Quanta Services Inc (PWR) 2006 Q1 法說會逐字稿

Welcome to the Quanta Services first quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded, Thursday, May 4, of 2006. At this time, I would like to turn the presentation over to Kip Rupp, Managing Partner with DRG&E.

We welcome you to Quanta Services conference call to review 2006 first quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be on the e-mail or fax distribution list or to receive future news releases on Quanta, or if you experienced any technical difficulty this morning and did not receive your e-mail or fax, please call our offices at DRG&E at 713-529-6600. Also if you would like to listen to a replay of today's call, it will be available via webcast by going to www.QuantaServices.com and going to the investor's center section of the website. In addition there's a telephonic recorded instant replay that will be available for the next 7 days 24 hours a day and the dial in information and passcode is in this morning's press release.

Please remember that information reported on this call speaks only as of today, May 4, 2006 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay listening. Also this conference cal will include forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements related to projected revenues and earnings per share, and other financial and operating results, capital expenditures, benefits of the Energy Policy Act of the 2005 or other legislation, growth in particular markets, strategies, expectations, intentions, plans, future events, performance, underlying assumptions and other statements that do not relate to historical or current fact. These forward-looking statements are not guarantees of future performance and management cautions that any or all of Quantas forward-looking statements may turn out to be wrong.

Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. Please refer to Quanta's annual report on Form 10-K for the year ended December 31, 2005 and its other reports filed with the Securities and Exchange Commission for additional information concerning some of the risks, uncertainties, and assumptions that could affect the outcome or the results of operations or Quanta generally. Actual results may differ materially from those expressed or implied as forward-looking statements. All such forward-looking statements, whether written or oral are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements. In addition, Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this call. Now I would like to turn the call over to Mr. John Colson, Quanta's Chairman and CEO. John?

Thank you. Good morning and welcome to Quanta Services first quarter 2006 conference all. Let's start the call this morning, I will provide a general overview of the quarter and a detailed discussion of our electric power and gas operations; my remarks will be followed by a review of our telecommunications and cable operations by Ken Trawick; and then James Haddox, our Chief Financial Officer will review the quarter's financial results; John Wilson, our President of Electric Power and Gas Operations is also present in the room to answer any questions. After our prepared remarks, we will open the call for questions.

This morning we announced the results for the first quarter of 2006. Our revenues for the quarter were approximately $496.5 million, this compares to $372.5 million in the first quarter of 2005. Yielding 33% internal growth for the quarter. I think it's important to note that we incurred less storm revenue in the first quarter of '06 than we did in the first quarter of 2005. We believe the strong internal growth in the first quarter of '06 is attributable to the increasing demands of our services by our customers in the electric utility and telecommunications industries. The weather in the first quarter also was mild across most of the country, which helped fuel the growth to a lesser extent.

We do not expect 33% internal growth in any other quarter this year, but we do believe we can achieve double digit internal growth for the year, in our core businesses excluding storm revenues for both periods. Another positive growth sign is that backlog is at record levels. Even though the first quarter is typically not a strong backlog period due to seasonality, backlog at the end of the first quarter was $1.321 billion compared to $1.295 billion at the end of 2005, and $1.163 billion at the end of the first quarter of 2005. And when we're talking about backlog, we're talking about 12-month backlog.

Perhaps more important than the 33% revenue growth for the quarter is that margins improved 520 basis points as well at the operating income line. And SG&A expense is down as a percentage of revenue from 11.4% in the first quarter of 2005, to 8.5% in the first quarter of 2006. Revenues and margins increased from the first quarter of 2005 in each of the industries we serve. These improvements are not the direct result of one industry, storms or even a handful of customers increasing spending. We believe it's the result of widespread improved financial health of our customers and a focus by these customers on maintaining and upgrading infrastructure and the electric power, gas, telecom, and cable industries.

The momentum behind the Energy Policy Act of 2005 is growing, and the mandated implementation schedule is keeping the federal, state and other organizations focused on its various requirements. As the one-year anniversary of the passage of the act and numerous deadlines come closer, we expect this momentum to continue. Electric power and gas revenues grew 34% in the first quarter of 2006, over the first quarter of 2005. Telecommunications and cable revenues grew at 26% in the first quarter of 2006, over the first quarter of 2005 and all of this growth is internal growth.

When divided by type of customer, our 2006 first quarter revenues were 66% from electric and gas utilities, compared to 66% in the first quarter of last year as well. 14% of our revenues were from telecommunications and broadband cable customers compared to 15% in the same quarter last year. And 20% was from ancillary compared to 19% in the first quarter of '05. Our largest customer made up approximately 6% of our revenues in the first quarter of '06. Our top ten customers for the quarter accounted for approximately 33% of our revenues, and our top 20 customers made up approximately 47% of revenues for the quarter. At the end of the first quarter of 2006, our employee count was 11,240, up slightly from 11,104 at the end of the fourth quarter of 2005, and up from 10,516 at the end of the first quarter of 2005.

Now, looking at the performance of our electric power and natural gas operations, revenues from customers in the electric power and natural gas industries increased 34% in the first quarter of 2006, as compared to the first quarter of 2005. Typically the first quarter is our worst, due to the negative impact of ice, snow, and other extreme weather conditions on our ability to operate. This year, a mild winter increased our productivity and the number of work hours for the quarter. However, as I said earlier, the good weather was not the main contributor to this strong quarter. Our results for the quarter reflect increased customer spending across the board, from transmission and distribution to outsourcing and energized services, we believe that the demand for our services will continue to grow and is being fueled by increased spending, growing capital expenditures, federal incentives to strengthen infrastructure, and a focus on delivering reliable power to the consumer.

Focus on reliability is not expected to shift any time soon. As demand for electricity continues to increase and congestion gets tighter and tighter along our nation's power grid. The U.S. Energy Information Administration projects that domestic electricity demand will grow at an average annual rate of 1.8% through 2025. This represents almost a 50% growth rate over the next 20 year period. Looking forward, Edison Electric Institute has estimated that shareholder-owned utilities are planning to invest over $18.3 billion in transmission in the 2006 through 2008 time frame.

Many utilities are turning to new methods and technologies to increase productivity and efficiency while maintaining customer service. As a result, we are working closely with our customers to evaluate outsourcing opportunities and deploy our proprietary energized resources where applicable. Many utilities will lose expertise as a large amount of their work force retires over the next five years. Quanta's nationwide 11,000 strong trained and variable work force makes a seamless supplement to the utility work force. The research form Gartner projects that the global market for customer service outsourcing for utilities will grow to $12.2 billion in 2007. From a utilities standpoint 78% of utilities have either outsourced a customer care function or plan to in the next two years. Quanta has proven success, has proven success as an outsourcing partner in multiple industries. And we expect to build on this track record to meet the growing demand from utilities for a strategic outsourcing partner.

We continue to experience regional shortages of skilled labor but with increased training and recruitment efforts, as well as being the preferred employer in most markets these regional shortages have been managed. Wage increases have been moderate and in most cases we have the ability to include these increased costs in our contracts. Technologically Quanta has several patented methodologies and practices that enable energized maintenance, construction, and repair work. This can save the utilities the financial impact of taking lines out of service. More and more utilities are turning to energized services as an alternative method in a highly congested transmission environment.

As I mentioned earlier, the growth experienced in our electric power and gas operations was not attributable to just a few but was wide spread throughout our customer group. Another key activity during the first quarter included the completion of the historic Wyoming Jackson ferry 92 miles, 765,000-volt American Electric Power transmission line that utilizes the first ever six bundle conductor configuration and other innovations. Next Monday there will be a celebration of the completion of this line, called the final splice. This will be a national media event with key political figures attending and speaking. It's sure to garner national news attention. So watch for photos and articles in the national media. It should be a great way to gain a perspective of the full scope of this project.

We are pleased with our financial and operational performance in the first quarter of 2006. The year is off to a strong start and we believe the industries we serve will continue to turn to Quanta as they seek to partner with our industry leader to strengthen their delivery systems while managing costs and maximizing efficiency and customer service. To close, I want to thank our operating units, our management team, and most of all our employees throughout the nation for their hard work and commitment to making Quanta the leader in infrastructure services. Now I will turn the call over to Ken Trawick who will discuss recent developments in our telecommunications and cable operations.

Thank you, John, and good morning, everyone. Our telecom and cable operations expensed approximately 26% internal growth in the first quarter. After several challenging years, we are beginning to see a recovery in this market as our customers begin to increase spending to maintain and build out their networks. In addition to strong top line growth, we continue to focus on maintaining margins and profitability. This improved financial health and overall optimism throughout the industry is driven partly by continued demand for high bandwidth delivery of dynamic interactive services. Such as video on demand and Voice over IP. In order to meet this ever growing demand, service providers and network operators must drive fiber deeper into the network. This, as you know, is core to Quantas service offerings.

Our outside planned services made good strides during the quarter with a significant portion of our revenues for the telecom group coming from FTTx initiatives for Verizon, AT&T, as well as other providers throughout the nation. This effort is being further supported by recent legislative developments. In previous calls we've discussed the franchise legislation in Texas, this set a new milestone for telcos and others entering the video market. This initiative continues to gain momentum with similar state legislation, being passed in Indiana, Kansas, and Virginia. Currently similar initiatives are pending in both California and Florida. However, what we believe may have the largest potential impact are Federal Bills moving through the House and Senate.

The House Energy and Commerce Committee passed a bipartisan bill that allows phone companies, such as AT&T and Verizon, to offer cable television service anywhere in the United States without obtaining local government approvals. The bill passed out of committee in a 42 to 12 vote last week. The same committee, however, rejected the network new trial T amendment to the bill which would demand payment from Internet based content providers in exchange for priority treatment of certain shopping and information services. In all this bill expedites the entry into the cable markets for the phone companies. Under the bill, Verizon and AT&T, as well as other providers would have video entry authorization after 30 days.

A separate bill was introduced to the Senate just Tuesday. The Senate bill does require that telecom companies seek local franchise approvals, but it requires the local municipalities to act on the request within 30 days. If they do not act, a franchise will automatically be granted. Either bill makes for a faster FTTx buildout. In any event, the total number of fiber-powered homes continues to grow. Since just last October, an additional 280 communities were added, bringing the total to 936 according to Render Bender Slice and Associates. In all, more than 4 million homes have been patched with fiber, making a 50% increase in fiber connections in the past six months. According to the fiber-to-the-home council.

For Verizon, we continue to build out the network to support their FiOS services in California, Florida, Oregon, Pennsylvania, Texas, and Washington. For AT&T, the majority of our work is just getting up to speed in the western states, as this program gains momentum. Utilities are also continuing to looking into new technologies to increase the effectiveness of their network and the return on investment. One of the technologies that gained momentum in the first quarter was broadband over power lines or BPL. BPL is receiving a boost this past quarter as California Public Utility Commission adopted an order designed to encourage a competitive market for BPL in that state. The California PUC also considers BPL one of the best ways to extend broadband access to rural areas in underserved communities.

Also in the first quarter, CenterPoint, a Texas-based utility, announced that it will conduct a pilot deployment, focused on an intelligent grid concept. It utilizes BPL technology but the service is more focused on monitoring power usages, outages, and trouble spots. Also in Texas, TXU announced that it will utilize current BPL technology to monitor and manage its electrical grid. TXU has reported that it expects to roll out delivery of high-speed Internet service to 2 million Texans in the latter part of this year. Currently is also working with Synergy Corporation to launch Voice over Internet Protocol services over its BPL system in Ohio.

It is important to understand that BPL provides two distinct products. One is broadband services, data, voice, and video to end users and the other is smart grid solutions which allow the utility to operate a more efficient system through a myriad of applications made possible by this technology. While many BPL initiatives remain in field trials we believe Quanta is well-positioned to deploy this new technology as utilities begin to leverage what is being referred to as the third broadband pipe into the home.

Now, looking at our inside plant operations, this area of our business is performing well with several new customers on board, and increasing revenues and margins. In addition, we have expanded our business with existing customers, such as Verizon. Our inside plant group is now working in new regions to deploy FTTP for Verizon and is also supporting DSL deployments across the country. We believe this area of our business will continue to strengthen as we progress through the year.

Just as the energy bill is spurring momentum and enthusiasm in our electric power operations, the telecom regulatory developments are having a positive impact on the telecom market overall. We expect state and national regulatory developments to remove barriers to investment, by service providers. The wireless area of our business continues to have strong potential but upgrades have been somewhat delayed by merger and acquisition activity. For some of our customers, capital spending has been delayed and projects that are moving forward are doing so at a more modest pace. We expect these conditions to be short lived as merged companies are integrated and spending accelerates to meet increased demand for services. Even in these conditions our wireless operations remain profitable, and we believe we are well positioned to support our customers with deployment of 3G and UMTS technologies.

Our cable operations are beginning to be positively affected by the response of the MSOs to the FTTx initiatives of the telcos. With the impending resolution of the Adelphia bankruptcy and the resulting purchase of those systems by Comcast and Time Warner, we are beginning to see specific projects announced to enhance the capabilities of the cable systems networks to deliver enhanced data, video, and voice services. We believe we may begin to see a positive impact from these projects on our operations in the fourth quarter of this year. Now, I will turn the call over to James Haddox for a review of our financial results.

Thanks, Ken. And good morning, everyone. Today we announced revenues of $496.5 million for the first quarter, compared to $372.5 million in the prior year's first quarter, resulting in an increase of $124 million. Revenues from electric and gas utility customers increased by $84 million or 34%. Telecom and cable customer revenues increased $14 million or 26%, and ancillary customer revenues increased $26 million or 36%. Resulting in overall internal revenue growth of 33%. Our quarter-over-quarter revenue growth resulted from improved business conditions in the industries we serve, and more favorable weather conditions across the U.S. Our gross margins of 12.0% for this quarter compared to 9.7% during last year's first quarter. We experienced higher margins across all the primary industries we serve, as these industries continue to recover. We also experienced higher productivity as a result of the better weather conditions in the first quarter of 'he 06, in certain areas we serve.

Our G&A expenses were 42.3 million in the first quarter of 2006, compared to 42.5 million in the first quarter of 2005. A slight decrease was due primarily to lower consulting and legal fees in the first quarter of '06, partially offset by higher personnel costs associated with increased head count and salary increases. In addition, in the first quarter of '06, G&A expenses were reduced by a gain on the sale of assets of approximately $0.5 million, while the first quarter of '05 expenses included a loss of approximately $0.2 million from the sale of assets. G&A expenses in 1Q '06 declined to 8.5% of revenues, versus 11.4% in 1Q of '05. Interest income increased approximately $1.5 million in the first quarter of '06, versus the first quarter of '05, as a result of our higher average cash balances and increased interest rates.

Net income attributable to common stock for the quarter was $7.9 million, resulting in earnings per diluted share of $0.07, compared to a net loss of 5.1 million or $0.04 per share in the first quarter of 2005. Cash flow from operations totaled approximately a negative 9.4 million for the quarter, primarily due to higher working capital requirements, as revenues in the month of March were higher than the month of December. Cash flow from operations less capital expenditures of 13.6 million, resulted in approximately $23 million in negative free cash flow for the quarter. In addition, due to the adoption of FAS 123R on January 1, of 2006, 4.4 million of tax benefits from our compensation plans are now classified as financing activities and would have previously been considered operating cash flow.

EBITDA was $31.5 million for the first quarter of 2006. EBITDA is defined as earnings before interest, taxes, depreciation amortization and non-cash compensation expenses. The amounts making up EBITDA of 31.5 million were net income of $7.9 million plus income taxes of $6.6 million, plus depreciation and amortization expense of $12.7 million, plus non-cash compensation expense of 1.4 million, and net interest expense of $2.9 million.

Our current backlog of work to be completed during the next 12 months is approximately $1.321 billion, which compares to $1.295 billion in backlog as of year end 2005, for an increase of approximately $26 million or 2%. Backlog increased in the electric and gas utility portion of our business, partially offset by slight seasonal decreases in backlog in telecom and cable and ancillary services. Total backlog increased 14%, or $158 million compared to last year at this time. Backlog represents the amount of revenue that we expect to realize from work to be performed over the next 12 months on contracts including estimates of work under long-term maintenance contracts, and new contractual agreements on which work has not yet begun.

Our day sales outstanding which we calculate by using the sum of current accounts receivables, plus cost and earnings in excess of billings, less billings in excess of cost, divided by average revenues per day here in the first quarter were 86 days at March 31, 2006, versus 90 days at March 31, 2005. At quarter end, we had $285 million in cash on our balance sheet. We had 144.8 million in letters of credit outstanding, primarily to secure our insurance program. Earlier this week, we closed an offering for an aggregate principal amount of $143.8 million of 3.75% subordinated convertible notes. We intend to use the proceeds of this offering, coupled with a portion of our cash reserve, tendered for our $172.5 million convertible notes which were going to become a current liability on July 1, of 2006.

We have also engaged our banks to amend or totally refinanced existing credit facilities in order to lower our interest rate and cost of letters of credit. We hope to complete this during the second quarter. Concerning our outlook for the future we forecast that we will continue to show quarter over quarter growth in the second quarter of '06, with revenues in the range of 500 million to 530 million and EPS in the range of $0.10 to $0.12. This compares to revenues of $439 million and diluted earnings per share of $0.03 during the second quarter of '05. This outlook does not include the positive effects of tendering for our $172 million convertible, or the potential writeoff of deferred financing costs associated with the tender or the refinancing effort.

For additional guidance, we are currently projecting our annual tax rate to be approximately 45%. We expect our diluted share count to be about $141 million shares during each remaining quarter of this year, which includes shares underlying our 4.5% convertible subordinated notes. The net income add back associated with the convert shares is approximately $2.2 million per quarter. We expect -- we continue to expect CapEx for all of '06 to be approximately $60 million. Our year is off to a great start. This coupled with a completed convert offering and our contemplated refinancing puts Quanta in an excellent position to capitalize upon increasing opportunities in the electric power and telecom industries and on acquisition opportunities. This concludes our formal presentation and now we'll open the line for Q&A.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Sanjay Shrestha with First Albany. Please go ahead.

Good morning, guys. First of all, congratulations on a great quarter. A couple of quick questions here. Obviously, you guys have refinanced your convert here with better terms and, preserving the cash. Now is that simply because you are seeing so much work coming your way that you feel like you are going to need a decent amount of working capital or should we read into that as maybe you are also in an active discussion as it relates to some tuck-in acquisition? Can you comment on that a little bit more?

I think what you just said is correct. We are anticipating increased needs for working capital over the next few years. We had an opportunity to refinance the convert that was about to mature, and extend the maturities about seven years and it just preserved our flexibility for doing acquisitions or to handle working capital or capital expenditure needs.

Okay, but you are not in any sort of an active discussion from an acquisition standpoint right now?

We have discussions from time to time, but there are no acquisitions that are imminent or announceable at this point in time.

Got it. Got it. Now if I could, guys, obviously weather helped a little bit here. When you look at the year-over-year comparison, is it -- now based on what you see right now, could you extrapolate that into the second half of the year as well that we might see similar kind of a trend from a year-over-year comparison standpoint, given margins are going up, spending is picking up and you guys clearly are in one of the better positions to win a lot of work both on the telecom and the utility side.

We are probably fairly optimistic about the year, for sure. The first quarter, no doubt, we did enough work in the first quarter that it will impact some of the work we will do in the second quarter and maybe some at the -- in the fourth quarter, because of budgets being used more in the first quarter. But in reality, we expect improved growth. I think the -- our projections show a 15% internal growth in the second quarter.

Yes.

Along with 300 to 400Z% improvement in EPS. So we're expecting the things to improve throughout all of the year.

Okay. Great. Then one last question. With the rising cost for the utility, really the emission control and with the rising price of fuel as well, do you guys see at some point maybe that will start to impact the level of spending on the transmission and distribution side? Or you think that the passes the energy bill and being able to put it in the rate case, it is something if anything we will want to continue to accelerate here?

Yes, we have -- in most of our long-term contracts, we have fuel adjustment clauses now.

Okay.

And we're able to pass on fuel adjustments and cost increases on the shorter term contracts as we bid them. So fuel costs, although they are rising, shouldn't have a huge impact on us. Certainly utilities are looking at spending some money on their existing power plants.

Sure.

And also a number of new power plants that are being planned and announced, and those, of course, would bode well for the transmission and substation business that we have. But we think too that we haven't yet really seen much impact from the Energy Policy Act of 2005, and we continue to expect to see something from the results from that in the latter part of this year and in '07. As well as there are continuing trends towards increased outsourcing by our customers and that, as well, is contributing to our growth.

Okay. That's terrific. Once again, congratulations guys. Thank you.

Thank you.

Thank you. Our next question comes from Jamie Cook with Credit Suisse.

Hi, this is Chase Becker. I'm calling on behalf of Jamie Cook. My main question pertains to the revenues. How much of the actual revenues do we see pull forward from the second quarter into the first quarter, given that you are talking about weather being a positive impact; although, you said you didn't really have much of an impact. So if you could just maybe quantify that or walk us through that.

Yes, it's impossible to quantify how much revenue was pulled out of the second quarter. Again, we're -- our forecasts are showing 15% growth over the last second quarter. So we are going to have a good second quarter as well as a good first quarter. So it's impossible to say -- it's just indicative, I think, that our customers are spending more money and doing more work on their infrastructure.

Okay. Thank you. And a follow-up question, just in terms of your SG&A, if you were to back out that gain that you had mentioned, you are still running at around 9% SG&A as a percent of sales, which typically, if you look historically you are running in the double digits for the first quarter and the first half of the year. How should we think about that going forward? Do you see that being a consistent run rate, or maybe touch a little bit on that, please.

I expect the G&A expenses may go up a little bit from the level that they were this quarter, as year goes on, but I don't think they are going to get back up into the double digit range. I mean, you might see G&A, creep up to 9%, maybe a little over 9%. There's no huge increases in G&A.

Okay. Thank you very much.

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

Thank you, and gentlemen I want to congratulate you on a really solid quarter as it relates to margins. Very impressive.

Thank you. Appreciate it.

A couple of quick questions. As it relates to the AEP project. Now that it's complete, can you talk about the timeline of the project and how that -- the time line on that project played out as it relates to revenues and profits and/or losses being booked, and I'm sure you don't want to quantify the profits and/or losses, but maybe just help us to better understand if they were evenly distributed across a three, four, quarter period of time, or if they were more front end loaded or back end loaded?

I think they were fairly evenly divided among the -- we have been at the project for over a year so over four quarters, there hasn't been any spikes at all in the profitability of the project.

That's good to hear. As it relates to work that you are doing for Verizon, you discussed inside plant work for Verizon. Can you expand upon that a little bit. Are you actually physically doing the in home installation of the fiber-to-the-premise ONTs and routers and so on, or are you working more in the central offices?

That's central office, Alex. Our inside plant operations work in central offices and equipment cabinets, installing cards and racks and that sort of thing. It is not ONT installation.

And inside your telecom and cable revenue, how much of that is actually coming from wireless.

About 25%, I think. I would have to look that up for you, Alex, but in that neighborhood. 25% of the telecom revenues.

Very helpful and then two last questions first. James, if you could provide us with the backlog by customer segments, and then if you could also comment on the 144 million that you are carrying of letters of credit as it relates to securing your insurance and what you can do over the next few years to reduce that?

Yes, I will give you both of them. Utility and gas backlog at the end of the quarter was about 989 million. Telecom and cable backlog is 208 million, and ancillary is 124 million. That should total 1.321 billion. And as it relates to letters of credit, we've discussed this in the past that our letter of credit requirement is higher than you might expect because of the fact that we had to replace insurance carriers. Back about three years ago, before our insurance program had actually plateaued. So we ended up having to stack letters of credit with two different insurance carriers.

Right.

We have actually had some success recently. I mean, it's -- it was -- it didn't happen in the first quarter so I didn't talk about it. But in the second quarter, as of this week, we received a reduction in our letter of credit requirement from our old insurance carrier of $23 million. So that -- and that's typically an annual process, where the old carrier reviews the letter of credit requirements. So you are not going to see that happen but once a year. Last year, I think we got $15 million back from them, and this year they released $23 million. Which should come through in the second quarter discussions.

Great. Thank you.

Thank you. Our next question comes from Curt Woodworth with JP Morgan. Please go ahead.

Hi, good morning.

Good morning.

A couple of questions. Just on the gross margin improvement, can you talk a little bit about where that's coming from? Is it mixed benefits? Is it better price realization you are getting on the contracts? Or is it just leveraging the model?

I think most of it is coming from better pricing opportunities on contracts. Certainly there's leverage in the model and there's still leverage in the model, but we're seeing price improvements across the board in almost all of our businesses.

Great. And when you look at the 34% growth rate in the electric and the gas business, is that spread pretty evenly between the T and the D sections?

Yes, it is.

Yes?

It's pretty well evenly distributed. We don't really keep track of exactly the amount of transmission or distribution because often we are installing distribution lines on transmission lines or building transmission lines that have a distribution component to them. And it wouldn't really be a really clear SEC number, so we don't really track that, but we saw growth in substation, switch yards, distribution, and transmission.

Okay. And then you mentioned a number, I think from the EEI, the 18.3 billion in transmission spending they are looking for 2006 through 2008. Given the long lead times and citing that, financing it and building it, it would appear that most of those bids would have to be done today. And my question is, are you seeing a lot of that bidding activity in transmission? Do you think you are going to win your fair share or is this more to come, looking out the next couple of years?

I think that that spending a lot of it is on material and you are seeing that as many of the material suppliers are seeing record growth and record quarters. And that growth will come to us, as time goes on in the '07 and '08 periods.

Okay. And then just lastly, when you look at the growth rates and the fact that there is somewhat of a labor shortage in the industry, are there any margin implications of that for you? Are you having to subcontract out more? Are you having to pay more in your wage rates to basically keep these crews in-house.

Certainly as labor becomes shorter, as spending continues to increase, there will be some pressure on wages; however, we manage that, I think, very, very well. Wage increases are typically very moderate. The Unions typically are the ones that drive the wage increases. I saw some literature recently that in '05, the average wage increase in our industry was 3.9%, which is certainly manageable. And in fact that was down slightly from '04. The largest wage increase I have heard about this year is 4.75%, and in turn, for giving that kind of a wage increase there was some language came out of the contract. So, yes, there will be wage increases but I think that they are moderate. Also we have the ability to pass those increases on to our customers. Even our long-term contracts have wage openers in them each year.

Okay.

The shorter term contracts you build that wage increase in as you bid the projects.

Great. And just one final question if I may. When you look at your employee count going up to a little over 11,000 from 10,500 last year, in terms of quantifying the outsourcing story here, is there any way to comment on what number of crews that you have added have gone on to say an AEP or a Florida Power and Light System, and was displacing crews, that basically those guys were retiring? Is there any way to get a sense of how meaningful the outsourcing trend is right now? It seems like it's accelerating.

I wouldn't say that right now that it's accelerating. I expect that we have seen some statistics that say that in some utilities, up to 50% of their work force is going to be retiring over the next five years. I think it's a nice steady trend that started, actually back in the early '90s.

Yes.

And I had a statistic some place that the utility work force decreased by 30 some percent from 1990 to the year 2000. And that's while the electricity usage increase.

Yes.

I think it's -- I don't think it's spiking or anything like. I think it's a nice steady increase as they reduce employment either through retirement or other means. They are doing more and more work with contractors, like Quanta.

Okay. Thank you and congratulations on a great quarter.

Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our next question will come from Erik Kramer with ThinkEquity Partners. Please go ahead.

Congratulations on a wonderful quarter, and thanks for taking my call. First question is about the training cycle. When you hire somebody, could you talk us through kind of how long it takes for that person to be productive and what percentage of full productivity they may have along that line?

Well, we hope that day one they are productive. I think what you are really asking is how long does it take to be a fully skilled journeyman linemen and that process takes 7,000 hours and approximately -- 7,000 hours of training and approximately 4 years to take someone from college or out of the service and make them a full fledged journeyman linemen. But during that period of time, they are productive, hopefully they are productive doing what they can on the job. Apprentices can start working on distribution lines hot after the fourth step. There are seven steps in the program. So after a couple of years, apprentices can start working hot work. But all through their apprenticeship program, they can do things away from the energized lines. And the journeymen linemen can do anything on the project, or energized or deenergized. So that's the highly skilled labor that we're short of.

Okay. Also, just following on to that, one of the things that I heard from -- from one of your competitors is they basically said that if they had extra crews they could add crews to every single customer that they serve. Are you seeing that kind of an explosion in demand?

Well, we're seeing certainly increased demand. I think that's probably the case in some areas; however, we haven't really turned down any work, because of lack of crews.

Okay. Fair enough. And then the last item is, your gross margins are up very nicely to 12%. If we look out over maybe a couple of year period, how good could that number get to be?

Well, in first quarter, I just really don't expect margins to be very good, just to be honest with you. Second, third, and fourth quarters will -- margins should be much better than the first quarter. This is not bad margins for the first quarter, in fact, good margins for the first quarter, but second, third, and fourth quarters are much better, because typically the weather is much better during those quarters and although, we talk about it being a mild winter, we did have weather impacts in California, the West Coast, was at near record wet weather and, of course, northern United States still had some winter, even though it was milder than normal.

Okay. Great. Thank you, and continued good luck.

Thank you.

Thank you, sir. Management, at this time we appear to have no additional questions in the queue. I'll turn the conference over to you for any further remarks.

Okay. Thank you. I would like to thank you again for your participation in our first quarter conference call. We appreciate your questions and ongoing interest in Quanta services. This closes our first quarter 2006 earnings conference call. We'll see you on the next one next quarter. Thank you.

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