Quanta Services Inc (PWR) 2004 Q1 法說會逐字稿

Welcome to the InfraSource 2004 first-quarter results conference call. Today's call will be hosted by David Helwig, President and Chief Executive Officer, and Terence Montgomery, Chief Financial Officer. As a reminder, today's call is being recorded.

Statements made on this conference call may contain forward-looking statements based on InfraSource's current expectations about future events. These statements generally relate to InfraSource's plans, objectives and expectations for future operations and are based upon management's current estimations -- excuse me, estimates and predictions of future results or trends. These statements are subject to a number of risks and uncertainties and other factors that could cause actual results to differ materially from those described in the forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements which are not a guarantee of InfraSource's future performance. For a detailed discussion of these and other cautionary statements please refer to InfraSource's filings with the Securities and Exchange Commission. At this time I would like to turn the call over to Mr. David Helwig.

Thank you, Jessica, and good morning. Welcome to the first InfraSource quarterly conference call following our IPO. Joining me today is Terry Montgomery, our Chief Financial Officer. Terry and I look forward to sharing the InfraSource story with you as we go forward. Today we will discuss our first-quarter 2004 results. As you will see, our financial performance is strong, we're achieving profitable growth in our business, and we are well-positioned for continued long-term growth.

For those of you that may be somewhat new to the InfraSource story, we are one of the largest specialty contractors servicing utility, transmission, and distribution infrastructure in the United States. Our business strategy is focused on capitalizing on the favorable trends in the utility infrastructure markets; increasing our market share by providing a unique value proposition for our customers and demonstrating excellence in our operations; maintaining a focus on specialized higher margin services and pursuing highly strategic acquisitions on an opportunistic basis.

Our first-quarter results are in fact reflective of our pursuit of exactly these business strategies. Earlier today we announced those results. Compared to the first-quarter 2003 and without the contribution of Maslonka results for January, our revenues increased by 34 percent and our EBITDA from continuing operations increased by 97 percent. Net income from continuing operations was at nominally the same level as 2003; however it increased by more than a factor of 3 exclusive of charges related to purchase accounting, exclusive of IPO expenses, and despite increased interest expense related to our purchase of the business from Excelon. Terry will review the financials in more details following my remarks.

To summarize our growth in revenues was attributable to an increase in aerial electric transmission work volume, including that associated with the acquisition of Maslonka which was completed on January 27th, and reflective of schedule accelerations beyond those originally estimated. Additionally there is the effect during this quarter of 10 additional days due to a change in our accounting period. These gains were partially offset by declines in IPP activity, underground transmission, and telecommunications construction work.

Our first-quarter revenues were derived from the following end markets -- 70 percent electric power; 21 percent natural gas; 7 percent telecom; and 2 percent other. Additionally about 20 percent of our revenues came from each of our two largest customers; 57 percent of our revenues were derived from our top 10 customers and 68 percent came from our top 20. The improvement in our EBITDA for the quarter resulted primarily from our performance on electric transmission work, improved operational performance in our natural gas operations, and more favorable weather compared to the first-quarter of 2003. These favorable results were offset by somewhat lower margins on industrial and other utility electrical work. Our backlog is strong; our total backlog at the end of the first-quarter was $790 million. This is up 34 percent over the first-quarter 2003 and relatively even with year end 2003.

Given the timing of this first-quarter earnings call it's appropriate to comment on our most recent progress and our view of our prospects for the second-quarter. The level of our backlog at the end of the first-quarter and our current operating performance indicates that the second-quarter should be a strong quarter. We expect the second-quarter to be roughly in line with the first-quarter results for revenues and gross margins. This is indicative of the strength of our first-quarter, major project results as the first-quarter is traditionally our weakest period.

Since the first-quarter we have continued to be awarded contracts for work including additional transmission line projects, gas and electric distribution blanket orders and powerplant work. For the remainder of the year our prospects continue to be somewhat dependent on the timing of new contract awards and releases of work. Our quarterly results will vary, of course, based on project schedules and the seasonality of our business. We are actively bidding on and negotiating considerable amounts of work that can have an impact on year end 2004 results. Our success at project schedule accelerations allows us to pursue these additional opportunities and we are continuing to do so in a disciplined manner.

We do continue to observe and experience favorable trends in our primary markets. Positive steps continue to be taken on a record reliability by FERC, NERC, various states and regional entities despite the lack of comprehensive federal legislation. Favorable actions do continue to be continued and pursued on Capitol Hill, most recently with the passage of the Senate Corporate Tax Bill on May 11th. However, for our business planning purposes, we are assuming no passage of significant legislation this year.

There does continue to be a high level of public, industry and media attention paid to the need for significant increases in electric infrastructure investment including most recently an article in this week's Forbes magazine describing an increase and anticipated transmission expenditures based on a poll of utility executives and last Thursday's speech by FERC Chairman Pat Wood in California highlighting transmission constraints as a continuing source of concern. Additionally, increasing amounts of transmission project work is being announced as owners and investors pursue a central improvement and economic opportunity. And finally, there continues to be a definitive trend towards increasing reliance on outsourced infrastructure services.

At the same time we experience these positive trends we do continue to experience softness in several industrial markets. This is primarily attributable to high natural gas prices, project delays and other factors and primarily impacts the volume and timing of our work in petrochemical, powerplant and pollution control markets.

Looking forward we will continue to leverage our core strengths in the electric power markets in order to capitalize on the growth prospects that we see in them. We believe that we are well positioned for long-term success with a strong balance sheet that will enable us to capitalize on this opportunity. Now I'd like to turn the call over to Terry Montgomery, our Chief Financial Officer, who will discuss our financial results for the quarter and our outlook in more detail.

As Dave mentioned, today we announced that revenues for the first-quarter of 2004 increased $38 million to $148.6 million compared to $110.6 million for the first-quarter of 2003. This increase was primarily due to additional aerial electric transmission work including the acquisition of Maslonka & Associates on January 27, 2004 and also the effective 10 additional days in the first-quarter of 2004 due to a change in our accounting period which I'll discuss in a moment. These increases were partially offset by declines in independent power producer, underground transmission and telecommunications work and additionally the discontinued operations which was not classified as such on our predecessor entity's statements.

EBITDA from continuing operations for the first-quarter of 2004 increased 7.5 million to 15.3 million compared to 7.8 million for the first-quarter of 2003. The EBITDA from continuing operations in the first-quarter of '04 included $1.7 million of expenses related to our initial public offering and for the first-quarter of 2003 include $100,000 of merger related expenses associated with the acquisition of InfraSource Inc. in September of 2003.

Our improvement in EBITDA margin from 7 percent in the first-quarter of 2003 to 10.3 percent in the first-quarter of 2004 is a result of the increased amounts of higher margin aerial electric transmission work from Maslonka, improved performance in our natural gas operations brought about by initiatives implemented throughout the past 15 months and also the absence of severe weather which we experienced in the Northeast and Mid-West during the first-quarter of 2003 and finally the continued expansion of our private dark fiber networks. These margin improvements were offset to a lesser extent by lower margins in other nontransmission electric work and also higher SG&A associated with professional fees incurred in connection with our public offering.

Net income for the first-quarter of 2004 was 1.1 million or 4 cents per share versus 300,000 or 1 cent per share for the first-quarter of last year. Our prior year earnings per share are based on our predecessor entity InfraSource Inc. results and share counts and are therefore not directly comparable. Net income for the first-quarter of 2004 included $2.7 million after-tax of amortization of intangible assets resulting from purchase accounting under SFAS 141 and also $1 million after-tax of IPO related professional fees and expenses. Net income for the first-quarter of 2003 included $700,000 after-tax of loss from discontinued operations.

Exclusive of the effect of those items, net income would have increased $3.7 million to 4.8 million for the first-quarter of 2004 from $1 million for the first-quarter a year ago. This despite $2 million of additional interest expense related to debt incurred in connection with the purchase of InfraSource Inc. in September of 2003. In connection with our IPO, we changed our quarter end to the last calendar day of the quarter from what had been accelerated closing schedules to meet Excelon's reporting requirements. Although that change would have increased revenues in the first-quarter of 2003 by an estimated $11.7 million, we do not believe that that impact would have had a material effect on net income in 2003. A reconciliation of GAAP net income to EBITDA from continuing operations is included in the table to this morning's press release and is also available on our Website.

Capital expenditures were $5.2 million for the quarter compared to $4.9 million for the first-quarter 2003. We believe that our fleet and equipment are adequate for our current operations and we regularly evaluate our backlog and potential future opportunities including transmission work against the mix and availability of equipment in the field. At the end of the first-quarter of 2004 we had total backlog of $790 million compared to $589 million at the end of the first-quarter of 2003 and $791 million at the end of 2003.

We classify contracts as backlog if we've been awarded the contract and we have received a notice to begin work. Backlog expected to be completed within the current fiscal year is $332 million with the balance of $458 million expected in fiscal year 2005 and beyond. At the end of the quarter we had $16.1 million of cash on our balance sheet and approximately $17.3 million of availability under our revolving credit facility. We had $27.7 million in letters of credit outstanding primarily to secure our insurance and bonding programs and we also had $5 million drawn under our revolving credit agreement for seasonal working capital. We are currently in compliance with all the covenants under our credit agreement.

As Dave mentioned earlier, we completed the initial public offering of our common stock on May 12th. We used $80.2 million of the proceeds from that offering to repay long-term debt resulting in significantly lower financial leverage. At the same time we amended our credit agreement to reduce the interest rates on our term loans and revolving credit facilities by 150 basis points today increasing to 175 basis points at the end of this year. We also amended the agreement to allow for the expansion of our revolving credit facility and $40 million up to $85 million dependent on our continuing syndication efforts.

Concerning our outlook for the second-quarter, we expect that revenues and gross margins will be comparable to those achieved during the first-quarter of 2004. This is reflective of strong performance in the first-quarter which is normally our weakest quarter due to seasonality. We will incur additional professional fees related to our public offering during the second-quarter; but absent those charges we expect SG&A to be comparable to the first-quarter. Depreciation will increase slightly due to a full quarter's worth of expense from Maslonka as well as the effect of an increase in the fair market value of assets due to purchase accounting.

Finally, we expect to incur a onetime charge of approximately $5.7 million related to our early extinguishment of the $30 million subordinated note repaid in connection with the proceeds from our IPO. Our projected effective tax rate is between 41 to 42 percent and our projected weighted average diluted shares outstanding is approximately 35.9 million shares for the second-quarter.

We intend to provide guidance for the next fiscal quarter only as a matter of policy going forward which we believe is consistent with our focus on long-term growth. In closing let me say that we're excited about our strategic direction and the prospects of the company, our employees and the customers that we serve. This now concludes our formal presentation and we will open up the lines for questions.

(OPERATOR INSTRUCTIONS) Sanjay Shrestha, First Albany.

Great quarter, first of all. Just a couple of quick questions here. First one, from the modeling purposes, I understand the numbers can be very -- the numbers can fluctuate a lot on a quarter-to-quarter basis but is it fair to sort of say that the third-quarter probably will be stronger than the second-quarter given some seasonality there?

If we look at a typical year and set the effect of large projects aside, the first-quarter is definitely typically our weakest -- winter weather, we do a lot of work in the northern states, buildup in the spring. Third-quarter typically our strongest and fourth-quarter starting to drop off. Now you have to overlay on top of that large projects that may not be affected by seasonal impacts. As an underlying norm that's pretty much the standard.

That's what I was trying to get at. That's great. And another quick question here. Can you maybe give us a little update on some of your large size projects, some of the progress that has been undergoing there? And second, maybe if you could comment a little bit more about the pipeline and the request for proposal that is out their sort of building a base for growth into 2005 as well?

Okay. I'll answer the first question first. As far as large projects that we're currently involved with, the three largest would be our electric transmission projects, the Path 15, the Bonneville Power Schultz-Wautoma Line and PowerUp Wisconsin. Path 15, for those of you that may not be familiar with it, is an 84 mile 500 kV line in California's Northern Central Valley. Scheduled completion for that project is late November of this year and we're making substantial progress on that line. All of the foundations have already been installed and approaching the majority of the towers and we're already pulling wire. So we're doing quite well on Path 15.

The Bonneville Schultz-Wautoma project is a 63 mile long 500 kV line in the Hanford area of Central Washington. Work is already underway there on foundations and powers. In fact, I was just visiting the site last week I guess it was observing progress. Very satisfied with a great early start. The scheduled completion of that project is not until November of 2005. So we're off to a very, very good start.

PowerUp Wisconsin is a 220 mile long project principally 345 kV from Minnesota across Wisconsin. Work actually began in February on right-of-way clearing and foundation work over on the Minnesota end and substantial mobilization on that project is scheduled for August. The work scheduled for it currently extends over several years.

Okay. That's great. And if you could comment a little bit more about the pipeline and some of the prospects that are out there that builds the case for sort of like a longer-term growth (indiscernible).

As you know, we don't comment on specific bidding activity and request for proposals. However, as an indication of the level of activity we are working every day on proposals or pursuing the development of various transmission projects and are quite actively engaged in what we call industrial work. Off the top of my head it seems that the preponderance of that work right now is interestingly power plant development work where there are projects that are under construction or about to begin construction that we are pursuing.

Okay. That's fair. That's great, guys; I'll hop back in the queue. Thank you.

Lorraine Maikis, Merrill Lynch.

Could you talk a little bit about the margin expansion that you experienced in the quarter; how much of that related to Maslonka and what we should expect to see next year once the Maslonka job finishes in November?

Actually the largest portion of it was related to the transmission work that we're doing primarily through Maslonka including work that they've gained since we purchased them. As far as what that means for next year, we're also pursuing a number of projects to fill up their backlog going into next year. So we're not expecting that it will be significantly different -- and performing transmission work under other subsidiaries than just Maslonka as well. So it's more about the type of work than the fact that it's Maslonka work.

Okay. And then could you discuss the funding situation? The projects in your pipeline right now, how are they being funded? Are they similar to the Path 15 public/private or do we have more of a government-sponsored? What's the preponderance of the work that you're looking at right now?

It's such a mixed bag. I wish there were an easy, simple, standard answer to that but the situation varies all across the country from state to state, from utility to utility -- very much a mixed bag. We do continue to pursue work of all types, directly utility financed, financed by regional entities and public/private finance. So we've got a pretty good mix of all of the above and, quite frankly, some that haven't exactly sorted out which they're going to be yet.

And finally, if you look at your bidding pipeline versus last year -- I know you don't comment on specific projects but a few months ago you were talking about a 50 percent increase in activity; is there a comparable number that you have for right now?

I'd say that still holds true at least for transmission. That is the most obvious increase in activity. The amount of development, of initiatives, projects, request for proposal, bids, preliminary discussions for electric transmission work is substantial and virtually a weekly continuum. So we are seeing considerably increased levels of activity there.

Thank you.

Tom Ford, Lehman Brothers.

Terry, I just wanted to follow-up on a couple things. Number one, when you talked about -- well you and Dave mentioned it too -- revenue in the second-quarter being similar to 1Q. Is that similar to the actual result or is it similar to if you pro forma'd Maslonka for the whole quarter?

Tom, it is similar to the actual results as we have been reported here.

Okay. And then in terms of the pro forma adjustments I missed, did you give a pro forma share count number?

The share count expedition for Q2 is $35.9 million at the average for the quarter.

Okay. And nothing changed in terms the -- the cost of debt assumption in terms of the savings expected, right?

I'm sorry, Tom, I meant 35.9 million shares if I said dollars.

Right, that's fine.

I'm sorry, what was the second question.

Second question, with respect to the interest expense nothing has changed there in terms of the anticipated savings?

No, actually we have an additional 25 basis points that will get a decrease in interest expense at the end of the year. So for this year it's pretty much as we had stated previously.

Okay. And then the last thing I was curious about was could you give -- I know that you had said you have plusses and minuses in terms of the year-over-year revenue; could you guys or would you break out the changes so that you could kind of get an understanding of exactly how much the transmission work is up as opposed to just the year-over-year change in revenue? Can you make any kind of comment about how much more that's increased?

We actually -- in our 10-Q, Tom, and the MD&A will go into some detail there. I'll give the amounts that are specifically related to the transmission work related to Maslonka and some of the other components.

Okay. And then just lastly, could you give some details on free cash flow for the quarter?

The cash flow statement also will be included in the 10-Q. I can tell you that cash flow from operations will be a use in the first-quarter due to the combination of the ramp up in -- the end of the quarter in our natural gas operations and also the impact of the Path 15 project during the first-quarter.

Okay. So we're looking at probably negative free cash?

Correct, in the first-quarter.

Okay. Great, thanks.

Jon Rogers, DA Davidson.

Just following up on a couple of things. The backlog at the end of the quarter, the $790 million, that compares with about 590 a year ago, you said up 34 percent?

Correct.

Okay. So if I look at this, in terms of booking activity during the quarter it looks like you added about $148 million worth of new work and a year ago that number looked like $170 million. Is that just reflective of the lumpiness of the business? I'm just trying to think about that a little bit.

Jon, actually at the end of 2003 our backlog was 791 million, so it's relatively constant meaning the work we added in the first-quarter was roughly equivalent to the amount that we've earned.

Right, but a year ago you would've added a fair amount to the backlog during the -- that first quarter.

Correct. And each of our three end markets, that backlog is up.

Okay, I just wanted to understand. And in terms of what -- and I know you can't give us too much specifics -- but in terms of what you have in backlog now, are you fairly comfortable with the margins that you've got as long as you execute on the work?

Yes, we are.

And any areas that are particularly different in terms of the range? I assume the Maslonka is still some of your higher margin work and the gas transmission is some of the lower margin work or is that incorrect?

Generally compared to last year again, we do have a higher mix of project based work which allows us the opportunity to earn higher margins. We're not going to split out specific company or underlying lines of business.

Okay. And then just finally, in terms of bidding activity, is there a big bulge of work coming this year? Or can you give us a sense of when you expect to hear on some of the projects that you're bidding on now or is it pretty spread through the rest of the year?

It's pretty spread. If we look at the pipeline and dates when things -- when we're expecting RFP's or when bids are due. It's pretty spread out but continues to be quite active -- in all of our end markets. Natural gas distribution, it is seasonal and we're pretty much coming to the end of the season for bidding and awards so that activity will drop off. But the large project work, whether it's industrial or transmission line work, will continue without as much seasonal effect.

And Dave, have you decided at what level you'll announce projects?

We haven't come up with a precise number on that but we certainly will -- major contract awards that would be considered material.

Okay.

Other Dan that, Jon, it will be described in our reports quarterly on backlog.

And the 10-Q, when will you file that?

We'll be filing that within the next two weeks, Jon.

Thanks a lot, guys.

(OPERATOR INSTRUCTIONS) Jeff Beach, Stifel Nicolaus.

Your backlog of 790 million, approximately how much of that do you expect to perform in the next 12 months?

Jeff, we haven't stated as what will be in the next -- for the remainder of this fiscal year which is $332 million; so the balance or 458 million would be in 2005 and beyond.

Okay. With 150 million of new work coming in equaling the revenues, if this pace is continued it appears as though the expectation is you will make your 2004 budget, is that fair? As long as you execute? Is the current pace of business good enough for you to meet your plan?

Yes, we believe it is.

Thanks.

Steve Dublin (ph), Bear Stearns.

Going back to Maslonka, can you just comment on how much that actually added during the quarter in revenues?

Yes, we can. It's $31.6 million.

Okay, thank you. And then your comments at the very beginning of the conference call just on your customer concentration and where your revenues came in, did I hear this correctly that 70 percent of revenue came from two customers?

No. Our top two customers were each approximately 20 percent and then our top 10 was 57 percent, our top 20 was 68 percent.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) There appear to be no further questions. I'll turn the call back over to management for any additional or closing remarks.

Thank you very much for your time and attention this morning. As I indicated, Terry and I look forward to sharing with you the InfraSource story as we go forward. We are very enthused about the business as is the rest of our management team. And we do believe that we are well-positioned to capitalize on the favorable market trends that we're experiencing. Thank you for your time and attention and participation, look forward to working with you.

Thank you. That does conclude today's conference call. We appreciate your participation and you may now disconnect your phone lines.