Greetings and welcome to Quanta Services First Quarter 2021 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 Investor Relations. Please, go ahead, sir.

Great. Thank you and welcome everyone to the Quanta Services first quarter 2021 earnings conference call. This morning we issued a press release announcing our first quarter results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2021 outlook and commentary that we'll 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 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 May 6, 2021, 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 rely -- 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 a 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 now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services first quarter 2021 earnings conference call. On the call today, I will provide operational and strategic commentary and we'll then turn the call over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a review of our first quarter results and full year 2021 financial expectations. Following Derrick's comments, we welcome your questions. This morning, we reported solid first quarter results, with revenues of $2.7 billion in GAAP and adjusted diluted earnings per share of $0.62 and $0.83 respectively. Backlog at the end of the quarter was a record $15.8 billion, which we believe reflects the continued advancement of our long-term growth strategies. We continue to see opportunities for multi-year growth across our service lines, driven by our solutions-based approach and the growth of programmatic spending with existing and new customers. The recognition that the country's infrastructure needs to be modernized to support economic growth improved safety and reliability and for a cleaner environment is evidenced by the Biden administration's recently proposed $2 trillion infrastructure plan. The proposal will evolve and take time to move through the political process. But as proposed, the plan includes funding and policies to encourage new infrastructure development and modernization in several of our core markets including, high-voltage electric transmission and power grid modernization and resiliency, renewable energy, electric vehicle charging station infrastructure and other electrification initiatives, and broadband infrastructure expansion. While this infrastructure proposal could accelerate activity in these areas and provide incremental opportunity for Quanta over several years, I want to stress that our positive multiyear outlook and strategic plan are not reliant on this infrastructure proposal. We have been collaborating with our customers for many years to support their significant multiyear investment programs already in place to modernize the existing…

Thanks, Duke and good morning, everyone. Today we announced first quarter 2021 revenues of $2.7 billion. Net income attributable to common stock was $90 million or $0.62 per diluted share and adjusted diluted earnings per share a non-GAAP measure was $0.83. The first quarter was another strong quarter for Quanta led by continued strength from electric power and better-than-expected profitability from our Underground Utility and Infrastructure segment. Our electric power revenues were $2.1 billion a record for the first quarter and a 17% increase when compared to the first quarter of 2020. This increase was driven by continued growth in base business activities as well as contributions from larger transmission projects underway in Canada and revenues from acquired businesses of approximately $70 million. Also revenues associated with emergency restoration services attributable to winter storm response efforts were approximately $80 million a first quarter record. Electric segment margins in 1Q 2021 were 9.7% versus 7.3% in 1Q 2020. The improved operating margins were driven by double-digit performance from our electric operations within the segment including the benefit associated with increased profit contributions from emergency restoration efforts, which typically present opportunities for higher margins than our normal base business activities due to higher utilization. Operating margins also benefited from approximately $5 million of income associated with our LUMA joint venture. Negatively impacting first quarter margins were recorded reserves for the identified issues Duke discussed, which when combined with normal seasonality exacerbated by severe weather challenges from winter Storm Uri created an operating loss within our US telecom operations for the quarter. Again we believe we have addressed the issues and expect margins at or near double-digits going forward. Underground Utility and Infrastructure segment revenues were $643 million for the quarter, 35% lower than 1Q 2020 due primarily due to reduced revenues from…

Thank you. [Operator Instructions] Our first question today is from Chad Dillard [ph] of Deutsche Bank. Please proceed with your question.

Hi. Good morning guys. Just wanted to dig a little bit into the infrastructure plan. So beyond the headline $100 billion of funding for power infrastructure, can you talk about the potential changes from a policy perspective that you could see in this plan? And whether that could actually have an impact on the process of construction or even before that out on the permitting side? And then secondly, the bill has also allocated a decent amount of money to water pipe infrastructure. Is this an area of interest for Quanta I mean given its heritage of linear construction? Thanks.

Good morning, Chad. The policy and the plan under administration, I do think it benefits us. As always states have a lot of say in right-of-ways and easements and permits. So I do think that that will be a sticking point as we move forward. But even without the plan, I would say the sentiment around the carbon-free environment neutrality is there we continue to see larger projects that are moving forward. So it's a robust environment in my mind with or without the federal funding. So I -- while it's good, I believe every bit of that would be incremental to anything we've commented on in the past. As well -- as far as water we do some water now. Anything involves cross-skill labor, we're riding there on it and looking at it. We believe that's kind of our core to us is our ability to perform that. So we do look at water quite a bit. I'm not signaling anything on that. I just -- we do look at it.

Got you. Okay. And just a question. I mean I know that your reason for underground guide us on the revenue side hasn't necessarily changed, but just curious about how you think about the industrial business in particular? Can you talk about how it trended in 1Q versus your expectations? And has there been any change in terms of how you're thinking about guidance for that business? Are you still expecting flat for this year?

When we look at the underground business, again we look at these businesses as a portfolio. So I would just say the LDC business, the integrity business there is working out nicely. We like where we sit from a base business and repeatable sustainable model. But the industrial business was down as we've talked about through COVID. We do see signs of life there. We have a really nice model. The things that we perform on the industrial sector are certainly necessary. There are signs of life there. As Derrick commented, I think, when we get to the second quarter, we'll know a lot more about where the economy is going and what we think about the industrial side. In my mind, certainly, opportunity on the back side of the year and 2022 looks really robust.

Okay. Thank you.

The next question is from Sean Eastman of KeyBanc Capital Markets. Please proceed with your question.

Hi, guys. Thanks for taking my questions. I just wanted to start on the Underground segment. I mean, obviously, the margins there in the first quarter stood out. I was surprised you didn't call out the Texas deep freeze. I would assume the stronghold business would have been dislocated around that. And I was just wondering if we could flush out whether there was something else that was particularly strong to overcome a dislocation there?

No. The phrase it was three or four days. I know it got a lot of press and certainly loss of life and -- but really it was three or four days. And while it was an impact to the quarter, the industrial sector performed well. I mean, we did some emergency work, but very little when we think about it. All-in-all, I just think it's performing better than we anticipated a bit. We do see signs of life in that business. But all-in-all, it's really the portfolio of the company to perform throughout.

Okay. Got it. That's helpful. And I hate to do this guys, but just following this 1Q performance, I mean, $412 million at the low end. I mean, what set of operating conditions put us there at this point? It just seems hard to get down there and just be helpful to sort of frame that low end case at this point?

Yes. So I know as you can see we raised the low end of the guidance here for the first quarter to some way to comment to that we continue to think that there's strength in the business model itself. But we very regularly put through a range of guidance on an annual basis. That considers a low end because of the fact that we work in volatile workspace. Oftentimes, it comes down to the way that the weather patterns impact the year more specifically in the fourth quarter. The fourth quarter is where substantial types of increment weather can come in and really impact the type of dynamic. Let alone the fact that through the year we work in a range of circumstances creating volatility. So we think it's always prudent to recognize those circumstances. But what I would also say is we think we have a tendency to execute throughout. I think also as we've seen us do the last few years. So as we stand here today, we think our business model is intact. We think we continue to do the margin improvements that we think are available to us, but it's just the right thing to do to recognize the volatility of what we're working.

Okay. Terrific. Thanks for the time.

Thank you.

The next question is from Noelle Dilts of Stifel. Please proceed with your question.

Hi, guys. Good morning. So given the challenge that you're facing on the telecom -- with the telecom subcontractor that you're working through. Could you kind of just remind us of your model there? I think at one point you were kind of 50% self-performed, 50% subcontracting. And could you touch on kind of where you'd like to see that go? And how you're thinking about investing in training folks to work on the self-perform side? Thanks.

Yes, thanks, Noelle. As we discussed earlier, we kind of through about a $770 million type number on telecom as guidance. And I think in my mind, the opportunity is still there for us to perform at those levels. I wouldn't call it such as a problem other than we had some shallow ditch. We identified it. We're remaining it through rework. We'll go after -- when I say go after, we'll work with the subcontractor to try to recoup that and go forward. That being said, we like the business. It is about a 50-50 model as we stand today. We continue to see broadband activity book work, like the business a lot and on our way to $1 billion in inorganically for the most part. So, I would just say, I think the company has done a real nice job. It is part of the Electric segment. We probably wouldn't have talked about it, honestly, if it was just normal stuff. But since it was telecom, Derrick and I thought, it was -- we talked about the good all the time. So, we'll take our lumps and talk about that a little bit here and move forward. But in general, it just shows the strength of the quarter of the Electric segment as well. And if you look at it and you add -- you do an add back call it, $10 million to $15 million of impact on the telecom business, you can see the quarter would have been substantially higher on the Electric segment.

Thanks, that all makes sense. And then second, just given what we're seeing with commodity price increases and steel concerns about availability, what are you kind of watching around that dynamic? Are there any concerns about some of the larger transmission poles getting to you on time? Just kind of curious how you're thinking about the supply chain challenges that are kind of dominating headlines right now? Thanks.

Yes. I mean we're seeing some challenges in commodities not really impacting us at this point. We'll watch it fairly closely on the larger projects to make sure that our material comes in on time. We don't have commodity risk per se. So, our jobs that they're impacted we'll collaborate with the customer on those impacts. But in general, we're able to work through most of those areas where we do have impacts. I would tell you like in my mind, Canada is probably our -- one of the ones that have impacted the most. And I don't think it's really material per se. It's just how it's delivered. And for the most part that's been more of a COVID issue than material, in my mind, but no really commodity impact at this point.

Okay, great. Thank you.

The next question is from Michael Dudas of Vertical Research. Please proceed with your question.

Good morning, gentlemen.

Good morning, Mike.

Good morning.

You called out an MSA that you signed earlier this year. And how are the -- when you think about your MSAs with these customers, they typically -- there are several year? Are they long-term with annual kind of budget requirements? Are there any margin or utilization benefits from those types -- that type of agreement and the work that you flow through relative to one or two-off type opportunities that arise from maybe that same or other customer base?

Mike, we really don't call them out that much. The reason why we called out the West is fairly incremental. And one of the things that we continue to talk about is kind of that hasn't started really ramping yet. And we were primarily signaling that ramp by calling it out and the incremental backlog growth on this MSA. Typically, when we think about it the 85% 90% of the business, it's kind of base businesses MSA-type business and -- in my mind. So that's how we look at it. And we book MSAs and re-up them probably monthly in my mind. So there is no real systematic way. I do think our backlog will continue to grow to record levels. We will have MSAs that renew that are larger. We continue to see a robust environment even when we have an MSA, the growth on the MSAs there as well. We take a prudent look at it to make sure that from our standpoint, the next 12 months and beyond or what the backlog would interpret. So in my mind, we're doing a good job with that. And our customer base certainly is spending the capital. The macro market is there on our end. So we see those MSAs just grow.

I appreciate that. And my follow-up Duke is you mentioned, again, in your prepared remarks partnership with broadband opportunity. Is -- when we see the -- from the administration and the infrastructure plan and money they want to spend on broadband technically, is the private sector doing enough to make this happen? Are these funds -- are these two, three, four-year type opportunities, it sounds that way? But I just want to get us a sense you from that point. And what made this unique partnership to call out for -- that you entered into with this company? And are others like that going to help the growth in getting to that $1 billion target that you've put out in the medium-term?

Yeah, Mark, we've talked a bunch about how the infrastructure on the utilities and broadband are converging. I think when we looked at it, we continue to look at the rule in the underserved markets that were out there. And for the last two years have really tried to find the solution with our customer in a collaborative effort to utilize that infrastructure. We found technology and a company that had the capabilities to do that, work with clients. I do think it's broad-based small-cell type deployment that you'll see ongoing. When we have a programmatic way to do that on this, we'll have a programmatic way to do it with every one of our customers. And it's really beneficial for us to be on the front side of this, providing the solution, pushing the rural development opportunity fund forward. And not just waiting for something to come to us, we're actually out making sure this happens in front of it, not just waiting on an RFP or get commoditized with labor. I think that's part of what we're saying as a solution-based provider as we're out in front of that with technology.

Absolutely. Thanks.

Next question is from Brent Thielman of D.A. Davidson. Please proceed with your question.

Great. Thank you. Duke, any color on some of the larger project pursuits in your electrical power business in 2021 that you're seeing and maybe how that could potentially influence the segment through the year? I think the guidance for the business is more reflective of the programmatic spending you see with the customers. But I'm wondering if there are some other larger projects that can potentially layer on here this year?

Now, I could name them for five minutes, but it doesn't -- it's not -- what I'm concerned about is just in general when we start talking about it in my mind we got a long ways to go in some permitting. It's a robust environment out there, we're around every one of them. Everyone you can name I could name them for days. There's a bunch of nice projects moving the renewables and the interconnections almost every RTO regional plan has a large piece of work in it, not only one probably two or three. In order to get to the -- what the plan and the carbon-free footprint, you need a significant amount of transmission. And in order to do that we need big projects. And certainly they're tough on the permitting side, administration side they're going to help that. There are some that are ongoing that are closer than others. I believe mid-America and some of that on the buffet call as he talked about it as well. So there's a bunch of projects that are out there that are around the edges on.

Okay. I appreciate that. And I guess another question I have is just, are you seeing anything that suggests your customers are shifting some capital plans from the gas portion of the business towards the electrical portion of the business? I just wonder, if these commitments sort of profound interest in grid reliability, or still in any thunder from the gas programs that drive the Underground segment?

No. I mean, I would say, we're seeing our pipeline customers try to build solar or build solar. We're seeing quite a bit of that happen, per se. We're not -- the LDC business, it's a safety concern as well as reliability of just what you have on any given day. I mean, you can see the freeze. We had -- in Texas you saw actually pipe freeze, which caused problems on your plant. So I think all that integrity that needs to be done is a safety concern as well as a balance until we figure out carbon free. And you can't do that without a significant amount of transmission. So the company sits in a really nice place on either side of that.

Okay. Thank you.

Yeah.

The next question is from Steven Fisher of UBS. Please proceed with your question.

Hi. Thanks. Good morning. I just wanted to come back to the telecom business and the challenge in the quarter. And if you could just sort of talk a little bit more broadly about, why you do need to go the route of subcontract models in the first place? Because it seems like, that is perhaps bringing in an element of additional execution risk here. And the bigger picture, I guess, I'm seeing is that, you have a great market opportunity across your businesses at the moment. And I guess, I'm just wondering, what you might be able to do, to enhance your potential to execute smoothly and capture that upside market opportunity without some sort of the risks of the hiccups here?

Yeah. Steve, I think when you look at the business, our performance from a margin standpoint in the segment, we did beat our expectations. I think we've raised the guidance on the year. We continue to do it. We look at it as a portfolio. We're getting operating leverage out of all of our offices, whether they're doing telecom gas or electric. We're reporting in segments. We may run the offices a little different than that. Overall, the performance of the company is exceptional in the field. The model around telecom it was an organic growth strategy around it. It does have probably 50% of subcontract. It's -- due to the fact that it ramps, up and down. And we're not going to invest in something that just ramps like that because, it continues to weigh on it we want some balance in it. And the balance allows us to have some variable cost in our equipment and things of that nature. My returns are better that way, in my mind. So that's the way we run the telecom business. And that's how we'll go forward with it. That being said, we did have a QA/QC issue in the quarter. We'll do a better job of catching that next time or now. For that matter and try to call back all we can. But all in all, I mean we're performing really well, across the board in my mind.

Okay. That's very helpful. And I just want to ask you about Puerto Rico. It sounds like you're working towards a timely transition there. But in the event that there is some delay. Can you just talk about what the possible implications might be for the rest of the year? I think there's some implications for some incentive potential, but you may not have expected any incentives this quickly anyway? And maybe when we should think about the real opportunities when the real opportunities for incentives on that contract might be? Thank you.

Yes. I don't think we anticipated that this year. It will be in the next year for the incentive base piece of it, but we do anticipate going into service here in June. The transformation will happen will take over in June. So from that standpoint that will move on. As far as, we're coming through the fame of phones that will be into next year in my mind before you see any of it. And that's also an opportunity next year in Puerto Rico. But all in all it's moving along like it should and we're pleased with where we sit.

We had commented previously that we thought that post-transition we would see on an annual basis a run rate contribution of around $0.25. That is excluding inflation adjustments, excluding all incentives and excluding any incremental construction opportunities. So all of those things would still get the upside opportunities for us.

Terrific. Thanks.

Thanks, Steve.

The next question is from Adam Thalhimer of Thompson Davis. Please proceed with your question.

Hey guys, nice quarter. I wanted to start on the energy side. Curious Duke if you've seen any pickup just from the rise in oil prices particularly around pipelines?

I would not say pipelines we've seen much there. I just -- our industrial businesses stated tons a lot there. I think it will get better. We've not seen pipeline movement. Our Canadian operations we see some long-term pipe, but not really in the Lower 48 in my mind it's pretty slow as far as I'm concerned. And I think we've transferred the business over to more competitive sustainable business anyway. So nothing that affects us in my mind.

Okay. And on the -- you talked about a fixed wireless award. Can you give a little bit more detail on that? I was curious if that was like a Tier one telco or kind of an emerging player some detail on that would be helpful? Thanks.

Yes. So we made an investment in the quarter in some technology and a service provider there on fixed wireless. It's -- to really look at the -- our dollar funds the rural development funds as well as the underserved. So not a Tier 1 carrier, but certainly someone that would put it out across, the Lower 48 and beyond from that mine in a programmatic way. So we have the ability to do that. As the Tier 1s move forward we'll have the ability to also do that in a programmatic way. Really I think it's the convergence of the electric such as your cooperatives your municipalities and the way to solve these issues around broadband. And it makes a lot of sense. We've worked on it quite a bit and this was our opportunity really to push it forward.

It is something we’ll hear more down the coming quarters, thanks.

The next question is from Andy Kaplowitz of Citigroup. Please proceed with your question.

Hey, good morning, guys.

Hi, Andy.

Duke, so we know signing longer-term electric power MSA is one of your main strategies. But does electric power MSAs being up over 40% over the last year give you more confidence regarding Quanta's ability to grow the core business. Maybe even toward the middle to higher-end of the longer-term guide you have we know you talk about mid-single digits to low teens. I mean do you start getting visibility even into '22 in that regard?

I mean I think we've talked about multiyear type growth kind of mid to upper single digits on the 80% to 90% -- 80% of the business I would say, at this point. At least we've talked about that growth long term three to five years at least. And so we continue to see that. We've stated that quite a bit. And we think the MSA, the backlog that you're seeing that grows there for a long period of time.

I guess Duke what I'm asking there though is that -- does it give you confidence in sort of -- because it's a pretty wide range right between mid-single digits and low teens. So I mean given sort of the visibility you have do you see actually a higher growth rate going forward? I know what the guidance is for this year, but just out of curiosity?

Mean if you go back in time and you look at what -- how we've grown the segment we've grown the Electric segment double-digits over the past 10 years on a CAGR basis. So I would tell you that -- that's what we've done in the past. It's bigger numbers. We're being prudent about how we talk about it. Do we have the ability to grow in the double-digits? Yes.

And then let me ask you about -- someone I think you asked you about large projects. So let me tackled maybe slightly different way. Again, you've talked in the past about this sort of $3 billion number and saying last quarter that you had quite a bit more than that in sort of opportunities. Is the funnel a lot larger than that double that now? Like any sort of thoughts about quantifying the funnel now? Is it sort of $5 billion, $6 billion just for perspective, Duke?

If we talked about all the jobs that were out there, there's not enough material to talk about it, to begin with. So I think in our mind we're being prudent about how we discuss it. The larger projects are growing especially with the sentiment around bringing renewables in a carbon-free environment by 2030, 2050. So the transmission corridors will have to exponentially get larger than they are now in a significant way. In order for that to happen, you're going to need large project dynamics for the next decade.

I just want to follow-up on one other thing that you talked about with LUMA. LUMA's CEO recently talked about $10 billion in federal recovery funds now flowing in Puerto Rico. Do you think those funds just don't make their way into projects until next year as you said, or is it possible that could happen as early as this year?

I mean you have about $1 billion budget down there, $600 million of a $1 billion budget down there a year on any given day. So there is projects down on the island. What I would say is the FEMA funds are on top of that, that would come in. I would be prudent to say it would be next year.

Great. Thanks, Duke.

The next question is from [indiscernible] of Credit Suisse. Please proceed with your question.

Hi. This is [indiscernible] on for Jamie Cook. So our first question is we were wondering if you have any concerns on securing labor in this cycle, just given the current labor market and the robust outlook? And then if you could comment on what you're seeing in the pricing environment, that would be great? Thank you.

Yes. Thank you for the question. From a labor standpoint, a tight labor market really suits us well. That's who we are. We really work on labor. I have invested well over $100 million over the last six to seven years. So any time we have a tight labor market cross-skill labor market, Quanta does really well. So we're in a good position there. We pretty much regulate some of the way that we look at wages. We have ability to pass-through those costs if they escalate. So we're in good shape. As far as pricing power and I would just say, in general, we'll stand by what we said in the past, the double-digit margins over time. At times, it'll go higher. And we're in good times now, so you're seeing some push on that. Primarily around the utilizations and things of that nature that is pushing up your margins, more so than pricing power.

Thank you

The next question is from Min Cho of FBR Riley. Please proceed with your question.

Hi, everybody. This is Min Cho for Alex Regal at B. Riley Securities. Just one question really, Derrick, given your continuation of strong cash flow and liquidity. Just wanted to know if there was any shift in change to your capital allocation strategy and want to know if there were any more kind of opportunistic M&A opportunities that you're seeing in the current market? Thank you.

No, I'd say, that we're still committed to the same allocation strategy really that we've held for a number of years. We look at first leaning into the growth of the business, on the working capital and CapEx front. Very much still yet look at the acquisition and investment side of the equation, partly as an example, as highlighted to Duke's comments here for the minority interposition here this quarter. And then, as well with the buyback of stock and dividends. We still look at all of those. We like to have our balance sheet positioned well to be able to lean into all of those areas at any given time, not having to choose which one creates the most value at a point in time. I would say that acquisitions has historically been kind of the largest component of recent years and we still see an active market there, ability to find good acquisitions. It will be sporadic, because we're opportunistic with the deployment of capital there, looking for strong management teams that supplement who we are. You can see over the last four or five years, we probably averaged about $300 million on average deployment there. And I wouldn't take exception to that kind of view as we go forward.

Great. Thank you.

There are no additional questions at this time. I would like to turn the call back to management for closing remarks.

Yes, I just want to thank everyone, our field leadership team and men and women working in the field through the pandemic, doing all the things that we've done well. We performed well, safely, and it's to their credit. So I want to thank you for participating in the conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call.

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