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#Thanks, <UNK>
Good morning everyone and welcome to the Quanta Services second quarter 2017 earnings conference call
On the call, I will provide operational and strategic commentary before turning it over to <UNK> <UNK>, Quanta's Chief Financial Officer, who will provide a detailed review of our second quarter results
Following <UNK>'s comments, we welcome your questions
We remain on track to achieve our full year guidance and multiyear outlook
We continue to execute on our core business and strategic initiatives and continue to believe that our end markets are strengthening
As a result, we believe 2018 and 2019 are firming up to be solid years for both our electric power and oil and gas segments and that Quanta is in a renewed multiyear up-cycle
While the timing of when project contracts are signed and reflected in our backlog can be challenging to predict, we have good visibility into the overall CAPEX and OPEX spends of our end markets and remain in active discussions with our customers for billions of dollars of work
I will note that the timing for larger projects is currently more difficult to predict due to the lack of commissioner quorum at FERC
Despite these challenges, we believe it is not a matter of if larger projects move forward, but when
We continue to believe end market drivers remain firmly in place and that we have the opportunity to achieve record backlog levels over the next few quarters
Turning to the electric power segment, we are generally pleased with our performance during the quarter as mentioned earlier
We continue to invest in the workforce for our electric distribution business, which created short-term margin pressure in the second quarter, but it is necessary to support future growth
Nevertheless, we are on track to achieving our margin expectations for this year and continue to believe we have the opportunity to improve operating margins to double-digits as these investments pay off and our Canadian operations strengthen with the start of field construction of the Fort McMurray West Transmission Project
Our customers are actively executing on existing capital programs
Small and medium transmission projects as well as distribution work remain active, and we continue to have discussions with customers about the solutions we can deploy for new large multiyear capital programs
These programs include both larger and smaller electric power infrastructure projects that are designed to upgrade and modernize the grid
On prior calls, we have talked about and anticipated an increase in larger transmission project awards
<UNK>ier this week, we announced that Quanta was selected by American Electric Power, or AEP to provide EPC solutions for the Wind Catcher Generation Tie Line Project
The anticipated contract value for this project makes it the largest award in Quanta's history
The Wind Catcher Tie Line consists of approximately 350 miles of a single circuit 765 kilovolt power line and two new EPC substations in Oklahoma
We will provide turnkey EPC services for the entire project
Once completed, the line will deliver energy from the Wind Catcher wind farm in Western Oklahoma to customers in Arkansas, Louisiana, Oklahoma, and Texas
We are providing early phase project services to AEP
And subject to AEP obtaining regulatory approvals, we expect construction to begin in the later part of 2018 with the completion expected in late 2020. We have yet to determine whether the project will be included in the third quarter 2017 backlog
Quanta has built more high-voltage electric transmission infrastructure in North America than any other specialty contractor
With industry-leading experience constructing 765 kilovolt lines, Quanta brings significant scope, scale and financial resources as well as a track record of safely executing large complex projects
We are also able to provide cost certainty to these projects like the Wind Catcher Tie Line, all of which, we believe, are competitive advantages
We have agreements for and continue to discuss additional large transmission project opportunities with numerous utilities and merchant transmission companies in North America
Several of these projects are making progress through the permitting and regulatory approval process, with announcements possible in the medium-term
Further, our ongoing investment in training through Quanta's world-class training facility, college and trade affiliations, and other regional activities, and our commitment to meeting the long-term needs of our customers sets us apart in the marketplace and will continue to pay dividends
We have added to that effort by helping form a non-profit line school
Although in the early stages, we believe this school will help to develop quality line workers to supplement our growing resource needs
Our oil and gas segment had a good second quarter as we executed well on several mainline projects and other work, which resulted in solid operating income margins
Further, backlog held up well in the second quarter, especially considering segment revenues increased strongly over the same quarter last year
As a reminder, oil and gas segment backlog can vary ---+ variable due to its faster book and burn nature and the timing of larger pipeline project awards
In July, Quanta was awarded two spreads of the Canadian section of Enbridge's Line 3 Replacement Project
Quanta's scope of the work includes the construction and installation of approximately 168 miles of new 36 inch diameter crude oil mainline pipe, which will begin in Hardisty, <UNK>a and continue into the province of Saskatchewan, Canada
Construction is expected to begin this month and is anticipated to continue through 2019. This project supports our prior commentary regarding improved expectations to booked pipeline work for the second half of this year
As I commented earlier, FERC currently lacks a commissioner quorum, which is required to provide final approval for major projects, including pipelines
Due to this uncertainty, customers have been reluctant to sign project contracts
A recent Bloomberg article estimated that there is $50 billion of energy projects that are held up and waiting FERC approval
The Trump administration has nominated candidates to fill all currently vacant FERC commissioner seats and we believe a quorum will be achieved over the coming months as commissioners proceed through the confirmation process
The majority of the pipeline projects waiting for FERC approval are planned to begin construction in 2018. Quanta remains in late-stage discussions and negotiations on multiple larger pipeline projects, and we continue to believe that 2018 and 2019 will be active years
We believe a number of them will be awarded pending their receipt of FERC approval or perhaps earlier and should break ground over the next 24 months
A couple of weeks ago, we announced the acquisition of Stronghold, a leading specialized services company that provides high pressure and critical path solutions to the downstream and midstream energy markets
Stronghold is a strategic acquisition that will allow us to capture a greater portion of the industry operating and capital spends
With positive industry dynamics, visible cross-selling opportunities, and Quanta's support, we believe there is a multiyear opportunity for Stronghold's operations to achieve double-digit growth
Stronghold's recurring revenues, accretive operating income margin profile, and strong free cash flow generation align well with our strategic imperatives for long-term profitable growth
Since announcing the acquisition, a number of Stronghold's customers have responded very favorably and we have received inquiries from several customers that would like to learn more about the comprehensive solutions, a combined Quanta and Stronghold can provide them
The growth of our communications infrastructure services operations continues and our outlook remains positive
market expansion efforts are going well and continue to be very well-received by current and potential customers and we are actively pursuing opportunities with various U.S
telecom and cable MSOs
During the second quarter, we booked approximately $150 million of new project awards in North America, the majority of which were in the United States
We are in discussions with providers across North America and in certain countries in Latin America for projects worth several hundred million dollars in the aggregate, which, if we are successful in signing, would be performed over the next few years
Additionally, during the second quarter, we completed the strategic acquisition of an established communications contractor that serves the Southeast and other regions of the United States with strong customer relationships
Now as a part of Quanta, we are growing the business and have strong support from its key customers
We remain focused on organically growing our communications services offerings
However, we will evaluate select acquisitions that bring strategic value to Quanta and allow us to provide differentiated solutions and that can accelerate our expansion efforts
In summary, we remain on track to achieve our full year outlook, continue to have a positive multiyear view of the end markets we serve, and believe we are entering a renewed multiyear up-cycle for electric power, oil and gas, and communications infrastructure services operations
We are confident that Quanta is well positioned to provide unique solutions to our customers and capitalize on favorable end market trends
Our small and medium-sized base business work continues to grow nicely and we are seeing larger electric transmission and pipeline projects move forward as evidenced by the Wind Catcher Tie Line and Line 3 Replacement Program projects
We are making progress with our U.S
communication services expansion efforts and see meaningful growth opportunities for our operations in North America and Latin America
We are focused on operating a business for the long-term and continue to distinguish ourselves through safe execution and best-in-class field leadership
We will pursue opportunities to enhance Quanta's core businesses and leadership position in the industry and provide innovative solutions to our customers
We believe Quanta's unique operating model and entrepreneurial mind-set will continue to provide us the foundation to generate long-term value for all stakeholders
With that, I will now turn the call over to <UNK> <UNK>, our CFO, for his review of our second quarter results
<UNK>?
Yes, good question
From our standpoint, what we're hearing from customers and how we're looking at schedules, we believe that everything that we're hearing that there will be a quorum, number one
I think yesterday or day before yesterday, some of them moved through committee, so that's a good thing and a good sign
We're not here to predict when that's going to happen
has been ---+ every day is something new
So we don't know, but our customers are optimistic and so are we
As far as when we need to get it, it depends on the regulations and what area you're in and how much they relax those as well
What we're hearing is good things about some of the relaxed ---+ relaxing some of the regulations on us as far as clearing and things of that nature will ease the construction and so you could get later in the year
But as we see it right now, we're optimistic that the quorum will happen and we'll get approvals on some of these larger projects
So in general, the industrial service business, we've been in it a long time, and we performed very well on our high-voltage side down
So we understand the market and we understood the others that have ---+ came out with announcements and where they were at as well when we made this acquisition
We fully understand
So that being said, what we do is we're critical path on both sides of that
And it's necessary ---+ our services are necessary in any turnaround and also in any cost structure that you would have in a turnaround
So if you wanted to expedite a turnaround, we believe that what we do is critical from our handling capabilities on the catalyst side to our high voltage side as well
So those two things are extremely important as well as all your ancillary services around that
That being said, the company that we bought has a five year track record plus a double-digit growth as well as a margin profile that's industry-leading, and we're confident in our guidance and what we bought
We're happier today or as happy today as we were when we purchased the company and believe the company itself fits in well
And everything that we've seen has been great as far as the management team and we're extremely happy and they fit in well as far as that goes
As far as cross-selling, we've been able to cross-sell already and have good client conversations about how the two put together and we can do unique things on the turnaround side
My comments were pre-Wind Catcher
And I also want to reiterate on the quarter, I think we had an exceptional quarter
We're right on track
We think that, from what we see, the markets and also our guidance is intact and we're affirming as well as increasing as far as I'm concerned
Yes, <UNK> I think you know we've been consistent in talking about our base business, which is particularly about 85% of what we do on any given day is our base business
The larger projects are a small piece, 15% of the business
So we're around the edges on them all
We talk to our customers all the time
We're involved in many, many projects, some as big as Wind Catcher, some not
But in general, we understand the markets
We understand the end markets and then we're able to get in front of that and provide solutions
We've said all along, we need to be solution-based
We need to able to program manage
We got out in front of some engineering capabilities, and it's consistent with what we've said for the previous years and where we're going with the company as far as the solution base
And our relationships with the clients and our execution capabilities are exceptional
Our guys in the field are just exceptional
Yes, <UNK>
I think, in general, what we'd say ---+ let me go backwards on the communications side as we've kind of commented on the $150 million to $200 million
We think we're on upside of that, the $200 million, as we sit today
And we're proud of where we stand there and what we've been able to do so far, primarily with organic growth there, almost holistically, organic growth
So we're happy with where we sit as far as the communications go
I'll comment a little bit and turn it over to <UNK> on what we said from a comment
When we gave the commentary on the $10 billion and what we said, we said we could see it
We never gave a time frame
We stand by that
We can see it
And so we see it; it's attainable
We wouldn't say it if we couldn't see it and I'll leave it there
I'll turn it to <UNK> on the numbers
Thanks <UNK>, I think, in general, that we basically work with Enbridge on the rest of the project
There's another portion that will come out later that we'll bid as well
They're great clients
We continue to work with them, a collaborative effort across both Canada and the Lower 48. We're not ---+ I don't want to get into a bunch of comments on where we're at on specific projects for competitive reasons, but in general, great, great client and we look forward to work with them ---+ working with them on this piece of work
Yes
<UNK>, it was a small acquisition
And it brought, actually, no backlog to us in the Southeast, but great client relationships and such
So we're able to leverage their client relationships across a broad spectrum and add our solution capabilities and some of the people that we had already
And we pulled them out of Canada and such and then really boosted our telecom operations and get a kick start in the Southeast
If we're able to do that in multiple areas, we'd do it, but it was a very small acquisition
I do not think we have a kind of a program as such as far as an acquisition profile in any way, shape or form going forward
We said we'd organically grow and I think that's the intent, but we're not going to pass up good opportunities
Yes, a little commentary as well
When you compare it to 4Q of 2016, we are on multiple large spreads in the South and so that's not in our backlog as we see it today
So that's part of our comparable issue as well
Yes, I'll take the electric side of it
In general, I think what we saw in the quarter, we added 500 or so people
We've added 1,500 as we look at the year so far just without the acquisition
So when you're doing that, in the distribution business especially, it does create some inefficiencies
It was ---+ what we see in baseload work and how we're ramping on that certainly caused some unique issues as well as we are ramping on our telecom business
And so in the segment, it caused some unique variables
And I think that's not what you see going forward
When you look at this business as we do and give guidance over a period of time, our ability with utilizations and such that just goes away
But that was a unique kind of quarter where you saw some pressure
It was not that much
And as <UNK> said, we were still in the double-digits in the Lower 48, but we thought we should at least comment to it
Chad, in general in Canada on the electric side, we see on the larger side ---+ large transmission side, we still see opportunities there
We've been disciplined about how we bid this work
We're starting West Fort McMurray now in the field and we're happy with where we sit there
We'll be ---+ we'll continue to be disciplined up there
We know our costs
We know where we're at, and we see it strengthening from a large project standpoint with non-core Nalcor as well as starting West Fort McMurray
And even when we come off Nalcor, we feel comfortable that we'll start to see that market strengthen due to that ---+ those projects as well as some of the base business coming back on your Eastern side of Canada as well as on your Western side of Canada
But in general, the overall economy is depressed due to the energy markets
We've been [indiscernible] that will help on the gas pipeline
So we are seeing opportunities there as well
But more importantly, I think our discipline on large projects and how we price work at states that size and we don't have any projects that we are off the rails or any issues, which I think says a lot about our execution capabilities as well as our bidding discipline as we move forward
I mean, I think, in general, the process within FERC has moved forward
The work underneath is ongoing, right of ways and things like that are getting bought, easements, all the necessary things within the state levels are getting done
We're optimistic on the ones that we're looking at or working or collaborating with our customers that we're moving forward
And as we stated before 2018 and 2019 we believe will be a robust environment
And so when we see that, again, it's mainly just waiting on the FERC quorum and final approvals, in my mind, to see us into 2018 and 2019.
We've been ---+ we've performed EPC work for 50 years, primarily on the transmission side of the business, substations
So we're very familiar with EPC and the risk profile
I'm confident in our capabilities internally to perform that work on leaner construction
And again, we had the power plant that was a problem, but that was something completely different, something that we stated that we're not in today
So that being said, we do understand the risk profile, having had ---+ of that project, on something that we didn't understand as well
So I think, in general, what you see and what you see in our backlog and our ability to perform on EPC, on electric side or the gas side, we do it very well
We're excited about the opportunities
We looked at that
I think, in general, what ---+ we can stay in our historical margins with the mix of EPC that we have today
If that changes, we'll come out and say so, but what we see today, we're very comfortable
And I'll let <UNK> comment on some of that, but in my mind, I'm happy with where we're at
I think we can stay in historical margins
We're not there yet, but probably we'll be there and even with EPC, but I'll let <UNK> comment
Yes, and I think we have consistently commented on this that we believe we'll be booked in 2018 and 2019 in the Lower 48. We stand by those comments
I just did
We're going to stand by our books
We believe we have a robust environment
It's difficult for us to comment on what that is going to look like
And certainly, in 2018 to 2019, we're not going to give multiyear kind of quantification on it other than to say it's a robust environment and our spreads, we believe, will be booked in 2018 and 2019.
Yes, I mean, again, as you start to see utilizations go up and project mix go up when you see bigger projects and the big transmissions start to move back in, as we've said before, the margin profile and ---+ at the risk profile and margin profile, we believe we can execute through
Certainly, it drives your margins up, but again, our base load work and what's going on in there as well, it's not necessary, but it should enhance margins
Yes, I mean, I think, as far as we see it, the labor environment and the amount of labor and qualified supervision that's in the market out there today, we talked about in the past that we've been a little heavy in supervision in certain areas a year ago or a year and a half ago because we saw some of this coming
We're in a really good spot from a labor standpoint as well as working with our line programs and things like that
We saw some costs roll through there
We got in front of the build
We consistently talk to our customers about what's going on and preplan and get involved with them on a collaborative effort
And that being said, it allows us to look at things like Wind Catcher and a multitude of projects, both on the merchant side and with our customers that ---+ most of over 50 years with us
So we stay involved with them and I think we're in a good spot and we really like the market going forward as I said before
Yes, <UNK>
I think, in general, from a weather standpoint, I mean, we bid kind of a weather pattern in our work and certainly there was probably something across ---+ the Northeast, I believe, was pretty wet
Again, we looked at it
We looked at the weather patterns, we have historical, and we worked through it
And basically, some of our design is that we're in West, East, wherever it's at and we were able to execute through any kind of weather issues
And I think if you look at the business from a mainline and base work, and this and that, again, about 75% to 80% of gas pipe is base load work, not mainline, so ---+ magnitude
Yes
I'd like to thank you for participating in our quarter ---+ 2017 conference call
I'd also like to thank the 32,000 plus employees in the field for safely executing through the quarter
We appreciate you, and thanks for your interest in Quanta Services
