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#Good morning, everyone, and welcome to the Quanta Services First Quarter 2017 Earnings Conference Call
On the call, I will provide an operational and strategic commentary before turning it over to <UNK> <UNK>, Quanta's Chief Financial Officer, who will provide a detailed review of our first quarter results
Following <UNK>'s comments, we welcome your questions
Quanta's first quarter results were consistent with our expectations and put us on track to achieve our full year outlook
Our end markets are strengthening and we continue to believe we are entering a renewed multiyear up-cycle for our business
The successful execution of our strategic imperatives, coupled with favorable end-market trends, positions us well to further separate Quanta in the marketplace and for profitable growth
Fundamental to Quanta's growth is our view that our backlog will remain strong and has a potential for solid growth
Our electric power segment backlog increased without the inclusion of multiple larger project opportunities that are in various stages of regulatory review or that remain subject to competitive submission processes to meet state and provincial energy policies
Oil and gas segment backlog declined in the quarter, primarily due to burn associated with significant pipeline construction activity, seasonality and the cancellation of a pipeline project contract for which we received a cancellation fee
As a reminder, oil and gas segment backlog can be variable due to its faster book-and-burn nature and the timing of larger pipeline project awards
As we mentioned in our Investor Day a month ago, we feel incrementally better about opportunities to book pipeline work for the second half of this year, which should positively impact backlog as contracts are executed
We're in the late-stage negotiations on multiple larger pipeline projects that are expected to start construction in 2017 and are in discussions for billions of dollars of larger pipeline projects that could break ground over the next several years
Overall, we are supporting our customers' project scoping and infrastructure development initiatives across our segments and believe there is opportunity for our backlog to increase to record levels over the next several quarters
Turning to the electric power segment, Labrador Island Link transmission project for Nalcor Energy in Canada is progressing well
In addition, full scale construction on the Fort McMurray West 500 kilovolt transmission project is on track to begin in the third quarter of this year
We have completed many important engineering and procurement milestones over the past two years for this EPC project and now look forward to the construction phase
The Fort McMurray West project is the largest individual project ever awarded to Quanta
Based on this expected timing, the Fort McMurray project should ramp up as the Nalcor project moves to completion
This dynamic should provide an efficient transition of our people and equipment, improve the stability for our Canadian operations and provide multiyear visibility since the project is scheduled to complete in 2019. Though our Canadian operations remain challenged by economic conditions, we are proud of how our team has executed on the Nalcor project
Overall, our customers' multiyear capital budgets continue to increase and should remain robust for some time
We continue to believe larger transmission project awards will likely increase over the next 18 months
We are in various levels of active discussion with numerous utilities and merchant transmission companies in North America about their transmission projects
Several of these projects are making progress with permitting and regulatory approvals, which increases our confidence that they could break ground over the near to medium term
In addition, small and medium transmission projects, as well as distribution work, remain active, and large multiyear MSA proposal activity is at record levels
Further, we believe the deployment of several new large multiyear capital programs by our customers is imminent
These programs include both larger and smaller electric power infrastructure projects to upgrade and enhance the grid
We are able to provide comprehensive turnkey solutions for these multiyear capital programs that we believe are unmatched in the industry
As we have said in the past, we believe we are uniquely well positioned to provide solutions for these potential opportunities, which are of the size and scope our industry has rarely experienced
We continue to have a positive long-term outlook for our electric power segment and believe we are entering an upward multiyear cycle
The end-market drivers we have spoken about for some time continues to spur demand for Electric Power Infrastructure Services
These drivers, including the need to maintain and replace aging infrastructure, generation mix shifting to more renewables and natural gas, grid modernization and regulation aimed at improving grid reliability are what we believe will continue to provide opportunities to grow are our electric business
Turning to our oil and gas segment, we generated record revenues in the quarter, which is also noteworthy because it occurred when it's typically the lowest quarter of the year due to seasonality
The quarter's record revenues were primarily driven by strong activity on several larger pipeline projects in the Southern United States and in Canada, which contribute to significant margin improvements versus the same quarter last year
We did, however, experienced some margin pressure in our base business
For example, we have been increasing and training our workforce to meet our customers' needs for the multiyear gas distribution and integrity programs
However, a couple of these customers delayed commencement of work under our MSAs during the quarter, which impacted margins
As discussed earlier in my remarks, we believe the larger pipeline project market will remain active for several years and are pleased with our execution to date
In addition to larger projects, we see opportunity for base load work to continue to grow over the coming years
This base load work includes supporting midstream infrastructure, downstream support services, natural gas distribution, pipeline integrity, MSAs, pipeline logistics management, horizontal directional drilling and engineering
During the first quarter, we resolved the litigation initiated by Dycom Industries related to the non-compete agreement entered into in connection with Quanta's disposition of certain communication construction operations to Dycom in December of 2012. While the terms of the resolution are confidential, we are very pleased with the outcome
We began the expansion of our U.S
communications infrastructure services operations following the expiration of our prior non-compete agreement in early December 2016, and with this litigation now behind us, our ability to continue our U.S
expansion efforts is unencumbered
market expansion efforts have been very well received by our current and potential customers, and we are actively pursuing opportunities with various U.S
telecom and cable MSOs
We have developed a workforce and delivery model over the past several months and anticipate receiving awards in the second quarter
Outside of the U.S
, we signed several MSAs in Canada
During the first quarter, deployed fiber to eight communities throughout the country, and our Latin American operation continues to expand its fiber, wireless and cable operations, which are all performing well
Quanta has provided infrastructure services to the communications industry since the company's inception and the expansion of our U.S
operations complements our existing and growing operations in Canada and Latin America
All three of these geographies provide multifaceted opportunities for growth in a broad diversified customer base, which we believe is advantageous versus focusing on just one area
We're excited about the market opportunity and look forward to sharing our progress and success as we grow our communications infrastructure services operations
We also continue to advance our infrastructure solutions capabilities with strategic partnerships between Quanta, our customers and capital partners
These typically take the form of concessions, public-private partnerships or private infrastructure projects in the markets served by Quanta
These structures are fairly common arrangements in the infrastructure world and Quanta has good success with partnerships like these over the recent years
Quanta believes aligning is a true partner in these projects, and for select projects investing alongside our customers, creates a strong collaborative relationship that is open and transparent
We believe this approach yields greater opportunity for Quanta and our customers to drive a more efficient and effective design and overall structure that reduces cost and increases the chances the project moves forward and is executed successfully
Infrastructure solutions is a capability that we've been building and executing on for a number of years
These successful efforts have resulted in approximately $2 billion of project revenue across our core competencies in electric power, oil and gas and telecom and across our geographies in Canada, the U.S
and Latin America
Further, we are pursuing a number of additional projects that fit well with our infrastructure solutions capabilities
During the quarter, we enhanced our capabilities with the establishment of First Infrastructure Capital, or FIC, which is a partnership between Quanta and select infrastructure investors
FIC provided $750 million of available capital to invest in infrastructure projects with the potential for this additional capital from our existing FIC partners
This partnership is an important part of our broader strategy of partnering with our customers and providing fully integrated, differentiated infrastructure solutions while leveraging Quanta's operational excellence, strong execution capabilities and project finance expertise
In summary, the year started off well and we are on target to achieve our full expectations
While project permitting and regulatory challenges remain, we continue to have a positive multiyear view of the end markets we serve and believe we are entering a new - renewed multiyear up-cycle for our electric power, oil and gas and communications infrastructure service capabilities
We are confident that Quanta is well positioned to provide unique solutions to our customers and capitalize on favorable end-market trends
We are focused on operating the business for the long term and continuing to distinguish ourselves through safe execution and best-in-class field leadership
We will pursue opportunities to enhance Quanta's core business and leadership position in the industry and provide innovative solutions to our customers
We believe Quanta's unique operating model and entrepreneurial mindset will continue to provide us the foundation to generate long-term value for our stakeholders
With that, I will now turn the call over to <UNK> <UNK>, our CFO, for his review of our first quarter results
As far as the backlog goes, and where we're at in the pipeline cycle there, it's lumpy, we've talked about it
We've announced ACP before
It's not in our backlog today
So you can see some of the stuff that's not in there and others that are imminent here
So it's - we're just in late stages of negotiations
It doesn't meet the criteria to put in our backlog
We feel confident that we'll fill that up with our large pipeline business
The 2018 cycle is robust
The latter half of 2017 is looking favorable
So we're happy with where we're at on that
As far as the cancellation fee, there are some contracts that contemplate this and delays and this is one of them
Roughly, the amount was around $100 million so for 2017.
We're in a robust environment in our large pipeline business
Rover's moving along
I think we're in good shape in 2018 as well as we stated in the past that we do have capacity
We can still book work
But I feel confident that with the ongoing opportunities and what we see, we should be in pretty good shape here for the next few years
Good morning
Yes, I think you have to look at it on the electric side and the gas side and split it
If you want to talk about Canada, the overall economics, being energy based, are down but our project-based business and the need to move natural gas to the coastline is there
We like where we're at
We like where we're positioned there
We're starting to see some projects move forward in your shales, in your Montney shales and such moving that gas out
And when you get some takeaway in there, things will look good
We've seen Trans Mountain get mentioned a few times
Those kind of things, those larger projects stroll up resources in the country and so that allows others - other projects that we'll be on to - we can execute well
So I like where we're at there
I think we're cautious about the overall economy on the gas side, but there's signs of life
On the electric side, with us having a backbone project of WFMAC and coming off Nalcor, we are seeing some stuff in the East, Toronto and in the West
<UNK>a is still, besides WFMAC, it's still very depressed there
So we're optimistic on the coast and we're cautious about the <UNK>a market
But all in all, we're executing through it pretty well through a tough economy there
And if you go back a few years in Canada, it was our highest margins in our company
So I'm optimistic we'll come back to those margins over time
Good morning
Yes, as I've said with <UNK>, I think what we see and our opportunity that we see and where we're at in the stages of the contract negotiations, we feel confident in the statement
So I'm fairly optimistic that we'll be in record backlogs
I would say, <UNK>, we'll over-communicate a bit for a few quarters here on telecom because we'll give you some idea of where we're at
I do think we're a little bit behind where I'd like to be
When you have a lawsuit in front of you, it does
It is a distraction on the operation and that past us now
And hopefully, that's the last time we'll talk about that, I think it is
And we're optimistic of the markets and you see it growing
You see what AT&T, Verizon and others are doing in that business
And our Canadian operations, our Latin America operations are growing nicely, similar to what you see others are doing in the U.S
So we had really good feedback from the customer base and I'm confident we'll move forward here in the next few quarters
And we'll definitely communicate it to the investment community
Yes, I'll talk a little bit about the job itself and let <UNK> talk a little bit about the numbers
From our standpoint, we're working collaboratively with the client and I think both of us have the same goal in mind and that's for a completion and it be a successful project
There's nothing to read into that other than we're working together to - on both commercially and on schedule that they would like to see completed this year
So we're working through all the issues that it takes to do that
It is a 1,200 kilometer or so job across very remote country and you get 50 foot of snow in the winter and so things, you get a thaw
And so it's difficult from a construction standpoint and we've done a great job executing through it
I'm happy with our performance there
And so the client's happy with us and we'll get through the commercial issues here over the next few quarters
And I'll let <UNK> comment on where we're at from a cash standpoint
Yes
Last year, we added some nonunion capabilities in addition to what we've had
All those projects were around the edges on all of them
And so we see them depending on where we're at from capacity and what they're trying to accomplish
We're in there
We're in all the basins for the most part
There's also some EPC opportunities with both pipe and stations in that arena that will be around
So we like it
We like it
It gets capacity out of the market as well
So again, as you start to see that takeaway come in, you'll start to see midstream business come back and all those markets are good markets for us
Yes
<UNK>, I'd like to add a little bit of commentary on that
We got $6 billion or so to execute through the next three quarters, and obviously, the first quarter has got the most seasonality in it
We're through it, so we can see the visibility in the next three
As we execute through, we will update
Also, as <UNK> said, we added roughly around 1,000 employees in the quarter
And as you do that it in your baseload business for the future, it's difficult to put the thing into three month windows
So as we have to talk about today, that's a good thing going forward
We're, by our highest headcount, 29,400. So we're optimistic about what's going on with the base business and also where we're going in the future
So it did put a little pressure on this three months here
Yes, I don't - I'll let <UNK> give you a quantification
I just - it's a general quantification to us
It's just we know it's pressure when we see 1,000 employees get at it
But we contemplate a lot of that in our guidance and so for us to say we didn't contemplate any of that would be a fallacy because we knew seasonality was there
We've stated it when we talked in our Investor Day that we thought that there would be some seasonality, we contemplated it
Yes, there were some impacts, both sides of this
But again, we contemplate the seasonality in the first quarter
But adding 1,000 employees and the seasonality is kind of what we're talking about
Yes
From a revenue perspective, yes, at the high end, I would tell you at this stage, I mean, it's possible that - for both segments to slightly exceed 10% to get to the high end of the range
And then from a timing perspective and how that plays out, I think that we've still yet to see the risk profile as the back half of the year may still yet not materialize for oil and gas, which is what's giving the variability in the overall revenue profile with the back half still having the risk of having declines
Although we feel incrementally confident in the nature of the rewards, as it stands here, I mean, until we actually receive and place them in backlog
We're not in position to guide to anything stronger and to continue to caution that the back half of the year could have weakness such as the fourth quarter
Much like we said at year-end, it could be down
And then the last part of your question, telecom, yes, as it stands here right now, we've not baked in any incremental aspects of telecom
We're still looking at something in the $150 million to $200 million range from both Canada, the U.S
and Latin America contributions
We have not increased anything relative to telecom
No, I mean, I don't want to put a time frame on it
We're going to collaborate with our customers to get the right contracts in place for both risks and M&As
It takes time
They're big projects, obviously
So as you walk through those, it just takes time
So I don't want to put a time frame on it but I would say the next few quarters here
We're not complete with all of them
Many of them are in the late stages and we're happy with what we've done as far as executing on the broad spectrum of all of our pipe and our spreads
We're extremely satisfied with where we're at
We can always do better but we're happy
I think what puts pressure on our segment is that you have a lot of ancillary businesses with your MSA work, your integrity work, which is good and its good long-term work, but you do get seasonality
And when you are ramping for these long-term integrity programs, along with that seasonality puts pressure in any given quarter when you add those folks
So lots of your adds are developed in this quarter or to support that piece of business and those guys once you get them trained
And also, we had some customers that delayed or were working through some state regulatory issues that cause some delays in MSAs that were anticipated to go in the first quarter
So that also caused a little pressure in the segment
We'll work through that as we go and start executing on their budgets for the year
Again, it's the right answer for the long term of the business, it just puts a little pressure here in the quarter
But we're happy with the way we executed on our mainline work
Well, we're not done with them yet, but we're happy with where we're at
From our standpoint, the way we looked at 2017 is playing out largely like we thought it would
As far as the way our customers look at it, they may look at it a little bit different than we did
But from our standpoint, the way that we see things happening is basically like we thought it would
What's going in '17 is going and with a few exceptions
Some of them did push a bit, but for the most part, it's playing out like we thought it would
We do need to get some commissioners in place
I don't think it's an issue
The administration has committed to putting people to work
I think you'll see that
The biggest issue that we see is probably in the Northeast with some of the water permits and some of the things that are going on there that you've seen make the press
All in all, it's lining up like we thought it would
I mean, I'll make a general comment on it
We've talked about the integrity business in our LDC, our local distribution markets, and the sustainability of that over the - there's 20 to 30 year bills as you get low natural gas prices, low interest and they're able to lock in long-term bills
I think it's good for the ratepayer
It's good for our customers
So as you see that, you'll start to see them announce it in their capital budgets and we're executing on those CapEx projects across multi-years, 20 or so years
We like the market
We think we can grow it double digits
And then that piece of business, it's a long-term stable type work
It does have lower margins than your larger diameter pipeline work
And it does have more cyclicality as you go into the winter months, just the way it is
So it's just, in general, lower margins, more seasonality, but its good business and a good long-term business and we understand the risk on it
Yes, Alex, some your spreads will come down as well in the quarter
So the net effect of that, as the spreads start to come off a bit in the quarter, it's just a dynamic
Yes
I just - I really don't want to get into it
I just - from my standpoint, we're in late stages negotiations on multiple large projects and I think it's - we'll talk about it more as we get them signed up
We talked about ACP so others have announced that, announced what's in their backlog, so you can see the type of contracts we're talking about with Atlantic Coast there
Again, we watch that
Everything concerns me and so we stay on it, we stay and watch it and think about it and think about how it impacts our business and our customers
And so yes, we're watching it closely
Most of our projects are natural gas based at this point
And we're moving gas and that's baseload fuel at this - what we see going forward, it will continue to be baseload
If you look at it, it surpassed coal and your electric grid
You need redundancy
We like that business, LNG export
I think that piece of business is really good
Oil, we're watching it closely
It affects Canada more so than the Lower 48 as far as what we're doing on a daily basis
And it also affects the overall economy in certain areas
So we keep our eye on it
So far, we've kind of weathered through some of the lower pricing and the volatility in it
Our customers continue to spend CapEx on different things and with the low interest environment and low natural gas, so it allows us to get a multiyear view on many things in our business
Yes
I think it's just - if you go to the major IOUs and specialty or integrated IOUs, nat gas and electric, if you just look at their CapEx and their OpEx budgets, they're giving five year guidance for the most part
As you look at that and you look at the incremental impact and how much more that is due to all the things that we talked about with grid modernization, it allows us to get more visible and work with them on multiyear builds as they get regulatory - they're getting their regulatory relief there and I'm able to talk to them about a long-term agreement in the rate base
So I think it's good for the customer
Fuel's going down
They can invest in infrastructure and talk about a multiyear view
And this is unique over the last year, so you're starting to see this
And it's additive to what was already going on in the industry
So we like what we'd see
It gives us an ability to provide the solution that we think we're unique on and talk about multiyear programs and how we help with those
So we like that piece of business and think it's something that's additive to what's been going on in the past
The overall environment in the communications business is robust
They need people to build infrastructure
So as you see that, you can see I'm talking about it as well in our CapEx
You can see others talking about how they're putting on people
It's a big market
I'm optimistic we'll be able to sign stuff fairly quickly here
I'd like to thank you all for participating in our first quarter 2017 conference call
We appreciate your questions and your ongoing interest on Quanta Services
Thank you, and this concludes our call
