Greetings and welcome to Quanta Services Inc Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kip Rupp, Vice President, Investor Relations. Please go ahead, sir.

Great, thank you, and welcome everyone to the Quanta Services conference call to review second quarter 2017 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts by going to the Investors & Media section of quantaservices.com. We encourage investors and others interested in our company to also follow Quanta on social media channels listed on our website. Please note that in today's call, we will present certain non-GAAP financial measures. In the Investors & Media section of our website, we have posted reconciliations of the differences between these measures and their most directly comparable GAAP financial measures. Please remember that information reported on this call speaks only as of today, August 3, 2017, 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 forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or that are 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 company's 2016 Annual Report on Form 10-K and its other documents filed with the Securities and Exchange Commission, which are available on Quanta's or the SEC's website. Management cautions that you should not place undue reliance on these forward-looking statements and Quanta does not undertake any obligation to update any forward-looking statements and disclaims any written or oral statements made by any third party regarding the subject matter of this call. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

Thanks, Kip. Good morning everyone and welcome to the Quanta Services second quarter 2017 earnings conference call. On the call, I will provide operational and strategic commentary before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detailed review of our second quarter results. Following Derrick's comments, we welcome your questions. We remain on track to achieve our full year guidance and multiyear outlook. We continue to execute on our core business and strategic initiatives and continue to believe that our end markets are strengthening. As a result, we believe 2018 and 2019 are firming up to be solid years for both our electric power and oil and gas segments and that Quanta is in a renewed multiyear up-cycle. While the timing of when project contracts are signed and reflected in our backlog can be challenging to predict, we have good visibility into the overall CAPEX and OPEX spends of our end markets and remain in active discussions with our customers for billions of dollars of work. I will note that the timing for larger projects is currently more difficult to predict due to the lack of commissioner quorum at FERC. Despite these challenges, we believe it is not a matter of if larger projects move forward, but when. We continue to believe end market drivers remain firmly in place and that we have the opportunity to achieve record backlog levels over the next few quarters. Turning to the electric power segment, we are generally pleased with our performance during the quarter as mentioned earlier. We continue to invest in the workforce for our electric distribution business, which created short-term margin pressure in the second quarter, but it is necessary to support future growth. Nevertheless, we are on track to achieving our margin expectations for…

Thanks Duke and good morning everyone. Today, we announced record second quarter revenues of $2.2 billion. Net income attributable to common stock was $63.8 million or $0.41 per diluted share compared to net income attributable to common stock of $16.6 million or $0.11 per diluted share in the second quarter of 2016. Adjusted diluted earnings per share, a non-GAAP measure, was $0.50 for the second quarter of 2017 compared to $0.18 for the second quarter of 2016. Consolidated revenues increased almost 23% when compared to the second quarter of last year. This overall increase was primarily associated with increased capital spending by our oil and gas pipeline customers on larger pipeline transmission projects and increased capital spending by our electric customers on multiple types of services and project sizes. Our consolidated gross margin was 13.7% as compared to 11.2% in the second quarter of 2016. This increase was driven by improved margins in both segments, which I'll discuss later in my prepared remarks. Selling, general, and administrative expenses were $185.9 million in the second quarter of 2017 or 8.4% of revenues as compared to $156.6 million or 8.7% of revenues in last year's second quarter. The increase in SG&A was primarily due to higher compensation costs largely associated with higher incentive compensation based on current levels of profitability as well as annual compensation increases and increased personnel to support business growth. Also contributing to the increase was $5.1 million in incremental G&A expenses associated with acquired businesses, which included a $3.8 million increase in acquisition and integration costs. We also made a $2.4 million charitable contribution during the quarter. This contribution was an initial grant to help form a non-profit line school and to fund its operations for the remainder of 2017. We anticipate making future annual contributions starting in…

[Operator Instructions]. The first question today comes from Matt Duncan of Stephens Inc. Please go ahead.

Hey, good morning guys. So, first question I've got, Duke, you talked about this a little bit in your prepared comments. It's regarding the lack of a quorum at FERC. And it sounds like you still feel pretty darn good about the outlook for 2018 and 2019, pretty on par with your comments from the analyst meeting back in early April. At what point would the lack of a quorum at FERC become a problem potentially, for revenues and profits in 2018? When do you think you need to see that by, for everything to stay on track timing-wise into 2018?

Yes, good question. From our standpoint, what we're hearing from customers and how we're looking at schedules, we believe that everything that we're hearing that there will be a quorum, number one. I think yesterday or day before yesterday, some of them moved through committee, so that's a good thing and a good sign. We're not here to predict when that's going to happen. D.C. has been -- every day is something new. So we don't know, but our customers are optimistic and so are we. As far as when we need to get it, it depends on the regulations and what area you're in and how much they relax those as well. What we're hearing is good things about some of the relaxed -- relaxing some of the regulations on us as far as clearing and things of that nature will ease the construction and so you could get later in the year. But as we see it right now, we're optimistic that the quorum will happen and we'll get approvals on some of these larger projects.

Okay. And the second question, on Stronghold actually. Not long after you guys announced that deal, there was another public industrial services company that preannounced a pretty messy second quarter. So can you help give people a little bit of peace of mind here on sort of how your business -- how that business, I guess, has held up better than other industrial services companies? What is it that makes it a more sticky business that's been able to grow that you think you can continue growing? And then, maybe talk a little bit more about what some of the cross-selling opportunities are that you see there and the revenue opportunity associated with those markets.

Yes. So in general, the industrial service business, we've been in it a long time, and we performed very well on our high-voltage side down. So we understand the market and we understood the others that have -- came out with announcements and where they were at as well when we made this acquisition. We fully understand. So that being said, what we do is we're critical path on both sides of that. And it's necessary -- our services are necessary in any turnaround and also in any cost structure that you would have in a turnaround. So if you wanted to expedite a turnaround, we believe that what we do is critical from our handling capabilities on the catalyst side to our high voltage side as well. So those two things are extremely important as well as all your ancillary services around that. That being said, the company that we bought has a five year track record plus a double-digit growth as well as a margin profile that's industry-leading, and we're confident in our guidance and what we bought. We're happier today or as happy today as we were when we purchased the company and believe the company itself fits in well. And everything that we've seen has been great as far as the management team and we're extremely happy and they fit in well as far as that goes. As far as cross-selling, we've been able to cross-sell already and have good client conversations about how the two put together and we can do unique things on the turnaround side.

The next question is from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.

Hi, guys and congrats on a decent quarter. I guess, first question. If you look at your comments in the past, Duke, about record backlog this year, would those still hold if you don't book Wind Catcher in the third quarter or did that project just come out of the blue in terms of timing of booking?

My comments were pre-Wind Catcher. And I also want to reiterate on the quarter, I think we had an exceptional quarter. We're right on track. We think that, from what we see, the markets and also our guidance is intact and we're affirming as well as increasing as far as I'm concerned.

Got it, and I agree based on what I saw today. And, I guess, the second question, Duke, we track these transmission projects pretty closely. It seemed like this one popped out, at least for us, out of nowhere a week before you announced it. Have you seen some of the regulated utilities that have been a little more slow in terms of announcing larger projects come back on the map?

Yes, Tahira I think you know we've been consistent in talking about our base business, which is particularly about 85% of what we do on any given day is our base business. The larger projects are a small piece, 15% of the business. So we're around the edges on them all. We talk to our customers all the time. We're involved in many, many projects, some as big as Wind Catcher, some not. But in general, we understand the markets. We understand the end markets and then we're able to get in front of that and provide solutions. We've said all along, we need to be solution-based. We need to able to program manage. We got out in front of some engineering capabilities, and it's consistent with what we've said for the previous years and where we're going with the company as far as the solution base. And our relationships with the clients and our execution capabilities are exceptional. Our guys in the field are just exceptional.

The next question is from Jamie Cook of Credit Suisse. Please go ahead.

Hi, good morning. A nice quarter and bookings. I guess two questions; one, Duke, longer-term or Derrick, you guys put out at your analyst meeting your medium-term targets of the $10 billion in revenues. With the Wind Catcher project in Line 3, just sort of how you're thinking about the time line associated with the $10 billion, does that get pulled forward to some degree maybe to three year versus five year and confidence that margins will come through, given some of these bookings? And then, I guess, just the second question, I was pleasantly surprised by the bookings on the communications side. So can you just talk about the momentum you're seeing there and whether there is any upside to the implied revenue guide for communications in 2017? Thanks.

Yes, Jamie. I think, in general, what we'd say -- let me go backwards on the communications side as we've kind of commented on the $150 million to $200 million. We think we're on upside of that, the $200 million, as we sit today. And we're proud of where we stand there and what we've been able to do so far, primarily with organic growth there, almost holistically, organic growth. So we're happy with where we sit as far as the communications go. I'll comment a little bit and turn it over to Derrick on what we said from a comment. When we gave the commentary on the $10 billion and what we said, we said we could see it. We never gave a time frame. We stand by that. We can see it. And so we see it; it's attainable. We wouldn't say it if we couldn't see it and I'll leave it there. I'll turn it to Derrick on the numbers.

Yes. Well, I mean, inherently I mean, our original discussion of that was excluding acquisitions. And so the Stronghold acquisition alone gives us a $500 million uptick to that number. And so based upon the guidance that you're seeing here for 2017, which is only inclusive of a partial year of Stronghold, I think that you would say although we're not in the spot of giving that multiyear guidance yet, that you would see a number in a much more sooner time frame.

And sorry, just the one thing you didn't answer, and Derrick, and I'll give this question to you because we've been going back and forth on this for a couple of years. Given the bookings that we're seeing, can we get confidence that, at least by 2018 we're back in our targeted range for electric transmission and, to some degree, oil and gas?

Yes, I think that quite honestly, when you look at our annual guidance of 9% to 9.5% for electric power, for us to get into that type of range you're going to have to see a stronger performance in the back half of the year. And that stronger performance is going to be at or near that double-digit margin. I'll reiterate that over the last couple of years, I've spoken about, and it's the same thing for 2017, that electric power, excluding Canada, is operating at the double-digit margin range. As it stands here for the -- for 2017 as a year as well as even the second quarter, it was very near or at the double-digit margins, excluding Canada. And so the headwinds in Canada had put some pressure. As we look at the back half of the year, it is some of the improvements in Canada because of the moving on to some of the larger transmission projects that are also helping to contribute to the higher margin profile for that back half of the year. So on an ongoing basis, we think that, that still bodes well for us to feeling comfortable with those double-digit margins on electric power.

The next question is from Noelle Dilts of Stifel. Please go ahead.

Hi guys, good morning. It was nice to see the Enbridge Line 3 win in Canada. It looks like you got about 25% of that Canadian mileage. So looking at that job, it looks like there is the two spreads scheduled to begin this year, six spreads scheduled to begin in 2018. So my question there is, is there any additional opportunity associated with those six spreads and then how are you thinking about the U.S. portion? And then, of course, any assistance you can give us to help us size that opportunity would also -- the portion you've won and then potential opportunity would also be great?

Thanks Noelle, I think, in general, that we basically work with Enbridge on the rest of the project. We bid some of it in Canada. There's another portion that will come out later that we'll bid as well. They're great clients. We continue to work with them, a collaborative effort across both Canada and the Lower 48. We're not -- I don't want to get into a bunch of comments on where we're at on specific projects for competitive reasons, but in general, great, great client and we look forward to work with them -- working with them on this piece of work.

Okay, great. And then, can you just give us a little bit more color on the telecom acquisition, sort of what this brings to you from a strategic standpoint, maybe key customer relationships that maybe come in with this, how you think it could grow? And then, are you looking to do additional kind of smaller bolt-on telecom deals?

Yes. Noelle, it was a small acquisition. And it brought, actually, no backlog to us in the Southeast, but great client relationships and such. So we're able to leverage their client relationships across a broad spectrum and add our solution capabilities and some of the people that we had already. And we pulled them out of Canada and such and then really boosted our telecom operations and get a kick start in the Southeast. If we're able to do that in multiple areas, we'd do it, but it was a very small acquisition. I do not think we have a kind of a program as such as far as an acquisition profile in any way, shape or form going forward. We said we'd organically grow and I think that's the intent, but we're not going to pass up good opportunities.

The next question is from Alan Fleming of Citi. Please go ahead.

Hi guys, good morning. Duke or Derrick, you averaged around 6% oil and gas margins through the first half of the year versus closer to 1.5% in the first half of 2016 and then last year you did 5%. So we know you want to keep expectations manageable for particularly the fourth quarter and you did raise the bottom end of the guidance there to 5.5% to 6%. But given kind of the confidence that you have in bookings and Line 3 coming in, I mean, is maybe the low end, at least the low end looking a little conservative now?

No. I mean, I think that our primary concern is the timing of projects themselves. I mean, when you think about that, any of the projects in oil and gas specifically, can be moved -- whether it be the third quarter or fourth quarter, the timing of when the weather aspect and whether you are able to accelerate based upon the winter weather or not. So we're pretty cautious about that. And at the same time, I would still say that we still see a reasonably marked downturn between the third quarter and the fourth quarter because of the timing of when we're working on some of the larger transmission projects. So you're right that we had pretty strong margins in the segment in the second quarter. But I think as we go forward and here in the third and the fourth, you should expect some level of margin pressure in the fourth and a big portion of that is us being cautious about how the winter builds into playing out.

Yes, a little commentary as well. When you compare it to 4Q of 2016, we are on multiple large spreads in the South and so that's not in our backlog as we see it today. So that's part of our comparable issue as well.

Okay, that's helpful. But maybe you can talk a little more about how you're thinking about cash flow in the second half of the year, DSOs around 80 days this quarter. I mean, what's your confidence in being able to get those down in the back half and do you think you -- a little bit more focus on working capital can help even as some of these larger projects start to ramp like Fort McMurray and Line 3?

Yes, I mean, I think that, in my prepared remarks, I commented that we're typically in the back half of the year, we're a stronger free cash flow company and I think that will be very much the case here still for 2017. At this stage, I would tell you that I expect free cash flow to be stronger than it was last year. Previously, we had been forecasting that the Canadian work would have some delays in that, but obviously we have reached a substantial improvement of that here in the second quarter. That's going to contribute to the third and fourth quarter free cash flow. I feel pretty comfortable that we'll have a pretty strong end of the year in that regard.

The next question is from Chad Dillard of Deutsche Bank. Please go ahead.

Hi, good morning. So you mentioned that there is an investment in the distribution that caused margin pressure in the transmission during 2Q. Can you just talk a little bit more about this, could you quantify how much pressure there was? And is it only a 2Q event or do you expect that pressure to continue over the next couple of months? And then also, just moving over to oil and gas, were there any closeouts for that segment in 2Q, if not, were there any baked in, in the second half of this year?

Yes, I'll take the electric side of it. In general, I think what we saw in the quarter, we added 500 or so people. We've added 1,500 as we look at the year so far just without the acquisition. So when you're doing that, in the distribution business especially, it does create some inefficiencies. It was -- what we see in baseload work and how we're ramping on that certainly caused some unique issues as well as we are ramping on our telecom business. And so in the segment, it caused some unique variables. And I think that's not what you see going forward. When you look at this business as we do and give guidance over a period of time, our ability with utilizations and such that just goes away. But that was a unique kind of quarter where you saw some pressure. It was not that much. And as Derrick said, we were still in the double-digits in the Lower 48, but we thought we should at least comment to it.

Relative to gas, I mean, we did execute two contingencies in a couple of our larger -- large diameter projects. That's -- we bake contingencies into these projects to deal with the risks inherent with them. But as we came to the second quarter, we were able to execute through and manage those contingencies so such that as some of those jobs neared completion, you saw that fall to the bottom as expanded margin.

That's helpful. And then, just moving over to Canada, can you just talk a little bit about the bidding environment on the transmission side? How's that changed in the last three to four months and whether you're seeing any recovery or have conditions softened in that market?

Chad, in general in Canada on the electric side, we see on the larger side -- large transmission side, we still see opportunities there. We've been disciplined about how we bid this work. We're starting West Fort McMurray now in the field and we're happy with where we sit there. We'll be -- we'll continue to be disciplined up there. We know our costs. We know where we're at, and we see it strengthening from a large project standpoint with non-core Nalcor as well as starting West Fort McMurray. And even when we come off Nalcor, we feel comfortable that we'll start to see that market strengthen due to that -- those projects as well as some of the base business coming back on your Eastern side of Canada as well as on your Western side of Canada. But in general, the overall economy is depressed due to the energy markets. We've been [indiscernible] that will help on the gas pipeline. So we are seeing opportunities there as well. But more importantly, I think our discipline on large projects and how we price work at states that size and we don't have any projects that we are off the rails or any issues, which I think says a lot about our execution capabilities as well as our bidding discipline as we move forward.

The next question is from Steven Fisher of UBS. Please go ahead.

Hi, good morning guys, this is Cleve on for Steve. Duke, just jumping back to the conversation about the FERC, once a quorum is established, how quickly do you think pipeline projects could actually move forward? I mean, are they pretty much staged and ready to go or is there additional citing and state regulatory requirements that need to be finalized?

I mean, I think, in general, the process within FERC has moved forward. The work underneath is ongoing, right of ways and things like that are getting bought, easements, all the necessary things within the state levels are getting done. We're optimistic on the ones that we're looking at or working or collaborating with our customers that we're moving forward. And as we stated before 2018 and 2019 we believe will be a robust environment. And so when we see that, again, it's mainly just waiting on the FERC quorum and final approvals, in my mind, to see us into 2018 and 2019.

Okay. And then, I just had a question on the EPC power projects. When you guys book that work, how does -- and, I guess, how does Quanta's risk profile change? Is there any more or less fixed price risk on this type of work or is it really just more of an opportunity to expand into different areas of the project?

We've been -- we've performed EPC work for 50 years, primarily on the transmission side of the business, substations. So we're very familiar with EPC and the risk profile. I'm confident in our capabilities internally to perform that work on leaner construction. And again, we had the power plant that was a problem, but that was something completely different, something that we stated that we're not in today. So that being said, we do understand the risk profile, having had -- of that project, on something that we didn't understand as well. So I think, in general, what you see and what you see in our backlog and our ability to perform on EPC, on electric side or the gas side, we do it very well. We're excited about the opportunities.

Thanks a lot guys.

The next question is from Alex Rygiel of FBR & Co. Please go ahead.

Thank you and nice quarter. Duke, can you talk a little bit about the mix shift in your electrical business, particularly as it relates to increasing level of EPC work and how we should think about its effect on margin over the next two years?

Yes, Alex. We looked at that. I think, in general, what -- we can stay in our historical margins with the mix of EPC that we have today. If that changes, we'll come out and say so, but what we see today, we're very comfortable. And I'll let Derrick comment on some of that, but in my mind, I'm happy with where we're at. I think we can stay in historical margins. We're not there yet, but probably we'll be there and even with EPC, but I'll let Derrick comment.

Yes. The only thing being is, is that if materials is a larger component of the overall contract, in some circumstances, you see pressure on margins. But to Duke's point, to the extent that we have contracts where material component is larger and diluting the margins, it will be our intention to somehow kind of bifurcate. So people are able to see what's happening from the construction side versus the material side, but we'll have to just address that as the level of mix of those contracts come forward.

And I believe your revenue contribution from Canadian operations last year was around 20% of total company revenue. How should we think about that number changing over the next couple of years? And what kind of implications are there towards that change?

That's probably right. It's in that 20% range. On a go-forward basis, we'll have to look at how, as an example, Stronghold and the like comes in. I think for right now though, between the markets that we see in the opportunity, whether it be in oil and gas or electric power, I think still holding something in that 15% to 20% range for now is likely a good number. We see double-digit type growth opportunities in the Canadian market as much as we do in electric power. So right now, I think I'd say you probably anticipate some sort of similar percentage.

The next question is from Andrew Wittmann of Robert W. Baird. Please go ahead.

Great, thanks. I guess my first question is on the pipeline side of the business. And you guys always have a pretty good sense about when -- on projects that your customers want to move on relatively urgently when you've got the awards. And so, I guess, I was just hoping you could give us a sense of the quantity of work that's pent up at the FERC that you know that once they do rule on it, you'll be ready to get to work in short order.

Yes, and I think we have consistently commented on this that we believe we'll be booked in 2018 and 2019 in the Lower 48. We stand by those comments.

But can you give a dollar amount to it, I guess, is my question.

I just did. We're going to stand by our books. We believe we have a robust environment. It's difficult for us to comment on what that is going to look like. And certainly, in 2018 to 2019, we're not going to give multiyear kind of quantification on it other than to say it's a robust environment and our spreads, we believe, will be booked in 2018 and 2019.

The next question is from Brent Thielman of D. A. Davidson. Please go ahead.

Hey, thank you, good morning. On communications, is that running -- or, I guess, with the new work you've picked up and are looking at here going forward, any reason to believe that could potentially be accretive to electrical segment margins as that ramps up?

Yes, I mean, again, as you start to see utilizations go up and project mix go up when you see bigger projects and the big transmissions start to move back in, as we've said before, the margin profile and -- at the risk profile and margin profile, we believe we can execute through. Certainly, it drives your margins up, but again, our base load work and what's going on in there as well, it's not necessary, but it should enhance margins.

Yes, okay. And then, Duke, what is something like Wind Catcher moving forward due to the market. Can something as large as that be a catalyst to get other utilities moving a little faster on the programs or at least look to secure contractors like yourself?

Yes, I mean, I think, as far as we see it, the labor environment and the amount of labor and qualified supervision that's in the market out there today, we talked about in the past that we've been a little heavy in supervision in certain areas a year ago or a year and a half ago because we saw some of this coming. We're in a really good spot from a labor standpoint as well as working with our line programs and things like that. We saw some costs roll through there. We got in front of the build. We consistently talk to our customers about what's going on and preplan and get involved with them on a collaborative effort. And that being said, it allows us to look at things like Wind Catcher and a multitude of projects, both on the merchant side and with our customers that -- most of over 50 years with us. So we stay involved with them and I think we're in a good spot and we really like the market going forward as I said before.

The next question is from Noelle Dilts of Stifel. Please go ahead.

Hi guys, just a couple of quick follow-ups. So first, given what we're hearing from some of your peers about weather impacts in the quarter, I was curious if; one, weather was meaningfully detrimental at all in the quarter and also if you had any meaningful storm work? And then second, I was wondering if you could give us just an update of what your mainline spread utilization was in the quarter?

Yes, Noelle. I think, in general, from a weather standpoint, I mean, we bid kind of a weather pattern in our work and certainly there was probably something across -- the Northeast, I believe, was pretty wet. Again, we looked at it. We looked at the weather patterns, we have historical, and we worked through it. And basically, some of our design is that we're in West, East, wherever it's at and we were able to execute through any kind of weather issues. I'll let Derrick comment on the storm.

Yes. I mean, we had kind of a typical quarter. We had about $25 million to $30 million worth of storm work this quarter.

And I think if you look at the business from a mainline and base work, and this and that, again, about 75% to 80% of gas pipe is base load work, not mainline, so -- magnitude.

Okay, thanks a lot.

There are no additional questions at this time. I'll turn the call back over to management for closing remarks.

Yes. I'd like to thank you for participating in our quarter -- 2017 conference call. I'd also like to thank the 32,000 plus employees in the field for safely executing through the quarter. We appreciate you, and thanks for your interest in Quanta Services. This concludes our call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.