Quanta Services Inc (PWR) — Q1 2021 Earnings Call Transcript

Great. Thank you and welcome everyone to the Quanta Services first quarter 2021 earnings conference call. This morning we issued a press release announcing our first quarter results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2021 outlook and commentary that we'll discuss this morning. Additionally, we'll use a slide presentation this morning to accompany our prepared remarks, which is viewable through the call's webcast and also available on the Investor Relations section of the Quanta Services website. Please remember that information reported on this call speaks only as of today May 6, 2021, and therefore you're advised that any time-sensitive information may no longer be accurate as of any replay of this call. This 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 include all statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance 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 beyond Quanta's control and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties, and assumptions please refer to the cautionary language included in today's press release, along with the company's periodic reports and other documents filed with the Securities and Exchange Commission, which are available on Quanta's or the SEC's website. You should not place undue reliance on forward-looking statements and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by a third-party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA, and free cash flow. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts through the Investor Relations section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services first quarter 2021 earnings conference call. On the call today, I will provide operational and strategic commentary and we'll then turn the call over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a review of our first quarter results and full year 2021 financial expectations. Following Derrick's comments, we welcome your questions. This morning, we reported solid first quarter results, with revenues of $2.7 billion in GAAP and adjusted diluted earnings per share of $0.62 and $0.83 respectively. Backlog at the end of the quarter was a record $15.8 billion, which we believe reflects the continued advancement of our long-term growth strategies. We continue to see opportunities for multi-year growth across our service lines, driven by our solutions-based approach and the growth of programmatic spending with existing and new customers. The recognition that the country's infrastructure needs to be modernized to support economic growth, improved safety, and reliability, and for a cleaner environment is evidenced by the Biden administration's recently proposed $2 trillion infrastructure plan. The proposal will evolve and take time to move through the political process. But as proposed, the plan includes funding and policies to encourage new infrastructure development and modernization in several of our core markets including, high-voltage electric transmission and power grid modernization and resiliency, renewable energy, electric vehicle charging station infrastructure and other electrification initiatives, and broadband infrastructure expansion. While this infrastructure proposal could accelerate activity in these areas and provide incremental opportunity for Quanta over several years, I want to stress that our positive multi-year outlook and strategic plan are not reliant on this infrastructure proposal. We have been collaborating with our customers for many years to support their significant multi-year investment programs already in place to modernize the existing power grid, ensure reliable power delivery and to integrate higher levels of renewable generation. Our Electric Power Solutions operations performed well during the quarter, reflecting broad-based business strength, driven by ongoing grid modernization, system hardening, renewable energy interconnections, and solid and safe execution. During the quarter, we signed a significant multi-year master services agreement with a utility in the Western United States, which made a substantial incremental contribution to our record first quarter backlog. We believe our record backlog and these initiatives will continue to drive multi-year growth opportunities for Quanta. Though COVID-19 has created some near-term challenges in Canada, we see opportunities to pursue additional large projects there for the coming years. Additionally, our discussions with high-voltage electric transmission project sponsors in the United States have increased as the need for large-scale electric transmission infrastructure to support growing renewable generation and achieve carbon-neutrality goals becomes evident. LUMA Energy and its employees, as supported by Quanta and its joint venture partner ATCO, are all working diligently towards transitioning the operations and maintenance of the Puerto Rico electric power grid to LUMA in early June. LUMA's efforts under the agreement are intended to deliver long-term social and economic benefits to the people of Puerto Rico. As stated previously, we believe this opportunity is transformative for all the parties involved, including the people of Puerto Rico, and the work to be performed by LUMA under the 15-year contract aligns with Quanta's strategy of providing sophisticated and valuable solutions to the utility industry that benefits consumers. The majority of our communications operations are off to a solid start this year, driven by strong demand for fiber densification to reach homes and businesses and the early stages of 5G network deployments. However, during the quarter, we experienced short-term challenges primarily associated with efficient subcontractor work in a specific geographic area, which required rework. We have addressed our quality assessment protocol shortcomings on this issue and are pursuing compensation from the subcontractor. This was an isolated issue, and we believe we are on track to generate high single or double-digit operating income margins for the remainder of this year. Additionally, we continue to believe we can achieve at least $1 billion in annual revenue with double-digit operating income margins in the medium term. As service providers continue to push fiber closer to the customer, fiber backhaul densification continues, 5G wireless infrastructure development increases, and meaningful federal funding is provided for broadband network expansion initiatives in underserved markets. On prior calls, we have shared our belief that Quanta is uniquely positioned between the communications and utility industries to provide solutions for broadband and 5G technology deployments leveraging existing infrastructure. We have made significant progress working with our customers and a broadband technology partner, and during the first quarter made a minority financial investment in this partner. We also entered into a strategic alliance with them where Quanta will serve as a program manager for large-scale deployments of their fixed wireless broadband technology, which we will utilize in our customers' facilities where appropriate. We believe this relationship advances our solutions with customers to accelerate and improve access to affordable and reliable broadband in rural and underserved markets. We believe our proactive strategy and the unique solutions Quanta provides the marketplace enhance our opportunity to expand our telecom infrastructure solutions with other utility and communication customers. Our Underground Utility and Infrastructure Solutions segment performed well in the quarter with better than expected profitability despite seasonality and continued challenges caused by COVID-19. We are confident in our full year expectations for the segment driven by solid demand for our gas utility and pipeline integrity service. Additionally, there are encouraging signs supporting our expectations of improved demand for our industrial services beginning in the second half of this year. We believe deferred maintenance and capital spending due to the effects of COVID on the downstream market is creating pent-up demand for our services which should prove beneficial as market conditions normalize for our customers. However, we would like to see how the summer travel season develops which could influence activity levels of our downstream customers before making adjustments to our full year expectations for this segment. The solutions Quanta provides support our customers' efforts to increase reliability, safety, efficiency, and connectivity, all of which have favorable environmental and social impacts. Our end markets and multi-year visibility are solid and we have built a strong platform that positions us well to capitalize on favorable long-term trends particularly grid modernization and hardening, the transition toward a carbon-neutral economy, and the adoption of new technologies such as 5G, battery storage, and hydrogen. Previously, we have discussed our strategic focus on enhancing our front-end capabilities such as engineering and permitting. To complement our world-class construction expertise, our strategy is designed to provide differentiated comprehensive and industry-leading solutions to our customers which we have achieved through organic investment and select acquisitions. This strategy is contributing to our backlog growth, increasing our total addressable market and providing meaningful growth opportunities for the future. In our earnings release this morning, we raised our 2021 guidance due to solid first quarter results and confidence in the business. We believe this demonstrates the strength and sustainability of our business and long-term strategy, favorable end market trends, our ability to safely execute, and our strong competitive position in the marketplace. We continue to believe we are in a multi-year up cycle with continued opportunity for further record backlog and results in 2021. We are focused on operating the business for the long-term and expect to continue to distinguish ourselves through safe execution and best-in-class build leadership. We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta's diversity, unique operating model, and entrepreneurial mindset form the foundation that will allow us to continue to generate long-term value for all our stakeholders. I will now turn the call over to Derrick Jensen, our CFO, for his review of our first quarter results and 2021 expectations.

Thanks, Duke, and good morning, everyone. Today we announced first quarter 2021 revenues of $2.7 billion. Net income attributable to common stock was $90 million or $0.62 per diluted share and adjusted diluted earnings per share, a non-GAAP measure, was $0.83. The first quarter was another strong quarter for Quanta led by continued strength from electric power and better-than-expected profitability from our Underground Utility and Infrastructure segment. Our electric power revenues were $2.1 billion, a record for the first quarter and a 17% increase when compared to the first quarter of 2020. This increase was driven by continued growth in base business activities as well as contributions from larger transmission projects underway in Canada and revenues from acquired businesses of approximately $70 million. Also, revenues associated with emergency restoration services attributable to winter storm response efforts were approximately $80 million, a first quarter record. Electric segment margins in Q1 2021 were 9.7% versus 7.3% in Q1 2020. The improved operating margins were driven by double-digit performance from our electric operations within the segment, including the benefit associated with increased profit contributions from emergency restoration efforts, which typically present opportunities for higher margins than our normal base business activities due to higher utilization. Operating margins also benefited from approximately $5 million of income associated with our LUMA joint venture. Negatively impacting first quarter margins were recorded reserves for the identified issues Duke discussed, which when combined with normal seasonality exacerbated by severe weather challenges from winter Storm Uri created an operating loss within our US telecom operations for the quarter. Again, we believe we have addressed the issues and expect margins at or near double-digits going forward. Underground Utility and Infrastructure segment revenues were $643 million for the quarter, 35% lower than Q1 2020 due primarily to reduced revenues from our industrial operations and a reduction in contributions from larger pipeline projects. Operations within this segment in last year's first quarter results had yet to be impacted by COVID-19 headwinds. In fact, our industrial operations had record results in the period. In Q1 2021, the segment continues to be negatively impacted by COVID-19, with first quarter revenues from our Canadian operations and our industrial operations both meaningfully below pre-pandemic levels. Despite the COVID-related headwinds, the segment delivered margins of 1.4%, and although 170 basis points lower than Q1 2020 primarily due to the reduced revenues, the results exceeded our original expectations for Q1 led by execution across much of our base business activity including our gas distribution and industrial services. Our total backlog was a record $15.8 billion at the end of the first quarter with a 12-month backlog of $8.9 billion representing solid increases when compared to year-end as well as the first quarter of 2020. This marks the third consecutive quarter where we posted record backlog, a trend driven primarily by continued growth in multi-year MSA programs with North American utilities, which we believe continues to validate the repeatable sustainable nature of the largest portion of our revenues and earnings. For the first quarter of 2021, we generated free cash flow, a non-GAAP measure, of $49 million, $115 million lower than Q1 2020, however Q1 2020 included the collection of $82 million of insurance proceeds associated with the settlement of two pipeline project claims. Day sales outstanding or DSO measured 89 days for the first quarter, an increase of four days compared to the first quarter of 2020 and an increase of six days compared to December 31, 2020. These increases are primarily due to the expected ramp in work on two larger electric transmission projects in Canada in the first quarter and the timing of billing. The Canadian response to COVID has significantly hampered production for which we will seek recovery and delayed meeting certain billing milestones. We had approximately $200 million of cash at the end of the quarter with total liquidity of approximately $2.1 billion and a debt-to-EBITDA ratio as calculated under our credit agreement of approximately 1.3 times. Integration activities associated with acquisitions closed in the back half of 2020 are ongoing and we closed another small acquisition during the first quarter of 2021. We continue to take an opportunistic view towards acquisitions and maintain the balance sheet strength to support strategic capital outlays in this area. Additionally, through the date of this earnings release, we acquired approximately $29 million worth of stock as part of our repurchase program. We remain committed to delivering shareholder value through prudent capital deployment. Turning to guidance, based on the Electric segment's strong first quarter and continued confidence in our ability to execute on the opportunities across the segment, we've increased the low end of our full year expectations for segment revenues resulting in a range between $8.4 billion and $8.5 billion for 2021. Similarly, we are increasing the low end of our full year margin range for the segment with 2021 operating margins now expected to range between 10.2% and 10.9%. Regarding the Underground Utility and Infrastructure Solutions segment, while we had a nice start to the year, we are not yet in a position to change our full year expectations. Accordingly, we are reiterating our original full year guidance for the segment, with revenues expected to range between $3.65 billion and $3.85 billion and segment margins ranging between 5.5% and 6%. These segment operating ranges support our increased expectations for 2021 annual revenues of between $12.05 billion to $12.35 billion and adjusted EBITDA, a non-GAAP measure, of between $1.1 billion and $1.2 billion. The midpoint of the range represents 10% growth when compared to 2020's record adjusted EBITDA. In addition to these improved operating expectations, our full year expectations for net income and adjusted net income, a non-GAAP measure, are expected to benefit from a reduced annual tax rate, driven by higher benefits realized in the first quarter associated with the fair value of vested stock compensation awards. We now expect our full year tax rate to range between 25.25% and 25.75%. As a result, our increased expectation for full year diluted earnings per share attributable to common stock is now between $3.25 and $3.69, and our increased expectation for adjusted diluted earnings per share attributable to common stock, a non-GAAP measure, is now between $4.12 and $4.57. We are maintaining our free cash flow guidance for the year, expecting it to range between $400 million and $600 million. And we'll reiterate that quarterly free cash flow is subject to sizable movements due to various customer and project dynamics that can occur in the normal course of operations. For additional information, please refer to our outlook summary, which can be found in the Financial Info section of our IR website at quantaservices.com. Overall, we are pleased with the start to the year and remain confident in the strength of our operations and prospects for profitable growth. As our backlog continues to grow and our visibility into the duration of this infrastructure cycle continues to improve, we have increasing conviction in our ability to capitalize on the opportunities across our end markets. We firmly believe the repeatable nature of our base business solutions coupled with opportunistic larger project deployments, disciplined capital allocation and continued balance sheet strength will be the key to delivering long-term shareholder value. This concludes our formal presentation and we'll now open the line for Q&A.

Hi. Good morning, guys. Just wanted to dig a little bit into the infrastructure plan. So beyond the headline $100 billion of funding for power infrastructure, can you talk about the potential changes from a policy perspective that you could see in this plan? And whether that could actually have an impact on the process of construction or even before that out on the permitting side? And then secondly, the bill has also allocated a decent amount of money to water pipe infrastructure. Is this an area of interest for Quanta? I mean, given its heritage of linear construction? Thanks.

Good morning, Chad. I believe the policy and plan under the current administration are beneficial for us. States hold significant authority over rights-of-way, easements, and permits, which may be a challenge as we move forward. However, even without the federal plan, there is a prevailing sentiment towards a carbon-free environment, and we are seeing larger projects advancing. In my opinion, the environment is strong regardless of federal funding. While the funding is advantageous, I consider it to be additional to what we have previously discussed. Regarding water, we are currently involved in some water projects. We leverage cross-skill labor where needed, and this capability is central to our operations. Therefore, we are actively exploring opportunities in water. I’m not making any announcements on that; I just want to emphasize that we are examining it closely.

Got you. Okay. And just a question. I mean I know that your reason for underground guidance on the revenue side hasn't necessarily changed, but just curious about how you think about the industrial business in particular? Can you talk about how it trended in Q1 versus your expectations? And has there been any change in terms of how you're thinking about guidance for that business? Are you still expecting flat for this year?

When we look at the underground business, again we look at these businesses as a portfolio. So I would just say the LDC business and the integrity business there is working out nicely. We like where we sit from a base business and repeatable sustainable model. But the industrial business was down as we've talked about through COVID. We do see signs of life there. We have a really nice model. The things that we perform in the industrial sector are certainly necessary. There are signs of life there. As Derrick commented, I think, when we get to the second quarter, we'll know a lot more about where the economy is going and what we think about the industrial side. In my mind, certainly opportunity on the backside of the year and 2022 looks really robust.

Hi, guys. Thanks for taking my questions. I just wanted to start on the Underground segment. I mean, obviously, the margins there in the first quarter stood out. I was surprised you didn't call out the Texas deep freeze. I would assume the stronghold business would have been dislocated around that. And I was just wondering if we could flush out whether there was something else that was particularly strong to overcome a dislocation there?

No. The phrase it was three or four days. I know it got a lot of press and certainly loss of life, but really it was three or four days. And while it was an impact to the quarter, the industrial sector performed well. I mean, we did some emergency work, but very little when we think about it. All in all, I just think it's performing better than we anticipated a bit. We do see signs of life in that business. But all in all, it's really the portfolio of the company to perform throughout.

Okay. Got it. That's helpful. And I hate to do this guys, but just following this Q1 performance; I mean, $412 million at the low end. I mean what set of operating conditions put us there at this point? It just seems hard to get down there and just be helpful to sort of frame that low-end case at this point?

Yes. So I know as you can see we raised the low end of the guidance here for the first quarter to some way to comment to that we continue to think that there's strength in the business model itself. But we very regularly put through a range of guidance on an annual basis. That considers a low end because of the fact that we work in a volatile workspace. Oftentimes, it comes down to the way that the weather patterns impact the year more specifically in the fourth quarter. The fourth quarter is where substantial types of increment weather can come in and really impact the type of dynamic. Let alone the fact that through the year we work in a range of circumstances creating volatility. So we think it's always prudent to recognize those circumstances. But what I would also say is we think we have a tendency to execute throughout. I think also as we've seen us do the last few years. So as we stand here today, we think our business model is intact. We think we continue to do the margin improvements that we think are available to us, but it's just the right thing to do to recognize the volatility of what we're working.

Hi, good morning. Considering the challenges you're encountering with the telecom subcontractor, could you remind us of your business model? I remember it was about 50% self-performed and 50% subcontracting at one point. Could you also discuss your goals for that balance and your thoughts on investing in training for the self-perform side? Thank you.

Yes, thank you, Noelle. Earlier, we mentioned a guidance figure of around $770 million for telecom, and I still see the potential for us to perform at those levels. I wouldn’t consider it a major issue; we encountered a minor setback, which we have identified and are addressing through rework. We plan to collaborate with the subcontractor to recover from that and move forward. Overall, we are pleased with the business, which currently operates on a roughly 50-50 model. We continue to observe solid demand for broadband work and are on track for approximately $1 billion in inorganic growth. I believe the team has done an excellent job. Although we might not have discussed this in detail had it been a typical situation, we felt it was important to address this telecom matter. We’ll acknowledge the challenges while also highlighting the strengths of the Electric segment this quarter. If we adjust for an estimated $10 million to $15 million impact from the telecom business, the quarter’s results for the Electric segment would have been significantly stronger.

Thanks, that all makes sense. And then second, just given what we're seeing with commodity price increases and steel concerns about availability, what are you kind of watching around that dynamic? Are there any concerns about some of the larger transmission poles getting to you on time? Just kind of curious how you're thinking about the supply chain challenges that are kind of dominating headlines right now? Thanks.

Yes. I mean we're seeing some challenges in commodities not really impacting us at this point. We'll watch it fairly closely on the larger projects to make sure that our material comes in on time. We don't have commodity risk per se. So, our jobs that they're impacted, we'll collaborate with the customer on those impacts. But in general, we're able to work through most of those areas where we do have impacts. I would tell you like in my mind, Canada is probably one of the ones that have impacted the most. And I don't think it's really material per se. It's just how it's delivered. And for the most part that's been more of a COVID issue than material, in my mind, but no really commodity impact at this point.

Good morning, gentlemen.

Good morning, Mike.

Good morning.

You mentioned a Master Services Agreement that you signed earlier this year. When considering your Master Services Agreements with these customers, are they typically long-term with annual budget requirements? Do those agreements provide any margin or utilization benefits compared to one-off opportunities that may stem from the same or other customer bases?

Mike, we don’t often highlight specific regions. The reason we mentioned the West is because it represents a relatively small increase, and we continue to emphasize that it hasn’t fully ramped up yet. We indicated this ramp by mentioning the incremental backlog growth associated with this MSA. Generally, we consider 85% to 90% of our business to be derived from base MSA-type operations. That’s our perspective. We usually book and renew MSAs on a nearly monthly basis, so there isn’t a rigid system in place. I believe our backlog will keep increasing to record levels, and we will have larger MSAs renewing. The market remains strong, and even with an MSA, we see growth in that segment. We approach this carefully, ensuring the next 12 months and beyond reflect what the backlog indicates. In my view, we are performing well, and our customers are indeed investing capital. The overall market conditions are favorable for us, leading us to expect continued growth in MSAs.

I appreciate that. My follow-up, Duke, is regarding your mention of the partnership with broadband opportunities in your prepared remarks. Given the administration's infrastructure plan and the funds they intend to allocate for broadband, do you think the private sector is doing enough to make this happen? Are these funds for two, three, or four-year opportunities? I just want to understand that better. Additionally, what made this partnership you entered into with this company stand out? Will similar partnerships contribute to achieving the $1 billion target you have set for the medium term?

Yeah, Mark, we've talked a bunch about how the infrastructure on the utilities and broadband are converging. I think when we looked at it, we continue to look at the role in the underserved markets that were out there. And for the last two years have really tried to find the solution with our customer in a collaborative effort to utilize that infrastructure. We found technology and a company that had the capabilities to do that, work with clients. I do think it's broad-based small-cell type deployment that you'll see ongoing. When we have a programmatic way to do that on this, we'll have a programmatic way to do it with every one of our customers. And it's really beneficial for us to be on the front side of this, providing the solution, pushing the rural development opportunity fund forward. And not just waiting for something to come to us, we're actually out making sure this happens in front of it, not just waiting on an RFP or getting commoditized with labor. I think that's part of what we're saying as a solution-based provider as we're out in front of that with technology.

Great. Thank you. Duke, any color on some of the larger project pursuits in your electrical power business in 2021 that you're seeing and maybe how that could potentially influence the segment throughout the year? I think the guidance for the business is more reflective of the programmatic spending you see with the customers. But I'm wondering if there are some other larger projects that can potentially layer on here this year?

I could list them for a long time, but what I'm really focused on is the general outlook for permitting, which still has a long way to go. The current environment is promising, and we are engaged with all of them. There are many impressive renewable projects and interconnections in almost every regional transmission organization plan, often several. Achieving our carbon-free goals will require a substantial amount of transmission, which in turn necessitates significant projects. These projects can be challenging on the permitting front, but administration support may help. Some projects are underway and further along than others. Mid-America and others have been discussed in previous calls. There are numerous projects on the horizon that are developing.

Okay. I appreciate that. And I guess another question I have is just, are you seeing anything that suggests your customers are shifting some capital plans from the gas portion of the business towards the electrical portion of the business? I just wonder, if these commitments sort of profound interest in grid reliability, or still in any thunder from the gas programs that drive the Underground segment?

No, I would say we are observing our pipeline customers attempting to develop solar projects. There is quite a bit of that taking place. The local distribution company business raises safety concerns as well as reliability issues. For instance, there was a freeze in Texas that actually caused pipes to freeze, leading to problems at the plant. All of these integrity issues are safety concerns and also indicate the need for balance until we find a carbon-free solution. Achieving this requires a substantial amount of transmission infrastructure. Therefore, the company is in a favorable position on both sides of this issue.

Hi, thanks. Good morning. I just wanted to come back to the telecom business and the challenge in the quarter. And if you could just sort of talk a little bit more broadly about, why you do need to go the route of subcontract models in the first place? Because it seems like, that is perhaps bringing in an element of additional execution risk here. And the bigger picture, I guess, I'm seeing is that, you have a great market opportunity across your businesses at the moment. And I guess, I'm just wondering what you might be able to do, to enhance your potential to execute smoothly and capture that upside market opportunity without some sort of the risks of the hiccups here?

Yeah. Steve, I think when you look at the business, our performance from a margin standpoint in the segment, we did beat our expectations. I think we've raised the guidance on the year. We continue to do it. We look at it as a portfolio. We're getting operating leverage out of all of our offices, whether they're doing telecom gas or electric. We're reporting in segments. We may run the offices a little different than that. Overall, the performance of the company is exceptional in the field. The model around telecom is an organic growth strategy around it. It does have probably 50% of subcontract. It's due to the fact that it ramps, up and down. And we're not going to invest in something that just ramps like that because it continues to weigh on it we want some balance in it. And the balance allows us to have some variable cost in our equipment and things of that nature. My returns are better that way, in my mind. So that's the way we run the telecom business. And that's how we'll go forward with it. That being said, we did have a QA/QC issue in the quarter. We'll do a better job of catching that next time or now. For that matter and try to call back all we can. But all in all, I mean we're performing really well, across the board in my mind.

Okay. That's very helpful. And I just want to ask you about Puerto Rico. It sounds like you're working towards a timely transition there. But in the event that there is some delay, can you just talk about what the possible implications might be for the rest of the year? I think there are some implications for some incentive potential, but you may not have expected any incentives this quickly anyway? And maybe when we should think about the real opportunities when the real opportunities for incentives on that contract might be? Thank you.

Yes. I don't think we anticipated that this year. It will be in the next year for the incentive base piece of it, but we do anticipate going into service here in June. The transformation will happen and will take over in June. So from that standpoint that will move on. As far as, we're coming through the fame of phones that will be into next year in my mind before you see any of it. And that's also an opportunity next year in Puerto Rico. But all in all, it's moving along like it should and we're pleased with where we sit.

We had commented previously that we thought that post-transition we would see on an annual basis a run rate contribution of around $0.25. That is excluding inflation adjustments, excluding all incentives and excluding any incremental construction opportunities. So all of those things would still get the upside opportunities for us.

Hey guys, nice quarter. I wanted to start on the energy side. Curious Duke if you've seen any pickup just from the rise in oil prices particularly around pipelines?

I wouldn't say we've seen much movement in pipelines. Our industrial businesses are doing well, and I believe things will improve. However, we haven't observed significant pipeline activity. In our Canadian operations, there are some long-term pipeline projects, but in the Lower 48, it's been quite slow from my perspective. We've shifted our focus to a more competitive and sustainable business model, so this doesn't impact us significantly.

Okay. You mentioned a fixed wireless award. Could you provide more details on that? I'm curious whether it was awarded to a Tier one telco or an emerging player. Any additional information would be appreciated. Thanks.

Yes, we made an investment this quarter in some technology and a service provider focused on fixed wireless. This initiative is targeted at our dollar funds for rural development as well as underserved areas. While it's not with a Tier 1 carrier, it is aimed at reaching across the Lower 48 states and beyond in a systematic manner. We will also have the capability to implement this as the Tier 1 carriers progress. I believe this represents the intersection of electric cooperatives and municipalities working together to address broadband issues, which makes a lot of sense. We've invested considerable effort into this, and this was our opportunity to advance it.

Hey, good morning, guys.

Hi, Andy.

Duke, so we know signing longer-term electric power MSA is one of your main strategies. But does electric power MSAs being up over 40% over the last year give you more confidence regarding Quanta's ability to grow the core business? Maybe even toward the middle to higher-end of the longer-term guide you have we know you talk about mid-single digits to low teens. I mean do you start getting visibility even into '22 in that regard?

I believe we've discussed expectations for multi-year growth in the mid to upper single digits for about 80% to 90% of the business. We anticipate this growth over a long-term period of three to five years. We continue to see this trend, which we have mentioned frequently. Additionally, we believe the backlog in our Master Services Agreements is likely to sustain growth for an extended time.

I guess what I'm asking is, does it give you confidence in the growth outlook because there's quite a wide range between mid-single digits and low teens? Considering the visibility you have, do you actually anticipate a higher growth rate moving forward? I'm aware of this year's guidance, but I'm just curious.

If you look back, we've achieved double-digit growth in the Electric segment over the past 10 years on a compound annual growth rate basis. That's our track record. The numbers are larger now, and we are being careful in our communication. Do we have the capacity to grow in double digits? Yes.

Let me ask you about large projects. You've mentioned a $3 billion figure in the past and indicated last quarter that opportunities exceed that amount significantly. Is the funnel now much larger, perhaps around $5 billion or $6 billion?

If we talked about all the jobs that were out there, there's not enough material to talk about it, to begin with. So I think in our mind we're being prudent about how we discuss it. The larger projects are growing especially with the sentiment around bringing renewables in a carbon-free environment by 2030, 2050. So the transmission corridors will have to exponentially get larger than they are now in a significant way. In order for that to happen, you're going to need large project dynamics for the next decade.

I just want to follow-up on one other thing that you talked about with LUMA. LUMA's CEO recently talked about $10 billion in federal recovery funds now flowing in Puerto Rico. Do you think those funds just don't make their way into projects until next year as you said, or is it possible that could happen as early as this year?

I mean you have about $1 billion budget down there, $600 million of a $1 billion budget down there a year on any given day. So there are projects down on the island. What I would say is the FEMA funds are on top of that, that would come in. I would be prudent to say it would be next year.

Hi. This is a question on behalf of Jamie Cook. We are curious if you have any concerns about securing labor in the current cycle, considering the current labor market and the strong outlook? Additionally, could you share your thoughts on the pricing environment? Thank you.

Yes. Thank you for the question. From a labor standpoint, a tight labor market really suits us well. That's who we are. We really work on labor. I have invested well over $100 million over the last six to seven years. So anytime we have a tight labor market cross-skill labor market, Quanta does really well. So we're in a good position there. We pretty much regulate some of the way that we look at wages. We have the ability to pass through those costs if they escalate. So we're in good shape. As far as pricing power and I would just say, in general, we'll stand by what we said in the past, the double-digit margins over time. At times, it'll go higher. And we're in good times now, so you're seeing some push on that. Primarily around the utilizations and things of that nature that is pushing up your margins, more so than pricing power.

Hi, everybody. This is Min Cho for Alex Regal at B. Riley Securities. Just one question really, Derrick, given your continuation of strong cash flow and liquidity. Just wanted to know if there was any shift in change to your capital allocation strategy and want to know if there were any more kind of opportunistic M&A opportunities that you're seeing in the current market? Thank you.

No, I'd say that we're still committed to the same allocation strategy really that we've held for a number of years. We look at first leaning into the growth of the business, on the working capital and CapEx front. Very much still yet look at the acquisition and investment side of the equation, partly as an example, as highlighted to Duke's comments here for the minority interest here this quarter. And then, as well with the buyback of stock and dividends. We still look at all of those. We like to have our balance sheet positioned well to be able to lean into all of those areas at any given time, not having to choose which one creates the most value at a point in time. I would say that acquisitions has historically been kind of the largest component of recent years, and we still see an active market there, ability to find good acquisitions. It will be sporadic because we're opportunistic with the deployment of capital there, looking for strong management teams that supplement who we are. You can see over the last four or five years, we probably averaged about $300 million on average deployment there. And I wouldn't take exception to that kind of view as we go forward.

Yes, I just want to thank everyone, our field leadership team and men and women working in the field through the pandemic, doing all the things that we've done well. We performed well, safely, and it's to their credit. So I want to thank you for participating in the conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call.