Quanta Services Inc (PWR) — Q1 2016 Earnings Call Transcript

Thank you, Priscilla, and welcome, everyone, to the Quanta Services conference call to review first-quarter 2016 results. This call is being webcast and a replay of today's call will be available on Quanta's website shortly after the completion of this call. Before I turn the call over to management, I have some housekeeping details to run through. Our first quarter earnings release and other information is available in the Investors and Media section of the Quanta Services website. Following this earnings conference call, we will post in the Investors and Media area of the website summary information that we believe investors may find useful regarding our 2016 outlook. If you would like to have Quanta news releases and other information emailed to you when they occur, please sign up for email information alerts by going to the Investors and Media section of the Quanta Services website. You can also access Quanta's latest earnings releases and other investor materials such as press releases, SEC filings, presentations, videos, audio-casts, conference calls, and stock price information with the Quanta Services Investor Relations app, which is available for free on mobile devices. Additionally, investors and others should note that while we announce material financial information and make other public disclosures through SEC filings, press releases, and public conference calls, we may also utilize social media. It is possible that the information we post on social media could be deemed material. Therefore, we encourage investors and media and others interested in our company to follow Quanta and review the information we post on the social media channels listed on our website. Please remember that information reported on this call speaks only as of today, May 5, 2016, and you are advised that any time-sensitive information may no longer be accurate as of the time of any replay of this call. This conference call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance, or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or are beyond Quanta's control, and actual results may differ materially from those expressed or implied in any forward-looking statements. For additional information concerning some of the uncertainties and assumptions that could affect Quanta's forward-looking statements, please refer to the company's Annual Report on Form 10-K for the year ended December 31, 2015, and its other documents filed with the Securities and Exchange Commission, which may be obtained on Quanta's website or through the SEC's website. Management cautions that you should not place undue reliance on Quanta's forward-looking statements, and Quanta does not undertake and disclaims any obligation to update or revise any forward-looking statements based on new information, future events, or otherwise, and disclaims any written or oral statements made by any third-party regarding the subject matter of this call. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services first-quarter 2016 earnings conference call. On the call, I'll provide an operational and strategic overview before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our first quarter results. Following Derrick's comments, we welcome your questions. As many of you know, in March, Jim and our board of directors decided that the time was right for me to step into the CEO role as part of Quanta's leadership transition planning process. I'm humbled and honored by the trust and confidence they have placed in me with this appointment. I feel fortunate to transition into the role following Jim's leadership and strong direction over the past five years. I'm the third CEO of Quanta. I've had the privilege to work with great industry leaders over the more than two-decade career. I'm fourth-generation in the business and began working alongside my father in the field. I've spent the last 15 years of my career at Quanta Services, most recently as Chief Operating Officer. I worked closely with Jim, Derrick, and our founder John Colson to develop Quanta's strategic initiatives. Therefore, you can expect a continued focus on operational excellence in building a company for long-term profitable growth. We will 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 customers, stockholders, and employees. I look forward to future conversations with you through the year and appreciate your support. Quanta's first quarter results put us on track to achieve our full-year outlook. Revenues were $1.7 billion for the first quarter, and diluted GAAP and adjusted earnings per share from continuing operations were $0.13 and $0.23, respectively. While these figures declined versus last year's first quarter, which was expected, we ended the quarter with record backlog, exceeding $10 billion for the first time in the company's history. We believe this bodes well for Quanta as we progress through the year and the years to come. For our Electric segment, the volume of larger transmission project revenues declined quarter-over-quarter, and our Canadian operations are experiencing a challenging operating environment due to the Canadian economy. Despite these headwinds, our core transmission and distribution operations executed well. We did incur additional losses on the power plant project in Alaska, which we have spoken about on prior calls. As we entered the testing and commissioning phase of the project, we experienced engineering and production issues that created additional construction costs. We revised our total estimates on the project to factor in these issues and additional time on site, recognizing these extra costs in the first quarter. Additional resources have been allocated to deliver a quality project to the customer and bring it to scheduled completion. Although we anticipate putting forth claims for a significant amount of these costs related to these issues, we have not recognized any potential recovery at this point. The project is more than 90% complete, and we expect to finish it in the third quarter of this year. These losses were not previously contemplated in our guidance, highlighting the strong performance in our core transmission and distribution operations in the first quarter. Regarding margins, I want to reiterate that we are committed to returning margins to historical levels. However, we are mindful not to compromise our core capabilities and long-term approach to growing the business. We are proactively addressing our margins by adjusting our cost structure where appropriate, optimizing the use of our equipment resources across the company, and providing value-added solutions to our customers. We expect improved Electric segment margins results this year while maintaining our positive multi-year outlook on the North American electric transmission and distribution markets. The industry drivers we have discussed with you over the years remain firmly in place to spur infrastructure investment, such as an aging grid that requires significant investment to maintain reliability, the generation mix shifting to more renewables and natural gas, and the implementation of existing regulations. We also see new drivers that we believe will be positive for our industry, such as the extension of the renewable electricity production tax credit, New York's clean energy standard, which calls for 50% of the electricity consumed in the state to come from renewable resources by 2030, and the Canadian government's clean energy initiatives and regional transmission plans. We believe these are significant drivers for new generation sources, requiring greater transmission investment for better connection in the United States and Canada. The high-voltage electric transmission award opportunities we have referenced over the last few quarters are exemplified by our recent contract with Eversource Energy to build a Northern Pass Transmission project, which was signed in the first quarter. This project was part of a competitive process seeking a transmission solution to advance the clean energy goals of Connecticut, Massachusetts, and Rhode Island, bringing clean energy to the New England power grid. If selected, the Northern Pass Transmission project will be an approximately 192-mile transmission line bringing more than 1,000 megawatts of clean, affordable hydroelectricity from Canada to New England. This project was not reflected in our backlog at the end of the first quarter. Additionally, our distribution services continue to grow as our customers increase spending levels to upgrade aging distribution infrastructure and to make systems better withstand extreme weather events. The electric distribution market has been growing nicely for several years, and we believe distribution investment could continue to grow. Estimates from the C3 Group call for North American electric distribution construction spending to exceed $35 billion through 2020. Overall, we continue to have a positive long-term outlook for our Electric segment. We will continue to build our base business while remaining nimble to capitalize on large multi-year project opportunities that develop. Turning to our Oil and Gas segment, revenues and margins were lower this quarter versus the same quarter last year, which was consistent with our expectations. We expect improved performance for this segment as we move through the year, with the second half expected to be significantly stronger than the first half, driven by expected significant increase in large pipeline revenue contributions. We anticipate having more large pipeline projects in construction this year than any other year since 2010. The large pipeline market is very active, with projects receiving FERC and other approvals and an active bidding and negotiating environment. In the first quarter, we signed large pipeline contracts with an aggregate value of more than $800 million, which we expect to realize this year and next. Looking forward, we continue to work with our customers on additional large pipeline projects and have visibility into significant project activity for the next several years. The need for natural gas, associated with coal to gas generation switching, natural gas mainline system redundancy, and increased natural gas demand, particularly in the Northeast, are drivers of current natural gas pipeline demand. As LNG export facilities come online in North America and export volumes increase, we expect additional large pipelines to be constructed later this decade to feed considerable volumes of natural gas to those facilities. While the LNG market faces challenges due to low oil prices, it is a market we are watching with cautious optimism. We believe our natural gas distribution and pipeline integrity services have attractive growth opportunities as well. The Pipeline and Hazardous Materials Safety Administration, or PHMSA, recently proposed new regulations, expected to drive multi-year opportunities in the natural gas distribution market as customer integrity programs continue to accelerate. Lastly, a strength of Quanta is our ability to be opportunistic. One of our strategic initiatives for long-term growth is to find adjacent market and new market opportunities. Over the past several years, we have been growing our telecom infrastructure services operations in Canada by leveraging our Electric Power services infrastructure and resources. We have successfully greenfielded our telecom infrastructure services in various Latin American markets. Following the expiration of our telecom non-compete arrangement, a natural progression of these efforts and our success will be expanding our operations in the U.S. telecom infrastructure services market, which we believe offers significant long-term growth opportunity. We currently perform limited telecom-related infrastructure services in the U.S., consistent with what is permitted by the terms of our non-compete arrangement. I'm not going into detail about our strategy to return to the market today, but once our non-compete arrangement expires later this year, we envision growing our telecom infrastructure services business in the United States. In summary, we expect a significant increase in activity levels in the second half of the year and are on track to achieve our full-year outlook. We continue to have a positive multi-year view on the end markets we serve and believe we are well positioned to serve the expanding needs of our customers. Quanta's entrepreneurial business model is unique and a critical driver of our success. We believe we have the best leadership and the best skilled workforce in the markets we serve. The combination of acquisitions and organic growth has allowed us to create a nimble company with a comprehensive breadth of self-performed infrastructure solutions, significantly distinguishing us in the marketplace. All of this positions us to generate long-term shareholder value while maintaining the core values that have served us well through changing market conditions. With that, I will now turn it over to Derrick Jensen, our CFO, for his review of the first quarter results.

Thanks, Duke, and good morning, everyone. Today, we announced revenues of $1.71 billion for the first quarter of 2016 compared to $1.86 billion in the prior year's first quarter. Net income from continuing operations was $20.5 million or $0.13 per diluted share. These results compare to net income from continuing operations of $47.7 million or $0.22 per diluted share in the first quarter of 2015. Adjusted diluted earnings per share from continuing operations, as presented in today's press release, was $0.23 for the first quarter of 2016 compared to $0.28 for the first quarter of 2015. The decrease in consolidated revenues in the first quarter of 2016 compared to the same quarter of last year was primarily a result of fewer ongoing larger electric transmission and large-diameter pipeline projects in the current quarter, resulting mainly from fluctuations in project timing and regulatory delays on certain mainline pipe projects, and to a lesser extent from reduced demand due to lower oil prices and their impact on customer spending. Additionally, consolidated revenues were negatively impacted by approximately $32 million, or 1.9%, compared to the first quarter of 2015 when quantifying the estimated impact of changes in foreign exchange rates between the quarters. Partially offsetting these decreases was the favorable impact of approximately $30 million in revenues generated by acquired companies, primarily in our Electric Power Infrastructure Services segment. Our consolidated gross margin was 11.9% in the first quarter of 2016 compared to 12.8% in the first quarter of 2015. This decrease was primarily due to increased costs associated with continued engineering and production issues on a power plant construction project in Alaska that resulted in $21.3 million of project losses recorded during the first quarter of 2016, and the previously mentioned decrease in revenues from large electric transmission and mainline pipe projects, which typically yield higher margins. Selling, general, and administrative expenses were $158.5 million in the first quarter of 2016, reflecting an increase of $13.1 million compared to the first quarter of 2015. This increase was primarily attributable to severance costs associated with the departure of Quanta's former President and Chief Executive Officer, as well as severance and restructuring costs associated with certain operations, primarily within the Oil and Gas segment. In addition, increases were from $3.6 million in incremental general and administrative costs associated with acquired companies and $3.6 million in higher salaries and benefits costs largely associated with cost-of-living increases. Selling, general, and administrative expenses as a percentage of revenues were 9.3% in the first quarter of 2016 compared to 7.8% in the first quarter of 2015. This increase was primarily due to the impact of the severance and restructuring costs previously discussed, as well as reduced revenues for the first quarter of 2016. To further discuss our segment results, Electric Power revenues were $1.19 billion, reflecting a decrease of $53.3 million quarter-over-quarter, or approximately 4.3%. Quarter-over-quarter revenues were adversely impacted by reduced customer spending, primarily associated with large electric transmission projects, while foreign currency exchange rates also negatively impacted first-quarter 2016 revenues in this segment by approximately $18 million. These negative factors were partially offset by the contribution of approximately $25 million in revenues from acquired companies and approximately $12 million in higher emergency and restoration services revenues. Operating margin in the Electric Power segment decreased to 7.4% in the first quarter of 2016 compared to 8.8% in last year's first quarter. This decrease was due to increased costs on the power plant project in Alaska during the first quarter of 2016. In addition, the decrease in revenues from a large electric transmission project negatively impacted this segment's margins as our revenue mix shifted to a higher proportion of smaller-scale transmission work. Although we experienced strong execution on transmission work overall this quarter, this change in revenue mix inevitably carries higher inefficiencies associated with transitioning between smaller projects that are not experienced during continuous production on larger projects, as well as certain large transmission resources being underutilized during the first quarter of 2016. As of March 31, 2016, the 12-month backlog for the Electric Power segment decreased by 1.4%, while total backlog increased 1.4% compared to December 31, 2015. The increase in total backlog was largely attributable to approximately $90 million of favorable changes in currency rates. Oil and Gas segment revenues decreased quarter-over-quarter by $94.4 million, or 15.2%, to $526.7 million in the first quarter of 2016. This decrease was primarily the result of fluctuations in large project timing, regulatory delays on certain large mainline pipe projects, and reduced demand for services due to lower oil prices. Segment revenues contributed from our international operations were negatively impacted by approximately $14 million due to less favorable foreign currency exchange rates in the first quarter of 2016 compared to the first quarter of 2015. Operating income for the Oil and Gas segment as a percentage of revenues decreased to 1.1% in 1Q, 2016 from 3.9% in 1Q, 2015. This decrease in operating income as a percentage of revenues was due to the decreases in revenues from large-diameter pipeline projects, which typically carry higher margins. The 12-month backlog for the Oil and Gas segment increased by $584.5 million, or 30.8%, and total backlog increased to $608.2 million or 19.8% compared to December 31, 2015. These increases were due to the award of several large diameter gas transmission projects during the quarter. It is worth noting, as a result of these awards, that as of the end of the first quarter, the midpoint of our annual revenue guidance does not include any uncommitted revenues associated with large diameter pipeline projects. Corporate and non-allocated costs increased to $6.9 million in the first quarter of 2016 compared to 1Q, 2015 primarily due to $4 million in costs associated with the departure of Quanta's former President and Chief Executive Officer. For the first quarter of 2016, operating cash flow from continuing operations provided approximately $199.7 million, and net capital expenditures were approximately $42.6 million, resulting in approximately $157.1 million of free cash flow compared to free cash flow of approximately $122.4 million for the first quarter of 2015. Free cash flow for the quarter of 2016 was positively impacted by lower working capital requirements due to fewer ongoing large electric transmission and large diameter pipeline projects. DSOs were 76 days at March 31, 2016 compared to 75 days at December 31, 2015 and 84 days at March 31, 2015. DSOs were lower at March 31, 2016 compared to March 31, 2015, primarily due to favorable billing terms for certain large projects ongoing in 2016. Investing cash flows of continuing operations during the first quarter of 2016 were impacted by cash consideration paid of approximately $39.7 million related to the closing of three acquisitions during the quarter. Financing cash flows of continuing operations during the first quarter of 2016 were impacted by net repayments of $75.2 million under our credit facility. At March 31, 2016, we had approximately $155.3 million in cash. We had about $321.1 million in letters of credit and bank guarantees outstanding to secure our casualty insurance program and other contractual commitments. We had $397.7 million of borrowings outstanding under our credit facility, leaving us with approximately $1.25 billion in total liquidity as of March 31, 2016. As previously mentioned in our fourth quarter earnings release call, we provide annual guidance and will adjust our expectations as we move through the year if needed. For the year ending 2016, we expect consolidated revenues to range between $7.5 billion and $8 billion. This range contemplates Electric Power segment revenues ranging from a decline of around 5% year-over-year at the low end of our guidance to remaining flat at the higher end, with the remaining difference in revenues coming from growth in the Oil and Gas segment. Regarding seasonality, I generally assume usual seasonality through the year, with the first quarter being the lowest regarding consolidated revenues and margins. We expect revenue and margin improvement sequentially in the second quarter and again in the third quarter, with the third quarter expected to be the strongest quarter of the year. I assume revenues and margins in the fourth quarter to fall somewhere between the second and third quarters, and the overall second half of the year is expected to be more heavily weighted than the first half of the year. Consistent with previous guidance commentary, we expect a more pronounced difference between the quarters of 2016 than we have experienced in recent years. We expect a sizable ramp-up in revenues through the third quarter, as we expect many large pipeline projects to begin moving to construction in the second and third quarters of this year. For 2016, we believe margins will continue to be at levels lower than our historical expectations, with Electric Power segment margins somewhere in the 8% to 9% range and Oil and Gas segment margins between 5.5% and 7%. Additionally, largely due to the ramp-up in revenues, we expect margins to reflect a fair degree of seasonality with a more pronounced effect through the year, particularly in the Oil and Gas segment due to the timing of large pipeline project starts. We estimate that interest expense will be between $15 million and $20 million for 2016, and are projecting our GAAP tax rate for 2016 to be between 36.5% and 37.5%. Our annual 2016 guidance reflects the current foreign exchange rate environment, and continued movement of foreign exchange rates could make comparisons to prior periods difficult, causing actual financial results to differ from guidance. For calculating diluted earnings per share for the year ended 2016, we are assuming 156.9 million weighted average shares outstanding. Consistent with previous guidance, our estimates include the reduction in shares associated with the final settlement of the shares delivered under the ASR program. The actual number of shares delivered as part of that settlement was approximately 9.4 million shares, totaling around 35.1 million shares retired under the arrangement at an average price of $21.36. In total, under our previously authorized $1.25 billion share repurchase program, we have acquired $1.2 billion of stock at an average of $22.10. Under the current and completed share repurchase programs, we have now repurchased approximately $1.7 billion or 71.7 million shares of common stock, reducing our shares outstanding by approximately 32% to levels we last had nearly a decade ago, while Quanta's revenues have nearly quadrupled since then and maintaining a leverage profile of less than one turn of EBITDA. We intend to use the remaining $50 million available under our 2015 program to repurchase additional shares opportunistically, depending on the overall capital needs of the company. In spite of the incremental project loss recorded during the first quarter, we anticipate GAAP diluted earnings per share from continuing operations for the year to be between $1.30 and $1.50, and anticipate non-GAAP adjusted diluted earnings per share from continuing operations to be between $1.61 to $1.81. Our forecasted non-GAAP measures are estimated on similar bases to historical adjusted diluted earnings per share presented in our release. CapEx for all of 2016 should be approximately $200 million to $220 million, compared to CapEx for all of 2015 of $210 million. We expect to continue to maintain a strong balance sheet and financial flexibility, positioning the company for continued internal growth and the ability to execute on strategic initiatives. Overall, our capital priorities remain the same, focusing on ensuring adequate resources for working capital and capital expenditure growth, an opportunistic approach towards acquisitions, investments, and repurchase of Quanta stock. Lastly, I worked closely with Jim during his entire 17-year career at Quanta, and we all want to thank him for his significant contributions. Through his years here, he helped put in place much of the foundation that made this organization a success. He was a valued leader, and we all wish him well. Jim and Duke have worked as a team, and for us, the transition to Duke as our CEO is natural, anticipated, and supported by our entire organization. We look forward to many successful years with his leadership. This concludes our formal presentation, and we'll now open the line for Q&A.

Hey. Good morning, guys.

Good morning.

So the first question I've got is on the Oil and Gas segment. You guys obviously had a great bookings quarter, and I think if I heard you correctly, you don't need any more bookings there to get to the midpoint of the revenue guide. But how are you expecting backlog to trend there over the balance of the year? Are you still seeing enough work that you think you can continue to grow that backlog level, even as you work off the high level of backlog you've got there now?

Yeah, Matt. This is Duke. I think, again, backlog takes us a while to negotiate some of these larger projects. So I don't want to comment on exactly when backlog will come in. It's a robust environment, bidding environment on large pipes, as well as other MSAs in the Gas segment. I think we will continue to be opportunistic there and able to book work. I just don't know the timing on it as we move forward through the year.

Okay. No worries. In Electrical, if you take out the Alaska charge, the $21.3 million, it looks like that margin would have been about 9.2% this quarter. That's the highest margin I think you would have had since the first quarter of 2014. So I'm just curious how you think it's going to trend from here over the balance of the year and what you guys have been doing on the cost side to try and get the margins back into your historical target range?

Yes. From a trend perspective, I think what we look at is that, inclusive of the charge, you'd have margins progressing through the year. You're right that the first quarter margins without that charge are higher. We had some good weather this quarter throughout, had very good production on a number of projects, transmission and distribution wise, so that did come in higher than we would have thought or expected for the first quarter. But, in general, we're going to stick with our overall 8% to 9% for the year because as we move forward through the year, we still have some of the pressure of lower contributions of large transmission work compared to 2015.

Yes. And also, Matt, the breakup in Canada in the second quarter is obviously something that we will take into account. The more pronounced Canadian economy being down will affect us there in the second quarter. So it will be more pronounced in the second quarter. But again, our goal is to get to the 10% to 12% range in the Electric Power segment over time.

Hey, good morning, folks, and congrats on a decent quarter.

Good morning, Tahira.

Thank you.

First question, Duke, when I take all of what Derrick has said and put it together, it seems like potentially if things go as planned, your third quarter could probably be the strongest cash EPS quarter you've seen?

Tahira, I think that's correct. Again, there's the projects, and it's definitely in the later half depending on where the projects go. So, the third quarter, yes, it's setting up to be the biggest quarter.

Got it. Okay. And then, Duke, you talked a little more about telecom and there was some other news that came out this morning. Can you elaborate on what you are seeing there that's really making you jump in? You just got out of the sector a bit back and now it seems you guys are interested again.

Yes, Tahira, I don't really want to comment a lot about it other than to say what we said in our prepared remarks is that, we are in the business in Latin America and in Canada and stay that way. And so as far as the strategy going forward, we'll update you as we go forward. In general, we're always optimistic around things in line adjacent to what we do, and that's certainly is something that's adjacent to the markets we serve in different areas. So, again, we'll – and as far as what was said, I really have no idea other than to say that there is a public statement out there that has our whole buy-sell agreement in a website. So everyone can turn to that to look at what it says.

Thanks. Good morning, guys.

Good morning, Dan.

First, Duke, congrats on the promotion.

Thank you.

Sure thing. And then secondly, first, on the Oil and Gas business, you guys booked some pretty good mainline work that it sounds like is heavily towards 2016. Can you contrast that booking with the guidance? Was there any thought – did this just fill the gap, or can you walk us through maybe your thought process on why maybe this didn't even push guidance a little bit higher? Or is that due to the Electric side?

Yeah, Dan, if you recall, in our last conference call, we talked about we had anticipated some of these awards to come through to fill the gap, and this is actually the closure of that. So it did just effectively fill the gap. We have no uncommitted large diameter work in our current forecast as it relates to meeting the midpoint. And then some of these projects still get rolled over into 2017. I mean, only roughly a little over half of it is contributing to 2016. So, as it stands here today, we're not looking at doing anything from a guidance perspective. To a great extent, we continue to be cautious about how the timing of these projects would go. And mainly it's associated with potential delays, and we're definitely trying to take that into consideration overall relative to our expectations.

Again, we continue to look at work throughout 2016. We're not stopping from that standpoint. We continue to bid and negotiate and look at work in 2016. But, like Derrick said, that should fill up what we said we would do.

Got it. And then the follow-up question is really related to your capacity. Given the amount that you've already booked, how much room do you have to add more work, and if you can contrast that U.S. versus Canada, for the balance of 2016?

Yes, I mean, we have capacity, Dan. We're not at capacity on either side of it. Canada is probably softer than the lower 48 at this point in gas. But, we still have some room to book. We'll be cautious about how we go about it and where it's at. And again, the way the regulations are working with the state and federal getting involved in all these larger projects, we're pretty cognizant about how we talk about it.

Hi. Good morning. I guess two questions. One just broadly on your margins assumption for 2016. If I look at Electric Power, you mentioned another award that you booked, which wasn't in the first quarter backlog. Your margins ex the project were again at the higher end of what you're targeting for the year. If I look at the Oil and Gas business, recognizing the first quarter margins were weak, but we expected that, the bookings that you put up in the quarter and what appears to happen throughout the year are pretty good. I'm just trying to understand why margins couldn't potentially be higher, given the bookings that we have and the underlying profitability of the business. So is it still uncertain, while you've booked things, on timing? Is the pricing environment more competitive, so the stuff that we're booking is lower margin? I'm just trying to get a feel for why margins broadly couldn't be higher because the bookings are there, unless there's other projects that we're concerned about. And then my second question, Duke, is a question to you more strategically. Back to the telecom business, while you can't give us your exact plan, as you're refocusing on the telecom business, do we read that as potentially longer term or an 18-month, you're not as optimistic about the growth opportunities that the Electric Power or the Oil and Gas business can generate? I'm just trying to think, is this incremental or is this a diversification strategy because you see one of the other businesses sort of tapering out? Thank you.

Yes. I'll take the last one first and just say, in general, we are always looking at adjacent markets and markets that our customers are driving us towards. So we feel like anything that we are going forward with would be an adjacent market or something that's strategic to us. We've stated many times that if we're going into something we think it has the ability to be a $1 billion business as we look long term. And again, anything you see us doing, that's where we're going. And we stated – we don't want to get too far on the strategy on any certain one of them, but that is certainly something that we are looking at to grow us into the future. As far as our end markets, our end markets that we're currently in today are robust. We are in the telecom market in Latin America and Canada, and it's a good market there as well. Our end markets today are robust, and we're very happy with where we're at. Anything that we are doing on the outside of that is additive and adjacent and strategic to us as we grow the business out in the long term. As for what's in backlog and where that is and our margins for the rest of the year, I'm going to let Derrick answer that.

Jamie, overall, more specifically, I'll start with Electric Power. We are seeing a lower margin profile, but it has nothing to do with the bidding environment or the way we are approaching bidding. I mean, our margins in backlog from a bidding perspective are comparable to what you've seen in the past. What you've got, though, as we face the rest of 2016, you have a lower contribution of on larger transmission work. And those carry higher margins, so you have a higher complement of the smaller transmission work, which bears a bit lower margin. And then, in addition, the Canadian economy overall has put pressure on electric margins, which we are factoring into our expectations for 2016. It's not a pricing or bidding environment for us; it's really just the kind of complement of the work that's contributing to 2016 versus what you've seen in the recent past. Also, actually, you made reference to the project that we announced that is not in backlog. At this stage in the game, that's also not in our expectations because it's not in backlog either at March 31 or in the second quarter. We've not placed that project in backlog at all as of yet. Then still and relative to the pipeline side, we are mobilizing on many jobs simultaneously here into the second and third quarters, and that bears a degree of risk, and we've tried to take that into consideration in our margin expectations. Mobilizing on that much work, you want to be prudent about how you think about the execution profile of that. Lastly, as you mentioned, there is a degree of the timing of when that work falls. We try to be prudent with that, looking at how in the past we've had projects move from one quarter to another for some delays, including the fact that we anticipate some risk that projects could move to some extent from 2016 into 2017, so we've tried to be prudent across both of those to take that into consideration in the environment we are working in.

Thanks. Good morning. First, on the transmission market and addressing the shift in terms of the mix that you're seeing in terms of large versus small projects. When you look forward, it seems like we're starting to see fewer but larger projects out there on the horizon. Also, some of the project developers seem to be shifting or splitting up larger projects into smaller pieces. As you look forward, do you think we're going to see a rebound in large project work or is that shift toward smaller project work going to be around for a couple of years?

As we look at the electric transmission market, we see the opportunity on these larger projects. They are there. How they go about executing them from small to large is really customer-driven. It's all over the place on that. So, again, we look at it in various ways. Our capital budgets, our core customers in the market and IOUs continue to grow. We continue to see demand in that market. From our standpoint, we see it long term. The transmission backbone is aging. The way you're bringing renewables on and the need to move power across the U.S. creates a demand for transmission. We'll take advantage of small or large. The projects are there. We will adhere to our bidding profiles that we have in the past, and we won't win them all. So again, I think there is risk to the projects; we take that into account when we're bidding this work. Therefore, we won't win all these larger projects, but there is the opportunity for us to win our fair share, and we like the market as we go forward on the transmission side.

Okay. And then in Oil and Gas, I think on the fourth quarter call, you talked about gathering and smaller project work in the Marcellus being down perhaps around 50%. Can you talk about if that's tracking as you expected and how you're thinking about gathering work moving forward? Have we essentially bottomed in that market yet?

Yeah, I mean, for the most part, we participated in the gathering market in Canada and the Marcellus. So, we don't feel the major effects of all the shells being down. But for what we did do in the Marcellus, it is off some. But it's certainly offset by the larger diameter pipe moving gas through redundancy and just moving it across the Northeast. In Canada, we do have some projects that are moving gas as well. While it is off some, I think the larger diameter pipe offsets that.

Thanks. Good morning and congrats, Duke.

Good morning.

There were some big developments at Nalcor recently. Can you just talk about those two projects? Are you guys on track from a cost and timing perspective? How big a risk is there that your work is forced to slow down or maybe your inflow of cash payment gets disrupted at all by the whole bore of rethink of the major projects there?

Yeah, Steve, we're well into the project. We have not seen anything on the ground that would make us think that the project would be canceled or delayed. We continue – I mean the material is there; the right-of-way is being cleared as we go forward. So I don't foresee any disruption on Nalcor. It is remote. There is a lot of press in Newfoundland. We are cognizant of that, and we are working with the project team and also will be working with the new CEO as he comes in to ensure we are on the same page. As far as where we are at, we are comfortable with our estimates on the project.

Okay. That's helpful. And you mentioned Northern Pass and a few positive developments in transmission. I know you've talked about this a few times on the call already. But to what extent has your view of the revenue growth potential of the transmission business changed over the last few months? Are you now more positive about this being a growth business over the next 12 months to 24 months? Are you the same, less so? How's your view on the transmission market changed just in the last few months?

I think the need for transmission remains, both in the lower 48 and Canada. Especially when you tie in renewables and the need to move power. So the need is there. How projects get developed and when they get out is the key. We are following all those larger projects, as well as the underlying need for the smaller transmission coming off the backbone as well. It's there; the market is growing. We will adjust our costs accordingly. Historically, we can remain in the 10% to 12% margin range for the long-term, and we view it as a long-term business and will be in that range going forward.

Hi, guys. Just wanted to talk a little bit more about some of the Canadian projects. You had the Fort McMurray West project with Adco that was supposed to start sometime next year. With some of the softening in the Canadian market that you referred to, is that one still on track to start up, as well? What's the status of that $1 billion project?

Yes, we are working with ASO, who is our client on that project, and we are meeting with them regularly, monthly. We feel like the project is on track to go. It may expedite a little bit, but as far as we are concerned, it's on track, and everything they are telling us indicates a need for reliability in Alberta. So, we will begin later this year or early 2017.

Okay. And then, there was an announcement of a large privately-held pipeline company that filed for bankruptcy. Are you seeing stress from your competitors that perhaps don't have the exposures that you have, creating opportunities for you to move into some geographies where you weren't or maybe pick up some assets in M&A at a discount? How much disruption is out there? Is this the first of many? Is this unusual? What's the implication for your business?

I don't want to comment on our competitors. Obviously, that's in the marketplace and everyone knows what's out there. What I can say is that the capital markets are there. We are talking to our customers about solutions. The risk of large diameter pipe is certainly evident, and we understand that. When we acquired Price Gregory, we did so with that expertise in mind as well as the associated risks. We believe we have a strong management team capable of executing on large pipeline projects. As for the risks others are willing to take, we can't control that.

Hey. Good morning, guys.

Good morning.

On telecom, historically the margins there were a little bit lower than T&D. I'm just wondering if, versus four or five years ago, the industry has changed at all? Do you think you can generate higher margins there going forward?

Any business we enter will take margins into account to ensure they align with our risk and capital expectations. We'll consider these factors as we look into new markets, should we move into that space.

Okay. I wanted to ask about the transmission side; previously you mentioned FERC 1000 being a driver and potentially for projects in 2017. Is that still how you look at FERC 1000?

What I would say about FERC 1000 is that it gets a lot of press. It primarily relates to merchant transmission. We are involved in large transmission jobs and while there are opportunities for us, we are mainly focused on our core business and driving margins.

Hi. Good morning, guys. It's Alan Fleming in for Andy. Duke, have you seen any changes in the bidding environment in Oil and Gas over the last couple of months, with the rise in oil prices, and has the tightening in the mainline industry impacted pricing or terms and conditions yet?

Yes. What we're really seeing is a focus on natural gas moving. It doesn't relate to the price of oil. For redundancy to export LNG and various things, Northeast therefore demands natural gas to support renewable infrastructure. That movement is economical, and we will continue to see that. In a constrained market, terms can become more favorable. We consider the long-term outlook and our fair approach with customers in all market conditions.

Okay. Let me ask you a more significant question. The Alaska power plant project has been a thorn in your side for several quarters now, and it looks like it will stretch into Q3. Perhaps you can discuss the lessons learned from that project and how it could impact future plans. How do you intend to limit similar issues while moving into adjacent markets, and is fixed-price power a business you want to be in?

Good question. We're focusing on our core and looking at our expertise in large projects. We faced challenges, but we're dedicated to getting the Alaska project sorted out. We believe we've established the right management team on that project. From the Electric Power side, we've explored adjacent markets. All of our customers are looking towards natural gas. We'll negotiate favorable contracts on these projects and ensure we have the right management team.

Hi. Just wanted to push you on the large transmission projects. Bookings are nice in Electric Power this past quarter, but can you talk about what you're seeing in terms of the mix of large versus small projects compared to revenue? I want to understand the trajectory and how to think about the next 12 to 18 months.

Yes, whether we look at it from a large or small standpoint in transmission, we see projects continuously. It’s more about the capital budgets of our core customers, which continue to be robust. Whether it comes out in a larger project or partitioned into smaller ones, the demand for transmission persists. We see both in our backlog and continue to bid on various opportunities.

Got it. And then just moving on to Canada. What are your expectations regarding revenues in that end market? How are you thinking about utilization? Do you think restructuring is necessary, and can you transfer some assets to the U.S. for the mainline buildout?

As it stands, I'd say that Canadian revenues are probably going to be around the 15% to 20% range. They're down slightly compared to what you've seen in the past. A larger portion of what we're looking at will be focused on margins in the Canadian operations. In fact, reductions in costs have come from these markets. We regularly evaluate moving personnel and equipment based on economic and job requirements.

Geographically, there are always cycles in the market. The projects in Canada are present, but it's about when they come online due to the regulatory environment there. The demand to transport gas and products from east to west creates the need for transmission, especially in the context of environmental standards. The bidding environment remains robust.

Hi. Thanks. Just a couple quick things to follow up on. Duke, in terms of the acquisition strategy at this point, you had a couple of small deals in the quarter. What's your priority here, especially given your market outlook? Does that include telecom beyond 2017, or is there anything you want to say at this point?

Our priority is to focus on our core business and return our margins to expected levels. As we look at acquisition potential, we will be strategic. We don't have a specific acquisition target in mind but aim to find adjacencies that can leverage what we have. We’re also focused on organic growth and enhancing shareholder value.

Thanks. Just one more clarity on that based on how you look at the market, comparing opportunities in Oil and Gas versus transmission. Any insights there?

We seek to fill strategic areas when pursuing acquisitions. Clients are always asking us to provide various services, and we factor that into our strategy when exploring acquisition opportunities.

Good morning, Duke, Derrick, and Kip.

Good morning.

Hi, Bill.

First question, just give us a sense, if you can, on the amount of spreads that you'll be utilizing in the second and third quarter. First question. Second question. We've had a lot of weather issues in certain parts of the country, even subsequent to the quarter. Maybe give us a sense of the impact during the quarter and what you're seeing in the potential impact in the second here. And finally, just an overall update and congrats on the announcement of the pipeline in Australia, but can you give us a little more granularity there?

I don't want to get too specific on spreads; the term is loose. We are involved in more projects than we've seen since 2010. Regarding weather, we experienced some fires in Canada recently. Our key focus is ensuring the safety of our workforce and our customers. We have communicated with them effectively and want to maintain safety first. It's not anticipated to impact our performance significantly in Q2. As for Australia, we acquired a condensate line, and our teams there are executing well on that project.

Bill, I’ll add that Canadian breakup will affect our margins during the second quarter, making them lower in the Electric Power segment compared to Q1. To assess the overall weather-related impact is too soon to tell, but we remain cautious regarding margin expectations.

Thank you for taking my question. Good morning. When you look at your recent projects that you won in the first quarter, can you share some color on kind of where they are located? Are they all mainline? How far along are they in their regulatory processes?

In general, when discussing projects in guidance, we account for regulatory issues. We're not going into specific details on any of our projects right now, but we believe we'll be executing on more mainline work than we've seen since 2010 and expect that trend to continue.

Okay, and as a follow-up, just to clarify. So for 2016, I understand you don't have any uncommitted projects to get to the midpoint of your guidance. But how much of your 2016 revenues have you already won, and how does that compare to how much work you still need to win to get to that midpoint?

To clarify, we have no uncommitted large pipeline projects. We do have uncommitted work in the Oil and Gas segment associated with other aspects of the business, such as distribution work or integrity. Our backlog for 2016 includes everything needed to meet the midpoint of our guidance and comprises the large diameter pipeline projects.

I'd like to thank you all for participating in our first quarter 2016 conference call. I also want to thank my family for supporting me in the role and the guys that are out executing work daily. Thank you for your interest in Quanta Services, and this concludes our call.