Quanta Services, Inc. (PWR)

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Quanta Services Inc. (PWR)

March 07, 2012 8:00 am ET

Executives

Kip A. Rupp - Founder and Managing Partner

James F. O'Neil - Chief Executive Officer, President and Director

Earl C. Austin - President of Electric Power and Natural Gas & Pipeline Divisions

Kenneth W. Trawick - President of Telecommunications & Renewables Division

James Haddox - Chief Financial Officer

Unknown Executive -

Analysts

Jamie L. Cook - Crédit Suisse AG, Research Division

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

William D. Bremer - Maxim Group LLC, Research Division

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Unknown Analyst

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Craig E. Irwin - Wedbush Securities Inc., Research Division

Presentation

Kip A. Rupp

Good morning, everyone, and thank you for joining us for the Quanta Services 2012 Investor Day. My name is Kip Rupp, and I'm Quanta's Vice President of Investor Relations.

We've got some interesting discussions and presentations about the business for you today. In addition to discussing industry trends we're seeing and what our various operating segments do, you'll be participating in a robust discussion about the strategies and initiatives in place to capitalize on opportunities and to grow the business over the next several years.

As you can see from today's agenda, our President, Chief Executive Officer, Jim O'Neil, will begin with a strategy presentation. Then we'll will get into executive presentations that will focus on a specific part of our business, with about 10 or 15 minutes of Q&A time allotted after each of those presentations.

Just kind of a housekeeping item, if you'd like to ask a question during this presentation, you'll see you've got push-to-talk mics on your table. Just push the button once you're identified. If you have a phone, please try and keep them away from the push-to-talks just because it will -- the signal can interfere with the push-to-talk signal.

After the Power Generation presentation, we'll take a 15-minute break and then we'll continue with the remainder of the agenda. Following Jim's closing remarks, we'll open up for general Q&A session. We're targeting to wrap up the event around 12:30 or so, if not a little earlier. After that, lunch will be available and we'll also either eat here or have boxed lunches that you can take back to the office with you, if you like.

This event is being webcast from our website and all the presentation materials we'll be discussing today can be found on our website at quantaservices.com for download. In addition, for the folks in the room who have a little folio on your table in front of you, there's a USB, a flash drive on it that also has all the presentations loaded there as well.

For those listening to our Investor Day webcast, you will be -- you'll see a box in your webcast pop up page where you can submit a question to be addressed during the Q&A session. I'll do my best to include as many of the questions in the queue in each session as possible.

Those in attendance here today will find a feedback survey in your Investor Day book. Those in attendance and also those participating via the webcast will receive this survey in e-mail form over the next day or so, with the email called investor survey. We appreciate you taking a few minutes to complete the survey and provide your feedback. It's important to always seek to improve what we do and your feedback will be valuable in helping us to that end.

If you would like to fill out the survey today in a hard copy, you can either give it to me or you can leave it out at the front table with Julie as well.

And then finally, another housekeeping item. All of the presentations and comments made here today are covered by the forward-looking statement language shown here. Please remember that information reported and discussed during this Investor Day speaks only as of today, March 7, 2012, and therefore, you're advised that any time-sensitive information may no longer be accurate as of the time of any replay of this event.

This Investor Day 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 they do not solely relate to historical or current facts.

Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or are beyond Quanta's control and actual results may differ materially from those expected or implied as forward-looking statements.

Management cautions that you should not place undue reliance on Quanta's forward-looking statements, and Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after this event.

For additional information concerning some of the risks, uncertainties and assumptions that could affect Quanta's forward-looking statements, please refer to the company's annual report on Form 10-K for the year ended December 31, 2011, its quarterly reports on Form 10-Q and its other documents filed with the Securities and Exchange Commission, which may be obtained on Quanta's website or through the SEC's website at sec.gov.

Now with that, I'd like to turn the presentation and the event over to Quanta's President and Chief Executive Officer, Jim O'Neil. Jim?

James F. O'Neil

Thank you, Kip. Good morning, everyone. Before I get started, I want to cover some housekeeping emergency procedures. If we have to leave this hotel in case of an emergency, we go out these doors to the back, down the stairs and out the front door. Okay, do not go out these doors here because it's going to be very confusing, it's a maze of hallways and you'll get lost.

So the hotel is also certified in CPR. We've got some people on standby. I know there's some other people in the audience, but you'll be well taken care of in the event that something like that happens, which hopefully nothing will happen, but that's covered.

So today, what I'd like to do in my agenda is -- first off, it's very important to the management team and to me that you have takeaways from this meeting that -- there's some key takeaways that we want you to leave here with about the company and the future of the company and the growth prospects and the health of the company going forward.

Secondly, I'm going to give a brief overview of the company. Now for those that are less familiar with Quanta, we'll take you through our normal presentation that we typically give at investor conferences about the company.

And then I'm going to spend some time talking about our strategies to grow our business over the next several years. I also want to talk about some of the things we're going to do to further differentiate our company from our competition to take advantage of key markets going forward.

Key takeaways. First, North America, we believe is in the very early stages of a multiyear investment cycle, particularly in the Electric Power and pipeline segments.

Secondly, the end market trends that we're seeing today and the record backlog levels that we're at today is going to provide Quanta with some significant near-term and long-term opportunities.

Third, Quanta is experiencing momentum in all segments of our business, all 4 of our segments, for the first time since 2008.

Fourth, we believe we are the best-positioned specialty infrastructure contractor, and we'll take advantage of opportunities in the markets that we serve.

And finally, we believe our financial strength and the diversity of our company is a foundation that will enable the company to execute on its growth strategies going forward.

So when you look at this slide, and you see that we're the largest specialty contractor. We have the scope and scale. We are the preferred employer in the industry. We lead the industry in safety performance. We've got an industry-leading balance sheet, and we have an entrepreneur business model. What does this mean? What does this mean?

This slide is a foundation of a premier service company in the industries that we serve. It means we're able to adapt to this ever-changing environment that we're in today to give our customers the comfort and satisfaction that we can provide them solutions. We also provide employees with job security and a safe place to work. And this is a very powerful slide and I believe this is what differentiates us from our competition in the eyes of our customers and our employees.

When you look back at 2011, our full year revenues were $4.6 billion. The breakdown by segment, approximately 66% of our revenues were from our Electric Power segment, 22% from our Natural Gas and Pipeline segment, 10% from Telecom and then 2% from our Fiber Licensing Segment.

Turning to the -- your attention to the graphs on the right, the estimated mix of revenues by contract type, we're seeing an increase. And the fixed-type contract amounts were about 40% fixed price, 40% unit price and 20% cost plus. Fixed-price, traditionally over the past few years, has been about 1/3 of the contract type. And then over the last few years, we're also seeing a trend toward more new construction. And that's really evident of the growth we're seeing in our electric transmission business, Telecom as well but primarily electric transmission.

One of the many strengths, we believe, is the diversity of our revenue mix, the type of contracts, the type of work because it diversifies the company's overall revenue base and the risk profile. We've talked in the past how fixed-price contracts command a higher margin, but that work could be more cyclical and there's more risk that needs to be managed in those projects where the cost plusing contracts are typically your MSA agreements since recurrent revenues. So the diversity of the strength, we believe, to our overall revenue portfolio.

We also have a very diverse customer base consisting of high-quality companies with low customer concentration, which is also a differentiator from our peers. No single customer accounted for more than 10% of our revenues in 2011. And our top 10 customers accounted for approximately 36% of our revenues during the same period. We have strong relations with customers in both the United States and Canada, with many of those relationships that go back for decades.

As you know, our headquarter office is in Houston, Texas. We have operations throughout North America and we continue to expand in Canada. We also have a presence in select international markets, and I'll discuss that more later in my presentation.

Because of our national presence, we can meet our customer needs in large geographic areas as they are acquiring and merging and form a larger geographical territories themselves.

We achieve this footprint largely through acquisitions over the last 14 years. Many of our field locations are led by the former owners who bring an entrepreneurial culture and continue to run these businesses like they would they were their own company. These individuals have a competitive drive, as well as very strong customer and employee relationships. This entrepreneurial culture is a key differentiator and a meaningful component of our past and future success.

The experience of our top executive team totals well over a century of industry experience. John Colson, who's here today, is Quanta's founder and executive Chairman after serving more than 14 years as Quanta's CEO. He came to Quanta after a 26-year career at Par electric, which is a founding company within Quanta where he was a majority shareholder.

James has 40 years of experience, including financial roles at 3 public companies prior to joining Quanta at its inception 14 years ago.

I assumed the CEO role in May of last year after serving as Quanta's COO for several years. I bring 32 years of experience to the executive team, including Quanta's renewable energy strategy, internal audit and running the acquisition program for many years in Quanta's early days.

Ken Trawick and Duke Austin, the Presidents of our industry segments, collectively bring over 5 decades of experience in the construction business. It's important to note that both Ken and Duke came from companies that Quanta acquired, and so that entrepreneurial culture that I talked about on my last slide extends all the way to the senior levels of this organization.

And finally, but just as important, the operating unit executives at our field locations bring an average of over 25 years of industry experience.

The first half of 2011 was very challenging period for Quanta, mostly because of the impact of project delays caused by stringent regulatory environment. All of our operating units -- or operating segments experienced delays due to the reinterpretation of existing regulations or new regulations that went into effect, which created havoc with our customers in trying to schedule projects throughout last year. The large diameter pipeline market was perhaps impacted the most by these project delays in 2011.

But there were positive events that did occur in the first half of last year that set the stage for a strong second half of the year. We were awarded a record number of large electric transmission projects during that period. Electric distribution, we started to see recovery in that market. I believe we ended the year with about 10% growth in that -- in electric distribution year-over-year.

Our Telecom segment, primarily driven by broadband stimulus and fiber-to-the-cell site awards, we began to build backlog in that segment. In addition, we made a strategic move in June of last year to move -- to pursue gathering system work local to the shale regions to diversify our Natural Gas and Pipeline segment.

During the second half of 2011, our electric transmission and Telecom segments that had previously been delayed moved into construction, large electric transmission of broadband stimulus projects that were awarded in the first half of '11 also moved into construction. We also began booking shale gathering work for the second half of 2011. As a result, we experienced significant revenue growth and margin growth and earnings improvement in the second half of 2011.

The momentum is carrying us into 2012 and beyond, which is why we're very optimistic about our business. We have record backlog levels. We have more than 10 large electric transmission projects in construction at this time. And we have visibility into more awards in 2012. Our Pipeline business is improving. Our Telecom business continues to ramp, and our Fiber Optic Licensing business is positioned to grow in 2012 as well.

I want to address our Natural Gas and Pipeline segment first thing this morning. This is a part of our business that is most misunderstood by analysts and investors. I need to do a better job of communicating our vision and industry drivers to demonstrate why we acquired Price Gregory over 2 years ago and established the leadership position in the pipeline construction industry.

The unconventional shale plays are an energy game changer for this country. The abundant supply of natural gas at low prices will drive demand. Shale gas discoveries are transforming market dynamics and creating pipeline demand outside traditional flow patterns. Shale gas drives the need for larger interstate pipelines, as well as expansion of smaller projects to gather and collect the gas. We are in the very early stages of development of this infrastructure.

Natural gas fuel growth will come from heating, standby power for renewable intermittency, petrochemical manufacturing and transportation. However, the biggest opportunity for natural gas fuel is fuel for electric generation. There are over 600 coal plants in the United States, and 1/3 of these plants are over 50 years of age.

The Department of Energy states that 90% of fossil fuel plants construction -- that is constructed in the future will be natural-gas-fired plant. Natural gas is the most economic choice in each of these sectors.

Today, we are experiencing significant activity in the shales with oil and natural gas liquids or NGLs. All of these areas that are rich in oil and NGLs require pipelines as the existing pipeline infrastructure is not sufficient to accommodate desired production levels.

The Canadian oil sands are also very active and lack the necessary pipeline infrastructure. These drivers are not changing and they will not change and will be in play for many years to come. And this is the primary reason we are in the pipeline business. We had a tough 2011 in our pipeline business. However, this year, as this year begins to materialize, I expect a much different result for this year and for many years to come.

James is going to drill down the details on the slide in his presentation, but I wanted to take a few moments to provide some comments as well. This slide takes a look at our Natural Gas and Pipeline segment in 2 different ways, and I'm going to show you the first right here, this graph. We'll show the segment results as a reported basis going back to 2007. Note that these results include the results of Price Gregory Services subsequent to October 1, 2009.

The graph on the right shows pro forma segment revenue and operating margins for the segment for 2 pipeline company acquisitions which were made during the period, one of which was Price Gregory. As you can see, these 2 acquired companies would have had significant positive effects on the historical results of our company had we owned them for the full years of 2008 and 2009. Yes, 2008 and 2009 were very exceptional years in the pipeline industry, but this slide represents the significance of the amount of earnings potential this segment can provide in good years.

I will tell you that 2011 was an anomaly year and that all we need is a normal year for our Natural Gas and Pipeline segment to generate higher revenue with operating margin profile that is consistent with our Electric Power and Telecom segments. The shale gas and Canadian oil sand development should provide us a better-than-normal operating environment for the next several years. My message to you is do not underestimate the value that our pipeline segment can add to this company in earnings growth in the years to come.

Now let's take a look at the typical -- how the typical pipeline bidding season works. Here we have a generic timeline, and the bidding season typically starts midway into the fourth quarter of a given year and runs through the following May. It is during this time that the majority of the long-haul projects that are built in a given year are bid and negotiated and awarded to contractors.

Depending on the activity level, early on in the bidding season, we may start to build backlog in the fourth quarter or we may build backlog in the first quarter or maybe most of backlog is built in the early second quarter.

As projects move into construction in the second quarter and gain momentum in the third quarter, your backlog typically burns very quickly. Then you complete projects into the fourth quarter and begin the bidding cycle all over again for the next year.

The dashed blue line shows you how revenue would typically flow for long-haul pipeline or large diameter pipeline work. You can see that revenue ramped sharply in the second and third quarter as projects ramp up, and then falls off into the fourth quarter as projects complete.

To provide some contrast, we could have 150-mile electric transmission project that takes 2 years to build and may generate $150 million. We could do that same 150-mile long-haul pipeline or large diameter pipeline job and generate $150 million in 3 to 4 months. So it's important to understand how the bidding season work and the correlation of backlog and revenues for large diameter pipeline projects.

Read the rest of this transcript for free on seekingalpha.com