Q3 2019 Earnings Call
Hi, It's Rachel are a C H E L.
Smith S.M.I.T.H.
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I'm from era, sorry, it's a I.E. Ari.
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With that I'll turn the call over to Mr., Duke Austin quite as President and CEO do.
Thanks, Good good morning, everyone and welcome to the Quanta Services' third quarter 2019 earnings conference call on the call I will provide operational and strategic commentary before turning it over to Derrick Jensen fun as Chief Financial Officer, who will provide a detailed review of our third quarter results. Following doug's comments, we will.
Welcome your questions.
We're pleased to report this morning, the quantum achieved record quarterly revenues operating income adjusted EBITDA and adjusted earnings per share in the third quarter.
We also ended the third quarter with record total and 12 month backlog.
Our backlog growth to record levels was driven broadly across our end markets and customer base, including through the support of our electric and gas utility customers incremental programmatic spending and our communication customers plans to push fiber deeper into their networks and preparation for the Fogey platform.
We believe this supports our continued favorable view a multiyear growth opportunities.
We are focused on continuous improvement and accountability to our multiyear plan.
We have executed well against our strategy over the past several years and expect that 2019 will be a record year for quanta.
As a result of our performance and the addition of several previously announced strategic acquisitions, we are increasing our revenue adjusted EBITDA and adjusted diluted earnings per share expectations for 2019.
We believe our solid year to date results and these increases in guidance demonstrate successful implant implementation of our strategic initiatives are strong position in the marketplace and favorable trends for multiyear demand of our services. We also believe our results reflect the benefits of service line diversity and our portfolio approach.
Note to managing risk, while enhancing earnings power.
Our electric power segment performed well during the quarter, considering several unique challenges that post alstom revenues and soften margins a bit.
We we believe this was due in part to the unprecedented demand for our Lyman resources in the Western region of the United States and continue to work through these challenges with our customers.
Because our customers resource needs can change rapidly we have taken a prudent approach to our fourth quarter utilization expectations.
In Canada, we experienced short term mobilization delays that impacted resource utilization on two projects. While these effects of carried into the first part of the fourth quarter, we expect improve resource utilization on these projects later this year and further utilization improvements in 2020 and 2021 asking.
Instruction begins to ramp up on these projects as well as the Wattay transmission project, which is expected to begin construction and the first quarter of 2020.
More broadly we see continued strength in programmatic spending by our electric utilities on their transmission and distribution networks. We are collaborating with our customers and providing solutions that include large scale distribution programs sub transmission system expansions and a range of technology solutions designed to enhance and modernized.
The grids for the future, which will benefit the consumer.
Quanta is increasingly managing large portions of these multi year multibillion dollar programs, which we believe.
Our in the early stages and will be long term in duration.
On a plays a critical critical role in facilitating the technologies and lower carbon footprint of the future for example, the implementation and widespread adoption of new technologies and services.
Such as electric and autonomous vehicles and Fiveg.
Require power and new infrastructure and the power grid up today must evolve if it is to meet those additional demands.
We are in active discussions with key players developing these technologies, helping them understand the needed infrastructure and how quanta can help them execute their go to market strategies.
As these industries deploy new technologies and continue to invest in the future. We believe quantum will play an important role that becomes increasingly apparent to the investment community.
We continue to gain visibility into the Fiveg deployment opportunity and believe it is large and that the build out we'll take many years due to the density requirements of small cells and the massive amounts of fiber required.
We believe quanta is uniquely positioned to provide solutions that bridge the gap between wireless carriers and utility companies as Fiveg infrastructure is increasingly deployed on the electric distribution system, which will require significant electric kleiman resources.
Our consolidated communications operations did well in the quarter and we continue to expect full year 2019 revenues of approximately $400 million.
We ended the quarter with total backlog of more than $770 million, representing a nearly 18% sequential increase.
Our U.S communications operations are leading the growth and profitability gains for these operations.
We continue to believe we're on track to grow these operation to approximately $1 billion of annual revenue over the coming years.
Next year, we see opportunity for double digit revenue growth for our US communications operations with operating margins approaching double digits on a full year basis.
The strong margin performance was driven by solid execution across our operations with materializing benefits of scale from our gas utility operations excellent execution on our big pipe work solid results from industrial services and strengthening midstream activity in the U.S and Canada.
We know one quarter is not a trend. However, we believe this quarter demonstrates the profit potential of our pipeline and industrial segment and is evidence that the margin improvement strategy. We've implemented over the past several years is paying dividends I.
I think it is worth revisiting the key components of that strategy.
The steps we've taken to achieve that include organic expansion of our gas utility operations.
The acquisition of stronghold to establish a leading and industrial services capability and most recently the acquisition of the housing construction company, which further enhances the scale of our gas utility operations, particularly in the northeast United States and improves the margins.
Of our gas utility operations.
We sought to right size and rationalize underperforming and noncore operations and 2017, 2018, and 2019, we shutdown restructure and sold underperforming noncore operations and assets and our pipeline and industrial segment that were previously impacting segment margins by more than 50 basis.
Points.
Much of this effort is complete however, we continue to evaluate our operations for additional steps that can be taken to prove improve these segment margins.
We wanted to complete problem projects and focus our efforts on opportunities within our core capabilities, we work to and completed various problem projects over the past few years that generated unacceptable results.
For example, and the third quarter, we reached mechanical completion on the processing plant that has generated disappointing results for several quarters and has masks the positive results of our other margin improvement initiatives.
Going forward, we are focused on pursuing and executing work consistent.
We are confident that are ongoing margin improvement strategy is delivering results and puts us on a path to achieve our upper single digit annual operating income margin goal.
We continue to evaluate opportunities to strategically expand our pipeline industrial operations as we gain scale and diversity. We believe the result will be a segment with higher margins less cyclicality and high quality repeatable and sustainable earnings streams.
So we have more work to do we are proud of our accomplishment complements to date and want to recognize the dedication of our fill leadership to that end.
Including economic risks through diversification.
We have a diverse customer base with low customer concentration.
And a diverse and expanding line of services, we believe our diverse diversification strategy favorable industry dynamics and the strategic investments. We have made will continue to benefit our results over a multiyear stock.
We are confident in our long term strategy and are focused on generating a more resilient and predictable earnings stream.
On a consolidated basis, approximately 90% of our 2019 estimated revenue is expected to come from base business activity. We believe we can grow those revenues at a mid to upper single digit CAGR over at least the next three years.
Additionally, we continue to pursue billions of dollars of electric transmission and pipeline project opportunities and beliefs, Tom could be awarded over the coming quarters.
While we provide our formal commentary and 2020 expectations on the fourth quarter earnings call. Next February we currently expect growth and consolidated revenues net income adjusted EBITDA and earnings per share in 2020 and for quanta to achieve another year of record results.
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 Bill leadership, we will pursue opportunities to enhance quantus base business and leadership position in the industry and provide innovative solutions to our customers, we believe quantums 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.
With that I'll now turn the call over to Derrick Jensen, our CFO for his review of our third quarter results there.
Thanks, Duke and good morning, everyone.
Today, we announced record third quarter 2019 revenues of $3.35 billion at 12% increase over the third quarter of 2018.
For the third quarter of 2019 net income attributable to common stock was $136.1 million or 92 cents per diluted share.
Adjusted diluted earnings per share our non-GAAP measure was a record one dollar in 14 cents.
Our electric power revenues increased 16% from compared to the third quarter 2000, $18 billion to $1.8 billion and represent record quarterly revenues for the segment.
This is the sixth consecutive quarter of sequential revenue growth for the electric power segment, which continues to be driven by base business activities as our utility customers expand their investment in grid modernization and infrastructure hardening, particularly in the western use.
The strength of the base business in the third quarter of 2019, offset approximately $100 million and reduced revenues from larger project when compared to Threeq you 18.
Telecom revenues, which are included within our electric power segment or slightly over $100 million, which growth largely driven by our us operations.
Margins in our telecommunications operations were mid single digits led by performance in our us telecom operations, but dilutive to overall segment margins.
Excluding our telecommunications operations electric power margins were 9.6% for the quarter.
Our pipeline and industrial segment revenues increased 8% when compared to the third quarter of 2000 $18 billion to $1.48 billion.
This increase is primarily due to elevated levels of smaller transmission pipeline project and gas distribution services, which offset a decline in revenues from larger pipeline projects.
Additionally, third quarter revenues for 2019 included approximately $40 million from acquired companies.
Operating margin for the pipeline in industrial segment was 9% in Threeq you 19, an increase over the 7% margin in Threeq you 18.
The margin the improvement in margin was primarily driven by strong execution across both larger pipeline projects and our gas distribution services.
Additionally, the third quarter of 2018 was negatively impacted by project losses associated with the processing facility, Duke referenced that has now reached mechanical completion.
As well as challenges encountered on a natural gas pipeline project in the northeast United States.
Corporate and non allocated costs increased $16 million as compared to the third quarter of 2018.
This increase is primarily due to a $9.9 million increase in acquisition related costs $4.6 million of increased amortization expense and a $5.2 million increase in expense associated with changes in the fair value of contingent consideration liability.
These increases are partially offset by 4.2 million dollar net decrease in incentive and stock based compensation expense.
Overall threeq to 19, adjusted EBITDA, a non-GAAP measure was a record $312 million, a 14% increase compared to $274 million in the third quarter of 2018.
This represents the first time, we've exceeded $300 million of adjusted EBITDA on a quarter and illustrates the strength of our portfolio approach.
For the third quarter of 2019, we have free cash flow and non-GAAP measure of $30 million.
Cash flow provided by operating activities was $91 million and net capital expenditures were $61 million.
Day sales outstanding or DSO for the quarter was 91 days inline with the second quarter, but 13 days higher than the 78 days for the third quarter of 2018.
Continuing to impact our DSO or retain its balances associated with the Fort Mcmurray project certain retained its balances associated with pipeline projects that largely completed in prior periods and elevated receivables associated with two customers than implemented further billing modifications during the quarter.
Of note the Fortenberry Retainage was collected in full in early October and represents approximately $100 million of cash flow in the fourth quarter.
Additionally, while building modifications have resulted in elevated receivables payments were received during the quarter, albeit at a slower pace and no items are in dispute.
Subsequent to quarter end billing and collections associated with these customers is improving and has contributed to positive cash flow for the first four weeks of October .
Excluding the impacts described above DSO for the quarter would've been approximately 82 days higher than Threeq to 18, but more in line with historical levels, which have averaged 79 days over the 20 quarters from 2014 to 2018.
Based on projected revenue levels for the remainder of the year. The collection of the Fort Mcmurray, Retainage and positive developments in billing and collection cycles with certain of our customers. We continue to expect DSL improvement between now and year end.
We did not repurchase any of our common stock during the third quarter of 2019 and had approximately $287 million available authorization remaining on our $500 million stock repurchase program at September 32019.
Additionally, during the third quarter of 2019, we announced our fourth quarterly cash dividend of four cents per share totaling $5.6 million.
During the quarter, we amended our credit facility, which among other things provided for an incremental term loan of $687.5 million and increase the commitments on our revolving credit facility by $150 million to approximately $2.14 billion.
At September 32019, we had $80 million of cash and $1.87 billion of borrowings outstanding under our credit facility 1.26 billion of which is borrowed.
Under the term loans and $608 million of which is borrowed under revolving loans.
Our debt to EBITDA ratio as calculated under our senior secured credit agreement as approximately 2.1 times.
As debt to EBITDA ratio is above our targeted operating level of around 1.5 times. However, it is attributable to the acquisition activity in the period as well as previously discussed pressures on our DSO.
As of September 32019, our aggregate total remaining performance obligations were estimated to be approximately $4.4 billion approximately 66% of which is expected to be recognized in the 12 months.
Additionally, the latte transmission project in Canada recently achieved financial close and quanta receive full notice to proceed.
As a result, we will include the contract value of the project in our fourth quarter backlog.
We will also include the large pipeline MSC that was signed in October and was highlighted in this mornings press release, which we believe will result in record backlog again at year end.
Our total backlog continues to expand as we capitalize on the growing infrastructure investment activity across our end markets and specifically the longer term demand for our base business activity.
Turning to guidance given the continued strength across our base business activities and incremental contributions from acquisitions made during the quarter, we're increasing our consolidated revenue expectations for the year to approximately $12 billion.
With regard to the electric power segment, we expect revenues for the year to be approximately $7.2 billion.
On an annual basis, we now see aggregate electric segment operating margins ranging from 8.3% to 8.5%, but the 79.2 million dollar effect of the Peruvian projects discussed in our second quarter earnings call negatively impacting annual operating margins by roughly 110 basis points.
Due in part to the uncertainty around the timing of the commencement of construction activities for certain larger electric transmission projects in Canada and the associated impact on fixed cost absorption. We now expect full year margins for the electric power operations to come in slightly below double digits.
However, as do commented our us electric power operations are expected to exceed 10% for 2019.
Regarding our telecommunications operations, we continue to see the opportunity for operating margins to achieve upper single digits in the fourth quarter of 2019, with our U.S telecommunications operations, leading the way with the potential to hit 10% in the fourth quarter.
We now expect pipeline and industrial segment revenues to range between 4.75, and $4.85 billion with full year margins between 6.2 and 6.4%.
We expect our full year diluted earnings per share to range between $2.49 to $2.62 and our adjusted diluted earnings per share to range between $3.16 and $3.28.
With regard to any acquisitions made in the third quarter. Their results were in line with our expectations and we continue to expect their adjusted diluted earnings per share contribution for the full year to be approximately six cents.
Our expectations for adjusted EBITDA, including the $79.2 million second quarter charge now range between 904 million and $932 million.
From a cash flow perspective, due largely to reduced revenues associated with the seasonality of our work and therefore reduced working capital requirements. We expect free cash flow for the fourth quarter to range between 300 $400 million, resulting in full year free cash flow between 100 and $200 million.
Due in part to slight changes in working capital expectations for the year as well as incremental cash paid for acquisitions during the quarter. We now expect interest expense for the year to range between 65 and $66 million.
We believe our third quarter results highlight the continued strength of our end markets and our ability to profitably execute across our operations.
We remain confident in our long term prospects for profitable growth and the repeatable and sustainable nature of our core markets.
This concludes our formal presentation and we'll now open the line for QNX operator.
Thank you will that be conducting the question and answer session.
Let me address questions for as many as possible. We ask you limit yourself to one question and one follow up.
To ask a question today. Please press star one from your telephone keypad and the confirmation Tal indicate your line is in the question Q.
You mean press star too if you like to move your question from the Q.
Participating speaker equipment, maybe necessary to pick up your handset before pricing the sharkey.
One moment, please hold the poll for questions.
Thank you. Our first question is coming from the line of Andy capital its with Citigroup. Please proceed with your question.
Hey, good morning, guys.
One important.
Good 1% margin in pipeline industrial the highest we've seen in 2014, we know what shape seasonally strong quarter for you you talked about the reason why margins higher now, but because it will give you won't confidence that margin in 2020 could get a lot closer to that 8% to 10% margin goal you have for that segment and then at this point given.
Positive mix that comes from Palin as well is there anything other than whether they really changing your way from a relatively significant step up in that margin moving forward.
Yes, thanks for the comments when we look at the pipeline and industrial segment, I think what you've seen us and we've been consistent over the past three years talk about strategy there to build that base business saw continued to be more repeatable and sustainable and that's what you're seeing share a broad based type beat on the quarter and I do think as we move forward we will continue.
To get better and continue to get in these vessels upper single digit type ranges going into next year. So I think it is our seasonal quarter that is high for us.
Like I said, we executed through from stronghold all the way through our big pipe really nice quarter, it's something for us to leave we continue to see this we've seen it for a long time and our strategy that we're making the right decisions in the field from the scale of the scalability standpoint, NR expansions how far we can go will do.
And on.
The markets in the northeast with our with our acquisition of talent as well as what we do with.
When we book Big pipe come into next year. So, we'll we'll give commentary a little bit deeper there when we get into our 2020 guides.
Okay. Thats helpful. Then can you give us more color on the impact of try them, particularly California utilization on electric power kind of seems relatively self explanatory utilization get better Ngls transmission projects ramp up what are the utilities in California, pushing off there because of how difficult. The first season has been.
I will just thought that there would be too much work for you there now and the growth in that region will be a highest within your businesses.
So, California is our biggest stated it's extremely complicated when you when you start talking about that amount of resources with the fires in first of all up our main concern is to make sure the safety of our people.
And also to make sure that we're supporting our clients in a manner that's.
Efficient and so when we think about it when we think about these resources in resource ramp ups Utilizations always play a big role there and landmark and fire areas. Obviously, we shut down some of that some of the areas. We had some crude movements in the quarter. We've worked really hard with with all of our clients in California to make sure we're supporting mall within.
Yes, I think this is a long term fire hardening approach build that youd somewhat what you've seen from the hurricanes in the southeast, albeit in California, now with fires and even the west. So it's not just California. It's all the west. It has trained a lot of the crop skilled labor resources out of the country into California, It's a big place for us.
So we're right in the middle of it.
We're supporting them across the board, but this quarter was a little inefficient I do think that that will work out weve taken a prudent approach to guidance, but it's a long term build there and certainly something that we're right in the middle of as we go forward with planning and things like that and.
From from that standpoint, we really like the business. So long term, we just we're getting through some of those strife of the season here as you see on the news.
Given could be clear you're actually hiring in California rate you can't get enough resources. There. It's just the inefficiency of all that's going on now correct.
We're hiring across the board if you look at our employee counts for.
The quarter were up 4000 quarter over quarter.
Thank you our next person this for the last one line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi, good morning, and congratulations on the pipeline and industrial margins I've been waiting for this quarter for some period of time.
I guess first just a follow up you know sort of on Annie's questions on the sustainability. These margins I think you said next year, you targeted or whatever upper single digit.
What are your so.
What are your assumption gena in terms of is that based on stuff that you have to wait and I'm trying to understand how much the acquisition that you did.
In the quarter is also sort of stress surely helping margins or any of this is.
Pricing scale. So just more color there and then my my second question. Yes. Also you know is as we shift to 2020.
So you talked about some free cash flow improvement in the fourth quarter, but is there is there any sort of structural improvements that we can think about and free cash flow as as we exit 2019. Thanks.
Yes, Jamie I'll talk a little bit about the pain on margins and we're not in a position to to give 2020 guidance at this point, but what I would say is we incrementally get better and.
And I do believe we can operate in those upper single digit margins. The base business alone can operate there. So in my mind, we continually get better and will operate better. We don't know all the synergies of Holland, but I know theres synergies there and our expansion in the northeast will certainly be accretive to to the segments. So when we think about it thats how were.
Thinking about it going into next year, it's too early to to say how much big pipe. We can book what we have set is on on a consolidated basis. We can grow the company next year, and 85 and 90% of that base business over over a three year period. We think we can grow kind of mid to upper upper single digit. So we're giving you pretty good guidance on what we see.
From the Capex and Opex of our utility customers, which is the very based of the whole company and your and also will will stock on the larger projects as we have in the past and we'll be able to formulate what I believe it is extremely good guidance going into 2020 on we'll do it in February .
Yes, and Jamie than relative to free cash flow dynamic 2019, we had in a larger growth is through the year compared to our original guidance at the beginning of the year and as you know the time at the dynamics of that revenue growth as a drop working capital.
And so that creates a largest portion the fluctuation for the extensive going into 20, Duke has commented about our confidence in consolidated revenue growth than to do that and I think that what we would see is is that that would have a.
Comparable draw of working capital historically, we run about 15%.
Working capital trailing 12 months.
It's kind of how to think medical and a 20 on the aspect of dynamics of changes.
DSO has put a little pressure here through the third quarter.
I talked about that as far as some of the billing dynamics I think that improves a little coming into the fourth overall going into 2020, I don't think that that continues to linger I think that we'll be able to see improvements of dsos more time trending towards kind of historical levels.
Alright, Thank you I'll get back in Q.
Thanks.
The next question is from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, Jim and nice quarter. Thanks for taking my question I wanted to start on the electric power margins.
So it looks like you guys will actually have three good size transmission projects all running at the same time in Canada. Starting in 2020, just been granted give some color on how powerful that Canada utilization uptake could be as we look out to next year.
Are you able to quantify what maybe the relatively low Canada utilization drag on electric as this year or any way to approach that kind of dynamic would be great.
Yes, sure when we look at Canada for the quarter, even for the year.
Somewhat down off Westport memory.
We.
We knew we were booking big where in the fourth quarter and so we do have some drag where weve.
You know inefficiencies, there with people and equipment and Utilizations in Canada for for even the year that being said I think with what latte in east West tie in some other things that are moving around there is certainly stabilizes our Canadian market for the next 24 to 36 months, which really gives us an anchor to grow our base business.
To do some other things there. So we really like the margin profile going into 2020, and beyond which will stabilize Canada and be accretive.
To what it was this year for sure and it continually we continually say the and I'll say it again, we'll operate this segment double digit margins. We will over time, we'll have some quarters, we'll have some periods, where it'll be nine seven and then you'll see it bump into 10, three so it's going to operate and thats in that space offset it.
Over and over and I continue to stand by the segment has over time the matter if its large transmission small transmission operated in double digits and that's our expectation going forward.
Great and it was nice to see you guys close on a solidly accretive acquisitions in this quarter.
Maybe give us an update on how the pipeline of targets looks at out there do you think we can see another Hal and ask transaction in the near term or maybe you guys prefer the buyback in the near term or maybe you want to pay down some leverage some color there would be great.
Sure, Yes, when we looked at looked at how and it's a great company. It's been business. Since 935, we worked on that for over two years, so that was us and that team and that management team working together they wanted to be a part of quanta, we wanted them to be a part of us.
They fit really nicely into our strategy I want to say that our strategies long term on them. We've been working on this strategy for three and a half years, it's not a transformation. It's certainly something that's core to us to to buy great companies with the right culture, but very selective on how we go about it certainly there's companies.
The out there that fit and as we go forward, we have a strategy you've seen us implemented you've seen our uses of cash we'll be opportunistic on how we do that both from a company standpoint, we do have some growth organic growth on so one of the things I think is a misnomer as a company while albeit we all believe it.
As a management team a value, it's certainly a growth company and our mind as well on we're putting it up we're showing the growth and you see it over over over time. So from our standpoint, we'll continue to be opportunistic with cash and look for the best ways to drive shareholder value.
Thank you. The next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.
Hi, good morning, and congratulations on next quarter.
You can you.
So my first question.
I think in your prepared remarks, you mentioned that youre seeing strengthening in the midstream market and I think.
You've heard some more cautious views out of some of the MLP Bend and developers and just general concern that some of those players might be a little bit more conservative of cash that was encouraging to hear those remarks I was wondering if first do you have.
Any thoughts on sort of that what you're seeing in the market versus some of that commentary and out what's giving you some confidence into the 2020 outlook.
So when we look at.
Our first of all the midstream market when we look at our markets in what we're doing it's a small piece of of our pipeline segment. So.
I'll say just in our areas the Canadian markets as well as some of the basins that were and on the midstream side, we do see some projects move in there so I think.
You built a lot of big pipe over the last four five years annual come back and we've said all along that you'll start to see midstream pickup to fill up the pipe.
You still have LNG exports and things like that going on there is still drilling and places. So in our mind you will continue to see that midstream be there for foreseeable future that being said, we still see projects and on obviously price of all things of that nature do affect drill and there's no doubt about it is cyclical drilling side.
But the pipe side and takeaways, we there's a multitude of projects the opportunities are there backing up LNG and other things and so we're optimistic that will come we'll book our fair share of work big pipe as well going into next year.
And when you look at the confidence in our and our and what we're saying as we've said it over and over again, we were building a repeatable sustainable segment and that was our strategy three and a half years ago. That's backed up by 30 year builds of of what we're seeing on on your distribution side of cast iron still replacements.
Large things all over that are big programmatic spends at a much larger than than things that you're seeing on one piece of pipe and from a permitting standpoint from a regulatory standpoint, it's certainly more efficient for us and we can certainly guide better on those areas. So those things are really stabilized in that segment and give us give.
This confidence that we can move up from a margin standpoint, as well as gives you good certainty to repeatable sustainable segment.
I think that's really helpful and then on that on telecom.
Any changes in how you're thinking about the timing of some of the opportunities here in the U.S. start just generally the trajectory of sand I understand that you're kind of small player and there's huge opportunity to grow but overall when you think about the market any any changes in your thinking.
The macro market and telecom business is certainly there will be smart about how we.
Enter areas and things like that where I think we play a.
Unique role is fiveg in the small cell deployments as it relates to electric distribution.
That comes on systems, it's more efficient for that infrastructure as it gets density to be put on distribution electric distribution facilities and we pay a unique gap we bridge that gap there between the carrier and the utility, which I think dot dot build is substantial as we go forward and the fiber behind it.
Hi, everybody is trying to get closer to the customer with data and I think you'll start to see the fiveg platform as a developed technology and things that gets the platform. The infrastructure that we see today will not supported so in my mind technology and how it moves forward will drive the infrastructure build is.
As it has in the past so youre going to start to see that and I think the telecommunications and where we sit there we play a nice unique role and the macro markets. Good was will be patient.
And systematic about it like I said, we added 4000 employees were really concerned that we make sure that from a safety standpoint and from the execution standpoint that we execute properly in the field and we'll pay stack growth I would expect the telecom to grow at similar numbers that we had this year ex.
Peru.
Thank you.
Our next questions from the line of Chad Dillard with Deutsche Bank. Please proceed with your question.
Hi, good morning, guys.
Jeff.
So just wanted to understand.
Cadence and transmission business exiting the sharing volume share its 2020, well I'm just trying to thanks for just the impact of cost absorption.
For a rolling off.
And times.
The new transmission projects like transmission projects in Canada is trying to Paul to ramp up.
Just given that Kevin I think it tends to be more.
Yes first half weighted.
Yes opportunities like how do we think about just.
Okay.
Yes, I mean I think.
As I've said in the past I think the segment itself will grow I also think it will certainly operate in double digit margins or have the opportunity there over time and for sure. The segment will candidate plays a big part not I believe.
If you look at the fewest margins. This year in this segment there double digits. So Canada is somewhat of a small drag, albeit last year. When we had Westport Maria was accretive so when I think about it over time, Canada is more project based and when we come off a large project and we know that we're going into another.
A large project.
Which if you look at Wattay and.
We slow east was tied together that's over 1 billion and a half dollars' worth of work. So over the next 24 to 36 months. So when we look at that we're making sure we have resources and we're making sure that we have the people there to that are qualified to start building that it is somewhat the climb their allows us to work more in the winter when.
It freezes, it's hard to predict when it does freeze so that being said it will have some cyclicality from a seasonality standpoint, when you have breakups certainly in the third quarter, it's countercyclical to the segment so.
In our mind, it's very very good for Canada to be moving forward on these larger projects.
Got it.
And then just talking about tall Todd.
Can you just talk about what you're seeing and the ramp on on switching fiber.
I tried to last 12 months compared to the next 12 months for look like in terms of given your revenue growth capabilities.
Yes, I think five days a platform and as you look at that platform and what it can do it. It's really your latency goes way down high speeds as software to develops against that and other things develop against that you will see.
More and more fiber, everyone will want to get closer to the customer and we continue to see that and the infrastructure in place today wont wont support the platform. So what you'll see as you will continue to see our carriers develop the infrastructure behind the platform and Thats, what we see today, how fast they do it will depend on.
Demand and.
As you see people start to want more demand high speed, we certainly think that the generationally that that people want.
You know readily available data and that will only happened with the platform and the amount of fiber in data centers and things like that that are in place to get to the cup customer quicker. So it'll continue to move forward I think the that denser it gets into into the communities and into the suburbia will only broaden out.
The amount of work we do.
Thank you.
Our next question comes from the line of Blake Hirschman with Stephens. Please proceed with your questions.
Hi, good morning, guys.
Good morning.
If I.
If I missed it but is there any update.
Got it.
Call out on the situation down in.
Turning to has anything really changed since the last call.
So I think what we were solid two is by design.
It's really from our standpoint, we set out we believe we ring fence that we're certainly in conversations with the government. There we stay in conversations were heading over the network as promised.
We're doing everything from our standpoint to put us on the right side of.
That situation I do believe that we have not seen anything there that would.
Changed at all our position, we still feel very comfortable and what we've done there and on the right side of.
The law as well as.
What our contracts so we're in very good shape.
I would just say that jute geopolitical environment in Latam as ever changing and we've assessed we continue to assess that and ring fencing. The works that we have there is very small in nature and nothing would be material on other than what we've already talked about so we we think good were handing over the Peruvian network like we're supposed to do so we feel comp.
Well, we'll continue to work with the government and try to do the right thing.
There so.
We are in conversations I would just say nothing's changed financially there in my mind or from a risk standpoint other than we were we continue to de risk.
The segment that division.
Got it.
And on capital allocation identify thank you bought back any stock in the quarter and haven't really done much year to date, either just curious as that is that due to.
Just your thoughts jewelry.
Pretty close on these deals that ended up closing and September .
That's right I mean, I think its sources and use of capital and we knew we were.
Very close to closing on some acquisitions that we thought it in our mind will be accretive.
Going forward, so that was where we chose to deploy capital. We are couple turns there.
Well.
For two turns we want them, we want to de lever and I think you'll see us do that over the next few quarters.
Derek.
No nothing for.
Thank you.
The next questions from the line of out Adam Thalhimer with Thompson Davis. Please proceed with your question.
Hey, do can you give us better sense for the fire hardening opportunity in the West just just big picture. If you think about over the next five or 10 years.
What that could mean for quanta.
Look I think when you look at it it's hard to say, what's going on there today is difficult for not only the consumer but the utilities to try to get their hands around what's expected and what's the expectation, it's an older grid and needs to be modernize we've said that.
Over the past and I think that remains the opposite to large piece of our business in California.
It depends on.
Where were at what they do if they start to underground and things like that it could really expand further than what it is it's a it's a large multi year type build as that.
I think it needs to stabilize for us to be predictable on and it has not stabilized at all yet and so I think when it stabilizes, we'll know more about what.
So look for from a capex spend but if you look at our customer base there they've all announced large fire hardening programs in the west It's not just California, It's your western States and I think thats.
Consistent and when we think about it it's a large build so I don't know how to put a number on it at this point other than is to say if you look at what's happened from a storm hardening standpoint in the south and southeast even up the eastern seaboard, it's bigger than that.
So I guess I understand that when you talk about the stabilization you're talking about that.
Stabilization, one large customer or people to still trying to figure out how to deal with the problem.
I think it's you had a large customer in California covers a lot of the state, but it's multiple states multiple issues on fire.
And just in general it's similar to what you saw with Hurricanes when Hurricanes came through its wind events buyer events, you can call at climate change I'm not sure.
But but what I would say is to the fires are more violent.
They are causing more issues in California and in west So that being said like you've seen on on Hurricanes. It's the same type dynamic that you have to go back in and take infrastructure that was put in 56 years ago and modernize it forward for today's environment and that we haven't done a lot of that in the west So you'll start to see that as you move forward.
Thank you.
Next question is from the line of Alex Frankel with B. Riley. Please proceed with your question.
Thank you good morning nice quarter.
Thank you.
Can you remind us what you think the free cash flow.
And the power of free cash flow generation is with your asset base today, and maybe if you could identify the top three uses in 2020.
Yes.
Well, we've talked about is the growth of the base business. We continue to think that that is a big driver more repeatable sustainable EBITDA and therefore more repeatable sustainable cash flow.
As as growth levels, even it at mid single digits.
Go forward basis on that based business.
At with those type of expectations that would be different things coming with the double digit growth. We've had over the last several years, we still have the opportunity for that.
But when we look about more mid level a percentage of that growth that gives the opportunity for cash flow.
I think you're looking at something along the lines.
We've talked about it kind of 40% of EBITDA level, 40% to 50%.
The drivers through yet gross.
We look at how we lean into growth.
As always the number one place that we end up putting into that working capital and impacts of free cash flow capex.
We continue to be fairly capital intensive this year, we're going to have capex around 265 million as I look forward I.
I think I would tell you somewhere in that $275 million to $300 million type level.
And then this year with the aspect of.
Some of these delays in billing, it's put a little bit of pressure on that I still as I said earlier comments with Jamie I think that those will ease up a bit and we'll be able to see dsos training back down to something closer to historical levels.
And so to that end, we had the opportunity to still be very strong free cash flow overtime.
Pinpointing that at any individual year is always challenging for us.
The starts and stops of projects.
Seasonal dynamics, most specifically, even how the storm events happen in any particular fourth quarter is an example can put.
Pushes and pulls and so we always remind everyone to be mindful of those type fluctuations.
Thank you.
Our next question is coming from the line as Steven Fisher with you. Yes. Please proceed with your question.
Thanks, Good morning.
So these MSR phase are an important part of your recurring revenues. So just curious what your funnel of new I must say agreements looks like over the next few quarters for bookings opportunities how many acres.
Existing ones you have that are expiring how many new bids are coming for for a decision et cetera. The on what you have already reported for planned for Q4.
Yes, I think when we look at it as part of the base business, we don't we don't necessarily track.
And my assays to that level and so when we look at it it could have some flows does depend some can extend for years sunken extend for three it's very difficult for us to pinpoint that what we will say is that when you think about 90% of the business. A lot of that is made up of am essays and what we're saying there is it will grow.
Mid to upper single digits for the foreseeable future. So you can see or that we're booking.
Quite a bit of MSC work going forward.
Talked in the past about us our top 20 customers, there and utility space being very sticky and I think that remains and we're adding customers.
From programmatic spending and things of that nature across the board.
Okay, and then just to maybe frame out what the bookings could be in Q4 from Wattay and the MSA.
Then how much backlog was added in the third quarter from.
Today.
Yes, the M&A is.
Roughly call. It 606, 50, and total with about 400, 450 that being kind of 12 month.
And then from the standpoint of the projects in the fourth quarter would tell you that in aggregate it's over $1 billion.
Thank you.
The next question comes from the line of Michael did with vertical research. Please proceed with your question.
Good morning, Gentleman, sorry about last night and thanks for squeezing in.
Well it happens.
Hey, good.
Just looking at going into 2020, given where your labor force stands today and again, given the issues in California, and the shifting in anything in such how do you feel relative to your current pace of labor. What do you think you might need to meet with you at growth expectations are likely to be in 2020 and.
Beyond and is the utilization effort of that later going to be an additive to some some margin improvement in both segments.
Yeah, I think when you look at it and when we think about it we have invested over $100 million over the past five years or so and labor in our labor force, we're very proud of that and that's what we specialize in this is cross skilled labor and we understand the markets, we understand labor in general and it's a collaborative.
Approach with our trade Association unions, whatever it may be so I think we sit in a very nice spot to continue to access labor train labor get it in the Phil quicker get to market quicker and be more efficient with some of the things that we've done with our curriculums our colleges things like that I think you continue to.
See us get more efficient on our our organic growth.
When you start to see it in the pipe side, the telecom side certainly in the power side. We continue to believe will operate in double digits every once in a law when you start having big movements and some.
Canadian softness there on some of those larger projects and we're we're sitting on some labor, we're a little inefficient, but over time I think thats the right right way to look at it and if you look at double digit kind of margins in a margin profile with the growth behind it. It's certainly something that we think we're doing a really nice Java is very core to our strategy.
Moving forward and.
You'll you'll continue to see us evolve and get better there on a daily basis, So I like where we're at like what we're doing I think will only get better as we move into the next three to five years.
Thanks.
No.
Thank you.
Next question is from the line of Bill Newby with D.A. Davidson. Please proceed with your question.
Thanks, and good morning, Congrats again on that on the great quarter guys.
Thanks.
Just a couple more follow up on on the pipeline business I guess I mean.
Really good growth there, especially relative to what you guys were alluding to earlier this year I guess I mean, you noted the areas of strength, but I guess relative to what you guys were seeing in three months ago everywhere, whereas the big experiences and the activity levels that you're seeing.
Again, I think from our standpoint, our utility business in that in that area has certainly.
Exceeded our expectations from our standpoint from.
A broad base.
Beat there, we did really well with with the whole segment. So we did execute well and some pipe.
Those projects we're certainly.
I have some contingencies and we work through some of that in the quarter and it was a it was a nice nice broad base beat and I think going forward. We continue to see that base business. Both in from an industrial standpoint, our distribution standpoint continue to evolve continue to enhance our margins to stabilize it and we stack on large projects, which we'll talk about.
In February so we really like to segment, it's been a long term strategy I'm really proud of what we've done there wasn't easy.
We certainly.
Worked hard at it in our guys in the field in the leadership should be commended because it's coming together and we really like where we sit.
Yes, I agree.
And then I guess as you get into the fourth quarter here on stronghold I guess, what do you see in turnaround activity activity in the goal.
I think there's a pretty tough comparable to last year, so any thoughts there.
I think when you look at stronghold are doing very well and what they're doing obviously some of the the quarterly dynamics.
Quarter over quarter are there, we like where they said what we think they're doing a nice job. Some some consolidation going on within that space, but there are accretive to the margin profile doing very well and quarter over quarter honestly not really looking at it from that standpoint long term from on a yearly basis.
They exceed our expectations.
Thank you.
At this time, if we see end of the question and answer session I will turn the call back to measure for closing remarks.
First I'd like to say.
The californias stripe there and the fires are for our people in the people lose affected we certainly stand behind them in our customers. It's not an easy easy place to be so we want to make sure that.
We help them to collaborate with our customer there and for all the people of 46000 plus that are in the field, we want to commend them on the safety and the things that they are doing to make this company great to see our company as well so we want to commend them and thank you offer participating in our third quarter Conference call. We appreciate your questions in your ongoing interest in Quanta services. Thank you. This.
Concludes our call.
Thank you today's call has concluded you may now disconnect. Your lines at this time. Thank you for your participation.