Quanta Services Inc (PWR) — Q4 2022 Earnings Call Transcript

Thank you, and welcome, everyone, to the Quanta Services Fourth Quarter and Full Year 2022 Earnings Conference Call. This morning, we issued a press release announcing our fourth quarter and full year 2022 results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2023 outlook and commentary that we will 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 is 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, February 23, 2023, 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 or that do not rely or do not relate solely 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 the risks, uncertainties, and assumptions, please refer to the cautionary language included in today's press release and the presentation 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 any 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, adjusted EBITDA, and free cash flow. Reconciliation 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 fourth quarter and full year 2022 earnings conference call. On the call today, I will provide operational and strategic commentary, and we'll then turn it over to Jayshree Desai, Quanta CFO, to provide a review of our financial results and full year 2023 financial expectations. Following Jayshree's comments, we welcome your questions. This morning, we reported strong fourth quarter and full year results, which were built off an industry-leading operational and financial platform that delivered another year of solid, safe execution and profitable growth. Additionally, total backlog of $24.1 billion at year-end was a record, and that does not include several notable recent project awards. Driven by the dedication and operational excellence of our world-class employees and the culture of collaboration throughout Quanta, we believe our 2022 results also demonstrate the benefit of our diversified portfolio of solutions, our repeatable and sustainable model and the successful execution of our strategic initiatives to drive operational excellence and total cost solutions for our clients and ultimately, the consumer. Our portfolio of companies, diversity of service lines, geographic coverage, outstanding field leadership, and deep, long-standing and collaborative relationships with our clients have allowed us to successfully navigate through the challenges presented by a global pandemic and manage ongoing macroeconomic uncertainty and supply chain constraints while still delivering five consecutive years of record adjusted EBITDA and six consecutive years of record earnings per share. We accomplished a great deal in 2022 through the successful implementation of our strategic initiatives and our past success positions us well for the future. Our innovative approach to our infrastructure solutions, our portfolio of services, and our passion for working collaboratively with our clients to support their success positions us to be a critical partner in enabling the energy transition for years to come. Here are some of our accomplishments in 2022. We continue to successfully advance our front-end solution strategy, both organically and through acquisitions and strategic investments. Our focus is on strengthening our design, engineering, permitting, environmental, logistics and program management capabilities. This strategy allows us to expand our customers and provide them with greater certainty around cost, time to market, and quality, which ultimately benefits consumers. It also enhances our risk management capabilities and increases our total addressable market. Electric Power Infrastructure Solutions segment revenues achieved record levels, maintain margins and increase market share despite some work delays caused by ongoing supply chain challenges. We further expanded our emergency response capabilities and supported our customers' efforts to restore power to millions of people adversely impacted by several severe weather events during the year. Our ability to quickly mobilize significant resources to support our customers in times of need is unmatched in our industry. LUMA Energy, our joint venture with ATCO, which is managing Puerto Rico's more than 18,000-mile electric transmission and distribution system, continued to improve its customer service, response times, customer communication and workforce safety as well as overall system reliability. Additionally, LUMA restored power to more than 90% of its customers in less than two weeks following Hurricane Fiona, which was much faster than previous storm responses by the prior grid operator and was comparable to, if not better, than restoration times following major hurricanes in the mainland United States. Though many years of challenges and work remain, we continue to believe this opportunity is transformative for Quanta and the people of Puerto Rico and remain committed to supporting LUMA's mission to provide reliable electricity while building a modern and sustainable transmission and distribution system. We continue to grow our communication services business and increased revenues by approximately 30%. Contributing to the growth was further development of our wireless infrastructure solutions, which expand our opportunities to capitalize on 5G network deployment and ongoing enhancement of 4G wireless networks. We continue to make meaningful progress on growing our portfolio of services within each of our operating companies to further enhance our operating results. For example, we are leveraging our gas utility assets to perform certain aspects of underground electric power and telecom-related work. We believe the resource expansion and operating leverage we gained through these initiatives present significant opportunities for Quanta to reinforce our self-perform capabilities, improve operating efficiency and profitability, and demonstrate the strength of our portfolio approach. Quanta's Capacity Model was recognized by the National Safety Council as a finalist for its prestigious Green Cross for Safety Award, which recognizes outstanding projects in organizations working to support the National Safety Council's mission to save lives and prevent injuries from workplace to any place. The Capacity Model is revolutionary because it creates a work environment that focuses on preventing incidents and builds the capacity to do so safely. We demonstrated our commitment to stockholder value and our confidence in Quanta's financial strength and growth opportunities through the repurchase of approximately $128 million of our common stock and a 17% increase in our dividend while also increasing our liquidity. Finally, we continued to increase our efforts and dedicate resources towards implementing sustainable business practices throughout the organization. We made significant progress in our 2021 Sustainability Report, which discusses the company's accomplishments during that year and marks a key milestone for Quanta as we published our first consolidated sustainability metrics, including our Scope 1 and 2 emissions. We also highlighted and discussed the important positive impact Quanta has on society and enabling the energy transition and technological development. Demand is robust for our solutions that support our customers' efforts to modernize and harden the grid and prepare it for the impact of increased electric vehicle penetration. This activity drove our Electric Power segment results and backlog strength during 2022, primarily due to significant multiyear master service agreements and gains through our service line expansion with utilities. Additionally, we continue to believe we are in the early stages of utilities undergrounding transmission and distribution lines to protect them from the effects of severe weather events and wildfires. We see this activity increasing in the Western United States and high-fire threat areas, but these initiatives are active in other areas of the country. Examples include electric transmission projects in the Northeast, distribution circuits along the coastlines and electric transmission line projects for offshore wind generation. Many of these initiatives are part of large-scale multiyear system modernization and hardening programs. Our utility and renewable developer customers who accounted for the majority of our 2022 revenues are leaders in the effort to reduce carbon emissions, increase electrification and lead the energy transition with aggressive plans to expand and modernize the power grid and grow their renewable generation portfolios. Achieving these goals will require substantial incremental investment in transmission, substation, and renewable generation facilities to produce and transport clean power to ensure grid reliability due to the growth of intermittent power added to the system. For example, in December of last year, we announced Quanta's selection by Xcel Energy as its prime constructor to manage all construction activities for Colorado's Power Pathway high-voltage electric transmission project. The approximately 610-mile high-voltage electric transmission line project is designed to increase the reliability of the state's power grid and enable future renewable energy development in Colorado including approximately 5,500 megawatts of new wind, solar and other resources that Xcel Energy plans to add through 2030. While the supply chain and regulatory hurdles created challenges for the renewable industry during 2022, there is significant demand for our power grid and renewable generation solutions. A number of solar projects that were delayed in 2022 are beginning to move forward in 2023. Regulatory hurdles are easing and the implementation of the Inflation Reduction Act or IRA, which is considered by many to be the nation's most ambitious legislative action ever taken on climate, is expected to have a meaningful positive effect on a number of our end markets, which would be additive to our strategy for at least the next decade. Our underground utility and infrastructure solutions segment consistently performed at a high level through the year. Revenues grew strongly and margins significantly improved after navigating tough operating conditions caused by the global pandemic over the prior two years. Importantly, we continue to invest in our people and strategies during those challenging times and emerged as a stronger and better company, which is reflected in our solid 2022 results. We expect to continue our focus on growing our gas utility, pipeline integrity, and industrial services businesses consistent with our strategy over the last five years, which are executing well and driven by regulatory spend to modernize systems, reduce methane emissions, ensure environmental compliance, and improve safety and reliability. Looking to the coming years, we continue to believe Quanta has meaningful opportunities with customers in this segment as they increasingly pursue strategies to reduce their carbon footprint and diversify their operations and assets toward greener business opportunities. Further, the IRA includes incentives to support certain energy transition technologies to further encourage a broader set of current and potential traditional energy and industrial customers to accelerate their pursuit of opportunities around these technologies. In our earnings release this morning, we provided our 2023 guidance, which we believe demonstrates the strength and sustainability of our portfolio approach to this long-term strategy, favorable end market trends, our ability to safely execute our strong and strengthening competitive position in the marketplace. Furthermore, our ongoing investment in and commitment to workforce training continues to positively impact our performance and allow us to capitalize on future opportunities. Our expectations call for another year of meaningful growth in record revenues, improved margins, and opportunities for double-digit growth in adjusted EBITDA, cash flow, and earnings per share. Additionally, we see an opportunity to achieve record levels of backlog in 2023. Jayshree will provide additional detail about our guidance in her commentary. Quanta's management team recently had the privilege of ringing the closing bell at the New York Stock Exchange to commemorate our 25-year anniversary of trading on the prestigious exchange. Standing on that balcony and reflecting on what we have built over the last 25 years and where we are heading in the future was inspiring, and I couldn't be prouder. Quanta's infrastructure solutions are at the tip of the spear of the energy transition in North America. At our Investor Day last year, we laid out a five-year financial goal we expect to achieve through 2026, which provided an organic growth strategy to generate a 10% adjusted earnings per share CAGR and when considering the levers available to us to allocate future cash flow generation into value-creating opportunities, a platform with opportunity to deliver more than a 15% CAGR in adjusted earnings per share. With the strong results we delivered last year, our outlook for 2023, and the momentum we see building for the coming years, we are increasingly confident in our ability to meet or exceed those goals we laid out. 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 field 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 our stakeholders. I will now turn the call over to Jayshree Desai, our CFO, for her review of our fourth quarter and full year results and 2023 expectations. Jayshree?

Thanks, Duke, and good morning, everyone. Today, we announced record fourth quarter revenues of $4.4 billion. Net income attributable to common stock was $163 million or $1.10 per diluted share and adjusted diluted earnings per share was a record for the fourth quarter at $1.68. Overall, the fourth quarter closed out another year of exceptional operational performance by Quanta. Our electric segment benefited from outstanding execution and higher revenues across the segment. Additionally, our underground segment performed well in the fourth quarter, led by increased volumes and operating income from our base business operations. Our renewables segment, however, was negatively impacted by unanticipated project delays, which were primarily attributable to the changes in the solar market regulations that we discussed in the third quarter. These delays created cost absorption challenges, which pressured operating margins. Additionally, the segment's operating margin was negatively impacted by approximately 120 basis points due to impairment charges on the software implementation project at an acquired company, which commenced prior to our acquisition but was discontinued in the fourth quarter. Ultimately, in the aggregate, against the backdrop of supply chain challenges, inflationary pressures, and a complex regulatory environment, our portfolio delivered against our targets for the fourth quarter and the year, and we remain well positioned for the anticipated growth ahead. Below the line, we recorded an unrealized loss of $15 million associated with our common equity interest in fixed wireless broadband technology provider, Starry Group Holdings, which reduced the carrying value of our investment to zero. Offsetting this unrealized loss was an unrealized gain of $26 million on the sale of an investment in a non-integral unconsolidated affiliate, of which $10 million was attributable to a non-controlling ownership interest. Further commentary comparing fourth quarter '22 to fourth quarter '21 for each segment can be found in the slides accompanying this call. Our total backlog was $24.1 billion at the end of the fourth quarter, a significant increase from third quarter '22 and another record level. The increases across each of our segments are attributable to multiple new project awards, including the previously announced Colorado Power Pathway Project, and extensions and increases in expected volumes under MSAs. Our 12-month backlog was also at a record level of $13.8 billion, which we believe is another indicator of the strength of our core markets and the steadily growing demand for our solutions-based approach. For the fourth quarter of 2022, we generated free cash flow of $513 million, resulting in $767 million of free cash flow for the year. Contributing to our free cash flow was the collection of $101 million of insurance proceeds following a favorable arbitration ruling associated with our Peruvian subsidiary’s terminated telecommunications project. Excluding those proceeds, our fourth quarter cash flow was still in line with our expectations and included planned outflows of approximately $45 million for change of control related payments associated with the Blattner acquisition and $54 million of previously deferred payroll taxes in accordance with the CARES Act in 2020. DSO measured 75 days for the fourth quarter of 2022, which was a reduction of 6 days compared to the third quarter of 2022, primarily due to favorable billing arrangements related to certain projects. Regarding the Canadian renewable transmission project that we've discussed in prior quarters, we continue to work with the customer to address the contract asset balance. Resolution of certain of these amounts could extend into 2024 and currently represent 5 to 6 days of DSO at December 31, 2022. While we remain confident in our position, our DSO will be pressured by the project in the near term. We had total liquidity of $2.4 billion at year-end and a debt-to-EBITDA ratio of 2.1 as calculated under our credit agreement. As we mentioned in today's release, we continue to identify and make strategic investments in acquisitions. In January of 2023, we acquired three businesses for total combined consideration of approximately $588 million, approximately $465 million of which was paid in cash at the time of the acquisitions. Additionally, we repurchased approximately $128 million of our common stock during the year. Turning to our full year 2023 guidance. The growth across our end markets remains robust, and we believe the tailwinds driving our growth are long in duration and create multiyear visibility in our earnings potential. As the build-out of the infrastructure necessary for the energy transition accelerates, we believe the complementary capabilities of our operations will become even more valuable to our customers. While segment designations help investors better understand the work we're performing, we'll continue to emphasize the power of our aggregate portfolio of solutions and the earnings they generate. That said, the following remarks will speak to our expectations at a segment level for 2023. As it relates to the Electric Power segment, we expect 2023 revenues ranging between $10 billion and $10.1 billion. Our base business continues to lead the growth in the segment, driven primarily by North American utilities outsourcing the activities required to replace, rebuild, and modernize existing infrastructure. Notably, our 2023 expectations included $250 million of emergency restoration services revenues compared to a little over $300 million in 2022. Also included within the segment are our communications operations, which we expect will generate around $900 million of revenue, in line with 2022 levels. We expect 2023 operating margins for the Electric Power segment to range between 10.7% and 11.3%, which includes contributions of between $43 million and $48 million of earnings from our integral unconsolidated affiliates, the largest portion of which relates to the LUMA joint venture in Puerto Rico. From a seasonality perspective, we expect revenues to be lowest in the first quarter with mid-single-digit growth from first quarter '22, then growing sequentially through the third quarter, followed by a seasonal decline in the fourth. We expect fourth quarter operating margins will be the lowest for the year, likely around 9%, then increasing into the second and third quarters and slightly declining in the fourth quarter. The Renewable Energy Infrastructure Solutions segment full year revenues are expected to range between $4.3 billion and $4.5 billion, over 15% growth compared to 2022 as we believe the headwinds faced by the solar market in '22 should meaningfully improve in the second half of 2023. We think it's important to note that within our range of guidance for renewables, approximately $3 billion of our planned revenues are already in various stages of construction, giving us confidence in our ability to deliver full year revenues at these levels. We expect 2023 operating margins for the Renewable Energy segment to be around 8.5% for the year, slightly lower than the 9% level that we would normally expect. We've invested meaningfully in the project leadership, specialized equipment, and administrative needs required to support the expected ramp in project activity in the second half of '23 and into '24. However, the cost of that investment weighs on margins, particularly in the first quarter. We expect margins for the first quarter to be the lowest for the year, likely between 4% and 5%, but should strengthen in each sequential quarter as volumes increase throughout the year. From a revenue seasonality perspective, we expect segment revenues to be between $850 million and $900 million in the first quarter, the lowest for the year, then growing sequentially into the third quarter and slightly declining in the fourth. As a reminder, it's possible that as we progress through the year and gain more visibility into the nature of the work we'll be performing, there could be movements outside these initial ranges for the electric and renewable segments, depending on the type of generation or activity support. With regard to the Underground Utility and Infrastructure Solutions segment, we are currently anticipating full year revenue range to range between $4.1 billion and $4.3 billion, a slight decline compared to 2022. This decline is due to lower volumes of larger pipeline projects, which contributed almost $900 million of revenue in 2022, but are expected to be around $450 million in 2023. Despite the revenue reduction, operating margins for the year are expected to range between 7.25% and 7.75% led by our base business activities in the segment. From a seasonality perspective, we expect segment revenues in the first quarter to be in line with first quarter '22 revenues, with operating margins around 5%. We then expect revenues and margins to improve in the second and third quarters with a seasonal decline in the fourth quarter. As it stands today, we expect fourth quarter '23 revenues to be the lowest for the year. These segment operating ranges support our expectation for 2023 annual consolidated revenues of $18.4 billion to $18.9 billion and adjusted EBITDA of between $1.8 billion and $1.9 billion. This represents another record level of adjusted EBITDA with expected full year adjusted EBITDA margins at the midpoint of over 10%. With these operating results, we estimate our range of GAAP diluted earnings per share attributable to common stock for 2023 to be between $4.67 and $5.17, and non-GAAP adjusted diluted earnings per share to be $6.75 and $7.25. Of note, we estimate our tax rate for the year will range between 26.25% and 26.75%. The first quarter rate, however, will be negligible, potentially zero due to favorable discrete tax dynamics associated with the increase between grant date value and the vesting date value of stock-related awards under our equity compensation plan. We currently expect 2023 free cash flow to range between $750 million and $1 billion with capital expenditures of around $400 million, which should give us the ability to be within our target leverage range of 1.5x to 2x by the end of 2023. We remain committed, however, to creating shareholder value with strategic acquisitions and opportunistic repurchase activity throughout the year while retaining our investment grade rating. Going into 2023, we have approximately $345 million of availability remaining on our current stock repurchase program. As a reminder, we've provided more guidance details in the outlook summary that was posted in connection with the earnings release and can be found on our IR website at quantaservices.com. The strength and versatility of our portfolio give us confidence in our ability to continue driving results against an uncertain macroeconomic backdrop. The infrastructure investment required to support North America's energy transition is still in its early stages and creates opportunities for Quanta to continue providing industry-leading comprehensive end-to-end solutions. Our relationships and the breadth of our solutions have proven to be critical in our ability to navigate the economic landscape of the last three years, and we are confident those attributes position us to continue along our expected double-digit growth trajectory. This concludes our formal presentation, and we'll now open the line for Q&A.

Excellent quarter. A few quick questions. Duke, backlog growth is fantastic here. Obviously, some of that is from some of your acquisitions. But I guess what I'm trying to get at is how do you think about backlog growth over the next couple of years? And maybe if you could comment on what you think your bid pipeline sort of looks like as it relates to backlog? Do you see an acceleration in your bid pipeline? It sounds like you might be seeing that, but any thoughts there would be helpful.

Thanks, Alex. The backlog is really not materially impacted when you look at the acquisitions, so take that out. I think we had broad-based backlog growth within the company. And as we look forward, I think you'll continue to see that throughout '23. The dynamic of the stacking of larger projects along with what we see at our MSA levels continues to be robust. And I think it will be broad-based across our Renewables as well as our Electric Power and even in our Underground & Infrastructure segment. So we see robust markets there. As we look at the bid pipeline, I think on the renewable side, you see more elongation out where it was just 12 months, you're seeing 24-months, 36-months type things within our backlog. So that's creating that growth as well there. But the pipeline itself, larger projects are certainly in there. However, our MSA business and base business is robust as well. So just a broad-based kind of look at the business at this point.

Hey, Alex. Just to add and to clarify that the acquisitions were done in January, so they are not in our backlog.

Fair enough. And then secondly, you referenced ongoing supply chain challenges. There's a couple of thoughts on that topic. One is supply chain challenges could hold back your ability to obviously acquire equipment to execute on projects. But also, when you layer in Quanta's historical achievements in managing difficult labor supply chain challenges and educating and training internally. Can you talk about how those supply chain challenges have allowed Quanta to gain market share kind of in this current environment right now and moving forward?

We anticipated the labor challenges. So I think craft skilled labor is still at the core of the business. We've invested long ago and continue to invest in it today. That is something that we are well-prepared for. The supply chain challenges with the fleet are something we've managed well, establishing great partnerships over the years. I believe we have the fourth largest fleet in North America. We challenge ourselves to stay ahead of labor and fleet issues. Through our collaborative manner with suppliers, we certainly gained an advantage that also allows us to foresee future needs. We will keep managing labor and fleet effectively, maintaining a steady approach.

Congrats on a great quarter here. I wonder if you could spend some time on the renewable segment. If you could comment first on how the Inflation Reduction Act is impacting customer conversations? And when you think it will start to show up in terms of either backlog or revenue? And then Jayshree, you made some comments about operating income at the segment moving in the right direction as you think '23. Can you help us give us the building blocks to think about that?

Yes. With the Renewables segment, when we look at the IRA, certainly, it's additive to anything we've talked about. I don't think we see anything at this point that has negative consequences. It does give us certainty over the next 10 years. As we discuss backlog and current conversations, it's certainly focused on U.S. content and labor considerations, all those elements within the IRA bill. Our readiness for this has been strong, and I'm proud of our approach. I'll let Jayshree comment further.

Yes, Neil, the Renewables segment margin and revenues, as we indicated, may show a slight dip in the first quarter but will pick up as we progress through the year. Industry comfort with the IRA will foster project advancement through Power Purchase Agreements and financing, leading to a notable increase in the back half of the year. We have been prudent with our guidance given ongoing supply chain and tariff challenges. Nonetheless, we're witnessing heightened interest and movement, which should materialize in the latter part of this year and into 2024.

I've got, I guess, a question just on the guidance and the acquisitions that you did post quarter. Just the $580 million that for three deals is actually a fairly large amount for you guys when you usually do kind of more smaller bolt-on ones per quarter. So maybe you could just give a little bit of guidance around the revenue and EBITDA contribution in 2023 from that incremental M&A?

Yes, the revenue contribution is around $600 million for those three deals, and I would just say that from an EPS contribution, they contribute around $0.15 to $0.20.

As far as the three deals, they're all within the strategic platform that we've set out and a regional T&D. One addresses the front end of the solar markets and wind, including batteries, while another contributes to the supply chain. These are all aligned with our long-term strategies. We've consistently said that the timing of our capital deployment can be lumpy and does not necessarily follow a pattern, so there’s nothing unusual here.

Good morning and congrats on a nice quarter. I guess just back to the renewable margins. I think you guys talked about investing in the business, which is weighing on margins, in particular in the first quarter. Can you help us understand the investments that you're making and how to think about how much that's impacting the margin guidance for the year? So I guess that's my first question. And my second question is, I’m sort of struck with the guidance that we're implying for 2023, $7 your company that typically guides fairly conservatively. So trying to think about if there's upside to the numbers in 2023 or downside to the numbers, could you just calibrate where the upside or downside could be given the good guide already?

Yes. Thanks, Jamie. When we think about the renewable segment, it’s primarily regarding utilization and absorption timelines. As we advance with stated projects, recovery occurs in the latter half of the year. But early phases may show reduced absorption as seen in both the fourth quarter and first quarter. We know the projects in our pipeline and have significant expectations for the second half. Our approach to guidance remains prudent, reflecting historical patterns of variability, especially concerning supply chain stability and how quickly we can implement IRA benefits.

I know there's been a lot of talk about the supply chain. However, I've heard that the transformer issue is still quite challenging with very long lead times. We've discussed this before, so I'm curious to know how much you think the situation is improving. Are things becoming a bit more predictable regarding some of these components that have been in short supply, particularly concerning electric transmission and distribution?

Thanks, Noelle. When we look at the supply chain, most of your larger customers have resolved many of these issues, not to say that transformers and certain items still have long lead times. This continues to pose challenges. However, once we understand the cadence of supply from our manufacturers, we can exercise more predictability concerning crew and asset deployments. That’s given us a competitive edge. I believe the transformer situation will take time to stabilize, likely extending into the back half of the year or possibly even into the fourth quarter before robustness returns to the market. Nevertheless, with EV penetration ramping up, we’ll see ongoing shortages and must remain vigilant in how we manage our asset deployment.

Just on the electric transmission and distribution customer's spending outlook. There's been some mixed data points on utility CapEx over the last few months, but I guess still overall positive. I'm curious about discussions you're having with the utility customers, specifically about planning for the IIJA funds, how are they integrating those into their spending patterns? And how will that ultimately flow into your bookings and backlog?

Thanks. Here's what we see. We observe North America experiencing load growth across all segments. The growth in generation in North America includes the expansion of renewables and addressing EV penetration. Pass-through capital projects are being prioritized particularly in distribution as utility investments adjust to accommodate the increasing demand for electricity and electrification. Despite hearing about mixed signals, our customers have indeed raised their CapEx budgets significantly, primarily focused on distribution and necessary transmission interconnects. Delays can occur, yet the essential nature of these improvements means they will not be indefinitely postponed. Our responsibility to ensure a resilient electrical grid means we need significant capital outlays over the coming years.

Great quarter. Great outlook. A quick question on electrical margins. So the guidance range for margins this year, 10.7% to 11.3%. It's the same guidance we started last year with and we ended up at the low end, 10.7%. So my question would be, what factors drove you to the low end last year and what could drive you to the high end of this year?

We talked about the segment. In general, last year, supply chain constraints had an impact along with inflation and increasing real costs, which we addressed early on in the first half of the year. However, we executed well through the second half. We now have greater insight into market behavior, allowing us to operate confidently at the higher end of the margin range based on our understanding of emerging markets around us. We continue to target a 12% EBITDA, which remains ambitious but achievable.

Duke, I want to go back to your comments about your focus on front-end. My question is, by how much does that greater focus on front-end work expand your total addressable market? Would you classify this as a pull from your customers versus a push from Quanta? Additionally, how are you thinking about building this out? To what extent do you plan to focus on inorganic acquisitions versus just organic growth?

When we look at the market, if you take it all together, it's approximately 30% or so of the total addressable market within our client base. We continue to build this out, as it improves efficiency on both our end and the clients'. It is critical for us to enter this business segment. Our clients are satisfied with our approach, and the projects underway underscore that. This strategy makes us more efficient from a construction standpoint, and we will continue to invest in this front-end pipeline as significant opportunities persist.

Got it. Okay. And then my second question is just on the supply chain. Can you talk about what’s embedded in your '23 guidance in terms of improvement maybe like versus where we are today? And then just going to the Renewables segment, how much of the revenues in '23 were delayed from '22?

Regarding the supply chain, our current outlook resembles the preceding quarters. Any improvement would be welcomed but will be evaluated as the year goes on. In the renewable segment, we expect some of our revenues for '23 to derive from projects that were delayed from '22; we are managing this onboarding and will update accordingly as projects progress.

Yes, it’s a mix. It's hard to specify how much is delayed versus additional backlog accumulation on the renewable segment since both factors are influencing our revenue expectations.

Duke, you announced several large T&D projects over the last couple of months. Can you talk about what you have in the pipeline relative to those types of projects and what your selectivity might be going forward? And maybe how that plays out over the next several years because these are much longer gestation projects than we have in your base business?

Yes, thanks, Michael. We've previously mentioned the stacking effect of these larger projects to bolster our base business. Over the years, we've carefully chosen to focus on this resilient business, which comprises roughly 85-90% of our operations. While we evaluate risks meticulously, we do not expect to win every project. In recent projects, we understand our cost and operational parameters, mitigating unnecessary risk. Our approach remains steady, and larger projects will continue to be a part of our pipeline moving forward into '23, '24, and beyond.

Duke, expectation for reduction in large pipeline work in '23 versus '22, is that just a function of sort of project sequencing for your business? Because your backlog is up pretty nicely in undergrounds that just sort of reflective of the environment we're in. And I also just be curious if there are still opportunities to fill that void you're sort of talking about for the underground business late in the year.

Yes, the backlog growth was primarily driven by MSA growth. We see reductions in larger diameter pipeline work contributing to an expected drop in revenue, guided towards about 450-500 million type range year-over-year. Nevertheless, opportunities for billion-dollar projects are still present, and our full-year guidance reflects solid coverage through our portfolio. Our prudent approach allows us to remain adaptable to any fluctuations in the market, both favorable and unfavorable.

Yes, I want to thank the men and women in the field, who are delivering exceptional performance every day alongside a commitment to safety. Their hard work has allowed for a successful quarter and achievement of our goals. After 25 years at Quanta, I believe we are just getting started. So I'd like to thank everyone for participating in our conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you, and this concludes our call.