico has embarked on a plan to rebuild, modernize, harden and enable a green power grid, the majority of which is expected to be funded by U.S. federal disaster relief agencies and managed by LUMA. The P3 authority in Puerto Rico estimates that more than $18 billion of electric T&D capital investment could be required through 2028 for this initiative. Our communications infrastructure services operation, which are included in our Electric Power segment continued to perform well. We see ample opportunities for growth in the near and longer-term, driven by strong demand for fiber densification to reach homes and businesses and the early stages of 5G deployments. In our press release this morning, we highlighted our recent acquisition of a Chicago-based company that is a leader in providing engineering, design, permitting and utility locating services to electric utilities, gas utilities and communication services companies across the United States. This acquisition meaningfully enhances Quanta’s proven engineering and programmatic delivery capabilities in our core utility markets. Additionally, engineering complexity is greater for 5G deployments as compared to previous wireless technologies, and we believe the increased communications engineering and design capabilities this acquisition brings will allow us to capture and execute on more fiber and 5G deployments. Our Latin American operations, which we are exiting, have been hardest hit by COVID-19. As a result, during the quarter, we accelerated our efforts to exit the Latin American region, which included terminating various contracts. These factors resulted and – in a greater-than-expected loss in the quarter. While uncertainties and challenges remain, we believe the most significant risk of ceasing our LatAm operations have been addressed by our actions and continue to believe our exit will largely be complete by the year-end. Turning to our Pipeline and Industrial segment. As we anticipated, portions of the segment experienced significant disruptions due to the pandemic in the second quarter. However, segment profitability was better-than-expected due to our rapid adjustment of resources to changing market conditions, effective cost management and operational excellence. Early in the quarter, our gas utility operations were shut down in several metro markets as shelter-in-place orders and work restrictions were implemented. Those restrictions begin – began to lift and our activity and utilization rates recovered better than expected through the balance of the quarter. As a result, our full year profit expectations for our gas utility operation remains largely unchanged despite our expectation that some customers’ work is now likely to shift into 2021. Utilities remain in the early stages of multidecade modernization programs to replace aging gas distribution infrastructure in order to meet regulatory requirements aimed at improving reliability and safety, and expect an improved environment next year. Demand for our pipeline integrity services remained solid during the quarter, and did not experience meaningful impacts from COVID-19. Regulatory requirements continue to encourage our customers to test, inspect, repair, perform maintenance and replace pipeline infrastructure to ensure the safe, reliable and environmentally friendly delivery of energy. Further, permitting challenges for building new pipelines make existing pipeline infrastructure more valuable. Increasing pipeline owners’ desire to extend the useful life of existing pipeline assets through integrity initiatives. Due to these dynamics, we expect demand for our pipeline integrity services will continue to grow. Our industrial services offering is diverse, which benefited us during a challenging quarter. Demand for our catalyst services and tank maintenance remained solid in the quarter. However, due to the negative influence of COVID-19 on the demand for refined products, customers’ restricted on-site activity for our other services and deferred maintenance and certain turnaround in capital projects to later this year or 2021. Because this work is necessary for the operation of these facilities, we are confident the delayed work will return in the future as economic and market conditions improve. Thus far, our industrial operations are performing consistent with our expectations, and we continue to believe there is opportunity for stability during the balance of the year and improvement in 2021. For the remainder of this segment, portions of our midstream and ancillary services operations experienced softness in the quarter as expected. However, these operations did a good job managing costs to the market environment. And finally, larger pipeline projects continue to face permitting challenges. The Atlantic Coast pipeline, for example. Our larger pipeline project activity this year is not significant. However, we continue to pursue opportunities for 2020 and beyond that would be an additive to this segment and our outlook. For the last several years, we have been focused on increasing and gaining scale in the base business of the segment, and diversifying the services and geographies of the segment to create a more sustainable and consistent operation. To that end, the three primary service lines we have been focused on are gas utility services, pipeline integrity services and industrial services, which account for more than 70% of the segment’s estimated 2020 revenues. Further, base business revenues are estimated to account for nearly 90% of the segment revenues this year. Going forward, we expect to continue our focus on growing the base gas utility, pipeline integrity and industrial services business, consistent with our strategy over the last five years, and continue to believe a post-COVID operating environment will offer opportunity for increased margins and returns for the overall segment. We have increased our financial expectations for the year and taken a prudent approach to our outlook. Additionally, we continue to pursue opportunities in the marketplace that are not incorporated into our expectations and remain positive and confident about Quanta’s multiyear growth opportunities. Over the past five years, we have executed on our strategy and remain dedicated to growing and enhancing our portfolio of services, which strengthens our ability to capture more of our customers’ large programmatic spending programs. These efforts are designed to mitigate risk inherent in our business and prepare for unexpected events through diversification and by maintaining a strong financial profile. We believe Quanta has a long runway ahead of us for generating repeatable and sustainable earnings as we execute on our strategic initiatives. Considering our organic growth opportunities and the levers available to us to allocate future cash flow generation into value-creating opportunities such as stock repurchases, acquisitions and strategic investments and dividends, we believe Quanta has the opportunity to generate meaningful stockholder value over time. To that end, this year, we have repurchased $200 million of our common stock and this morning, we announced that Quanta’s Board of Directors has authorized the company to repurchase up to $500 million in shares of its outstanding common stock through June 30, 2023, under a new stock repurchase program. I would also note that over the past six years, we have repurchased approximately $2.4 billion of common stock, which equates to the retirement of more than 40% of the shares outstanding at the start of those repurchases. We believe these actions demonstrate our confidence in Quanta and our commitment to generating value for our stockholders. We are focused on operating the business for the long-term and expect to continue to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance 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 all our stakeholders. I will now turn the call over to Derrick Jensen, our CFO, for his review of our second quarter results and 2020 expectations. Derrick?

Thanks, Duke, and good morning, everyone. Today, we announced second quarter 2020 revenues of $2.5 billion. Net income attributable to common stock was $74 million or $0.52 per diluted share and adjusted diluted earnings per share, a non-GAAP measure, was $0.74. As expected, our results for the second quarter were affected by the unprecedented economic environment caused by the COVID-19 pandemic and its compounding impact on the challenging energy market. We experienced significant challenges in certain of our operations that were disrupted by stay-at-home orders or job site access restrictions as well as customers pulling back capital deployment amidst all the uncertainty. However, we were able to successfully execute across the majority of our operations and deliver results that exceeded our estimates. Our Electric Power revenues, excluding Latin America, were $1.8 billion, a 2% increase when compared to the second quarter of 2019. This increase was primarily driven by continued growth from our communications operations, which are included within the Electric Power segment, delivering a 50% increase compared to the second quarter of 2019. Revenues from our electric operations were in line with 2019 levels, a meaningful accomplishment given the COVID-19-related disruptions and reduced levels of West Coast fire hardening activities, which we still expect will accelerate in the second half of 2020. Electric segment margins in 2Q 2020 were 10.3%, and excluding our Latin American operations, segment margins improved 130 basis points to 11.1% versus 9.8% in 2Q 2019. The operating margins reflect strong execution across our operation and improved performance from our Canadian operation due to increased revenue levels and asset utilization. In addition, communications margins continue to improve both against last year and sequentially despite the COVID-related headwinds. As Duke mentioned, we continue to take actions to expedite the wind down and exit of our Latin American operations. The challenges in Latin America have been exacerbated by stringent COVID-19 stay-at-home orders across the region, but particularly in Peru, which is our largest operation. This exceedingly uncertain environment caused us to purposefully accelerate early termination of various contracts to prudently avoid increasing losses due to the lack of customer activity. Additionally, certain MSA contracts had incurred costs to support the multiyear operations that upon contract termination, were no longer recoverable. Of note, we currently receive no tax benefit for losses in Latin America, so the $15 million in losses impacted the quarter by approximately $0.11, $0.08 more than we anticipated. We expected most of the negative impacts from COVID-19 and the challenging energy market to be experienced by our pipeline and industrial segment, and that proved to be the case. Revenues for the segment were $713 million, 35% lower than 2Q 2019. In addition, revenues were also lower compared to last year due to the reduction in contributions from larger pipeline projects. Partially offsetting these declines were increased levels of gas distribution revenues, including approximately $55 million from acquired companies. We expected that these headwinds would challenge P&I segment profitability, potentially resulting in a loss for the second quarter. However, we successfully operated through the challenging conditions and delivered segment margins of 3% and lower than 2Q 2019, but a significant accomplishment given the circumstances based across the segment. This performance was led by solid execution across our base business activities and proactive cost management activities in the field for those operations with significant revenue headwinds. Our total backlog was $13.9 billion at the end of the second quarter, approximately $1.2 billion or 9% higher than 2Q 2019. 12-month backlog of $7.7 billion is a slight increase from both the second quarter of 2019 and the first quarter of 2020. Total backlog decreased from the first quarter, largely due to the removal of the remaining portion of our expected revenues associated with the Atlantic Coast pipeline project. Subsequent to June 30, 2020, project owners, Dominion Energy, Inc. and Duke Energy Corporation announced their intention to forego completion of the pipeline. Although the joint venture in which Quanta is participating has not received a notice of termination, based on the announcement, we have concluded that the revenues related to the original remaining performance obligation associated with the contract are no longer probable, and therefore, are excluded from remaining performance obligations and backlog as of June 30, 2020. As Duke mentioned, we continue to have robust conversations with our customers on multiyear spend programs, extensions of existing multiyear arrangements and new larger project opportunities in both the electric and P&I segments. We expect that as challenges associated with customer engagement normalize, those discussions will finalize and drive the opportunity for record backlog. More importantly, Duke mentioned the second quarter announcement of our LUMA Energy joint venture to operate, maintain and modernize Puerto Rico’s electric transmission and distribution grid over the next 15 years. While this business show up in backlog, to the extent that we successfully move through the transition phase to commencement, our expected portion of LUMA’s award would represent the largest cumulative contract value ever awarded to Quanta. If you assume our historical electric segment margin profile of 10%, the 15-year award would imply a backlog equivalent of over $6 billion. It is important to appreciate what this award represents as a predictable, sustainable contribution to our future earnings and cash flows as well as the potential opportunities that can arise as LUMA successfully executes against this award. For the second quarter of 2020, we generated free cash flow, a non-GAAP measure, of $457 million. Our strong cash flow in 2Q 2020 was partly attributable to reduced levels of working capital requirements resulting from the sequential quarterly decline in revenues. Cash flow levels were also positively impacted by a reduction in days sales outstanding, or DSO, which measured 82 days for the second quarter, a decrease of nine days compared to the second quarter of 2019 and a sequential decline of three days compared to 1Q 2020. The DSO in 2Q 2020 is more in line with our historical average as compared to DSO last year, which were impacted by higher retainage balances due to project timing as well as billing process changes for certain customers that pressured DSO throughout 2019. We also benefited from the deferral of $89 million of tax payments permitted by the Cares Act, $58 million of which was paid in July and the remainder due in equal amounts at the end of 2021 and 2022. We had $530 million of cash at the end of the quarter. As of June 30, 2020, we had total liquidity of approximately $2.1 billion and a debt-to-EBITDA ratio, as calculated under our senior secured credit agreement of approximately 1.3 times, slightly below our preferred range of 1.5 to 2 times. Turning to our guidance. Similar to where we found ourselves last quarter, we are still dealing with some level of uncertainty as we assess the near-term prospects of our operations, particularly those that are susceptible to local stay-at-home orders, operate in enclosed facilities or depend upon project teams having access to local permitting offices. As COVID-19 cases continue to spread, we have approached our guidance with our typical prudence and a cautious expectation for what the remainder of the year will deliver. Our full year revenue expectations for the Electric Power segment are unchanged, expecting to range between $7.5 billion and $7.7 billion. However, we are increasing full year operating margin expectations to between 9.3% and 9.6%, with Latin America contributing operating losses of $40 million to $45 million. Excluding Latin America losses, margins are now expected to be around 10%, which reflects continued successful project execution, plus the incremental impact of the LUMA joint venture. The LUMA joint venture is accounted for as an equity method investment and therefore, will not contribute to revenues. However, we are including our equity and earnings of LUMA within operating income since LUMA is operationally integral to our operations under accounting guidance as compared to most of our other equity investments that are more positive in nature. LUMA’s results are presented after tax and are anticipated to positively contribute to operating income in 2020 by approximately $10 million or $0.06 to $0.07 per share. We also anticipate that LUMA’s earnings could be accretive to diluted earnings per share attributable to common stock by approximately $0.25 annually, after the approximately one year transition period with upside opportunity from performance-based incentives. The P&I segment continues to be impacted by COVID-19 and the challenged energy market conditions, and accordingly, we are reducing our full year revenue expectations to range between $3.5 billion and $3.7 billion. Customers have continued to evaluate this environment and have reduced spend expectations for certain smaller capital projects and gas distribution activities. In addition, certain larger pipeline project opportunities have been delayed, and we now expect they will contribute more meaningfully to 2021 results. We have increased our full year operating margin guidance for the P&I segment, which is now expected to range between 4.75% and 5.25%. Of note, with regard to the cancelation of ACP, we have yet to receive a formal termination notice, and we are working with the customers to determine how the project will close out. Although we believe potential upside associated with termination fees and other contract accounting exists, the final contract closeout will not be determined until the timing of project wind down is known, any closeout scopes of work are defined by ACP and then agreed and allocated by the joint venture to Quanta. Relative to seasonality, for both the electric and P&I segments in our current environment, we do not expect significant variability in revenue or operating margins across the third and fourth quarters. As noted in our earnings release this morning, we have increased our full year earnings per share expectations, and now expect GAAP diluted earnings per share of between $2.33 and $2.64. And adjusted diluted earnings per share, a non-GAAP measure, of between $3.18 and $3.48. These earnings per share expectations include a loss per share of between $0.28 and $0.31 from our Latin American operations. Turning to cash flow. We are raising our free cash flow guidance for the year to range between $600 million and $800 million. The countercyclical nature of our cash flow was further validated by the strong cash flow for the first half of the year, with aggregate trailing 12-month free cash flow of $1.2 billion. However, we expect the ramp of revenues in the third quarter to increase working capital requirements and drive cash outflows for the quarter, followed by a recovery in the fourth quarter as is typically the case. While we have experiment – and while we’ve experienced minimal payment delays related to COVID-19 through the second quarter, we remain cautious about the third and fourth quarters and have raised our DSO expectations through the rest of the year to account for capital preservation actions that may be taken by certain portions of our customer base if economic conditions deteriorate. I’ll close my guidance commentary, reiterating the challenge that the combination of COVID-19 and the volatile energy market conditions present for our near-term outlook. Excluding our Latin America operations, we continue to estimate that at least 70% of the change in our 2020 expectations from the beginning of the year can be attributed to COVID-19-related disruptions, with the remaining 30%, largely associated with the residual effects that low oil prices have in our pipeline and industrial customers’ capital budgets. Overall, we are pleased with the resilient second quarter performance and are excited about the long-term prospects of our business, particularly what the LUMA opportunity with Puerto Rico represents for Quanta’s future and for the people of Puerto Rico. We’ve continued to maintain a strong balance sheet with the flexibility to pursue opportunistic deployments of capital for M&A and investments as well as returns of capital. Our efforts to return capital to stockholders are further enhanced by the new $500 million share repurchase authorization, which, coupled with the $87 million remaining under our previous program, represents $587 million of aggregate authorizations. We believe the long-term repeatable, sustainable nature of the majority of our earnings streams provide stability to all of our stakeholders and ensures we have the foundation to deliver long-term shareholder value. This concludes our formal presentation, and we’ll now open the line for Q&A. Operator?

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.

Hi guys, good morning, and congratulations on good performance in a tough environment.

Good morning. Thank you.

Good morning. So just given a lot of what’s going on in 2020, COVID, the headwinds associated with Latin America, I was hoping you could just kind of give us some thoughts on how you’re starting to think about 2021 and to what extent some of these headwinds, particularly on the oil side – oil-related side of the business, how you’re thinking about whether to the degree to which they will or won’t continue into next year. If you could just give us some sort of initial thoughts on how you’re thinking about 2021, that would be helpful.

Yes. Thanks, Noelle. I think when we talked about Latin America early on. We talked about exiting this year. We’re doing that in a prudent manner. We’re trying to get that behind us. COVID certainly came in and cost rose. We did some things with contracts to exit earlier. So I do think that the majority of that will be out, and we’ve guided for that in 2020. As we look forward, I – we talked about the base business being robust, being able to grow. It were largely intact on the Electric segment throughout the year, even pre-COVID. So our strategy is working. On the P&I side, we saw the light switch effect, some cities down. After that, we are largely intact. Everybody’s back to work for the most part. We do have some shift where we’re customer interfacing with utilities, so we’re going in people’s homes. That work has somewhat shift to next year and beyond. So that’s a little bit of drag on there and the Canadian work pushed out into next year. But all in all, 90% of the base work, the baseload work, obviously, we added Puerto Rico, which I believe is transformational for the company and a lot of opportunity there into 2021. So in my mind, the company has gotten stronger through this. Our Industrial segment, you can’t – you don’t know where the economy is going to go. So the demand on the Industrial segment is certainly there long-term, but it will be predicated around the economy. And we’ll continue to evaluate that. But sometimes in these areas of lulls, we’re able to gain market share, and we have a really good management team down there. I like our chances to gain market share and come out of this way stronger on the other side.

Okay. That’s helpful. Thank you. And then just given the $500 million stock repurchase authorization announcement and the acquisition in the quarter. Could you just kind of give us some thoughts on how you’re thinking about the prioritization of capital deployment, given where your stock is trading today? And then what I would think might be some opportunities to make potentially some attractive opportunities to pick up players that may be struggling a little bit more in the downturn. Thanks.

We’ve never been a company to acquire companies that are struggling. So I think when we look at it, we buy in, in the strength in the – into our strategy. Our strategy has not changed over the last five years in the way we’ve deployed capital. Everything is against our stock price and our strategy. So when we look at things, when we’re looking at companies, their – its strength to a region to a strategy. The Chicago company that we bought was – will allow us to get on the front end of programmatic spends that are ongoing within our service lines as we expand. So that was very strategic to us. We like the company. It’s an old historic company that will give us a lot of flexibility on the programmatic spend. That being said, everything is valued against our stock price. We continue to believe our earnings streams and our earnings power is much greater than its value today. It’s more consistent, more resilient, and we’ll continue to lean into it and drive EPS and EPS growth.

Thank you.

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

Yes. Good morning, everyone.

Good morning.

Good morning.

Duke, as you convent with your relations with your electric power customers and gas power customers, as things get to normalize, are there any thoughts of acceleration in certain parts of the CapEx spend that’s anticipated, that’s going to be in your sweet spot relative to what you would have there, you would have thought, say, 12 months ago as some of the demand load factors and certainly coal plant closure and shutdowns and renewable drivers could certainly maybe impact some of that program expanding going forward?

Yes. I think when we talked about it at the first part of the year and even beyond, you’re seeing multi-year T&D spends on CapEx on a go-forward basis. That’s still there. It’s still prevalent. We’re working with our customers and collaborating with them. When you start putting EVs, electric vehicles, in order to enable that, you have to have a very modern grid. And so the modernization thereof and the CapEx that it takes to get there is something that’s ongoing on the distribution side of the business, both gas and electric, for stability. As you see more renewables, the interconnections that are required in the amount of transmission and the redundancy within the grid, that’s why you’re seeing most of our clients have both renewable expansion on the generation side as well as your transmission expansion on the other side. So really, in my mind, whether it’s renewables that we’re enabling or just the stability of the grid for electric vehicles. Either way, it’s necessary to invest in – for a long period of time. People are talking about 2050 to be carbon-free and things of that nature. In order to do that, the amount of transmission and distribution expenditures to this grid is exponential of what you see today just to give you the flexibility to enable those enhancements.

That’s very helpful. And my follow-up would be with the success of your Puerto Rican joint venture, the – securing it and assuming going forward, it will be successful, is that model able to be replicated elsewhere in the U.S. or internationally, that could continue to enhance that kind of that earnings, sustainable earnings flow on top of your normal base business going forward? And is that something we could see in the next 12, 18 or 24 months?

I think it was a unique opportunity in Puerto Rico to collaborate with a great customer, that ATCO, that we have a great relationship with, and both their strengths and our strengths came together along with IEM, our partner there. It will allow us a unique opportunity. In my mind, what we’re able to do there is strengthen the people of the island. It’s – for me, it’s a social thing because I think at the end of this, we’re going to modernize the grid. We’re going to stabilize an economy, and people are going to benefit. I mean lights are out every day there for periods of time. And for us, at the end, if we – when we get through this, I think we’ll be able to look back and it will be so meaningful to Quanta, us, ATCO and also the whole industry of what we’ve done in Puerto Rico. I know we can do it. We don’t talk about things. We actually go out there and build things. So it will be unique. And the opportunities on the other side of that is the FEMA money that’s coming in, which is $18 billion or, call it, $10 billion, call it $12 billion, whatever it is, it’s meaningful on the other side of the contract that I think we’ll have an opportunity and I like our chances on work because it – we do it cost certain, we do things right and economically for the consumer. So as that – as you see, that’s a huge expansion for us. There’s other islands. There’s other ways that we can participate and collaborate with our customer. We’re doing this all the time at – on different ways to enable technology, to enable EVs, to enable a grid that’s sustainable under renewables and things of that nature. So we’re around the edges all the time of what you hear about, and I was sitting on a call the other day, and they were talking about all this things around technology. In order to get there, everything that we’re doing and everything as a company that we’re doing, we’re enabling all those things to happen. So in my mind, there’ll be all kinds of opportunities for us, and we have a really nice base to grow off of.

Well said. Thank you very much.

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

Thanks. Good morning. I got on the call a little bit late, so I’m not sure if you’ve addressed this or not. So I apologize, but I wonder if you could talk about the strength in the margins in the Electric segment. How much of that was something from the electric side versus the communication side? And to what extent, if you’re seeing a notable pickup in the communications side, do you think we’re at an inflection point there on that business, really kind of ramping up over the next handful of quarters?

Yes. Thanks. The margins were impressive. The guys in the field are really operating well under extreme conditions. I’ve said this before, and I want to make sure I say it again. The electric side of the business will operate in double digits over time. And we’ll continue to say that if we operate in 11, we’ve operated in 9, we’ll operate in 12 at times. And so I would just, in my mind, we always think around double digits. That’s the way to think about the Electric segment. They did have – we did have a nice quarter, and I think we’re setting up for a nice year here. The telecom is certainly a part of this. And we are making incremental progress there. The opportunities are out there. They’re large. We continue to build office, build strength. We added some engineering capabilities in the quarter, which will only help us as we EPC, and we do work in cities and metroplexes. That was extremely important for us to get the engineering in the front end, right on those things. And I – we’ve done that through an acquisition. So I’m proud of where we’re at. I’m proud of where we sit. We’ll only get better as we move forward in the telecom.

Okay. And then if you could just talk a little bit about what’s happening at Stronghold on the downstream side to talk about the flow of opportunities you’re seeing there and how you think of that business positioned in light of sort of the more challenging downstream conditions. Is the business rightsized for what you see going forward?

We have a great industrial business, both on the Hubble side as well as the Stronghold catalyst side that really is – it gives us a good base to grow off of. The management team’s stronghold as well as our management team on the electric side, they’re exceptional. They’ll take advantage of these opportunities as we see them. We certainly rightsized the business, the G&A aspects of it. We had a record quarter in the first quarter and obviously fell off in the second. But again, we’re still profitable. We’re still doing well out there. And I think we’ll only come out the other side stronger.

Okay, thank you.

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

Hi, good morning, and nice quarter. I guess, just to follow – a couple of quick follow-ups. One, also – the Pipeline and Industrial margins were pretty good in the quarter, just considering the revenue declines that you saw. So maybe you can talk to anything that you’re seeing there that’s sort of a structural improvement in margins and whether it’s fair to assume margin can continue to improve at a nice pace as we exit the year and into 2021. And then my follow-up question is sort of on what Noelle asked. And a little more specifically, Derrick, I think I asked you this last quarter, but if you take the base of 2020, add back LatAm, you adjust for the COVID disruption, you consider your share repurchase, and now we have Puerto Rico. Why isn’t $4 a reasonable number to think about for 2021 on an adjusted basis?

Good morning, Jamie, I would say, in general, we’ve made incremental progress on the pipeline side pre-COVID. I – we were 7%-plus guidance on it early on. And I think that progress is still there. We’ve done the things right strategically to position the company ex-pipe to go forward at mid- to high-single digits, and that’s where it stands. I think our goal is a portfolio, a double-digit EBITDA. We’re not there yet. We’re working on it. You can see the Electric margins pulling up. I could think you’ll continue to see the pipe and the resiliency of the pipe – pipeline segment, P&I segment go forward. And it’s utility-backed, it’s industrial-based. And as that goes farther, you’ll continue to see those margins rise and then the returns get better there. And as far as – I’ll answer a little bit on the $4. I think when we talked about it last quarter, we stand by now. The opportunity is there. It’s opportunity for more than $4. So – well that’s where we’re at. It’s early. It’s June. And it’s August now. But we’re giving June numbers. So we’re not going to give 2021 guidance, but everything you’re saying and everything you’re inferring. We see the same thing. The company is in very, very good shape, and we’re working hard at margins.

Thank you very much. Great job.

Thanks.

Our next question is from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question.

Hey, good morning, guys. Nice quarter.

Thanks.

Hey, duke, did I hear you say that telecom was up 50% in Q2? And if so, was that new contracts? Or was that more work under existing contracts?

I don’t know if I said that or Derrick said that. But I – it’s – I think that’s accurate. It’s under both. And in our mind, we talked about early on that we were having some – when we thought about it, we were doing a lot of front-end engineering. And as we went to the field, things would get better, revenues picked up, and that’s what you’re seeing. We’re starting to put people in the field. Our Canadian work strengthened some too in the quarter. So all those things kind of come together. And we’ll continue to see those kind of ramps in the business. Not 50% ramps, but it will continue up as we go to the field with construction. There’s a lot of opportunity there. We’re growing the business quite nicely. And I like the things we’re doing.

Yes. It’s Derrick, also. I mean, keep in mind, we’ve talked about it now for quite some time. We saw the ability to have a faster ramp, obviously, and I talk on compartment of our business than in other components. And we stand behind this year of still being able to see telecom revenues at or above $500 million.

And the acquisitions, really, we talked about this morning certainly enhances the front side of that and then it gives us the ability to move quicker into the field.

Okay. And then just one more on telecom actually. You mentioned 5G. How does Quanta play in 5G? And how does that opportunity ramp?

I’m – when we look at it, I mean, it’s somewhat pulled back. The density – I mean, 5G is about seven components. But as you think about it, what enables 5G is your communication from your fiber to your cell towers and things of that nature. They need line of sight on the cells, the small cells, whatever it may be. But the fiber backbone and data on the edge, all those things are part of 5G. And every bit of that – and by the way, it takes quite a bit of power as well to enable those data centers and things of that nature. So we’re around the edges on all of it and how we interface with our local electric utilities or – and gas utilities, along with the telecom and collaborate there on the middle grounds of those things, put us in a great position to enhance our ability to deploy 5G.

Okay. Thanks, guys.

Our next question is from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen. Nice work this quarter. I just wanted to start with, yes, a really high level one. Going through Utility earnings releases this quarter, a lot of talk about hydrogen technologies. Is there any discussion – is Quanta part of any of those discussions? Just curious if that is something interesting for you guys to be looking at over the long-term.

Yes. We talk to them around all those things. I think in general, hydrogen is something, we talked about batteries a long time. We talked about solar a long time. It continues to be part of a carbon footprint that is environmentally friendly. So those things are all part of it. And I think we’re around the edges on all those kind of conversations, whether we build any kind of hydrogen plant or something of those natures. It just depends on what it is. We’re going to stay down the middle and do the things that we’re very good at, like we’ve done in the past. And certainly, we’ll collaborate on all those kind of opportunities, such as hydrogen, solar, 5G, whatever it may be. We continue to talk to them and try to advance those technologies forward through enabling the grid and also your infrastructure.

Got it. And just as we think about the second halfs, just seeing all utilities maintain their capital budgets. I think I’ve seen a couple increase their budgets and accelerate some stuff. But just trying to think about what that dynamic means for the second half. I just thought about this sort of prospect of maybe getting some work accelerated. So those customers are able to spend those budgets and what you guys have built in around a potential acceleration in the second half or catch up dynamic.

Yes. Sean, I think when we looked at it, where still many cities are within the COVID environment or different kinds of restrictions. So I think we took a prudent approach to guidance. We said the back half, the fire hardening in the back half of the Electric segment was strengthened, we still believe that. I mean, we’re on a storm now in the East Coast. And so under Covid restrictions, where our guys are performing exceptional and so it’s very difficult to say what the second half, if there’s upside to it. I think we took a nice prudent approach like we do all the time. But we do have some strength there, and we continue to see opportunities with our clients and making sure that either their workforce is at home due to COVID. So we’re backfilling and things of that nature. Or we’re making sure that their capital budgets and what they see in the future, we’re able to deliver on those capital plans. So lots of conversations going on. All in all, I think we gave good prudent guidance as we move forward.

Got it. Again, nice work guys, and thanks for the time.

Thanks.

The next question is from the line of Justin Hauke with Robert W. Baird. Please proceed with your question.

Thank you. Good morning. I’ve got two quick ones here. First one, just to, I guess, level set on telecom to – as we think about 2021. I think the guidance originally for the year was that it would be about $500 million of revenue with margins getting close to the segment average. So I just was kind of hoping to get an update, year-to-date, what’s the revenue as we’re halfway through the year and where are those margins so we can think about the second half. And then also how we comp next year. That’s my first question. And the second question is just to the extent that there’s any update on the arbitration process in Peru. And if there’s anything else that – as you’ve exited these contracts, any other legal items that have come up related to those closures? Thank you.

I’ll let Derrick take the margin questions, and I’ll jump back in on Peru.

Yes. From a telecom perspective, we’re still looking at revenues probably $500 million to slightly above for 2020 very much intact. On a year-to-date basis, I would tell you, we’re probably about halfway there. We’re probably in that $250 million range. On margins, we commented that margins are sequentially higher than the first and still had improvement over last year. They’re above the mid single-digit range and continuing to improve. We see very much as we exit now through the rest of the year, our margin profile that’s increasing. A little bit of COVID dynamic there in the second. So I think otherwise, you would have seen our margins kind of creeping up, I see it even further more in the second, but we still feel very confident in our ability to be that upper single-digit and double-digit by the time we exit the year.

As far as Peru goes, we’ve physically handed over the network at this point. We’ve done the things administratively that we needed to do to preserve our asset as well as our lawsuit there. We’re incrementally more positive about where we’re at. It’s a long process. We continue to make what I think is the right decisions going forward that will allow us to recoup our investment down there. We’ll see where it goes over the next 18 months.

Thank you.

The next question is from the line of Andy Kaplowitz with Citi. Please proceed with your question.

Hey, good morning, guys. Nice quarter.

Thank you.

Duke, last quarter, you talked about expecting to book a number of MSA renewals as 2020 evolves and consequently book revenue have you seen any delays in these MSAs coming to fruition? And then you also have talked pretty much every quarter about having billions of potential large transmission projects. I hope that they’d be booked. Do you see an opportunity to book a large project in the second half of this year?

Look, I don’t – we don’t press timing on those things. They just – again, we take our time. We’re looking at them all the time. There’s multiple opportunities out there. It depends on what you call large or not. I think when you go back and you look at what we’ve booked this quarter, as Derrick said in his commentary, $6 billion is not too bad the way I see it and their earnings streams, they’re off of it. And we worked on that for 18 months or better. And I would I just say, it’s transformational in this company what we did in a quarter through a pandemic and the guys and the teams that have done that and what we’ll be able to do on that island is something that will go down and is meaningful for, not only us, but the generations to come. So that being said, the opportunities are there. They’re larger. The larger transmission opportunities remain robust. We continue – I will say this on pipe. It doesn’t matter. Large pipe doesn’t matter to us. It doesn’t matter on this quarter, and it doesn’t matter going forward. It’s only incremental to anything we talk about. So the big pipe, when I think about it, it’s incremental to anything we say. If it’s there, we’ll pick it up. If it’s not, we won’t. And it’s fine. That’s not what this company is built around on the future or today.

That’s helpful. And obviously, you then can accelerate sort of getting out of Latin America. So as we sit here today, do you think you – when you go into 2021, you really should be out and the impact on EPS would be amenable to not being extended in 2021?

Yes. I mean, I think for the majority of it, you could have a little bit of linger, but I – we’re hard-pressed to get that done, and we were able to negotiate contracts out. It costs us a little money in the quarter, but it was the right answer for our shareholders, the right answer for Quanta is to move through that, and we were able to do a multitude that within the quarter. Again, we’re preserving the asset there in Peru. We’re working through the other areas. But in my mind, we’re on the other side of that, moving forward very quickly to get out.

And Duke, I just want to say that you mentioned the storm here in the tri-state area. We need more help so whatever you had for your expectations for the year in terms of revenue, maybe you’re going to out that because you think there’s more work to do in this area around this storm. So thanks, anyway. Good quarter.

Yes, thank you.

Thank you. At this time, I will turn the floor back to management for closing remarks.

Yes. Thanks, everyone. I – mainly, I want to thank our employees for the work that they’ve done in the storm environment. I will say that our business is inherently risky due to COVID. It’s even more still. I would say, in general, they’ve done a great job. We’ve collaborated great with the client here. And hopefully, we’re all picking the lights back on at a pretty rapid pace. So that being said, the industry has made a ton of progress there. And we’re proud of that and proud of what our guys have done in the field. We want to thank you, thank our customers, and I appreciate your questions and ongoing interest in Quanta.

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