Quanta Services Inc (PWR) — Q2 2023 Earnings Call Transcript

Thank you, and welcome, everyone, to the Quanta Services Second Quarter 2023 Earnings Conference Call. This morning, we issued a press release announcing our second quarter 2023 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, August 3, 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, including all statements reflecting expectations, intentions, assumptions, or beliefs about future events or performance, but that do not solely relate to historical or current facts. You should not place undue reliance on these statements as they 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. We'll also present certain historical and forecasted non-GAAP financial measures. Reconciliations of these financial measures to their most directly comparable GAAP financial measures are included in our earnings release and slide presentation. Please see Slide 2 in the appendix of the slide presentation for additional information regarding our forward-looking statements and non-GAAP financial measures. Lastly, if you would like to be notified when Quanta Services publishes news releases and other information, please sign up for email 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 will now turn the call over to Duke Austin, Quanta's President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services Second Quarter 2023 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's CFO, to provide a review of our second quarter results and full-year 2023 financial expectations. Following Jayshree's comments, we welcome your questions. Our second quarter results continue our solid start to the year with strong double-digit revenue growth that resulted in record quarterly revenues exceeding $5 billion for the first time in our history, as well as a record total backlog of $27.2 billion. We added approximately 3,000 employees during the second quarter due to the building momentum and increasing demand for our infrastructure solutions. We are investing in safety and training programs for our employees, expanding various service lines, and advancing our supply chain and other solutions. We are positioning Quanta for decades of necessary infrastructure investment and continue to believe our operational portfolio is a strategic advantage that provides us the ability to manage risk and shift resources across service lines and geographies, which we believe will become increasingly important as the energy transition accelerates. We believe our portfolio approach positions us well to allocate resources to the opportunities we find the most economically attractive and to achieve operating efficiencies and consistent financial results. Our Electric Power Operations are performing well overall, though segment margin experienced some pressure from lower utilizations in Canada. Demand for our Electric Power Infrastructure Solutions is strong, driven by broad-based business activity from utility grid modernization, grid security, and system hardening initiatives, as well as our reputation for consistent and safe execution. Accordingly, we are investing in resources ahead of the anticipated startup of multiple multiyear utility programs and projects. Additionally, our communications operations continue to execute well from both a revenue and margin perspective. Going forward, our utility customers' multiyear CapEx plans remain strong, and we are having discussions with a number of them about capital plans and programs looking out in years. North America's power grid continues to be challenged by a number of demands, including the need to increase the pace of modernization and increase the grid's resiliency and reliability through system hardening, enabling new technologies, facilitating higher levels of electric vehicle penetration, meeting growing power load demand, and capitalizing on favorable federal and state policies designed to accelerate the energy transition. We believe Quanta Solutions' offering and ability to safely execute consistently is industry-leading. We are uniquely positioned to collaborate with our clients on their multiyear grid operations. Renewable Infrastructure Solutions segment revenues increased significantly in the quarter, as construction of renewable generation projects within the multiyear programs ramped up and high-voltage electric transmission and substation work remained active. Segment total backlog reached a record $7 billion at quarter end, driven by the addition of SunZia transmission and HPDC converter station contracts and various renewable generation, transmission, and substation projects. We believe the momentum in this segment will continue, and we are making the necessary investments to scale our resources and capacity to handle multiyear renewable programs that we expect will yield record levels of new renewable generation over the coming decade, driven by the acceleration of North America's energy transition. Additionally, we are pursuing billions of dollars of high-voltage transmission projects that are designed to support current and future renewable generation capacity growth and overall system reliability. As we have discussed on prior earnings calls and reported more recently in the media, federal and state policies designed to accelerate the energy transition and the electrification of everything are expected to significantly increase load demand and are already pressuring the power grid. At the same time, there are significant challenges to getting regional transmission infrastructure built in a timely manner, primarily due to obtaining necessary environmental permits and regulatory approvals. The need for collaboration at all levels to ensure great reliability while minimizing cost impacts to the ratepayer remains the industry's greatest challenge. We remain pleased with the performance of our Underground Utility and Infrastructure Solutions segment, which delivered double-digit revenue growth and record second quarter profitability, demonstrating solid execution across our operations in this segment. Our Industrial Services Operations executed well, and we had strong demand for our gas utility and pipeline integrity operations, driven by regulated spending to modernize systems, reduced methane emissions, ensure environmental compliance, and improve safety and reliability. We believe we are in the early stages of capitalizing on significant opportunities across our service lines and geographies, which are driven by our collaborative solution-based approach that is designed to ultimately benefit consumers. Additionally, the growth of programmatic spending, with existing and new customers, increased renewable generation activity and favorable megatrends provide greater visibility into our near- and long-term growth outlook. As a result of these dynamics and our solid year-to-date financial performance, we have increased our full-year 2023 financial expectations for revenues, adjusted EBITDA, and adjusted EPS. The energy transition towards a reduced carbon economy continues to progress, and we believe it is gaining pace. Quanta is successfully executing on our strategic initiatives to drive sustainable and resilient operational excellence, total cost solutions for our clients, and consistent profitable growth. 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 our stakeholders. I will now turn the call over to Jayshree Desai, our CFO, for her review of the second quarter results and 2023 expectations. Jayshree?

Thanks, Duke, and good morning, everyone. Today, we announced record second quarter revenues of $5 billion. Net income attributable to common stock was $166 million or $1.12 per diluted share, and adjusted diluted earnings per share was $1.65. Our second quarter electric power revenues were $2.4 billion and operating income margins were 10.1%, consistent with our expectations for sequential revenue growth and margin expansion against our first quarter results. Our base business activities continue to lead the way for the segment of utility investments in hardening and modernization initiatives, creating growing demand for our comprehensive solutions. While the segment executed at a double-digit margin profile, it was negatively impacted by a lower-than-expected utilization of electric resources in Canada. Renewable Energy Infrastructure segment revenues for the second quarter '23 were $1.4 billion, with operating income margins of 8%. The revenue strength in the quarter reflects the growing momentum behind renewable energy infrastructure and our customers' ability to move forward with construction activities in this favorable regulatory environment. Margins improved sequentially as increased revenues contributed to better cost absorption and as we successfully executed through risks on ongoing projects. Underground Utility and Infrastructure segment revenues were $1.2 billion for the quarter, and operating income margins were 8.6%, a noteworthy second quarter performance. Both large projects and base business operations contributed to the elevated revenues, with margins benefiting from improved fixed cost absorption. For additional commentary comparing 2Q '23 to 2Q '22, please refer to the slides accompanying this call. Regarding backlog, with the inclusion of two of the three contracts with the previously announced SunZia award and continued robust activity in our Renewable segment, we achieved another record level at quarter end. At June 30, 2023, backlog was $27.2 billion, an increase of $1.9 billion compared to March 31. Our 12-month backlog is also at a record level of $15.6 billion, approximately $1 billion higher than March 31. For the second quarter of 2023, we had free cash flow of $46 million, measured at 78 days for the second quarter, lower than our historical average and aided by favorable billing arrangements associated with certain awards during the quarter. Regarding the Canadian Renewable Transmission Project, we've discussed in prior quarters, based on operating conditions and our ability to achieve stakeholder targets while overcoming the COVID-19-related challenges encountered throughout the course of the project, we decided to accelerate the construction schedule into the spring and early summer. As a result, the contract asset balance grew during the quarter and continues to pressure DSO, and will do so until we finish the project. Given our successful execution in the field and the ongoing discussions with the customer regarding significant portions of the balance representing approximately six to seven days of DSO as of June 30, we remain confident in our position. As of June 30, 2023, we had total liquidity of approximately $1.8 billion and a debt-to-EBITDA ratio of 2.5 as calculated under our credit agreement. We expect second half earnings growth and cash generation to support our ability to deleverage over the coming quarters while continuing to create stockholder value through opportunistic capital deployment. Turning to our guidance. We are pleased with our performance through the first half of the year and see significant strength in the back half of the year, particularly the fourth quarter. From a segment perspective, we continue to expect Electric Segment revenues between $10 billion and $10.1 billion for the year. However, we expect full-year margins will be impacted by the costs incurred this year in preparation for the anticipated growth in multiyear utility programs. That, along with pressure from our Canadian operations, is leading us to lower our full-year margin expectations for the segment to range between 10.5% and 11%. Regarding our Renewables segment, given the performance of the second quarter and increased visibility into project activity, we are raising our full-year revenue expectations for the segment by $700 million, now ranging between $5.2 billion and $5.4 billion. We continue to expect margins around 8.5% for the year, as much of the work is just getting started, and we will need to execute through project risks before margins have the opportunity to improve. After a good second quarter, we now expect revenues from our Underground segment to range between $4.4 billion and $4.5 billion, a $250 million increase at the midpoint, and we continue to expect full-year margins for the segment to range between 7% and 7.5%. As Duke said, given our performance to date and improved visibility, we are raising our full-year revenue expectations, which we now expect to range between $19.6 billion and $20 billion, a $950 million increase at the midpoint of our range. We've increased our expectation for full-year adjusted diluted earnings per share attributable to common stock to now range between $6.90 and $7.30 and increased our expectation for full-year adjusted EBITDA to range between $1.88 billion and $1.97 billion for the year. With regard to free cash flow, we are modestly raising our full-year expectations, primarily due to the expected increase in renewable revenues, which typically have a favorable working capital profile compared to our other segments. Therefore, we now expect free cash flow for the year to range between $800 million and $1 billion, with the highest levels in the fourth quarter, as is typically the case. We slightly modified other aspects of our guidance, the details of which are included in our outlook summary, which can be found in the Financial Information Section of our IR website at quantaservices.com. Looking ahead, we are excited by the momentum and highly visible and growing multiyear outlook behind our Electric and Renewable segments. Additionally, we are encouraged by the strength of our underground utility and infrastructure segment, which continues to grow and execute at a high level. With this core operating portfolio, we are confident in our ability to deliver comprehensive solutions to support the energy transition and to create significant shareholder value through organic growth and strategic capital investment. I'll now turn it back to the operator for Q&A.

Great, hey thank you. Good morning. A nice rebound in renewable margin this quarter. I was wondering if you could just provide an update on solar supply chain pressures previously seen, maybe how that may or may not still be impacting the new renewables business? And should that sort of be a factor here still for you for the rest of the year?

Thank you. Good morning. We are observing the solar supply chain pressures that we anticipated. We are managing through those challenges, and there was a period of six months where the industry came to a standstill. As we progress, we expected a rhythm in the solar segment, and that rhythm is unfolding as anticipated. We are certainly raising our guidance as a result. Looking ahead to 2023 and into 2024, we expect to see a more balanced margin profile each quarter, with margin improvements and opportunities that we foresee in the second half of the year and into 2024, 2025, and beyond being even more significant than we expected.

Got it. Thanks, Duke. And then just my follow-up. Can you talk about what from SunZia is reflected in bookings this quarter? Is there still more to come as you're likely still in negotiations? Is it all represented here in the financials?

No. We're still negotiating a third contract for the wind side of the business. We believe we'll have that completed in the second half of the year, ideally around the third or fourth quarter.

Good morning, Kip, Duke, Jayshree.

Good morning, Mike.

Duke, I want to follow up on your prepared remarks. You mentioned the challenges that customers, utilities, and regulators are encountering. Have these issues been resolved to date? Based on your conversations with utility clients, do you expect there will be more challenges in the next 12 to 18 months, or even sooner? Is this affecting the types of wind or solar developments being considered based on what regulators and your customer base are looking for as you manage your backlog opportunities?

Yes, Mike, that’s a good question. When we consider regulation and what is happening at the consumer level, the way we are providing rebates for electric vehicles needs to be addressed alongside the significant modernization required for the grid at the distribution level. This process should begin now, rather than waiting until consumers get their cars and find they have no reliable way to charge them. As an industry, we need to be proactive. It’s important to collaborate with utility customers at both the federal and state levels, especially in states concerned about consumer costs and capital investment, with federal directives pushing in a different direction. We need a better system to ensure we can meet the upcoming demands. Car manufacturers and our discussions have indicated that generation is increasing much more than we expected—possibly tripling instead of doubling. This change is undeniable. With the decline of coal and gas due to renewables, the implications for transmission interconnections and the necessary grid rebuilds are substantial. The capital needed for these upgrades is significant, and while future energy costs may seem justifiable, we must initiate our capital plans now, as they may exceed current expectations. We need to ensure the industry is working together. Despite inflation and other challenges, our clients are investing more capital. However, we must focus on the pace of advancements needed for the next three to five years, particularly the need for upgrading transmission and modernizing distribution systems.

The industry has been growing base load electricity at very slow rates. Are your customers expecting that to accelerate in the next five years? Additionally, do you have the capacity in your plans to meet that demand based on your three to five year outlook?

When considering transmission, it is certainly essential during fuel switching, especially as load shifts from data centers and AI to various sectors, resulting in widespread load growth in the industry. We experienced extreme heat conditions of 110 degrees, and the first quarter was generally mild for the industry. However, as we moved from July into August, many areas saw temperatures exceeding 100 degrees. These factors influence how capital is allocated and where investment is necessary. As temperatures increase on the grid from a planning perspective, the load growth becomes exponential.

Thanks. Good morning. Obviously, some of the investments you're making for growth are weighing a little bit on the electric margins for now, but it's not really a new concept you've long talked about how you need to make investments to prudently support the growth. So can you maybe just talk a little bit about some of those investments that you've made this year already to support the growth, if you can kind of quantify year-over-year what that impact is? And how should we think about the investments for the second half versus the first half kind of where you're making these investments and out of frame what that might look like in '24 relative to the investments in '23?

Yes, Steve, I think when you look at the quarter, we added around 3,000 employees. We normally add about 1,000. So when you start thinking through that, it does pressure where the company is capable of training, doing all the things that we need to do, the investments are already made. It's just pressure; there are four or five things that we could call out that are pressuring inflation, and you can call out whether we can make all kinds of excuses about it. Really, we can operate much better in Canada than we have been operating. The transition is a little bit behind in Canada, where we can operate Canada at normalized margins. We've been through the pandemic there. We've made different levels of, I would say, balance from G&A to training, to indirect and all those kinds of things in Canada. As we move out of '23 into '24, you'll get into more normalized Canadian execution, and I think you'll see much better results that we can absorb just about anything. The portfolio that we put together in the segments, which should allow us to train, to put people in place for the foreseeable future, and still even in outward growth years, produce the type of margins that we produced in the past. I see no reason why we can. And I do believe we can operate the renewable segment in double digits. I'll stand by it.

Okay. And maybe just to follow-up there. Jayshree mentioned that the Renewables margins are staying in this range until you can get comfortable with, I guess, execution and some of the other risk factors. So how should we think about the timing for allowing some of that upside to be realized in the margins and when could we see that better margin come through Renewables?

Yes, Steve. We're beginning several large transmission projects in this segment, along with thousands of renewable utility-scale solar and wind projects. Considering our current position, we initially thought the workload would be more concentrated toward the end of the timeline. As we progress through those contingencies, I anticipate we will see a more typical margin profile by 2024. We aim to maintain double-digit performance in the second half, or else we won't achieve the anticipated numbers. I believe there are opportunities available, and we've taken a careful approach to managing them. We've aimed for a balanced strategy, and I am confident that we will be able to establish a more consistent pace into 2024.

Good morning, everyone.

Good morning.

Would backlogs continue to rise in your underground utility business and revenue has actually continued to pick up. I know last quarter, you were modestly concerned. You did raise the forecast there for the year for this year. So what are you seeing on the ground there? And how are you thinking about the business moving forward? Could it end up being more resilient even into '24 than you expected?

When we examine the UI segment, we have mentioned our belief that we could achieve scale through some regional offices in the portfolio. We're beginning to see evidence of this in the segment. We have performed well, securing good industrial results in the first half of the year. As we move into the latter half, we have received some pipeline awards and have positive developments taking place. While we don’t necessarily need these additional factors to meet our targets, we do see potential for growth. However, we must consider the impacts of weather. We're increasing our electrical underground operations, which will cause some of our UI segment work to be classified under the Electric segment due to the way segment reporting functions. In terms of our teams and the scalability initiatives we are implementing, this should enhance our overall company returns. Additionally, the segment continues to perform well within our service lines.

Duke, maybe if I could follow-up on that. You did 8.6 in that UI segment, which is basically as high as we've seen Quanta deliver, but it's maybe the consistency over the last few quarters that's been interesting in that segment. So based on your comments, scale, balancing of the businesses there, could you continue to see more consistent and higher margin in that segment moving forward?

I always expected our performance to be in the upper single digits, and I still hold that expectation. We are cautious about how we progress in the second half, considering factors like the weather and northern climates. Overall, I believe that segment can function in that upper single-digit range. We are experiencing absorption benefits because we are providing electric, gas, telecom, and renewables services from the same offices. You will notice some growth from that, and margins are likely to improve, which is reflected in our results.

Good morning, everyone. I wanted to inquire about the Electric segment, specifically regarding the equity income contribution, primarily from LUMA. At $9.4 million this quarter, it seemed light compared to last quarter, and I noticed that you've adjusted your guidance for that contribution downwards. Considering that last year it was nearly double this amount, has anything changed in that business that suggests this is a more appropriate level for contributions moving forward?

LUMA is performing as expected; there are some investments that we have in other businesses there that are off in the first half. We expect those to pick up in the '23 and into '24. But Jayshree, you can comment.

Yes, Justin, we experienced a couple of significant events last year. A storm positively impacted certain entities in that segment, and we also had some recovery in LUMA, which you noticed last year. This year, overall, that segment is performing quite well. We continue to see operations progressing as we anticipated, with a bit of a pullback, but nothing major, and we believe we can manage through that while maintaining our performance levels.

Okay. And then maybe following up on Andy's question on just the margins in underground. Obviously, they were quite strong. Usually, you would have more margin in the second half than you do in 2Q, but your guidance would imply a little bit softer than it was in 2Q. But is there anything unusual like project closeout or something like that, anything quantifiable that was in the quarter that made those margins unexpectedly high?

No.

No. I mean we said our Industrial business performed really well in the quarter as well. So that certainly was strength in the quarter. And I do think when you start to look out, you do not have great visibility in the fourth quarter in the Industrial business. So that said, the prudent guidance would be to pull it down a bit in the fourth quarter. And that's kind of what you're seeing show up.

Yes, thank you. A couple of big picture questions. Duke, maybe your perspective on the M&A markets here. It has clearly been a core competency for you guys, particularly as we saw with Blattner. What do you think the market looks like for M&A? And are you thinking to the extent it is opening up smaller bolt-ons versus larger strategic?

Yes. M&A, we have a strategy. We have a five-year strategy to provide solutions to our customers. We see opportunities across the board really to add-on, bolt-on, provide solutions, do some things that we talked about our front-end services. There's no shortage of opportunities out there. We're picky about how we go about it, and we'll follow the strategy. We're watching our cash generation. We're making sure we can absorb what we have, and we'll be prudent about how we go forward. And anything that we're doing is following the five-year plan, the strategy we laid out to our investors, and we're ahead of those plans significantly. And I feel like the company is in a great position to provide those solutions that are necessary to keep the company moving forward at the pace that we've seen in the past. And we have good visibility into the next decade. And we're known for execution. We have to keep executing in the field while looking at the strategy to add on and deploy capital in the proper manner for our stakeholders.

Thanks, Duke. And that was the follow-up. If I go back to last April, you talked about the glide path of $6 to $6.50, I believe it was to $8 to $8.50. So like a 7% to 10% EPS CAGR. But then you talked about upside scenarios where you could get as high as $11 or $12. Just could you just give us a status update on how you think you're tracking relative to that plan? And remind us again, what are the levers that would get you beyond the base case of that $8 to $9.50 to some of those upside scenarios?

I think when you look at our guidance at the EPS level, which is what we're measured upon, we're ahead of the 10% guide now on a growth basis this year, relatively 13% or better. So when I think about it, we're already doing that as we sit here today. And I do think we set all levers of the balance sheet, the opportunities that we see going forward. We'll continue to, we hear a lot of big numbers and those kinds of things. We're executing at the local level. We're executing across the strategy and doing the things we need to do to drive EPS. And it's not just the top line; it's the quality of earnings. We're constantly talking about quality of earnings. If you look at our returns on return on invested capital and all of our returns, they are moving in the right direction as we go forward.

Good morning. Congratulations on the quarter. My first question, I wanted to ask about the outlook for CO2 pipelines related to carbon capture and sequestration. And just following on Exxon's acquisition of Denbury in part related to Exxon wanting to get larger in terms of the CO2 pipeline infrastructure. And just kind of curious what you're seeing out there in terms of outlook for potential building on those kinds of pipelines?

Yes. We see opportunities there across the board on hydrogen and also carbon sequestration. We do see that market as being a nice market. The blinds are usually smaller, they run longer, but they're smaller on that type of builds. But we're in constant discussions with the operators as well as the end users of hydrogen and also carbon the way we're looking at it. So I do think you'll see some of those lines move forward in '24, be some opportunities for us. The bill, the RA certainly provides economic benefits on both sides of that, and I do think that will help the market as well. So we are seeing opportunities in that area and staying in front of it. We've had some nice pipe awards. So we're happy with the business. We certainly said we would be able to handle those types of things, and we can, and we are. So I think it's opportunities for us. It's not the mainstay of the business, but we certainly like it.

For my follow-up question, I wanted to ask about the undergrounding of transmission distribution lines. It seems to be gaining more attention in the media and among utility companies regarding these multiyear programs to underground electric lines. Can you discuss what you're observing from a customer perspective? Is there a meaningful increase in investment in these programs?

In the West, there is ongoing fire hardening due to the fires, and the current insurability issues and the consequences of fires are pushing utilities to begin undergrounding their lines. This trend is still in its early stages and will take decades of reconstruction, but many lines in fire-prone areas will transition underground. The rising insurance costs are making it economical to underground, which is a significant change from a decade ago. Today, underground transmission is becoming essential. We anticipate seeing more underground lines in the areas we operate. There are substantial constraints with overhead wires, especially regarding larger transmission projects in Europe, and the supply chain is currently tight. However, as we progress, we expect to see more underground transmission projects come to fruition. While most of our ongoing work will remain overhead, especially for long-haul projects, we will see some underground initiatives in fire-prone regions.

Hi, good morning, guys. So my question is about the large versus small project mix, particularly for Electric Power and Renewables. Can you talk about what that mix is in the first half? What do it look like in the second half? And what did that second half exit rate mean for '24 and ultimately margins?

We don’t view it that way. Our focus is on utilizations, which are strong across all segments. You can expect larger projects, particularly in Renewables at this time. Bigger, multi-year programs will predominantly be in Electric. This all involves the same capital deployment and workforce across segments. We recognize that. The utilizations will remain high in both areas. Regardless of the segment, project starts are substantial, and the pace is beginning to build rather than just starting off. Currently, we are in the early phases of several large projects and programs. As we transition from 2023 to 2024 and then to 2025, we'll begin to see more consistency in our operations as we work through any contingencies, provided we continue to execute as we have over the past 25 years. This will position us well, and we can anticipate those contingencies contributing to future earnings.

That's helpful. My next question is about the Northwest Lineman's College. I'm trying to understand your ability to scale it to meet demand and labor over the next three to five years. Could you discuss what the current capacity is and how it can grow during that time? Additionally, out of the 3,000 people you brought on, how many came from Northwest versus other channels?

We recruit internally across the board; Northwest has a lot of curriculum development that is essential for scaling. It's one thing to add new recruits, but it's another to bring on 3,000 every quarter or 1,000 every quarter. While we are not completely satisfied with the Electric margins, which are down 25 basis points according to the guidance, there are still opportunities to operate at the level we expected. That said, it’s not as straightforward as it may seem. Northwest is definitely helping us place people in the field and execute quickly, and as we achieve better absorption, that will only improve. We have invested in these colleges and curriculums, and we are not facing challenges with cross-skilled labor or front-end engineering. Would we benefit from more workers? Yes. However, we are currently able to meet both existing and anticipated demands across any scenario we are considering. We are hopeful that the supply chain will catch up with us.

We believe we have made significant investments in the colleges and curriculums necessary to scale effectively. While there is always room for more cross-skilled labor and front-end engineering, we are currently meeting the existing and anticipated demands. We also hope to see an improvement in the supply chain.

Jamie, you're breaking up. I can't hear you. You got to do it again.

Right. Hold on. Can you hear me now?

Got you.

Okay. Sorry. So my first question, if I think about your guide for 2023 and the back half earnings trajectory, it's $2.10 a quarter or so, which implies if we just annualize that earnings of, let's say, a base of $8.40 million, and that's without SunZia. So I'm just trying to think about the back half of earnings in the setup and what that implies for 2024 is like can we think of an $8 base for 2024 without SunZia and that would imply upside to that? And then my second question is more to you, strategically. I understand you're fairly comfortable with your ability to ramp labor in this environment and capitalize on the growth opportunities. But to what degree do you get concerned just with projects like the size of SunZia that you want to limit the number of big projects you want to take on just in terms of more from a risk management perspective? Thank you.

Thank you, Jamie. I wanted to address the guidance for 2024. As we look ahead, we anticipate some seasonality in our numbers and run rate. We previously mentioned that we expect double-digit growth in earnings per share, and I see no reason why we can't sustain those figures. Could it exceed expectations? Possibly, but we're not ready to confirm that just yet. We're excited about the market opportunities ahead of us, and I believe we're well-positioned for the upcoming year. Our experience with larger projects like CREZ has prepared us well. We're staying focused on our customers, and our base workload remains at over 80 percent, which I expect to continue. We will pursue large projects as we progress, and we're consistently negotiating various programs that can span several years, while others may be shorter in duration. The nature of these projects varies, but our company is concentrating on executing them effectively. I perceive benefits on both sides, especially with increased material content in our EPC (Engineering, Procurement, and Construction) business. This presents different opportunities for us. From a returns perspective, we perform better when we can manage material costs efficiently. There are numerous favorable factors at play, and I consider this a competitive edge for us as we become a significant buyer of materials. I am pleased with our direction, and I believe that expanding our larger projects will further strengthen our business and enhance our ability to deliver solutions to our clients.

Hey, good morning, guys. Nice quarter. Hey, Duke, what's the outlook for large T&D projects in Canada? And if it's not good, can you shift some of those resources back to the U.S.?

Good question. We see a strong market in Canada. We already have some contracts that we expect to begin by the end of the year, and we have excellent clients collaborating with us in Puerto Rico. With a substantial customer base in Canada, we can allocate resources and engineering capabilities. There are aspects of our operations in Canada that we can apply in the Lower 48 states. I wish crossing the border was simpler; it would definitely assist us in terms of skillsets. However, the company has done a good job of reallocating resources and managing operations in Canada. Overall, when I take a step back, COVID had a considerable impact there, even more than what we experienced in the Lower 48, and it often goes overlooked. We sometimes think it wasn't a big deal, but it was significant, and we were operating in camps and other unique conditions. If the market doesn't improve, we may have to downsize, but we currently observe a transition taking place. We're noticing increased activity in wind, solar, and hydro projects in Canada aimed at decarbonization. We're right in the center of these developments, though they are slightly behind the Lower 48. As we catch up, I believe we will see normalized margins in Canada and a robust market.

Okay. In the Renewable segment, I hate to ask about 2024. But Jamie started it. You really surprised me with the top-line results for renewables in 2023. I'm curious how you plan to build on that success next year.

I think we can continue to grow the business in the Renewable segment. We said it when we purchased Blattner; kind of the cadence of that, and you're coming off of a year where the outward, what I think pullback was primarily due to the solar panel discussions. And when that cleaned up, there was pent-up demand, but I also see a great future in a future market. You're going to see quite a bit of wind repowering coming up as well as wind projects. And I don't even think you're seeing that yet. And when you start to see the programmatic spends of the wind repower on that as well, the company is positioned nicely for those things, and we'll take advantage of that. That was what led us to the Blattner acquisition, and I think that strategy is playing out. And we see decades of renewable switching; you have load growth as well that will go towards a renewable state. So as you see load growth double and you start to say, okay, well, how much carbon are we going to take out of the system while you're getting the load growth, it's significant. EV penetration, all those things are starting to hit the electrification of everything. And then you have the security issue of North America where you're onshoring. All these things are happening at once, and I see really, really good markets for a long time. Can you have some blips in the radar? Of course, but on a CAGR basis over time, we like what we see, and we'll continue to execute in the field, which is our main concern is to make sure that we execute, build projects on time, on budget that are at a cost that's what we feel is economic to the consumer.

Yes, thanks for taking the question. In terms of energy storage. Are you starting to see an increase in demand for that in the renewables segment? If so, in what regions, and as storage is incentivized at a residential level, does that have any impact on transmission and distribution?

I believe energy storage has significant potential and we're already observing considerable growth. I would estimate that our size in this area has about doubled, give or take 10 percent, with numerous storage projects emerging. This trend is especially evident in the western regions, but we are witnessing activity across various areas. From a utility-scale perspective, this growth is crucial given the current market demands. While our involvement in this segment has been modest, it is definitely on the rise. We have been at the forefront of this development and are performing well in the storage sector. I believe it has the capacity to alleviate some of the stress on transmission systems. However, batteries will continue to improve over time, and while storage capacity is advancing, we are not quite there yet. For the foreseeable future, it will still represent a small part of our business, but it is growing. I am optimistic about this segment; it aligns well with our solar and wind initiatives. We're exploring ways to enhance battery efficiency, and while improved storage can relieve some transmission pressure, we do not anticipate any significant decline in transmission at this time.

Hi, team. I wanted to come back to the comment about adding basically 3x the normal run rate of people in the quarter? I mean, obviously, that's pretty notable. I mean other than the obvious signal that that's positive for underlying demand trends. What else we should take away from that? Is this showing an ability for the training infrastructure to flex up? Maybe we've hit a new kind of throughput level there? Any additional thoughts on this addition to the human capital story this quarter?

I think, Sean, it's just a great example of what we've tried to say for a long period of time that we're able to scale the business. And a lot of people can talk about it and a lot of people can talk about scaling it. I want to see somebody at 3,000 and put the projects in there and execute at the levels we're executing. So I think we put the infrastructure in place to be able to do this, not one quarter, but over time, and it surprised me a bit from a seasonality standpoint; we added quite a bit in Renewable segment. And their ability to scale their business to these utility-scale projects adds many reasons why we acquired Blattner, and we have the resources that we have internally. I just can't say enough about what we do from an execution level in the field every day to put the numbers up we put up. And they're just doing a really, really nice job. And we have great curriculum, great people. We'll continue to build upon what we have. It's exponential the way I see it in the curriculum and the things that we're doing from technology and training and things of that nature. We're certainly at the forefront. I look forward to us continuing down the path that we're on.

Hi, thank you. I wanted to ask about the renewable power growth and kind of as it relates to the CAGR that you outlined at the Analyst Day last year of 10% to 12%. It would seem like you're well above that rate here, exceptional year in '23. But how should we be thinking about that 10% to 12% now? Is there upside to that? And how much of a bottleneck is interconnection? Thank you.

I believe that when we assess the situation, we discussed a 10% reduction in risk at the lower end on a compound annual growth rate basis. Looking at all aspects of the balance sheet and the major trends we are observing, there could be a 15% growth in the outer years with acquisitions and smart utilization of our balance sheet and free cash. If we continue to invest similarly to how we have in the past, I am optimistic about achieving higher growth in the future. However, regarding organic growth, the current state of our business and the queues indicate there is some tightening. Specifically, our transformers for high-voltage direct current projects are 24 to 36 months out. If you have a project today and haven’t ordered your transformers, you’re looking at significant delays. This shouldn't impact our existing clients, as they typically have already secured transformers or have slots allocated. The challenge arises for those pursuing new projects; it’s not just about getting in line but also ensuring they have transformer capacity and necessary infrastructure in place. Planning is crucial here. I do think there is some improving clarity in regulation, and I’ve noticed a greater level of collaboration among the federal government, FERC, states, and the utility sector, more than I’ve experienced in my career. It's essential for us to work together as an industry over the next decade and beyond.

Thank you. A very nice quarter. DSOs have improved into the 70s from past historical ranges of the high 70s to 90s. Can you talk about the catalyst to this and whether or not mix or contract terms have been a factor? And maybe expand a little bit more on contract terms today versus a handful of years ago, and if they've become a little bit more favorable to the contractor?

Yes. I'll say a little bit. We're acquiring more materials and things of that nature, Alex, so it's helping us a bit on some of those projects from a DSO standpoint, but I think that's the bigger piece of what you see from a term standpoint. We need to be able to order outward, and you've seen some inventories; our inventories move up a little bit here or there on some of those things. But that said, I think that's the better terms. And Jayshree, you can comment on the DSOs.

Yes. I think we've talked in the past about our expectations will improve on our DSOs and our working capital, and we're starting to see that. In terms of contract terms, certain parts of our renewable projects definitely allow us to because the materials or the way the work is performed, allow us to run in a positive working capital. And you're seeing some of that benefit coming in now. But in general, we're feeling good about where our DSOs are headed as well as our cash flow projections. And you see that's why we modestly increased our cash flows for the year. It's moving in what we expected, and we'll continue to see that improvement as our business grows in the Renewables segment.

Thank you. We want to thank the 52,000-plus employees of Quanta for their commitment to safe execution. It does not go unnoticed that you're working in over 100-degree heat every day. Thank you. And I want to thank all the participating people in our conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.