Quanta Services Inc (PWR) 2005 Q1 法說會逐字稿

Welcome to the InfraSource 2005 First Quarter Results conference call. Today's call will be hosted by David Helwig, Chief Executive Officer, and Terry 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 of future events. These statements generally relate to InfraSource's plans, objectives, and expectations for future operations and are based upon management's current estimates and projections 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. Infrasource cautions not to put any due 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 David Helwig. Please go ahead sir.

Thank you, Adele, and good morning. Welcome to our first quarter 2005 earnings conference call. Joining me today is Terry Montgomery, our Chief Financial Officer. Today, we will discuss our first quarter 2005 results and the outlook for the second quarter of 2005.

As you'll hear, our results exceeded our expectations for the first quarter and each of our primary markets remains active. For the first quarter of 2005, our earnings per share was $.07 per diluted share reflecting the reversal of a litigation judgment and better than forecasted operating performance despite the impact of higher than anticipated fuel costs.

Our revenues were $183 million, 25% higher than for the first quarter 2004. This increase was spread fairly evenly over our three primary end markets of natural gas, electric power, and telecommunications, and is over and above the substantial contribution of Path 15 last year. EBITDA as adjusted was $10.8 million reflecting our current mix of work and our normal seasonality.

Our revenue mix shifted slightly for the quarter decreasing the percentage of our electric power revenues and increasing our natural gas and telecommunications services revenues due to the completion of Path 15 and reflecting the acquisition of EnStructure and Utili-Trax as well as continued growth of our telecom business.

Our business strategy continues to be based on capitalizing on the favorable trends in the utility infrastructure market, including higher levels of planned investment, increased levels of outsourcing, and consolidation of suppliers, although uncertainty does remain with respect to the timing for the release of a number of large transmission projects.

In the intervening time period, we will continue to experience somewhat lower margins due to our mix of work. Our changes of backlog during the period are as follows. Our electric power backlog of $326 million is up 13% or $37 million over the first quarter 2004 and down 33 million over the fourth quarter of 2004.

Within our electric power backlog, electric transmission backlog of $153 million is down 14% or $24 million over the first quarter last year, due to the substantial progress of Path 15 during the prior period and our continued progress on the BPA, Schultz-Wautoma (ph) line and a number of Wisconsin transmission projects.

The Schultz – Wautoma project continues on schedule for completion during the fourth quarter of this year and is currently approaching 70% complete. We have substantially completed the first segment of the Power up Wisconsin project and are currently receiving materials and completing planning for additional segments pending judicial ruling on a number of appeals, which is expected by mid-summer.

In the intervening time, our field forces are actively engaged in the construction of two other Wisconsin transmission projects, which we have been awarded, each of which is scheduled for completion near the end of the summer. We continue to be awarded small to medium-sized electric transmission contracts on a regular basis.

Since our last earnings call, we were awarded additional scopes of work in Wisconsin and in New Jersey, including those previously mentioned. We continue to track a number of additional large transmission project opportunities with the potential to contribute to 2005; however, there does continue to be a great deal of volatility in their timing and scope.

Within our electric power backlog, our other electric backlog of 173 million is up 57% or $63 million over the first quarter of 2004 and down 15% or $26 million over the fourth quarter. This includes significant projects awards during the period in New York, California, Illinois, Texas, Utah and Wisconsin, primarily as a result of the strengthening in our industrial and petrochemical markets compared to last year at this time.

For natural gas, our backlog of $388 million is up 9% or $32 million versus the first quarter 2004 and is essentially the same as the fourth quarter. This reflects the stability in our master service agreement work and the current level of bidding activity.

For telecommunications, our backlog was $186 million, up 52% or $64 million versus the first quarter 2004 and up 9% or $16 million versus the fourth quarter, due to additional awards of dark fiber (ph) contracts.

Now I'd like to turn the call over to Terry Montgomery, our CFO, who will discuss our financial results for the first quarter in more detail and our outlook for the second quarter. Terry?

Thanks. As Dave mentioned, today we reported net income of $2.7 million or $0.07 per diluted share for the first quarter of 2005 versus $1.1 million or $0.04 per diluted share for the first quarter last year.

These results for the first quarter included on an after-tax basis, $2.3 million of income related to our litigation reserve reversal or approximately $0.06 per share, and $1 million for amortization of intangible assets resulting from purchase accounting under SFAS 141, about $0.02 per share.

And for the first quarter of 2004, they included on an after-tax basis, $2.7 million of amortization of intangible assets or $0.09 per share and $1 million of IPO related expenses or $0.03 cents per share. Exclusive of the affect of those items, income as adjusted was $1.6 million for the first quarter of 2005 versus $4.7 million for the first quarter of 2004.

Revenues for the first quarter increased $36 million to $182.9 million compared to $146.9 million for the fourth quarter of 2004. This increase in revenues for the quarter was due to growth in each of our electric power, natural gas and telecommunications end markets, including organic growth and the acquisitions of EnStructure and Utili-Trax.

This growth was despite a decline in the aerial (ph) electric transmission work due to the substantial progress recognized on the Path 15 project during the same period last year. EBITDA from continuing operations for the first quarter of 2005 decreased $0.7 million to $14.5 million compared to $15.2 million for the first quarter of last year.

EBITDA from continuing operations for the first quarter included $3.8 million of income related the reversal of the litigation reserve reported in the third quarter of 2003, and EBITDA from continuing operations for the first quarter of 2004 due to $1.7 million of IPO related expenses.

Excluding those items, EBITDA from continuing operations as adjusted was $10.8 million for the first quarter of 2005 versus $16.9 million for the first quarter a year ago. This decline is due primarily to the substantial progress realized from the Path 15 project in the prior period and to a lesser extent, higher fuel costs, offset by growth in the balance of our business.

Reconciliation of GAAP net income to EBITDA for continuing operations and to EBITDA from continuing operations as adjusted as well as GAAP net income to income as adjusted was included in the tables contained in this morning's press release.

We are providing that reconciliation of unusual items affecting EBITDA and net income to order to demonstrate how we as management evaluate the results of our operations exclusive of the effect of unusual non-operational items.

SG&A expense for the first quarter was $17.6 million as compared to $15.5 million in the first quarter of 2004. The increase includes the effects of our acquisitions during 2004, the increased cost of operating as a public company and the commencement of expenditures for our SOX compliance efforts.

At the end of the first quarter, we had total backlog of $925 million or a 17% increase compared to $790 million at the end of the first quarter of 2004, and 1% less than the $935 million of backlog at the end of the fourth quarter. We classify contracts as “backlog“ if we have been awarded the contract and we have received a notice to begin work. Our backlog includes an estimate of work to be completed under master service agreements. Approximately $400 to $425 million of this backlog is expected to be completed during the balance of 2005. This level of backlog gives us visibility into revenues for the remainder of the year even though it represents a shift in mix to lower margin work, pending further development of large project transmission work.

At the end of the first quarter, we had $8.8 million of cash on our balance sheet and approximately $46 million of availability under our revolving credit facility. We are currently in compliance with all covenants under our credit agreement. Net cash flow used by operating activities from continuing operations was $16.1 million in the first quarter, due to our seasonal ramp up of outdoor operations in March, and also due to an increase in unbilled work volumes with one of our largest customers. We expect that net cash flow provided by operating activities from continuing operations will not turn positive until later in the year consistent with our typical seasonal profile.

Capital expenditures were $9.1 million for the first quarter compared to $5.2 million for the first quarter of 2004, due to anticipated growth in our revenues. This is exclusive of our acquisition of Maslonka in the first quarter of 2004. At the end of the first quarter, we had $32 million of letters of credit outstanding, primarily to secure our insurance and bonding programs, and we had drawings of $6 million under our revolving credit facility. Revolver drawings were used to finance seasonal working capital needs.

Concerning our outlook for the second quarter of 2005, the expected revenues will range from $190 to $200 million, and EPS will range from $0.09 to $0.10 based on the current mix of the work in our backlog, and the potential delay in the resolution of the certain project claims, which we had previously expected during the second quarter, and also the expected impact of higher fuel costs.

With regard to those project claims, we currently expect a positive resolution during the second half of the year, although unfortunately, the timing of these proceedings is not within our control. As we have mentioned previously, our quarterly revenues and earnings will continue to be dependent on the timing and scope of contract awards, especially those for larger transmission projects. Due to the nature of these projects, it is very difficult to forecast precisely when or even whether they will occur.

This now concludes our formal presentation and we'll open up the line for questions.

Thank you, sir. (Operator Instructions

Our first question comes from Lorraine Maikis from Merrill Lynch. Please go ahead.

Hi. This is Julie Shotshiff for Lorraine Maikis. We had a question, your revenues were above the $150 to $160 million guidance that you gave in February. What segments show the biggest difference from your expectations?

Actually it was across a couple of the segments, in natural gas and electric. They were fairly even.

And do you expect this to continue going forward, this mix?

With the - basically, yes. The big game changer there is again, the large transmission project work that would carry substantial revenues with it. It would shift the mix, but other than that on a steady state basis, about the same.

And for gross margin, the gross margin was below the 13 to 14% guidance that you gave. Do you expect that to change going forward as a result of natural gas?

We expect, as Dave mentioned, the mix to be about the same going forward.

Thank you.

Thank you. Our next question comes from Sanjay Shrestha from First Albany. Please go ahead.

Great. Thank you. Good morning guys. Just a couple of quick questions. First one, Dave, you mentioned that dark fiber, you know, really contributed to the nice growth in your telecom backlog, but I was wondering, was there any fiber to the premise growth?

And if that's the case, maybe if you could give us some color in terms of how much of that was the factor behind the growth and what's your outlook and expectation in that market for 2005?

Sure. We had - I'm not sure I remember the exact numbers in the backlog at the end of the quarter, but between work to date and backlogs for the year, we probably have on the order of $10 million ...

Okay.

... fiber to the premises revenue. That would be, you know, for the year. So that's not huge in our scale and as we've talked before, we do it selectively in the areas that we have a presence and can do it on our terms without the need for, you know, substantial mobilization and setup costs and things like that.

And Dave, can you also share with us your expectations in terms of how much of that does - line of the business might contribute, you know, to the growth for 2005?

I'm sorry, for the fiber to the premise ...

That's right.

That's our forecast for the year. It's revenues to date plus forecast for the year is only about $10 million.

Got it. Got it. Okay. Great. Another quick question here, obviously, you know, the revenue has been coming ahead of expectation and it sort of seems like, you know, that your acquisition on the natural gas front is doing pretty well, along with the master service agreement for you guys.

But does that, you know, high level of revenue maybe also reflects that you guys are strategically doing more work on a selective basis on the distribution line front as well while we're waiting for some of the larger scale transmission projects? Or is it really more of a natural gas front?

That's an excellent question Sanjay, and in fact, there is a high level of electric distribution work that is ongoing with a number of our customers and there has been substantial volume of that, much more than we anticipated or were actually pursuing.

As you know, we perform that work substantially for key strategic customers as part of our market basket of service and we have a confluence of events, where for a number of those customers, there has been a fairly extraordinary amount of work to be performed that we've scaled up to accomplish.

Okay. Great. And one last question if I could, Dave, I know you guys don't want to talk about specific project-by-project basis, but I was hoping if you could talk a little bit more on how many large sized transmission projects you guys are tracking and out of the ones that you're tracking, maybe some that are other - you know, waiting on approval of the, you know, the public utility commission front or, you know, maybe just getting approval on the board level?

And second, if you could also share with us what are you seeing in the industry? Are you seeing a lot of public private partnership or are you actually seeing utilities trying to put this spending in their CapEx and maybe trying to make you go through the main base?

Again, directionally, two excellent questions. The first one, we have seen no diminishment of large projects on our radar screen and then our sales pipeline, whatever we want to call it. In fact, if anything, more activity, certainly not less.

Just within the last quarter, some of you may have been following various announcements of transmission expansion plans, specifically in the Midwest and New England, announcements in the Western states of a number of state agencies being formed or proposed, and of course, the multi-state proposal on the Frontier Line which had quite a bit of splash a week or two ago.

So more activity than ever I guess is what I'd have to say with the gauge of what we're seeing developed. As far as what form it takes, it's quite a mixture. Some public, private development proposals, but I'd have to say at the moment, probably the preponderance of the development is being fostered and pursued through regional arrangements, perhaps with multiple utilities if not just with one. But more regional than public, private arrangements.

Okay. That's great. Thanks a lot guys.

Thank you. Our next question comes from Jeff Beach from Stifel Nicolaus. Please go ahead, sir.

Thanks.

Good morning, Jeff.

Good morning. Can you expand on this project claim that will impact - negatively impact second quarter results? Anything you can say about it, particularly, can you give us a rough idea of how much this - the size of this that's impacting the results and a little bit more about the nature of it? And then I have one follow-up.

Okay. Well, Jeff, you appreciate, as we said before, that that's clearly a commercially sensitive subject that we're not in a position to quantify. We do expect a positive outcome as Terry indicated. There was a timetable for reviews and resolutions that had been established earlier in the year that has not been met by the other parties, but we're continuing to track all of our claims for settlement and case for entitlement and all that sort of stuff, has been filed some time ago.

And we're involved in an established bureaucratic process for review and conclusion that we just can't control the timing of. So it's not a negative impact at all. It's just a matter of timing.

So in other words, the second quarter guidance that you had talked about is really reflecting your profitability in the second quarter? There's not really any significant negative drag?

That's correct.

Okay.

No negative drag and no extraordinary contributions, exactly.

Okay. The other question I had was, there was a significant drop in interest expense from the fourth quarter to the first quarter. I don't know if that, what you're seeing - I wasn't sure of ...

That's related to the judgment that we reversed. We actually had been accruing interest on it as the court had indicated an interest rate while it was going through the appeal process. Because that was overturned, we were able to overturn that interest expense also.

So in the second ...

Absent that, the first quarter would have been, you know, very similar to the fourth quarter of last year.

Okay. And this is minor, but the interest income that you're getting I'm calculating over 5% return on your cash. I know it's minor, but I'm just kind of interested in how you're getting such a return on your cash.

We have a great treasury department. We're trying to make them a profit center, you know?

Actually, it's hard to actually estimate that because the cash fluctuates ...

Yes.

It was off significantly in January and then, you know, back down in February and March.

All right. Thank you.

Thank you. From Lehman Brothers, we now move to Tom Ford. Please go ahead.

Thanks. Good morning, guys.

Hi Tom.

Just a couple of questions. Number one, Dave, do you - you guys had indicated $400 to $425 million of the backlog is going to be burnt over the rest of the year. Do you guys have a mix breakdown of that?

We'll have to look it up. While we're doing that, do you have another one?

Yes, Dave, just off the top of your heard, I mean, I sense - I mean, has the mix changed at all with respect to that burn over the rest of the year?

Again, it would be uncertainty of the timing and contributions from large project transmission work now.

Okay.

Tom, I can get back to that question. Roughly, of that backlog, roughly 45% electric, 40% gas, 10% telecom, and the balance with the other.

Okay. And could you guys talk a little bit more about what the fuel impact was and, you know, if you have any means at hand to try and address it?

Sure. We put our budget together in the fourth quarter of last year and we used the pricing information of what we were currently paying gas at the time, and what the estimates were for 2005 cost per gallon. And during the first quarter, it was up significantly.

I think we averaged about $2.05 or so in the quarter and we're estimating that it's going to continue at the current levels in our projection for the balance of the year. So for the first quarter, it had approximately $500,000, $600,000 of impact for pricing and then we expect that rate to continue throughout the balance of the year, or actually be a little bit higher.

Okay. So we kind of - so we should assume sort of a 500, 600 per quarter impact?

Roughly, yes.

Okay. All right. And is there anything, Terry, that you can do? I mean, do you guys have fuel adjustment language in any of the contracts or how are you guys trying to deal with this on a go forward basis?

Yes, great question. It is not typical and it has not been typical to have fuel adjustment clauses baked into our contracts. It's not a typical market term for us or anyone else in the business. We have been rather methodically and deliberately pursuing relief in that regard from various customers with some modest degree of success.

Okay. So in other words, maybe the total impact was probably more than 5 to 6, but you're getting some relief to partially offset?

That's correct.

Okay.

That 5 to 6 is over our budget or expectations. It would be higher compared to the first quarter of last year because prices have increased significantly since that time period.

Right. Right. Okay. One other question, Terry, in terms of the 2Q numbers, what's going to be the trend for G&A?

It should be about the same on percentage of revenue, that we are 9.6, 9.7 for the first quarter. It should stay about there, actually throughout the year, it will go up slightly on a dollar basis because of again the SOX efforts.

Okay. This is on 404?

Yes.

Okay. Okay. And Dave, you talked about large projects and possibly some contribution to 2005, but, you know, not something that you're factoring in. I'm just wondering, number one, when would you know or get an idea of, and number two, has there been anything - is there any way that you can discuss for us or describe to us, you know, projects that you've been tracking for a multi-quarter period, you know?

Is there any way that you can describe to us progress that you've witnessed in terms of those kind of moving through the pipeline?

Multi-part question there. As you know, we're not in the practice of commenting on specific projects.

Right.

Many of those large projects are very publicly known and their situation can be followed. There are some, for example, one that's been highly visible and public is the progress on the Northeast Utilities line, Norwalk to whatever, for instance. It just got its final approval. So there is steady progress on quite a number of fronts. I don't know, it's hard to say.

There's a mixture of projects there that are in the process of regulatory approvals, funding approvals, completion of engineering and issuance specifications. We have seen a fair number of large projects approach and enter the request for proposal stage in recent months. I'd say our actual progress in preparing responses to specific requests for proposals has been noteworthy in the last quarter.

Okay, great. And then, just one last question for you, is you highlighted that in your commentary that it sounded like the industrial and petrochemical space, I guess this is probably down in the Gulf area, is starting to improve there. How would you characterize it versus, you know, looking back over the past couple of years?

Because I know we sort of went down to sort of a trough level. Are we kind of bouncing back here, but still sort of close to the bottom?

Yes. As you're well aware, last year at this time, first half of the year last year was in fact the trough in both the petrochemical and refining customer base, driven by natural gas prices being high and driving cutbacks on the petrochemical folks that rely on natural gas as a feed stock.

That pricing level has pretty much sustained at a high level and we're not seeing much activity there in that market. But on the other hand, the refiners, as you read in the papers, are all pretty flush with cash and confident that pricing is going to remain high and are proceeding with considerable investment in both clean air type activities and capacity expansion and reliability investments.

So that's a pretty active market for us right now and we expect that to continue through the foreseeable future. I would not say that that side of it remains in a trough. The petrochemical side on the other hand does.

Okay. Great. Thanks very much.

Sure.

Thank you. Our next question comes from Alex Rygiel from Friedman Billings. Please go ahead.

Thank you and good morning gentlemen.

Good morning, Alex.

One quick question, can you provide us the revenue mix by customer in the quarter?

Our top 10 customers represented 45% of revenue. Exelon, our largest, was 20% of revenue.

And then revenue by electric, gas, telecom?

Yes, 53%, 54% electric, 24% gas, 11% telecom and the balance was other.

With regards to the telecom backlog, what's the mix between dark fiber and other?

The majority of it is dark fiber. I don't have the exact breakdown here.

I told you the fiber to the premise portion of it.

It was $10 million, I understand that, but I wasn't sure what the balance of other outside of dark fiber and fiber premise there was.

It's just like Terry said, the majority of it is dark fiber.

And with regards to some of these transmission opportunities, you referenced one in Connecticut, in Norwalk or whatever. Would you be bidding on the aerial, the underground, or both of that project?

Yes.

Thank you.

Thank you. From Sidoti & Company, we now move to Rick Wesolowski. Please go ahead.

Thank you. Dave, how much of the Schultz - Wautoma is in the backlog now? Can you quantify that?

How much a share? You know, with it being 70% done at this point in time, there's maybe $8 to $10 million remaining.

Okay. And just going over a couple of prior projections, one of them was that the gross margins would increase through the year to end up at or just below the level seen in '04. Does that still hold?

Yes, for the most part. The only uncertainty would be about the net impact of fuel cost and how things balance out, so that would probably temper that a bit. A little bit hard to integrate a crystal ball in what happens to fuel prices for the rest of the year though.

Also, there were - I think on the last conference call, there were larger, or at least significant projects yet to be won that were in your projections for the year. Is that still the case? I mean, have your assumptions changed at all here?

No, no they haven't. And actually, I guess Tom asked the question earlier along the lines of whether any large project work was build into our forecast and as I indicated last time, there is some degree of that built in for the second half of the year. And our projections have not changed in that regard.

Okay. Thanks a lot.

Thank you. Ladies and gentlemen, once again, if you would like to ask a question, please press star, one, now to signal.

Our next question comes from John Rogers from D.A. Davidson. Please go ahead.

Hi, good morning.

Good morning, John.

Two things, one, Dave, what's your sense of the impact or of the energy bill in terms of your business? Are people - are your customers waiting for a passage there or are they proceeding without it or ignoring it? So what sort of impact is that having on the market or planning for projects?

That's an interesting question and very hard to figure out a great simple answer to. Certainly the energy bill, if it ever does happen, will - as it's being proposed, has many positive features that won't hurt, they'll only go to the positive side.

I can't say that any of the work that we're pursuing and involved with or think is real is held up pending the energy bill. I think the energy bill, when and if it happens, will just produce more demand.

Okay. And the second question I had is, looking at your revenue mix, and then your margins, I mean, the margin decline that you've seen, you know, either at the gross level or the operating level, relative to where we were running last year, is that all tied to the electrical distribution and specifically the transmission portion of that?

In other words, if you were to look at margins by segment, would you see declines only in that area?

I'm not sure I follow the way you structured the question, but the answer that I would offer would be that differential is all attributable to the one extraordinarily large project that we had in the period last year.

Okay, which would all be in the transmission side of it? In other words, margins in your distribution, the smaller project work and your gas and I guess a little bit of telecom, those margins are roughly comparable to where you have been running?

We have not experienced any erosion of margins in those lines of business.

In the electric work, even though we had growth in each of our three end markets in revenue lines, the electric work was more distribution and industrial than transmission like it was last year, and then off the natural gas, I'm sorry, growth in the natural gas business at about similar margins.

Okay. That's what I just wanted to confirm, that it's -- strictly it's mix?

Correct.

Okay, great. Thank you.

Thank you. We'll now take another follow-up question from Jeff Beach from Stifel, Nicolaus.

Yes. In the second quarter, you described that you have some project delays, but you've been able to move your crews over to work on other projects that have come up. Can you - I would have thought that the seasonal increase off of the $183 million would be a little stronger than your guidance.

Is there - from shifting all this work, is there a net negative impact of revenues in the second quarter from project delays?

No. We're not seeing a net negative impact. We have filled in with substitute work quite substantially.

Can you - can you explain why there's less seasonality? Is this the pickup of natural gas work in the Southeast, or you know, it seems like it's less seasonal than I would have thought.

Probably two factors, change of mix, you know, to more business in the Southeast than we had before due to the acquisitions and secondarily that the transmission project work is not as seasonal. You know, it's a large project. There are substantial projects that go on for many months and they're not delayed or shut down due to electric loads and the time of year.

All right. Thank you.

Thank you. We'll now take another follow-up question from Alex Rygiel from Friedman Billings.

I'm sorry, just one clarification. With regards to your revenue mix by end market, can you confirm that electric was 54%, gas was 24% or was it 34%? Telecom, 11 and then other was what?

You're talking about revenue splits for the first quarter, Alex?

Yes.

54% electric, 24% gas, 10% telecom, and then the balance in other.

Thank you.

Thank you. Ladies and gentlemen, once again, as a final reminder, if you would like to ask a question, please press star, one, now.

And we'll take a follow-up question from John Rogers from D.A. Davidson.

Hey, Terry, the revenue split that you just gave, do you have those comparable numbers for last year?

Yes, I think we do. That would be 71% electric, 21% gas, 6% telecom and 2% other.

Great. Thank you very much.

Thank you. Gentlemen, it appears there are no further questions at this time. I'd like to turn the call back over to you for any additional or closing remarks.

Great. Well, thank you ladies and gentlemen, for participating today. As you've heard, we're very pleased with our results for the quarter, and we believe that we are well positioned for the rest of the year and for future growth. We look forward to speaking with you on our next call.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.