Welcome to this session for Quanta Services, ticker PWR. This is Quanta's first-ever presentation at the Raymond James Conference. Duke Austin, CEO, and Jayshree Desai, CFO, will have a fireside chat with some questions from the audience towards the end. So let's zoom out first, big picture. Should we think of Quanta as a construction company or something else?
No, I mean, we're really a solution provider. I think 10 years ago you may have said we're a construction company, but I think what we're doing today and how we see ourselves and where we sit in the transition, the nucleus of the company is basically craft skilled labor , which allows us to self-perform probably 80%-85% of what we do. And with that, we're seeing a lot of different things across the energy spectrum, which allows us to get in front of it and really see where it's going and then be in a collaborative effort with our clients across whether it be solar, wind , utilities, interconnections, vertical supply chains. I think our ability to see that and also provide really the Lower 48, Canada, and even Australia, those solutions against that transition is something we pride ourselves in.
Okay. I want to start with the kind of industry landscape for the different verticals that you guys are involved in. Maybe we'll start with the biggest one, right? The utility kind of grid infrastructure buildout. Has it ever been this active in North America as it is today?
No, I mean, the grid buildout is extremely active. In saying that, I do believe sustainable, affordable, clean energy, say it real fast, but it's very difficult to, that change and that transition requires a lot of infrastructure to go into place. And when you look at your total cost of energy and where the country's going, whether it starts and stops a bit here or there, the country's still moving forward. The need for the energy's there. The investments can be made there. I do believe when you see federal policy, state policy, it becomes challenging to say all that and say you can do it affordable and not look at the future.
And the NPV on it looks really good when you look at what the European—as you start to see EV penetrate, as you start to see renewables come in, the fuel charges go down—all that requires a significant amount of transmission distribution buildout. And I think we're very, very early stages. We never thought it would be perfect. We've always thought it would be 2050, not 2030. And I think the company's set up quite nicely against that transition, which is between $3-$6 trillion—pick a number—of investments necessary to get us there. And we play across that whole pendulum. And those utilities, the utilities that we have, they service everything that it takes really to make the transition. So all the regulatory impacts, all the transmission, all the things are coming against load growth that we believe is between two and three times.
So it's all difficult when you see the load growth. You've been in a two-decade cycle of really flat to negative load growth, and now you're seeing load growth against fuel switching, against data, against onshoring. So we're in a unique position. Hey, it's a great business. The most prolific time probably of anyone's career wasn't like this in the 1970s. But that comes with challenges. And so I think the industry challenges, we provide those solutions. It should be something that we're proud of, and we're able to really help our clients here and collaborate much deeper than we have in the past.
The American Society of Civil Engineers says in its Report Card that the U.S. electric grid gets a C minus. Why is that?
I think when you're trying to transition like this and your interconnections are in RTOs or regional transmission authorities and they're not connected, most modern countries have connectivity across the grids. Your corridors in Europe are three times bigger than your corridors in the States. It requires connectivity, and we don't have it where you're bringing load from areas where wind and solar are prolific into service areas. There's a lot more DC, which is long-haul transmission going point to point. It's very efficient, but it passes states. It'll pass. It's the whole state rights in the country. No matter what you think from FERC, no matter what FERC does, they can help. We established some corridors that are seen from a security standpoint, it would help. It's also security. It's national security. You have to think about it.
This grid needs to be very, very secure as we move forward. And I think it's both things coming into play. And the industry's done a nice job kind of moving forward, but this transition is something that is going to require a lot of regional collaboration, state collaboration, federal collaboration, and everybody in the industry, plus all your services and everything else to say, "Okay, we got to come together and build out the infrastructure under rate structures and taxes and everything else that you have going on here to get the returns that are necessary for the investment." So look, I said that real fast. It's complicated from a state level, but state rights, federal rights come into play so much. It makes the grid imbalanced a bit, and you can't get it to an A where it needs to be. And that's where we need to go.
We need to get it up. It needs to get better. It needs to get more modern than it is today.
Okay. Beyond just the sort of putting up power lines, what else does Quanta provide for the grid?
I mean, I think we basically provide everything. We have front-end services where it's just permitting, environmental impacts. We do system planning. So we can really take it. We can build generation in 25% of the renewables in North America. We built and are building through Blattner, one of the companies we acquired two years ago. So balance of plant , both solar and wind, batteries, very big in batteries now. So those three things. And then all the interconnections, substations, we can do that in a turnkey way on an EPC basis or however you want to do it. But then you go back into the utility, and anything the utility does besides regulatory rates, we don't touch that. It's not our deal. We can help support. We don't get in rate-making. But supporting those things, yes. So anything really a utility would do, we supplement them.
Or in some cases, we are doing everything around the utility and running it, such as the island in Puerto Rico. We do some in Washington State. So we do run it as well. So anything around what a utility would do is where you would see us at and telecom as well in there.
Okay. Shift to renewable energy. So a skeptic might say building a nuclear plant is hard. Building a fossil plant is kind of hard. Putting up wind turbines or solar panels is easy. You probably would disagree with that. Just talk about why.
I mean, philosophically, it's easy until you have 1,000 acres of it or hectares. I mean, it sounds easy, but really when you're trying to critical mass, we're on 60 large-scale utility-grade projects today. They're well over 100 megs each one of them. And those things are like big cities moving in into remote areas. The mobilization's in. The assembly line functions of solar, we engineer it. We have sophisticated trackers we're putting out there. It's not as easy as it sounds. Many have tried and many have failed. And the reasons that we acquired Blattner was critical mass. We had tried early. Start and stop, start and stop. It's difficult to gain that critical mass necessary to really do well and have a business that's repeatable, sustainable, which I believe we've created. It's much more difficult than it looks.
And I do believe our development community that we work for are very good. They're sophisticated. We work in a collaborative effort with the development people that we work with, companies that we work with. So I think all those things come into play. Technology's out there. So we're working with technology on solar panels, but still a lot of labor. We ramp probably 4,000 employees in that area in a given year. When you start ramping like that, the onboarding processes to get that efficient and stay efficient, I would just say it's much, much, much more difficult than people think on the face of it.
Okay. One of the things we've been watching with the wind and solar buildout throughout kind of COVID, post-COVID, is everything seems to be taking longer. Even just the permitting, but also the physical construction. So many of these things have been delayed. And I'm curious, is that over? Are the delays in the rearview mirror, or are we going to see more of this in 2024?
Yeah, good question. I do believe you'll see starts and stops in the business, on the distribution side of the business. I think there's an infinite amount of projects that need to be done throughout probably decades and multi-decades' worth of capital that needs to be spent for this grid. And how you prioritize that, whether it be undergrounding, whether it be securitization, whether transmission interconnections. So decisions have to be made on how you prioritize capital against returns at the PUC level. So when you look at it holistically, utility's going to put money where the return is and where it's needed from a securitization standpoint. So that creates some imbalance in the systems. With all that said, it's definitely moving forward, and we see great markets going forward.
Okay. Let's turn to the underground segment. So first, we talked a lot about energy transition. You're clearly involved in that, but you're also involved in the fossil fuel side of the business. I guess philosophically, are you okay with that?
Yeah. I mean, I think the things that we do on look, we're going to support our clients, whether it be fossil fuels or we've really quit investing in long-haul pipe. For us, it was to—I mean, I would just say we would have projects for $ billions, and they'd go away. And for us, we didn't feel like we could come in, give good guidance in a public forum, and be resilient. And we came out with guidance. We'll save $500 million. If it's $400 million, we're fine. If it's $300 million, we're fine. If it's nothing, we're fine. If it's $1 billion, it's great. So it just stacks on to anything we've talked about, and it's not a business that we want to continue to try to forecast or invest capital in. So you'll see us not invest in big pipe.
Then we have our industrial business we did make an acquisition in. We have a really nice industrial base there with high voltage. coal is changing now, environmental, which we really, really liked all those things. And I do believe industrial basins are going to continue to drill for security purposes. If we don't even use it in the Lower 48, we will be pushing crude. We will refine crude. We'll do a lot of things from chemicals to plastics. That basin's not going anywhere for the next 30-40 years. And I do believe it's great investment. So we've invested in our industrial business. And then our gas distribution, LDC business, it's more portfolio-based. So our underground business there can both do both undergrounding of electric. They can do the undergrounding of natural gas. A lot of methane replacement as well. So the existing systems are leak-prone.
There's a leak-prone pipe replacement program that we're in most of the country. So we're replacing cast iron, steel with polyethylene, cleaner type of arrangements. And we're still putting in new gas services daily. So I continue to see natural gas play a role in the transition to some extent.
Okay. So power grid is booming. Wind and solar are booming. Is natural gas booming?
It's solid. And when you think about it, you should think about it as a portfolio. So if we're not building natural gas, we're on electric. I mean, in New York, we're both doing underground electric. We're doing natural gas replacements. We'll do telecom out of that same, getting leverage across the segments. It's really a portfolio when it comes to our underground business, and the skill sets are transient between the segments.
Okay. Jayshree, I'll ask a few CFO questions here. Can you talk about the role of M&A in Quanta's kind of business expansion and maybe how it varies among the three segments?
Is that to me, or?
Oh, okay.
Yeah. You think about Quanta's history. We have built a company of solid management teams across the sectors. We continue to invest in good M&A. We're very, very deliberate in how we approach it. You think about the origination of our M&A. It's not from typically a banking process. It's very much our senior leadership knows these companies, has known them for years and years and years or either worked with them or in some cases competed with them or have partnered with them. So it's a deep knowledge that has helped us quite a bit in attracting that talent to our organization. We look at it a lot of these acquisitions as providing additional services to our portfolio. And then I think another unique aspect of Quanta's M&A approach is we don't really lose the management teams.
The management teams stick around, which I think is a huge advantage for Quanta Services. Duke came from a company we acquired in 2002. Our Chief Operating Officer, same thing. Our head of electric power, head of gas distribution, underground, they all came from former companies that we acquired decades ago, and they've stuck around to really help build Quanta. I think that's a big advantage that sets us apart because it allows us to keep that quality team. It allows us to stay local, but then it allows us, when you bring that management team in the organization, it allows us to build a platform across that knowledge base that just gives us the ability to drive more solutions to our customers. So our M&A strategy will always be a big part of Quanta. Like I said, we're deliberate about it.
We tend to do a lot of these bolt-on acquisitions. So we're not looking at huge one-off capital investments. We like the portfolio approach, as Duke talked about. It's also our strategy in M&A. And so you get a wide variety of specialization as a result of that.
This may be a counterexample or the exception to that rule was Blattner, right? A couple of years ago, I mean, that was a chunky M&A deal. Can you just talk about Blattner?
Yeah. I mean, yes, and maybe the price tag was a little different for us since our average we say we do about $500 million-$1 billion of M&A over several companies. Blattner was a little over $2.5 billion, $2.7 billion. But in terms of the type of company it is, it very much fits our profile. It's family-owned businesses that have been owned, that have been in existence for many decades, has a significant track record of performance, very strong customer relationships. Performance was excellent. We don't buy fixer-uppers. We like to buy the best in that space. Blattner fit that mold. So other than maybe the price tag, and they were a much larger company than some of the other companies we bought, the profile of that team and their performance very much is similar to the rest of our Quanta businesses.
I would say it's right in our sweet spot.
Yeah. Just to reiterate, I do think when you look at our M&A, it's based on a strategy. We put out a five-year strategic plan, and we stay to it. It's how we allocate capital across that strategic plan as we generate free cash. I mean, I think that's the key to this. And you see the stacking growth and where we're going. It's our ability to invest free cash and how we do it. And if we can do it like we've done the last seven years and go forward seven, I think you'll see substantial results going forward. But the M&A is strategic against the plan. It's not purposeful. We're not saying that it's going to be a flat line, $1 billion no matter what. Basically, we're following a strategy.
If we see good businesses, good management teams that are wanting to divest of their family business and stay involved in it, certainly we lean into them in these markets. But it has to follow the strategies that we've laid out. And what it does for the strategy is just expedites. Whether if it's a five-year plan, we can turn it into two. And we can also build off all the verticals as we acquire platforms such as Blattner. I mean, it allowed us to be a substantial player in the transition, synergies across it. Battery business, we can take it in many, many different places. So it just gives you a lot of verticals of growth, organic growth.
Okay. And maybe just kind of a final finance question for our audience that maybe did not catch your guidance for 2024. Just talk about the three segments and how you expect them to kind of evolve through the rest of the year.
Yeah. I mean, we very much focus on adjusted EPS. The bottom line is where we focus. We want to grow double digits using all levers of the balance sheet. We ended the year at $7.16. Last year, we're looking at a midpoint of $8.25 for this year. Top line growth continues to be solid. The primary growth is coming from our renewable segment, but we're growing across all three. We put a five-year plan out that says our revenue growth on an organic basis will be in that mid to high single digits growth rate. And now with some of the things that are happening in the renewable segment, we're obviously pushing beyond what we said in the five-year plan. So we continue to feel really good about our growth markets. We're very focused on making sure quality of earnings is strong.
We're not a company that's chasing revenue at low margins. We want to keep that margin profile. We're looking at double digits in the electric power segment, around 9% for the renewable segment, and 7.5% for the underground utility segment. We believe there's opportunities to do better than that, but as the year progresses, we'll let you know.
Okay. Questions? Yep.
Of the three segments, which one do you think has the greatest potential to surprise you in regards to the market and the revenues? And which one do you think is the most challenging of the three?
So I think when you look at it, the renewable segment certainly has the upside as far as how we've operated historically. We've historically operated in double digits in that segment. It has some legacy, what I consider electric-type functions in it. Most of that transmission business was typically back over in the electric segment. So the bigger work, the larger projects now are coming in that segment. So it does have some upside as we operate through contingencies and get back to our historical norms, which are double digits. Our goal is to operate there. There's no reason we can't. We won't be happy if we continue to operate below that. And that's where we should operate, given the risks that we take. And then the utility segment certainly storms. Things of that nature can come into play.
I do think you can strengthen the distribution business in the back half as we see utility spend on EV penetration, things of that nature. So there's upside to those two segments. Underground is growing. You could get some pipe work in there that could push it up in the back half. But the portfolio itself has some room in it to move margins up as well as top line growth on it.
In the back?
Question around AI. We all know how it's been talked about the challenges of bringing up all these data centers required to serve AI workload. How is that benefiting your business? Are there any obvious winners among your customers and utilities and regions in the United States that are sort of prime beneficiaries of AI?
Yeah. AI makes me sleep at night because I think no matter what you hear in the affordability, the amount of data centers going across the country, and it's basically where they can get affordable power. And now, it doesn't matter where you look. You can be in Columbus, Ohio. You can be in Virginia. You can walk over in Arizona, New Mexico, Oklahoma, Texas. Data centers are prevalent, and they're big. And someone was saying 30% of the new load is data center-driven. I don't know. I'm not familiar. I've seen the number, but that's what I keep getting told. That said, what we do see is interconnections in renewable generation to support those data centers. And even the existing data centers are going to go back into more powerful servers, things of that nature.
The tech business and AI is something that really backstops the business itself because they continue to penetrate, push forward, take the interconnections, take the PPAs if the utilities are not taking them against renewable projects. So it backstops everything we're doing. We don't actually build balance of plant at this point on data centers. So we build all the ancillaries, everything that would support them, our own transformer manufacturing. So obviously, we can serve that standpoint, substations that they build, the high-voltage piece in. We're serving tech every day. And I think we're either talking to them directly or talking to the utilities that are serving them on interconnections. And we can do a lot more in that area.
A lot of the renewable power, right? Duke alluded to it. About 10 GW a year for the last three years of renewable PPAs have come from the data centers. So they will continue to be a big driver of our renewable segment growth.
Can I flip that question? Kind of a different angle on AI. Does Quanta utilize or plan to utilize AI within the company?
I mean, I think if you're a business today and you're not planning on using AI, your head's in the sand. I mean, you have to really think through, can it do some engineering for us? Can it do some mundane things for us? Absolutely. We're looking at it, and every day we have to. As a company, we look at technology quite a bit. You could take our second quarter earnings of those three pages anyway, and AI could do it in about a minute. It's amazing what the data you have to input good data in it. We have tons and tons of historical data within the company. And so how do you take the data that you have implemented in some usable form?
But I do believe it will make us way more efficient on the front side of these things that we're doing, permitting a lot of different things on the engineering side of the business that we can do through AI that it's not like you repurpose jobs. It doesn't replace jobs. People thought farming was going away when a tractor hit. Farming's farming. So smart people are going to benefit from AI. And we're certainly, as a company, deep into figuring out where it benefits us the most.
Yep.
On your renewables, so you guys are doing a great job of doing fast. Some of your competitors and even some of the utilities, also the suppliers, they have been complaining about delays, whether it's the PPA mediation, those supply chain issues. What is the difference between the type of customers and projects that you are servicing versus the projects that are complaining? What are the sources of these delays? And do you think that there is some holding them back that they're going to open up in more time?
I think tech supporting any kind of backdrop that you may hear delays. The delays are the stop-starts, canceled projects you're hearing. They're primarily around pricing pre-COVID-type arrangements where PPAs are way back. So there's some cancellations out in Nevada. I saw this morning. But that was 12 months ago. We knew that 12 months ago. That was already done. But it was primarily around the PPA being imbalanced against post-COVID-type pricing on panels and steel and everything else in the country. So I do think some of that's out there. Our customer base, top 10 developers in North America, we're fairly close to them on collaborating on what we're doing on a given day. We feel quite comfortable with our growth patterns. And I would tell you, the pipeline's bigger than it was yesterday, and it continues to grow across that.
We're comfortable in saying that we see growth. We have scale. We've been in the business a long time. I do believe the name, the recognition, the bankability from our standpoint of certainty because we self-perform 85%-90% of our work. It means something to get it done on time, on budget, especially on these larger projects that are critical. We continue to see a prolific market.
The earlier question about why is it solar and wind easy to build? Well, one of the things in addition to what you heard earlier, so much of the success around wind and solar is really working with the right customer and the right project that has the right profile around how the development aspects of it. And I think Blattner, because they've been in the industry for as long as they have, really since the birth of it almost, the last 20 years or so, they understand that customer base very well. And they've got a good, solid database and years of history behind them to support that.
That allowed them, when others struggled with that because they were either newer to the space or working with developers that came in in the last five years without that history, it allowed them to be much more selective on who they work with. I think that's made a big difference.
Right. Good point to conclude on. We will have a breakout session downstairs right after this. Duke and Jayshree, thanks very much.
Thank you.
Thank you.
Yeah. Appreciate it.