Greetings. Welcome to Quanta Services Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I’ll turn the conference over to Kip Rupp, Vice President, Investor Relations. Mr. Rupp, you may now begin.

Great. Thank you, and welcome, everyone, to the quanta services second quarter 2020 earnings conference call. This morning, we issued a press release announcing our second quarter results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2020 outlook and commentary that we will discuss this morning. Additionally, we will 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 6, 2020. And therefore, you’re advised that any time-sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability, established by the Private Securities Litigation Reform Act of 1995. These include all statements reflecting Quanta’s expectations, intentions, assumptions or beliefs about future events or performance that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or beyond Quanta’s control, and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties and assumptions, please refer to the cautionary language included in today’s press release, along with the company’s periodic reports and other documents filed with the Securities and Exchange Commission, which are available on Quanta’s or the SEC’s website. You should not place undue reliance on forward-looking statements, and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by 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 and free cash flow. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts through the Investor Relations section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would like to now turn the call over to Mr. Duke Austin, Quanta’s President and CEO. Duke?

Thanks, Kip. Good morning, everyone, and welcome to Quanta Services Second Quarter 2020 Earnings Conference Call. On the call today, I will provide operational and strategic commentary, and we’ll then turn it over to Derrick Jensen, Quanta’s Chief Financial Officer, who will provide a review of our second quarter results and full year 2020 financial expectations. Following Derrick’s comments, we welcome your questions. This morning, we reported solid second quarter results. Our electric power margins were exceptional due to broad-based execution. Pipeline and Industrial segment margins, adjusted EBITDA and earnings per share were all better than we expected. We continue to see opportunity for record backlog and earnings as evidenced by the signing of LUMA Energy contract. Cash flow was robust, and we ended the quarter with a strong balance sheet and ample liquidity, all of which we believe demonstrates the resiliency of our business and the operational excellence of our people during extraordinary economic and operating conditions. We believe our resilient business model and strong financial position provides us the opportunity to, not only navigate through tough times of uncertainty, but to emerge better positioned. Our pandemic health and safety procedures in the field have matured, and we have reliable access to personal protective equipment for our crews. We continue to actively communicate with our customers and believe we have adapted effectively to the unprecedented health and economic environment caused by COVID-19. We recognize the strain that the pandemic is placing on our country, and, I, again, want to recognize and thank our incredible employees for all their hard work and let our customers know that we value our collaborative relationships with them. Our electric power operations performed well in the second quarter, with solid profitability, driven by our focus on cost management and operational excellence. Demand for our…

Thanks, Duke, and good morning, everyone. Today, we announced second quarter 2020 revenues of $2.5 billion. Net income attributable to common stock was $74 million or $0.52 per diluted share and adjusted diluted earnings per share, a non-GAAP measure, was $0.74. As expected, our results for the second quarter were affected by the unprecedented economic environment caused by the COVID-19 pandemic and its compounding impact on the challenging energy market. We experienced significant challenges in certain of our operations that were disrupted by stay-at-home orders or job site access restrictions as well as customers pulling back capital deployment amidst all the uncertainty. However, we were able to successfully execute across the majority of our operations and deliver results that exceeded our estimates. Our Electric Power revenues, excluding Latin America, were $1.8 billion, a 2% increase when compared to the second quarter of 2019. This increase was primarily driven by continued growth from our communications operations, which are included within the Electric Power segment, delivering a 50% increase compared to the second quarter of 2019. Revenues from our electric operations were in line with 2019 levels, a meaningful accomplishment given the COVID-19-related disruptions and reduced levels of West Coast fire hardening activities, which we still expect will accelerate in the second half of 2020. Electric segment margins in 2Q 2020 were 10.3%, and excluding our Latin American operations, segment margins improved 130 basis points to 11.1% versus 9.8% in 2Q 2019. The operating margins reflect strong execution across our operation and improved performance from our Canadian operation due to increased revenue levels and asset utilization. In addition, communications margins continue to improve both against last year and sequentially despite the COVID-related headwinds. As Duke mentioned, we continue to take actions to expedite the wind down and exit of our Latin American…

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.

Hi guys, good morning, and congratulations on good performance in a tough environment.

Good morning. Thank you.

Good morning. So just given a lot of what’s going on in 2020, COVID, the headwinds associated with Latin America, I was hoping you could just kind of give us some thoughts on how you’re starting to think about 2021 and to what extent some of these headwinds, particularly on the oil side – oil-related side of the business, how you’re thinking about whether to the degree to which they will or won’t continue into next year. If you could just give us some sort of initial thoughts on how you’re thinking about 2021, that would be helpful.

Yes. Thanks, Noelle. I think when we talked about Latin America early on. We talked about exiting this year. We’re doing that in a prudent manner. We’re trying to get that behind us. COVID certainly came in and cost rose. We did some things with contracts to exit earlier. So I do think that the majority of that will be out, and we’ve guided for that in 2020. As we look forward, I – we talked about the base business being robust, being able to grow. It were largely intact on the Electric segment throughout the year, even pre-COVID. So our strategy is working. On the P&I side, we saw the light switch effect, some cities down. After that, we are largely intact. Everybody’s back to work for the most part. We do have some shift where we’re customer interfacing with utilities, so we’re going in people’s homes. That work has somewhat shift to next year and beyond. So that’s a little bit of drag on there and the Canadian work pushed out into next year. But all in all, 90% of the base work, the baseload work, obviously, we added Puerto Rico, which I believe is transformational for the company and a lot of opportunity there into 2021. So in my mind, the company has gotten stronger through this. Our Industrial segment, you can’t – you don’t know where the economy is going to go. So the demand on the Industrial segment is certainly there long-term, but it will be predicated around the economy. And we’ll continue to evaluate that. But sometimes in these areas of lulls, we’re able to gain market share, and we have a really good management team down there. I like our chances to gain market share and come out of this way stronger on the other side.

Okay. That’s helpful. Thank you. And then just given the $500 million stock repurchase authorization announcement and the acquisition in the quarter. Could you just kind of give us some thoughts on how you’re thinking about the prioritization of capital deployment, given where your stock is trading today? And then what I would think might be some opportunities to make potentially some attractive opportunities to pick up players that may be struggling a little bit more in the downturn. Thanks.

We’ve never been a company to acquire companies that are struggling. So I think when we look at it, we buy in, in the strength in the – into our strategy. Our strategy has not changed over the last five years in the way we’ve deployed capital. Everything is against our stock price and our strategy. So when we look at things, when we’re looking at companies, their – its strength to a region to a strategy. The Chicago company that we bought was – will allow us to get on the front end of programmatic spends that are ongoing within our service lines as we expand. So that was very strategic to us. We like the company. It’s an old historic company that will give us a lot of flexibility on the programmatic spend. That being said, everything is valued against our stock price. We continue to believe our earnings streams and our earnings power is much greater than its value today. It’s more consistent, more resilient, and we’ll continue to lean into it and drive EPS and EPS growth.

Thank you.

Our next question comes from the line of Michael Dudas with Vertical Research. Please proceed with your question.

Yes. Good morning, everyone.

Good morning.

Good morning.

Duke, as you convent with your relations with your electric power customers and gas power customers, as things get to normalize, are there any thoughts of acceleration in certain parts of the CapEx spend that’s anticipated, that’s going to be in your sweet spot relative to what you would have there, you would have thought, say, 12 months ago as some of the demand load factors and certainly coal plant closure and shutdowns and renewable drivers could certainly maybe impact some of that program expanding going forward?

Yes. I think when we talked about it at the first part of the year and even beyond, you’re seeing multi-year T&D spends on CapEx on a go-forward basis. That’s still there. It’s still prevalent. We’re working with our customers and collaborating with them. When you start putting EVs, electric vehicles, in order to enable that, you have to have a very modern grid. And so the modernization thereof and the CapEx that it takes to get there is something that’s ongoing on the distribution side of the business, both gas and electric, for stability. As you see more renewables, the interconnections that are required in the amount of transmission and the redundancy within the grid, that’s why you’re seeing most of our clients have both renewable expansion on the generation side as well as your transmission expansion on the other side. So really, in my mind, whether it’s renewables that we’re enabling or just the stability of the grid for electric vehicles. Either way, it’s necessary to invest in – for a long period of time. People are talking about 2050 to be carbon-free and things of that nature. In order to do that, the amount of transmission and distribution expenditures to this grid is exponential of what you see today just to give you the flexibility to enable those enhancements.

That’s very helpful. And my follow-up would be with the success of your Puerto Rican joint venture, the – securing it and assuming going forward, it will be successful, is that model able to be replicated elsewhere in the U.S. or internationally, that could continue to enhance that kind of that earnings, sustainable earnings flow on top of your normal base business going forward? And is that something we could see in the next 12, 18 or 24 months?

I think it was a unique opportunity in Puerto Rico to collaborate with a great customer, that ATCO, that we have a great relationship with, and both their strengths and our strengths came together along with IEM, our partner there. It will allow us a unique opportunity. In my mind, what we’re able to do there is strengthen the people of the island. It’s – for me, it’s a social thing because I think at the end of this, we’re going to modernize the grid. We’re going to stabilize an economy, and people are going to benefit. I mean lights are out every day there for periods of time. And for us, at the end, if we – when we get through this, I think we’ll be able to look back and it will be so meaningful to Quanta, us, ATCO and also the whole industry of what we’ve done in Puerto Rico. I know we can do it. We don’t talk about things. We actually go out there and build things. So it will be unique. And the opportunities on the other side of that is the FEMA money that’s coming in, which is $18 billion or, call it, $10 billion, call it $12 billion, whatever it is, it’s meaningful on the other side of the contract that I think we’ll have an opportunity and I like our chances on work because it – we do it cost certain, we do things right and economically for the consumer. So as that – as you see, that’s a huge expansion for us. There’s other islands. There’s other ways that we can participate and collaborate with our customer. We’re doing this all the time at – on different ways to enable technology, to enable EVs, to enable a grid that’s sustainable under renewables and things of that nature. So we’re around the edges all the time of what you hear about, and I was sitting on a call the other day, and they were talking about all this things around technology. In order to get there, everything that we’re doing and everything as a company that we’re doing, we’re enabling all those things to happen. So in my mind, there’ll be all kinds of opportunities for us, and we have a really nice base to grow off of.

Well said. Thank you very much.

Our next question is from the line of Steven Fisher with UBS. Please proceed with your question.

Thanks. Good morning. I got on the call a little bit late, so I’m not sure if you’ve addressed this or not. So I apologize, but I wonder if you could talk about the strength in the margins in the Electric segment. How much of that was something from the electric side versus the communication side? And to what extent, if you’re seeing a notable pickup in the communications side, do you think we’re at an inflection point there on that business, really kind of ramping up over the next handful of quarters?

Yes. Thanks. The margins were impressive. The guys in the field are really operating well under extreme conditions. I’ve said this before, and I want to make sure I say it again. The electric side of the business will operate in double digits over time. And we’ll continue to say that if we operate in 11, we’ve operated in 9, we’ll operate in 12 at times. And so I would just, in my mind, we always think around double digits. That’s the way to think about the Electric segment. They did have – we did have a nice quarter, and I think we’re setting up for a nice year here. The telecom is certainly a part of this. And we are making incremental progress there. The opportunities are out there. They’re large. We continue to build office, build strength. We added some engineering capabilities in the quarter, which will only help us as we EPC, and we do work in cities and metroplexes. That was extremely important for us to get the engineering in the front end, right on those things. And I – we’ve done that through an acquisition. So I’m proud of where we’re at. I’m proud of where we sit. We’ll only get better as we move forward in the telecom.

Okay. And then if you could just talk a little bit about what’s happening at Stronghold on the downstream side to talk about the flow of opportunities you’re seeing there and how you think of that business positioned in light of sort of the more challenging downstream conditions. Is the business rightsized for what you see going forward?

We have a great industrial business, both on the Hubble side as well as the Stronghold catalyst side that really is – it gives us a good base to grow off of. The management team’s stronghold as well as our management team on the electric side, they’re exceptional. They’ll take advantage of these opportunities as we see them. We certainly rightsized the business, the G&A aspects of it. We had a record quarter in the first quarter and obviously fell off in the second. But again, we’re still profitable. We’re still doing well out there. And I think we’ll only come out the other side stronger.

Okay, thank you.

Our next question comes from the line of Jamie Cook with Crédit Suisse. Please proceed with your question.

Hi, good morning, and nice quarter. I guess, just to follow – a couple of quick follow-ups. One, also – the Pipeline and Industrial margins were pretty good in the quarter, just considering the revenue declines that you saw. So maybe you can talk to anything that you’re seeing there that’s sort of a structural improvement in margins and whether it’s fair to assume margin can continue to improve at a nice pace as we exit the year and into 2021. And then my follow-up question is sort of on what Noelle asked. And a little more specifically, Derrick, I think I asked you this last quarter, but if you take the base of 2020, add back LatAm, you adjust for the COVID disruption, you consider your share repurchase, and now we have Puerto Rico. Why isn’t $4 a reasonable number to think about for 2021 on an adjusted basis?

Good morning, Jamie, I would say, in general, we’ve made incremental progress on the pipeline side pre-COVID. I – we were 7%-plus guidance on it early on. And I think that progress is still there. We’ve done the things right strategically to position the company ex-pipe to go forward at mid- to high-single digits, and that’s where it stands. I think our goal is a portfolio, a double-digit EBITDA. We’re not there yet. We’re working on it. You can see the Electric margins pulling up. I could think you’ll continue to see the pipe and the resiliency of the pipe – pipeline segment, P&I segment go forward. And it’s utility-backed, it’s industrial-based. And as that goes farther, you’ll continue to see those margins rise and then the returns get better there. And as far as – I’ll answer a little bit on the $4. I think when we talked about it last quarter, we stand by now. The opportunity is there. It’s opportunity for more than $4. So – well that’s where we’re at. It’s early. It’s June. And it’s August now. But we’re giving June numbers. So we’re not going to give 2021 guidance, but everything you’re saying and everything you’re inferring. We see the same thing. The company is in very, very good shape, and we’re working hard at margins.

Thank you very much. Great job.

Thanks.

Our next question is from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question.

Hey, good morning, guys. Nice quarter.

Thanks.

Hey, duke, did I hear you say that telecom was up 50% in Q2? And if so, was that new contracts? Or was that more work under existing contracts?

I don’t know if I said that or Derrick said that. But I – it’s – I think that’s accurate. It’s under both. And in our mind, we talked about early on that we were having some – when we thought about it, we were doing a lot of front-end engineering. And as we went to the field, things would get better, revenues picked up, and that’s what you’re seeing. We’re starting to put people in the field. Our Canadian work strengthened some too in the quarter. So all those things kind of come together. And we’ll continue to see those kind of ramps in the business. Not 50% ramps, but it will continue up as we go to the field with construction. There’s a lot of opportunity there. We’re growing the business quite nicely. And I like the things we’re doing.

Yes. It’s Derrick, also. I mean, keep in mind, we’ve talked about it now for quite some time. We saw the ability to have a faster ramp, obviously, and I talk on compartment of our business than in other components. And we stand behind this year of still being able to see telecom revenues at or above $500 million.

And the acquisitions, really, we talked about this morning certainly enhances the front side of that and then it gives us the ability to move quicker into the field.

Okay. And then just one more on telecom actually. You mentioned 5G. How does Quanta play in 5G? And how does that opportunity ramp?

I’m – when we look at it, I mean, it’s somewhat pulled back. The density – I mean, 5G is about seven components. But as you think about it, what enables 5G is your communication from your fiber to your cell towers and things of that nature. They need line of sight on the cells, the small cells, whatever it may be. But the fiber backbone and data on the edge, all those things are part of 5G. And every bit of that – and by the way, it takes quite a bit of power as well to enable those data centers and things of that nature. So we’re around the edges on all of it and how we interface with our local electric utilities or – and gas utilities, along with the telecom and collaborate there on the middle grounds of those things, put us in a great position to enhance our ability to deploy 5G.

Okay. Thanks, guys.

Our next question is from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen. Nice work this quarter. I just wanted to start with, yes, a really high level one. Going through Utility earnings releases this quarter, a lot of talk about hydrogen technologies. Is there any discussion – is Quanta part of any of those discussions? Just curious if that is something interesting for you guys to be looking at over the long-term.

Yes. We talk to them around all those things. I think in general, hydrogen is something, we talked about batteries a long time. We talked about solar a long time. It continues to be part of a carbon footprint that is environmentally friendly. So those things are all part of it. And I think we’re around the edges on all those kind of conversations, whether we build any kind of hydrogen plant or something of those natures. It just depends on what it is. We’re going to stay down the middle and do the things that we’re very good at, like we’ve done in the past. And certainly, we’ll collaborate on all those kind of opportunities, such as hydrogen, solar, 5G, whatever it may be. We continue to talk to them and try to advance those technologies forward through enabling the grid and also your infrastructure.

Got it. And just as we think about the second halfs, just seeing all utilities maintain their capital budgets. I think I’ve seen a couple increase their budgets and accelerate some stuff. But just trying to think about what that dynamic means for the second half. I just thought about this sort of prospect of maybe getting some work accelerated. So those customers are able to spend those budgets and what you guys have built in around a potential acceleration in the second half or catch up dynamic.

Yes. Sean, I think when we looked at it, where still many cities are within the COVID environment or different kinds of restrictions. So I think we took a prudent approach to guidance. We said the back half, the fire hardening in the back half of the Electric segment was strengthened, we still believe that. I mean, we’re on a storm now in the East Coast. And so under Covid restrictions, where our guys are performing exceptional and so it’s very difficult to say what the second half, if there’s upside to it. I think we took a nice prudent approach like we do all the time. But we do have some strength there, and we continue to see opportunities with our clients and making sure that either their workforce is at home due to COVID. So we’re backfilling and things of that nature. Or we’re making sure that their capital budgets and what they see in the future, we’re able to deliver on those capital plans. So lots of conversations going on. All in all, I think we gave good prudent guidance as we move forward.

Got it. Again, nice work guys, and thanks for the time.

Thanks.

The next question is from the line of Justin Hauke with Robert W. Baird. Please proceed with your question.

Thank you. Good morning. I’ve got two quick ones here. First one, just to, I guess, level set on telecom to – as we think about 2021. I think the guidance originally for the year was that it would be about $500 million of revenue with margins getting close to the segment average. So I just was kind of hoping to get an update, year-to-date, what’s the revenue as we’re halfway through the year and where are those margins so we can think about the second half. And then also how we comp next year. That’s my first question. And the second question is just to the extent that there’s any update on the arbitration process in Peru. And if there’s anything else that – as you’ve exited these contracts, any other legal items that have come up related to those closures? Thank you.

I’ll let Derrick take the margin questions, and I’ll jump back in on Peru.

Yes. From a telecom perspective, we’re still looking at revenues probably $500 million to slightly above for 2020 very much intact. On a year-to-date basis, I would tell you, we’re probably about halfway there. We’re probably in that $250 million range. On margins, we commented that margins are sequentially higher than the first and still had improvement over last year. They’re above the mid single-digit range and continuing to improve. We see very much as we exit now through the rest of the year, our margin profile that’s increasing. A little bit of COVID dynamic there in the second. So I think otherwise, you would have seen our margins kind of creeping up, I see it even further more in the second, but we still feel very confident in our ability to be that upper single-digit and double-digit by the time we exit the year.

As far as Peru goes, we’ve physically handed over the network at this point. We’ve done the things administratively that we needed to do to preserve our asset as well as our lawsuit there. We’re incrementally more positive about where we’re at. It’s a long process. We continue to make what I think is the right decisions going forward that will allow us to recoup our investment down there. We’ll see where it goes over the next 18 months.

Thank you.

The next question is from the line of Andy Kaplowitz with Citi. Please proceed with your question.

Hey, good morning, guys. Nice quarter.

Thank you.

Duke, last quarter, you talked about expecting to book a number of MSA renewals as 2020 evolves and consequently book revenue have you seen any delays in these MSAs coming to fruition? And then you also have talked pretty much every quarter about having billions of potential large transmission projects. I hope that they’d be booked. Do you see an opportunity to book a large project in the second half of this year?

Look, I don’t – we don’t press timing on those things. They just – again, we take our time. We’re looking at them all the time. There’s multiple opportunities out there. It depends on what you call large or not. I think when you go back and you look at what we’ve booked this quarter, as Derrick said in his commentary, $6 billion is not too bad the way I see it and their earnings streams, they’re off of it. And we worked on that for 18 months or better. And I would I just say, it’s transformational in this company what we did in a quarter through a pandemic and the guys and the teams that have done that and what we’ll be able to do on that island is something that will go down and is meaningful for, not only us, but the generations to come. So that being said, the opportunities are there. They’re larger. The larger transmission opportunities remain robust. We continue – I will say this on pipe. It doesn’t matter. Large pipe doesn’t matter to us. It doesn’t matter on this quarter, and it doesn’t matter going forward. It’s only incremental to anything we talk about. So the big pipe, when I think about it, it’s incremental to anything we say. If it’s there, we’ll pick it up. If it’s not, we won’t. And it’s fine. That’s not what this company is built around on the future or today.

That’s helpful. And obviously, you then can accelerate sort of getting out of Latin America. So as we sit here today, do you think you – when you go into 2021, you really should be out and the impact on EPS would be amenable to not being extended in 2021?

Yes. I mean, I think for the majority of it, you could have a little bit of linger, but I – we’re hard-pressed to get that done, and we were able to negotiate contracts out. It costs us a little money in the quarter, but it was the right answer for our shareholders, the right answer for Quanta is to move through that, and we were able to do a multitude that within the quarter. Again, we’re preserving the asset there in Peru. We’re working through the other areas. But in my mind, we’re on the other side of that, moving forward very quickly to get out.

And Duke, I just want to say that you mentioned the storm here in the tri-state area. We need more help so whatever you had for your expectations for the year in terms of revenue, maybe you’re going to out that because you think there’s more work to do in this area around this storm. So thanks, anyway. Good quarter.

Yes, thank you.

Thank you. At this time, I will turn the floor back to management for closing remarks.

Yes. Thanks, everyone. I – mainly, I want to thank our employees for the work that they’ve done in the storm environment. I will say that our business is inherently risky due to COVID. It’s even more still. I would say, in general, they’ve done a great job. We’ve collaborated great with the client here. And hopefully, we’re all picking the lights back on at a pretty rapid pace. So that being said, the industry has made a ton of progress there. And we’re proud of that and proud of what our guys have done in the field. We want to thank you, thank our customers, and I appreciate your questions and ongoing interest in Quanta.

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