Q4 2020 Quanta Services Inc Earnings Call
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Greetings and welcome to the Quanta services fourth quarter and full year 2020 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If he would like to ask a question.
Please press star one on your telephone keypad.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Kip Rupp, Vice President Investor Relations. Thank you Sir Please go ahead.
Certainties 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 Qantas or the SEC website.
You should not place undue reliance on forward looking statements and quantum 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 our earnings release.
Lastly, if you'd 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 Quanta services Dot 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 on.
Call over to Mister, Duke Austin, Quanta, as President and CEO Duke.
Thanks, Kip good morning, everyone and welcome to the Quanta services fourth quarter and full year 2020 earnings conference call on the call today, I will provide operational and strategic commentary and we will then turn it over to Derek Jensen Qantas, Chief Financial Officer, who will provide a review of our fourth quarter and full year results and full you.
2021 financial expectations for.
Following Derrick comments, we welcome your questions.
As noted in our earnings release. This morning, we have renamed both of our segments to include solutions, which we believe is an accurate word to describe the value, creating and collaborative approach, we take to working with our customers.
Additionally, we renamed our pipeline in an industrial segment, two underground utility infrastructure solutions, which we believe is more reflective of the strategic changes we have made over the past five years to reposition this segment towards a greater level of resilient business services to our gas utility pipeline integrity and industrial.
Real customers.
These services tend to be more visible and recurring in nature and are driven by safety for liability and environmental regulations.
We continue to expand our capabilities in both segments to provide comprehensive and solutions with craft skilled labor at the core.
We're proud of our successful focus on base business activity over the last five years, which now accounts for more than 90% of our revenues. We continue to view large projects as upside opportunities and are well positioned to safely execute them when they occur.
Quanta performed well and delivered a solid year in 2020, which includes numerous accomplishments. This was due to the performance of our fill leadership and the people of this organization who continued to be exceptional.
Here are some of the accomplishments in 2020.
Electric power segment revenues achieved record levels and we earned our best operating margin performance in six years, driven by strong execution across our operations included in these results for record storm response revenues from supporting our customers efforts to restore power power to millions of people adversely impacted by numerous severe weather.
Other events during the year.
Our ability to quickly mobilized this level of resources to support our customers in times of need even during a pandemic is unmatched in our industry.
After an 18 month competitive process luma energy or joint venture with ACCO was selected for a 15 year operation and maintenance agreement to operate maintain and modernized profit is more than 18000 mile electric transmission and distribution system in Puerto Rico Luke.
<unk> and proper are making good progress towards transitioning operations of the system. This year and we continue to believe this opportunity as transformative for quanta.
We grew our communication services revenues by more than 40% meaningfully improve profit margins and ended the year with the total backlog of approximately $900 million we.
We substantially completed the exit of a Latin American operations, despite the significant challenges and impacts to these wind-down activities from the effects of COVID-19.
We continued to lead the industry and safety, which we believe starts with training can.
We continue to incrementally invest in our training efforts through our northwest line College in advance and Quanta Advanced training Center.
Additionally, last year, we began site preparation for a new line worker training campus in Puerto Rico that will be operated by northwest line College <unk>.
Facility, we will provide world-class training to women's employees and develop Puerto Rico's future cross skilled workforce.
Our industry, leading training and recruiting initiatives are driving improved productivity in the field and ensures that we have the very best craft skilled labor.
This enhances our ability to collaborate with customers and labor affiliations on future workforce needs and further differentiates us in the marketplace as a strategic solutions provider.
We invested approximately $400 million and strategic acquisition of seven high quality companies with great management teams that expand or enhance our ability to provide solutions to our customers.
Are added to our base business and advanced our strategic initiatives.
These companies add to our cell perform capabilities.
Typically accounts for approximately 85 per cent of our work and our key to provide providing cost certainty to our customers.
We believe our approach to acquisitions and are operating model helps derisk, our work portfolio through improved execution.
And results and more consistent earnings.
We strengthened our financial position with the closing of our 1 billion dollar investment grades senior notes offering, which we believe points to the resiliency and sustainability of our business model and positive multiyear outlook.
We demonstrated our commitment to stockholder value in confidence and Qantas financial strength and continued growth opportunities through the acquisition of approximately $250 million of common stock and a 25 per cent increase in our dividend.
And finally, the diversity of our services proactive cost management and execution through significant uncertainty caused by the pandemic and challenged energy markets allowed our underground utility infrastructure solutions operations to perform well under the circumstances.
We are optimistic that the most challenging market conditions are behind us and we see opportunity for revenue in margin improvement in 2021 and continue to believe the segment can achieve upper single digit operating income margin as operating conditions further normalize over time.
We believe our strategic position in the marketplace remains strong and we are well positioned for continued profitable growth over the near and longer term for.
Despite unprecedented operating conditions and uncertainties caused by the global pandemic proportions of our business. The strong performance of our electric power and communications operations resulted in record adjusted EPS.
Adjusted EBITDA cash flow and backlog in 2020.
While we are proud of the achievements last year, we remain focused on getting better to ensure that quanta continues to evolve to effectively collaborate with our customers and business partners and helping them and see their goals and to capitalize on the opportunities ahead of us.
The recent severe weather conditions that impacted living conditions in Texas in other parts of the country shows how critical infrastructure that we design build and maintain is to our every day will be.
<unk> solutions Quanta provides supports our customers efforts to increase for liability safety efficiency and connectivity olive wits have a favorable favorable environmental and social impact.
On both the market's that we serve and society.
Additionally are solutions facilitate policies and goals aimed at the adoption of new technologies and transitioning towards a carbon neutral economy.
As a result, we believe our business is levered too favorable and sustainable long term goals.
Our utility customers, who account for more than 70% of 2020 revenues are leaders in the effort to reduce carbon emissions with aggressive efforts to modernize and harden their systems expand their renewable generation portfolios and implement new technologies for current and future needs.
A number of utilities have committed to providing 100% of their power by clean energy or achieving net zero carbon emissions by 2050.
The television these goals for require substantial incremental investment and transmission substation and distribution infrastructure to interconnect, new renewable generation facilities to the power grid and to ensure reliability due to the significant increase of intermittent power added to the system.
Further developed economies are expected to be increasingly driven by electricity to make carbon reduction goals over time.
Vehicle electrification offers a large carbon reduction opportunity in addition to residential and commercial space and water heating and industrial and agricultural electrification.
According to report from the wires group increased electrification and electric vehicle adoption, United States could require 70 to 200 gigawatts of new power generation by 2030.
The majority of which is expected to be renewables and could require incremental transmission investment of 30 to 90 billion by 2030.
We believe these these investment requirements associated with electrification are in addition to the significant multi year investment programs already in place for the coming years to modernize the existing power grid to ensure reliable power delivery under current market conditions.
The outlook for our communications operations, which is within the electric power segment remains Bryce, we expect to generate approximately $700 million in revenue this year, which would represent approximately 30% growth over 2020.
Our communication services support the technology, we use every day for work Education Entertainment.
Connecting with friends and family all of which are critically important.
Do that and the effects of COVID-19 have caused communication providers to increase investment in the fiber networks to ensure adequate speed capacity and reliability to meet these needs.
Additionally, we believe quanta as well positioned to leverage our electric power and communications solutions capabilities to assist many of our role in municipal electric customers, who are expected to participate in the rule digital opportunity fund.
This bond provides more than $20 billion for is the digital divide that exists for millions of people living in rural America without access to adequate broadband connectivity.
Further we expect faggi deployments to accelerate in 2021, which we remain well positioned to continue to participate in.
Our underground utility and infrastructure solutions segment experienced meaningful challenges during the year to the effects of COVID-19, such as sat down in certain cities that has short term impact on our gas utility services and a significant reduction in demand for refined products that materially impacted our industrial server.
Customers.
As discussed previously we believe the greatest impact from these dynamics are behind us.
Going forward, we expect to continue are focused on our gas utility pipeline integrity and industrial services business.
Consistent with our strategy of the last five years due to the favorable long term trends driven by safety reliability and environmental regulations.
Our gas utility services supported regulated programs to replace and modernize aging infrastructure, which can be late crone and post potential safety concerns. They also support customer efforts to reduce methane emissions and positioned their gas distribution systems to potentially deliver hydrogen for users and the feet.
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Our pipeline integrity services seek.
Seek to ensure that existing pipelines operate safely and in an environmentally friendly manner.
And many of our industrial services support customers.
Compliance with regulations aimed at minimizing environmental impact caused by methane gas release and increase operational efficiency and safety.
We believe these favorable safety reliability and environmental initiatives and long term industry trends, such as electrification and technology implementations will continue to drive growth opportunities for quanta for the foreseeable future.
One is actively engaged in collaborative conversations with many of our customers.
About their multiyear multibillion dollar programs extending as far as 10 years.
Regarding how quanta can provide solutions throughout our customers value chain to meet their strategic infrastructure investment goals in support of these initiatives.
And our earnings release. This morning, we provided or 2021 guidance we believe.
Which we believe demonstrates the strength and sustainability of our business and long term strategy favorable and market trends, our ability to safely execute and are strong competitive position in the marketplace our expectations call for growth in revenues adjusted EBITDA and earnings per share and improve profit margins. Additionally, we see.
Opportunity to achieve new record levels of backlog in 2021.
In summary, we generated solid results in 2020 that we believe for free.
Flat, the resiliency and sustainability of our business the benefit of our strong finance position the successful execution of our strategic initiatives and the ex excellence of our people the.
Challenges, we faced and the way, we continue to support and collaborate with our customers last year, particularly as it relates to the pandemic brought out the best of this organization and I believe may quanta stronger.
Overall, our end markets and multiyear visibility or solid and we have built a strong platform that positions us well to capitalize on favorable long term trends, particularly the transition towards a carbon neutral economy and the adoption of new technologies.
Considering our organic growth opportunities and the levers available to us to allocate future cash flow generation into creating opportunities such as stock repurchases acquisitions strategic investments in dividends. We believed quanta will continue to generate meaningful stockholder value going for.
Quanta is a portfolio of an exceptional businesses with geographic in service line diversity.
We are anchored by our commitment to craft skilled labor and our self a form capabilities.
We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution in best in class build leadership, we will pursue opportunities to enhance quanta based business and leadership position in the industry and provide innovative solutions to our customers. We believe Qantas diversity unique operating model and entrepreneurial mindset.
For them 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 are CFO for his review of the fourth quarter and full your result, and 2021 expectation.
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Thanks, Duke and good morning, everyone today, we announced fourth quarter of 2020 revenues of 2.9 billion net.
<unk> net income attributable common stock was $171 million or $1 17 per diluted share and adjusted diluted earnings per share a non-GAAP measure was $1 22.
Overall, the fourth quarter closeout, another exceptional year of operational performance per quarter, a year in which we delivered record results across multiple metrics despite headwinds faced related to the pandemic.
Our electric power revenues, excluding Latin America, or 211 billion or.
$15, 7% increase when compared to the fourth quarter of 2019.
This increase was driven by mid single digit growth in our based business increased contributions from the timing of certain larger projects and $75 million in revenues from acquired businesses.
Contributing to the base business growth was approximately 13% growth from our communications operation and record for quarter demand for our emergency restoration services of approximately $150 million, primarily associated with efforts to restore infrastructure in the south eastern and Midwestern United States. Although it came at the expense of Sir.
Other work in progress.
Partially offsetting these increases with the expected reduction in fire harking work in the Western United States during for Q 20, as compared to 14 19.
Electric segment Martens, and for 220 or 11, six per cent and excluding a Latin American operations segment margins for $12, 9% versus 9% in for Q 19.
That robust operating margins were driven by increased profit contributions from the elevated emergency restoration services, which typically typically present opportunities for higher margins due to hire equipment utilization and fixed cost absorption as well as improve margins and a Canadian operations, primarily associated with certain larger transmission project.
However, although difficult to calculate the direct incremental effects, excluding revenues and profit from storm response efforts our margins were still comfortably in double digits, reflecting continued strong execution across all of our electric power operation.
Of note or communications Martin's continue to improve against the prior year with a margin of 9% during the quarter.
Regarding our Latin American operations included within the electric segment, we have substantially completed the wind down activities required to exit those markets.
Our year long effort to shutdown our operations across the region was significantly impacted by COVID-19 dynamics as well as political and regulatory uncertainties in customer challenges all of which contributed meaningfully higher losses than anticipated.
And the fourth quarter, we took the additional step of reserving remaining property equipment and inventory assets as the uncertain market conditions minimize likely recoveries upon disposition.
As a reminder, we currently received no tax benefit for losses in Latin America, So the $27 million in losses impacted the quarter by approximately 19.
With minimal contractual obligations remaining we feel comfortable that other than arbitration updates on the terminated Peruvian Communications network project, we will no longer provide commentary a Latin America.
Revenues from our underground utility and infrastructure solutions segment, where $806 million, 36% lower than 14 19.
Similar to prior quarters expected reduced contributions from larger diameter pipeline projects contributed to the decline.
The variability attributable to larger pipeline projects is why we've taken strategic steps to reposition our service offerings around more predictable utility backed revenue streams.
While we remain well positioned to opportunistically deploy resources for larger pipeline projects. We expect most future work will consist of smaller pipeline transmission and integrity oriented project.
Additionally, the lingering negative impact of COVID-19 have reduced some level of demand for broader services across the segment with reduction in demand for refined products substantially contributing to reduced quarter over quarter revenues from our industrial operation.
Operating margins for the segment, where five 1%.
These margins for 190 basis points lower than 14, 19, primarily due to reduced revenues as well as some degree of execution challenges during the quarter and costs associated with the exit of certain ancillary pipeline operations. These.
These negative impact for partially offset by net positive project Closeouts, primarily driven by the recognition of previously deferred suspension and milestone payments and the reduction of remaining contingency balances associated with the Atlantic Coast pipeline project, which was officially terminated on December 31 of 2020.
Our total backlog was $15.1 billion at the end of the fourth quarter slightly higher than 14, 19 and comparable to the third quarter of 2020, yet remains at record levels.
12 month backlog of eight $3 billion is an increase from both the fourth quarter of 2019, and the third quarter of 2020.
As a reminder, the luma joint ventures accounted for as an equity method investment and therefore does not contribute to revenue and does not included in backlog. However.
However, assuming an operating margin profile consistent with our electric power operations Loehmann's contribution over the 15 year operation and maintenance agreement would imply a backlog equivalent of more than $6 billion per quarter.
For the fourth quarter of 2020, we generated free cash flow and non-GAAP measure of $200 million.
And although $381 million lower than 14 19, it was higher than we anticipated driven by stronger profit in the quarter and a cash cycle consistent with our third quarter results for.
For the year, we generated record free cash flow of $892 million.
Day sales outstanding are DSO measured 83 days for the quarter, which is comparable to the third quarter of 2020 and fourth quarter of 2019.
Cash flow and the fourth quarter and full year of 2020 did partially benefit from the deferral of $37 million and $109 million of employer payroll tax payments permitted by the cares act with the payments do an equal installments at the end of 2021 and 2022.
We had $185 million of cash at the end of the year with total liquidity of $2.2 billion.
And a debt to EBITDA ratio as calculated under a credit agreement of approximately one two times.
Turning the guidance.
We continued to deal with some level of COVID-19 uncertainty as we assess the near term prospects of our operation primarily in our underground utility and infrastructure solutions segment and move remain prudent with our expectations for 2021.
However, as we look ahead to 2021 and beyond we see the base business propelling multiyear growth opportunities for both segments.
Electric segment revenues grew to seven $8 billion at the end of 2020, and we continued to see our based business, providing mid single the double digit growth opportunities coupled with some degree of increased contributions from larger projects, primarily associated with previously announced project in Canada.
In the aggregate, we expect electric power revenues the range between eight three and $8.5 billion, which includes expected revenues from our communications operation of around $700 million.
As it relates to electric power segment revenue seasonality, we expect revenue growth in each quarter of 21 compared to 2020 with quarter over quarter growth in the first and second quarters potentially exceeding 10%.
We expect first quarter revenues to be the lowest of the year due to normal seasonal weather dynamics impacting certain construction activity.
We expect the high end of our revenue range to represent greater revenue growth opportunity and the third and fourth quarters relative to 2020.
We expect 2021 operating margins for the electric power segment for range between $10, one and 10.9%, which includes contributions of approximately $29 million or 20 per share from the luma joint venture an earnings from other integral unconsolidated affiliates.
Lumea is expected to contribute around $9 million in the first half of the year and an increasing in the back half of the year as we exit the front end transition services period.
Although we are proud of our overall electric power performance in 2020, or 11.6% margin. Excluding Latin America are above historical averages and are the highest since 2013 due in part to record annual emergency restoration service revenues of $450 million.
As outlined in our accompanying slides are 2021 expectation for margins for this segment are consistent with historical averages and are also based on expectations for more normalized emergency restoration service revenues of approximately $200 million also in line with historical averages.
As is typically the case, we expect that first quarter operating margins will be the lowest for the year, possibly slightly below 10%. However.
However, we expect marks into increase into the second and third quarters, and then slightly decline in the fourth quarter.
We believe communications operating income margins, which have been dilutive to segment margins and prior periods could be a parody with electric operations on a full year basis.
The underground utility and infrastructure solutions segment continues to be impacted by COVID-19, and the challenging energy market conditions. However, we are anticipating upper single digit to double digit revenue growth off of 2020 with full year revenues expected to range between 365 to 385 billion.
Over 90% of our revenue expectations for 2021 represent based business with larger projects, representing the lowest level of contribution in the last seven years.
From a seasonality perspective, we see first quarter revenues being our lowest for the year likely more than 20% lower than the first quarter of 2020.
This decline is primarily due to significantly reduced industrial service revenues compared with your record results and once you 20 as industrial customers are still dealing with lower demand stemming from decreased global travel activity associated with the pandemic as well as reduce contributions from lower larger pipeline projects.
Revenue should increase sequentially into the third quarter, then seasonally decline in the fourth quarter.
Quarterly revenues for the second through the fourth quarters are expected to be higher on a quarter over quarter basis as compared to 2020 with double digit growth expected for each for.
Operating margin improvement for the segment continues to be a focus for us we.
We see segment margins ranging between five 5% and 6%, let primarily by continued execution within our gas LDC operation.
Our full year margin expectations include a breakeven contribution for my industrial services operations in 2021 due to the continued challenging environment. However.
However to put our current segment margin guidance and context.
Our industrial operations contributed at historical pre Covid margin levels are segment margin guidance would increase by over 100 basis points.
Consistent with years past and similar for electric power, our first quarter traditionally has lower activity in this segment due to weather seasonality, which impacts our revenues and pressures margins.
With current inclement weather across much of the US further pressuring those operation, we expect first quarter margins between breakeven in a small loss. However, we expect solid improvement into the second and third quarters with the seasonal decline in the fourth quarter.
These segment operating range of support our expectations for 2021 annual revenues of 11 $95 billion to $12 three $5 billion and adjusted EBITDA, a non-GAAP measure of between 109 and $119 billion. This.
This represents 8% growth at the midpoint of the range when compared to 2020 is record adjusted EBITDA.
With these operating results, we estimate a range of GAAP diluted earnings per share attributable to common stock for the year to be between $3 16, and $3 66.
And anticipate non-GAAP adjusted diluted earnings per share to be between $4 and <unk> and $4.52.
Turning to cash flow, we expect free cash flow for 2021 to range between 400 $600 million with the standard disclaimer at quarterly free cash flow is subject to sizeable movements due to various customer and project dynamics that occur in the normal course of operation.
Included in our free cash flow expectation is the anticipated payment of $54 million in the fourth quarter related to payroll taxes that were deferred in 2020.
As we have discussed during prior investor events or cash flow generation moves countered for our revenue growth rate.
For instance, a large driver of our significant free cash flow in 2020 was reduced revenues of approximately $900 million compared to 2019 decreasing working capital needs.
However, higher revenue growth like we're guiding for 2021 will likely require and meaningful investment and working capital to support the growth.
While our 2021 free cash flow may be negatively impacted by increased working capital required to support our return to 2019 revenue levels.
We believe that consistent sustainable growth profile and solid margins of our base business provides for repeatable levels of free cash flow generation in line with our 2021 guidance and future periods.
For additional information please refer to our outlet summary, which can be found on the I our website at quanta services Dot com.
Looking back on our 2020 performance, although there were headwinds to the year. We ended the year with $11.2 billion in revenues, which represents an 8.1% revenue CAGR since 2015.
More importantly, we ended the year with slightly over $1 billion of adjusted EBITDA, a record for quanta and equal to our goal established five years ago, which represents nearly 15% CAGR since 2015.
Lastly, our record adjusted EPS of $3 82.
Represents a 28% CAGR since 2015 with our adjusted EPS growing faster than profit, which are growing faster than revenue.
Over the last five years, and we have deployed approximately $1.4 billion in cash for M&A and strategic investments and $760 million for stock repurchases.
While we acquire $250 million of common stock in 2000 $27 million of common stock through February 24th of 2021, we have approximately $530 million of availability remaining on our current stock repurchase program.
Our first capital priority remains supporting the growth of our business through working capital and capital expenditures. However, we remain committed to the deployment of remaining available capital to stockholders through our stock repurchase and dividend program and we continue to expect opportunistic acquisition.
A 1 billion dollar bond offering in 2020 established a fixed level of debt that nicely complements our current EBITDA profile, which we believe is a repeatable sustainable baseline of earnings sigh.
Simultaneously, we secured and expanded credit facility further enhancing our ability to meet incremental capital needs.
Overall, we remain confident in the strength of our operations, our prospects for profitable growth and the repeatable and sustainable nature of our core markets. We've.
We've developed a platform for quanta to capitalize on the trends driving to spend in our markets and we firmly believe delivering based business solutions to world class craft skilled labor optimistic larger project deployment and continued balance sheet strength will be the key to delivering long term shareholder value.
This concludes our formal presentation and will now open the line for Q&A.
Operator.
Thank you so far is now open for.
Question. Thank you I'd like.
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In the interest of time, we are asking analysts to keep themselves to one question and one follow up once again, that's star one check register questions at this time.
Our first question is coming from Noelle sales.
Please go ahead.
Hi, guys, good morning, and congrats on a great quarter.
Hi.
Could you could you just expand a little bit on how things are progressing in Puerto Rico.
How we're looking at that the transition over to.
Kind of full full scale operations, there and any change in how you're thinking about some of the opportunities around construction projects in the region. Thanks.
Yes, I am Puerto Rico, we're we're making progress where stand on task on the timeline that we set for it within.
Our bid process and so I think we're making great strides there were continue to transition.
The labor force as well as everything that comes with that from remediation plans and capital plans on the proper side of the business.
And for.
For my standpoint, I think the third quarter. Some time is when we expect to fully transition over into commencement if not it will just we have a supplemental agreement that will continue and we will stay in the supplemental agreement, but the the numbers and what we put for it does not change we continue to be optimistic.
About the progress, we're making as well as what we're doing for the island of people.
We've got our.
Training facility very close to opening so we're seeing a lot of progress there and momentum around what we can do for the island as far as the people as well as the economics for the island, so everything's on track going well.
Okay great.
And then obviously kind of a lot of positive drivers on the electric T&D side I guess a couple of questions are first.
I think some of the the great hardening work that was particularly around tires that was kind of plan for for 2020th May be then pushed off could you had.
Had been pushed off can you comment on how you're thinking about that for 2021, and then just kind of.
Any thoughts on.
Some of the biting administrations goals around renewable energy and.
The potential for an infrastructure bell sort of how are you thinking about and won the.
The potential for an infrastructure Berlin, and if you could see some certain grid.
Some great related initiatives there Kevin on.
The administration finished it thanks.
Yeah, So I'll take the wall for a question to the West first.
When we looked at it last year, we knew.
In our minds.
One of our larger utilities out there was coming out of bankruptcy as well as putting a management team and there's still putting that management team in place.
We said all along that we if we weren't working on that we would be working somewhere in the west that's still the case it has not the demand for our services and what we're doing there for most solutions.
Provider to the wildfire assessment as well as the construction thereafter still remains I think it's a long term build in the west around hardening modernization and all the things that are necessary when you want to.
Move to more of a carbon free environment and when we look at that to the West I think there are a little farther along in anticipation of being there. So you are still backed up by quite a bit of gas in the region. So I continue to believe that will will continue to see modernization of that infrastructure as well as heartening for for <unk>.
Are still less than the way we looked at it. This year is we took the normal approach that the same one we've taken years and years passed Tonight. If we're not busy on the wall for RP set of it will be busy.
Doing other things in the west so.
I think all that's anticipated if we start to move in expedite that it would be in the later half of the year and we comment on it as as a move forward move upward. So we took a prudent approach to that as far as the by an administration, we've done well under both administrations.
It doesn't whether it be Republican or Democrat, we're really agnostic to that when we look at it I think if they follow the energy plan of the 20 32050 type timeframe as far as moving to a more apartment for a footprint is certainly drives our business I don't think that sentiment is going away. So we continue to see momentum.
Around renewables and carbon free types of environment.
Environment, whether it be hydrogen and batteries whatever it may be that sentiments. There administration, certainly cushion that and I think it's beneficial for quanta on all fronts. So that's why we Smith.
Okay.
Thank you. Our next question is coming from Sean Ethan of Keybanc capital markets. Please go ahead.
Hi, gentlemen, nice work all around great job.
I wanted to start on the underground utility margins. So they are set at five five to six per cent for 21.
I think you said it would be 100 basis points better.
We had a normalized.
Contribution from industrial services. So I guess first of all does that just.
Mean, we'd be 100 basis points higher if demand for refined products was normalize around a reopening.
Second I mean, what is the sort of longer term trajectory in this segment, maybe you could just refresh a song.
Beyond just a normalization and.
All on a reopening of the economy.
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Longer term target is for this business.
Yeah. So I think when we look at this segment look award what we're trying to accomplish there we moved it away from.
Large projects into a more of a base business and you see that happening as we said today.
When we look at the industrial business, we have it is flat for the year, we do see signs of life. There. If the economy comes back we will get in a more normalized indoor.
Industrial sector and see more of the same type of work, we've seen or historical so if you go back to eight nine and you look away no nine after eight O. Nine we are very busy years and industrial space.
I expect that that will happen nothing's changed there I really liked that business. You know I think will grow out of it we have opportunities where others have left the space. So we continue to see greater opportunity we've ever had there on a go for basis, we like it and we will continue to stay in it.
So.
Again as Derrick commented, we do believe if that gets back if you get in the upper single digits. They're like it's operated in the past it will move the whole segment up and that's what we see so.
We're committed to operating the segment and upper single digits, we're making strides to get their every day based on base business and repetitive and resilient type.
Framework with growth to our LDC markets that are regulated markets and thats backing that segment I will say that the company itself isn't a portfolio and when you look at those individuals segments are operating unit said perform now work it's not they they can go perform electric work and do that.
Perform telecom work and do so while it looks like in a segment you get what you see it one way it doesn't mean that we're not fully utilized as a company and we're not moving forward as a portfolio. So you see the overall margins of the company lift and we've always said that our goal for the company has to be.
Double digit adjusted adjusted EBITDA.
Okay got it that's helpful, Duke and maybe just continuing on a larger discussion with electric power I guess firstly.
The trajectory from the 11th six ex Latam in 2020 to the 10, one to 10 nine and the guidance for 21, all just a normalization and storm revenue run rates in a second and then relative to the $10 one to 10.
Nine I mean, it seems like law and the out year.
A full transition contribution in the out years as a tailwind it seems like telecom is exiting.
Is going to exit 21 at a higher run right in terms of margin. So.
Is there.
Is there potential for expansion beyond this 2021 guidance range for electric power margins around those factors.
Yeah, I mean, when we look at the margins and.
Look at a non CAGR basis, you go back 20 years, we've operating kind of double digits and so for US that's what we see historically, we have operated above that we've talked about that I think when we look at our guidance. We take a prudent approach to it's very early we have seasonality we have all kinds of events, we did pulled back.
To $200 million a storm guidance. So if that's more obviously that would pick up the segment, we're operating really well there and I think certainly there's opportunity, but as far as we were we said.
The guidance that we gave is prudent and I think it's if you look at it over time, that's where we will sit over time non kg's basis. So yes, there is always opportunity for us and we're going to do everything we can to operate above that.
Yeah, Shaun one other bit of color I mean, no. It it's not really right to look at 20 to 21 being all just a storm fullback clearly that as a component of it, but that's where duke saying that the broader aspect of the operating model would average into that 10%, we've got a slide and they're trying to illustrate.
And the slide deck, and then relative to going forward, though.
Yes, as it relates to the back half of the year performance for 21 going into 22 to the extent that you saw.
More of run right type dynamics for luma.
And the back half of the year, then, yes that would be accretive too picky about the mall going into 22.
Okay terrific. Thanks for the color and again nice where it thanks guys.
Thanks.
Thank you. Our next question is coming from.
Capital with Citigroup. Please go ahead.
Hey, good morning, guys.
Moving van.
Can you update us and where you are in terms of your focus on catching more of your customers program make programmatic spend it looks like your estimate orders under Msas with an electric power up dramatically, which is a major reason for the positive moving your power electric power backlog in 2020. So would you expect that to continue to move up in 21 and are you.
Generally seen customers more willing to outsource some more of their operations to you given labour scarcity and job complexity.
We pride ourselves in self performance and cut across skilled labor and I think it's right now that that is tight in the marketplace in our training facilities and the things that we've done allow us to collaborate with our customers. There. So it's really driving the front side of the business in our ability to capture and a more holistic manner the full <unk>.
You chain that we see in solutions on utility base. So yeah. So I think we're making great progress there I think it's something that we said we were going to do and pride ourselves going forward and it will drive.
The business forward so.
The capital Spoons are also getting longer when we talk about it when we were talking to customers.
Sure Msas or lengthening non getting shorter so we're seeing more multi year type msas versus.
One year.
<unk> to make sure that they had the.
Craft skilled labor and the ability to perform that Capex opex on a go for basis.
I like our position I think we're doing very well in the utility side of the business as far as capturing more of the front side.
That's helpful. And then you mentioned large projects from Ken and electric power contributing little more in terms of revenue in 21. So could you talk about the duration. These projects I think they'll bring revenue in between two and then given all the focus on energy transition in renewables are you at least having more conversations at this point regarding larger transmission work, so when you're bigger.
Canadian projects and you should be able to replace them Mandar further grow in large transmission.
I mean, when we look at North America, if the sentiments days to renewables and we continue down the path.
There's no way around not putting in large transmission to move.
Low to load centers I think it's whether it would be Canada or North America will continue to see those type dynamics stack onto the base business as we move forward the projects that are in Canada, performing well and I.
Parts of it will end in 2002 skin parts of it will end in 2003. So it's it's a good base for us in Canada, we do see opportunities beyond that and and other other areas as well. So we continue to kind of see that and as far as kind of the magnitude, we still see well above the 3 billion type framework.
Dark and large projects of opportunity and I think that continues on it's well above that out just comment to that so no. One will get excited that it's not that you can book that so.
For.
Good color I appreciate it.
Sure.
Our next question is coming from Alex cycle.
Riley FBR. Please go ahead.
Thank you and good morning, gentlemen, with regard to the revenue guidance for 2021 of 7% to 10%, what's the anticipated contribution from acquisitions completed in 2020 as.
As well as once completed early in 2021.
I would say that the incremental is probably around.
200 200.
So for the full complement of acquisitions and 20.
And then as you think about capital allocation of 2021 can you quantify or bracket.
Sort of what you are targeting for acquisitions in the coming year, either from a revenue contribution basis or capital to purchase those businesses.
No <unk> I think the strategy remains the same you'll see us continue to.
Obviously, we are evaluating everything against the stock and what we can do with that and are organic growth. So we'll we'll continue to make sure that we invest back into business as far as working capital.
We used to see plenty of acquisition type Todd.
Targets out there that come through we're not hard pressed to make acquisitions, but if we see the right.
Company management teams will certainly leaned into him as we have in the past and I think that will will also be added it to anything we're trying to accomplish from a strategy standpoint, and I do think when we look at the way the companies running in the way to the capital allocation happens going forward. It does allow us to start thinking.
True.
For the opportunity certainly for double digit EPS growth year over year, and so we've seen much more than that and if you go back on a five year carrier basis, it's much more than that you say are guidance. This year more than that so I do think the company's ability to to clean and pull all levers of the balance sheet to move us for.
Certainly there and you'll see us do that.
Another way to think that it.
Go back and look at our averages I mean, you see that we average probably around $400 million or more and and deployment of capital acquisitions over the last for five years.
Thank you.
Thank you all right.
Question is coming from Steven for sure at the at the at please go ahead.
Thanks, Good morning, just on the cash flow your guidance of about 45% conversion of EBITDA seems a little bit higher than you were previously talking about when you get growth going into sort of the upper single digits on a revenue basis. So I guess is there anything in particular.
<unk>, that's taking that cash flow.
Above that maybe 35% to 40% conversion will on a kind of a low single digits low to mid sale digit basis or is this now sort of a new normal kind of cash conversion at a at a better level.
Yeah. Thanks for the question <unk> actually, but I would say is.
It is a little bit higher we ended up the year with probably running about a little over 12% working capital as a percentage of trailing for them with revenues. Historically, we were really running probably about 13%. So we I think we've done a good job of continuing to get some of that pressure down on the working capital side I think we can maintain that throughout this.
Here and that will give us a little bit higher conversion rate.
As Alex disaster is a little bit of of M&A driving the revenue side. So that would factor the revenue growth up just a little bit, but we commented multiple times that and a moderated growth rate call. It it kind of that mid single digit that we could be in at 40% to 50% type conversion, which is largely what you're seeing.
With a little bit of an uptick based on expectations of maybe a little bit better cash conversion then routine recent periods.
Great and then just on the telecom business just curious what the bookings potential looks like are there are there any opportunities out there to.
Maybe drive a step function increase in that line hundred $9 backlog at has today or should we now expect that his business gets a little bit bigger growth rate and it starts to have a moderating trend both on the revenues on the backlog side.
Steve I think when we look at the telecom business.
Sees macro market.
Very good and I think our ability to book is there continue to book.
What I would say is we've taken a measured approach to make sure that we kept our double digit margins and hit those targets and I think we've done that for grown it nicely as long as we can hit and kind of the double digit target target margins that were after that and we will continue to see for the kind of growth rates, but it will moderate at some point the law.
Big numbers will get there, but in general the market's there for us to continue to grow that business above the growth rate of that electric segment for sure. So I think we see that going forward and our ability what's happening with art.
Aw.
Work is that's also go into municipal electric customer, so, it's allowing us even more opportunity to grow the business with even on our electric non side of the business as far as our cruise soon with five <unk> in the way that that's going into the on the electric space certainly it will push our telecom up.
Even farther so.
Optimistic the market's good and we're we're doing well there.
Perfect. Thank you.
HM.
Thank you. Our next question is coming from Jamie Cup of credit. Please. Please go ahead.
Hi, good morning, a nice clutter.
I guess my first question back Kayla underground utility infrastructure.
Are there any sort of an organic opportunities and that you could do inc.
Acquisitions that we could think about in 2020 line to somewhat accelerate that that.
Margin improvement in this business I note. This for our historically gives you talked about scale perhaps.
Not enough geographic diversification sort of laying down on the margin finished business I'm wondering how opportunistically can be there versus just waiting for.
The industrial services business.
Come back and then an industrial services I know you talked about if we normalized he'd get.
Margin improvement in that business.
I guess, what what's the revenue growth that you need or can you remind us where industrial services revenues were ended in 2020 versus what you would need to get that margin improvement. Thanks.
Now thanks, Jamie.
Be clear I want I want to make sure. Our goal is to operate that segment and we're doing what's necessary to operate ex segment and an upper upper single digits. The way it states that being said.
Our crews aren't stood any I mean, many times they will go and perform electric work.
They'll do other things on the electric segment, so you're seeing the overall margins of the company move up.
No matter what class of work they do a bore rig for example, more electric one day gas an ex in telecom. The next so what we're doing is making sure that our offices that are fully utilised. So it's driving the overall margins up of the company and we do anticipate that as we continue to grow out of utility <unk>.
Does that LDC business with integrity and pipe replacements that that will continue to be the largest piece of the segment as well as move up our margin profile and resiliency of the business as we go forward. So those are 30 year builds.
We liked that business, where you have put in the eastern seaboard, albeit it had some issues last year and just now starting to kind of come back to full scale on the eastern seaboard. So I think when we see all that come together, you're going to start to see it move up fairly rapidly I do think the industrial business we.
We acquired stronghold it was around $500 million, we had anticipated that grow into a 1 billion at some point, but that is back.
For more than normal the highest level wood. So when we look at that keeps going forward. We liked the pieces that are there there are critical path infrastructure, we've not scaled back to operate at 500 million Mark we still believe when this moves out that there's there's greater opportunity for us so we.
Are holding on this and people to make sure that we can fulfill the customers.
Needs as we move forward. So there is a little drag on on margin there in the industrial business by design, we've done it before in other areas I think it's the right thing to do for the long term.
Vision that we have for that group.
Jamie.
Okay. A couple a couple other quick points there relative to the difference differential revenue.
Commented effectively thinking about it like a couple of hundred million dollars, but I think another point that's worth noting is.
2021 expectations are exacerbated by kind of our first quarter effect industrial is counter seasonal and so oftentimes contributes a little bit more to the first quarter than the normal aspect of our business. When you look at the modeling I think what you'll find is for you to get to a five 5% to 6% margin profile for underground.
Based upon the breakeven too small Austin first quarter, you're going to have to see second third and fourth quarters operating effectively at around seven per cent. So it's really right now and exacerbated first quarter dynamic that's really creating the majority of the dilution, but otherwise you're seeing margin execution of.
Remaining portion business ex industrial in the back half of the year still at.
7% type plus.
Lawrence.
Okay. Thank you I appreciate it.
Thank you. Our next question is coming for Michael Day would ask this article research. Please go ahead.
Good morning, all.
You had some rough weather down your per neck of the woods last week 10 days.
I just feel share with us how.
You guys work through that and and do you get the sense certainly I'd be in touch with your utility customers.
Maybe for air caught area interest in general.
Plus of of the news and the.
The flow that's happened is this going to accelerate some of these are some of the decisions and.
The problems that are caught had to some other parts of the country and are you going to be when you think you're going to get a sense of that here in the next couple of months seem especially from a regulatory standpoint alley, just in Texas, but there's so many other regulars regulators around the U S.
No. Thanks, Mike. Thanks for the question Yeah, we have some weather here for sure.
Gonna save me on our employees, both at the corporate level and in the field remarkable job for an earnings out and.
Being safe in the field and whites back onto that being said when we look at that I think you're going to have to have some redundancy no matter what you do.
Intermittency so whether it be if you are still backed by gas your pipe that froze out in west, Texas, you're going to you're going to have to see some redundancy on to backup the grid and night, whether you do it with batteries or or.
New pipe.
That's certainly there as well as transmission, where you had load you can't bring it out because it you are constrained so I think you're going to see transmission across North America. If we're going to go to more of a renewable sentiment state that has been stated.
Set it before and I'll say it again the amount of transmission, it's necessary to have a robust redundant system to backup intermittency as large in nature much more than you can anticipate if you go to a European type environment, where you see large corridors of transmission. So I think those spend.
Day, there batteries will come into play at some point and be more of could take some of that intermittency al but we're early and batteries as.
As we move for so.
Those kind of things to build up modern grid as you see electric vehicles come on on the distribution system, our infrastructure that we have today.
We continue to need to invest to modernize and you're going to.
Our utility customers, Capex, and Opex and as well as our regulators will continue to put it put focus on those areas as we move for.
I appreciate that caller. Thank thanks for Ya.
Thank you. Our next question is coming from.
Now Heimer Thompson David Please go ahead.
Hey, good morning, guys congrats on a strong queue for.
Thank you Hey, Dick on.
The transmission side in the U S and Canada, just at a high level what are you seeing in the bidding environment out there.
I have a really busy.
Most of most of the work we have her multiyear agreements across the board. So really we're in multi type of your agreements.
I am on the base business and then your larger work continue to sleep.
A robust bidding environmental and transmission side and I.
From our standpoint for settlement physician well for those larger projects both in Canada.
And then lower 48 so.
It's a robust environment.
And then I guess sort of the same question on the gas side and where are you.
And your.
And your plans to kind of grow the base business on the gas side with cash utilities, adding msas.
Yeah, we're adding msas.
<unk>.
Pretty much every year, probably every quarter for that matter, it's really about us having the qualified personnel and continuing our training programs too.
To get the the folks in the field and so it remain productive and make sure that we keep our margin profile up and don't grow faster margins. So it's more about a margin issue than the amount of macro work from a macro standpoint amount of work that's out there. So we'll be prudent about how we step into.
The gas the gas piece of the LDC market utility market, but certainly there and growing and I think we've grown it kind of upper single digits, the double digits year over year, and you'll continue to see that.
Maybe well, let me to think about an aggregate msas are now as it relates to the end of 2020, we're just about 50% interest over 50% of revenues, which is definite growth from what you've seen through for years ago.
Gets that thanks Derrick.
Thank you. Our next question is coming from Cat tailored for an escape.
Please go ahead.
Hi, good morning, guys.
Free.
Alright, my questions on the telecom margin and you guys are getting share I guess fall in line.
All levels fall through this year old.
On the revenue side guidance about for homeowners.
Trying to understand.
What sort of equal to leverage Diaz going from the $700 million a share to your eventual golly dollar one right.
And.
Potential upside beyond Paul.
Like an average for telecoms.
And I think again, when we see portfolio.
Approach there when you start to use electric crews too.
Not only.
For them for electric work, but also telecom work you get some synergy there that would would increase the margins on the telecom side. So is that comes into play in.
Years beyond when we start looking more faggi in the rural areas I think you'll start to see margins increase as we go for and it's about utilization people utilizations scale with offices in and for.
From a from a management managerial standpoint, as well as the fleet standpoint, so the return to get better as well.
That's helpful and just.
Bigger picture question.
So how much will gas transportation and distribution infrastructure needed changes.
Hygiene kits introduced as as a bigger part of any energy mix.
What infrastructure day on the pipe side.
And are there any Paul we can draw versus what we saw shanghai's formulation all about a decade ago.
In terms of capable all day that that quanta had.
Is there anything to be pop line in terms of the actual skill set geographic focus or customer coverage to realize opportunities ahead there there.
Yeah, I think when you look at these this segment and you look at it is.
As far as.
The gas distribution and hydrogen and how it mixes and it's certainly more corrosive so when you're starting to blended we're working on those plans and things of that nature today, So that gross and this will will cause work as well so.
We see that going for it's early in my mind and Hydron, we're still working on how that interacts.
And my mind with what's going on today, but.
We continue to see Gaspin utilize in new areas as well as replacements and are older areas to reduce methane emissions. So that's that's been something that.
Has gone somewhat I noticed as the methane emissions that it's caused today from Lee prone pipe that's no longer there. So I think we're doing a good job of from the environmental aspect as well by replacing.
And so I think about it like the systems that are in place are very valuable because it's very difficult to build a new system today and so the ones that are in place. What will happen is is the integrity piece of our business will continue to flourish as we move for due to you.
You're using an older pie because it's too difficult to build new pipe. So we will continue to see the our integrity peace move up and what we're looking at that as we as a strategy as we go for it.
Thank you.
Thank you. Our next question is coming from France, Thielemann FDA Davidson. Please go ahead.
Okay, great. Thank you congrats on a great quarter great year.
Maybe similar to the last question.
Themed clean energy electrical vehicles in the infrastructure needed for that day day meaningful for your business over the long term.
Are there other capabilities are services that you don't have the day that could be an entrance to leverage notes themes more items, whether that's direct engagement and renewables developed manner things around the EDI infrastructure Arena, just wondering if you're looking at any of those sorts of things and sort of supplemental growth opportunities today to the core business.
Yeah, when you think about.
Everything that you said, whether it be electric vehicles.
Automated vehicles technology.
Renewables.
Hydrogen.
Where.
In conversations collaborations with helping build the modern infrastructure necessary to enable every one of the things that you hear every day. So the companies in a unique position to enable all those things to happen whether it be electric vehicles on the distribution system to make sure that not only can.
We put charging stations in but we can also make sure the grid behind it can handle the amount of electric vehicles that are going.
Going to be charging on a daily basis in the Intermittency that it causes is for the tremendous step.
Step forward within the.
Distribution systems that we see today on the electric side technology on the telecom side as we move into five G. The companies and very in a unique position there to deploy resources. There. So I think any any way you look at it from the sentiment standpoint and.
And how were.
Becoming more sustainable going forward as well as environmental friendly from from our company, we're enabling all those things to happen.
Okay I appreciate that and then on communications.
If you touched on the earlier, but I guess I'm wondering with the completion of the C band action whether that.
Being a much more meaningful dialogue with customers just around the bell-bottom construction, maybe whether you're hearing from them now marble that is completed.
I think we still see the same I mean, it's a robust conversation on a daily basis about what's going to happen. Obviously, there has been with the pandemic. Some of the plans I've moved and you see some more fiber pushing into.
You're the Serb suburbs.
So that's certainly something that we see but.
Go for by the capital spins. There are are there and I think for and what we're well positioned to take advantage of that is with me for it.
Okay. Thank you.
Thank you. Thank you ladies and gentlemen at this time I'd like to turn to for back over to management for any additional ex closing comments.
Yes, I want to congratulate the company and mentioned the management teams that we have they are they are exceptional.
Performed very very well in tough conditions as well as the corporate office to push out earnings.
In tough times, and so I commend everyone in the organization and I want to thank you for participating in the call. We appreciate your questions and ongoing interest in Quanta services and thank you. This concludes the call.
Ladies and gentlemen, thank you for your participation you may disconnect. Your line in lockup for webcast at that time and have a wonderful day.
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