Earnings Call Transcript - PWR Q3 2022

Operator, Operator

Greetings and welcome to the Quanta Services Third Quarter 2022 Earnings Conference Call. This conference is being recorded. It is now my pleasure to introduce your host, Kip Rupp, Vice President of Investor Relations. Thank you. Please go ahead.

Kip Rupp, Vice President of Investor Relations

Thank you, and welcome, everyone, to the Quanta Services Third Quarter 2022 Earnings Conference Call. This morning, we issued a press release announcing our third quarter 2022 results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2022 outlook and commentary that we will discuss this morning. Additionally, we will use a slide presentation this morning to accompany our prepared remarks, which is viewable through the call's webcast and is also available on the Investor Relations section of the Quanta Services website. Please remember that information reported on this call speaks only as of today, November 3, 2022, and therefore, you're advised that any time-sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These include all statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or beyond Quanta's control, and actual results may differ materially from those expressed or implied. For additional information concerning some of the risks, uncertainties, and assumptions, please refer to the cautionary language included in today's press release and the presentation, along with the company's periodic reports and other documents filed with the Securities and Exchange Commission, which are available on Quanta's or the SEC's website. You should not place undue reliance on forward-looking statements, and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third party regarding the subject matter of this call. Please also note that we will present certain historical and forecasted non-GAAP financial measures in today's call, including adjusted diluted EPS, backlog, EBITDA, adjusted EBITDA, and free cash flow. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for e-mail alerts through the Investor Relations section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Duke Austin, President and CEO

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services Third Quarter 2022 Earnings Conference Call. On the call today, I will provide operational and strategic commentary, and we'll then turn it over to Jayshree Desai, Quanta's CFO, to provide a review of our third quarter results and full year 2022 financial expectations. Following Jayshree's comments, we welcome your questions. This morning, we reported our third quarter results, which continue to reflect strong demand for our services and solid execution. We believe the results highlight the benefits of our diverse, repeatable, and sustainable earnings streams and our ability to successfully leverage our portfolio approach in managing our service lines. Our third quarter results include a number of record financial metrics, including revenues, adjusted EBITDA, and adjusted earnings per share. Additionally, total backlog of $20.9 billion was a record and is considerably higher than the same period last year. Notably, we also see the opportunity to significantly increase backlog as we move into 2023. Our Electric Power Infrastructure Solutions segment continued to perform well with record revenues and solid margins. We achieved these results despite some delays caused by ongoing supply chain challenges that led to resource imbalances and utilization inefficiencies. As we commented on our second quarter earnings call, these supply chain challenges are not causing meaningful delays in our overall utility capital spending that we are seeing, and we believe these dynamics are shorter term conditions that should be resolved over the coming quarters. Demand for our services continues to be driven by broad-based business strength from utility grid modernization and system hardening initiatives, as well as our reputation for solid and safe execution. Overall, our electric power outlook remains strong, driven primarily by increasing service line opportunities and market share gains for our base business. Quanta deployed emergency response resources to utility customers for two hurricanes late in the third quarter. Hurricane Fiona made landfall in Puerto Rico and damaged 50% of the island's distribution feeders, 30% of its transmission lines and submerged seven substations. Quanta sent more than 200 skilled line workers to the island to support LUMA's restoration efforts and has strategically prepositioned a fleet of trucks and equipment on the island prior to the storm, which allowed us to quickly respond when the hurricane hit. While the fragile state of the island's existing power grid and the heavy rain and flooding from the hurricane made restoration efforts more challenging, LUMA still managed to return power to more than 90% of its customers in less than two weeks. We are proud of the way LUMA responded to this event, which was much faster than previous storm responses by prior grid operators and comparable to, if not better, than restoration times following major hurricanes in the mainland United States. At the end of the third quarter, Hurricane Ian made landfall in Florida as a large and destructive category 4 hurricane, which left more than 3 million customers across the Southeast United States without power. Quanta deployed significant resources to support utility customers whose electrical power infrastructure was damaged or destroyed by the hurricane, including more than 3,500 line workers and front-end support services staff from 18 different Quanta operating companies. Although restoration efforts for Hurricane Ian were largely a fourth quarter event, we believe our industry-leading, comprehensive emergency restoration capabilities highlight our ability to rapidly mobilize substantial resources to support our customers in times of need. Importantly, the system hardening investments that Florida utilities have made over the past 10 years proved beneficial during Hurricane Ian and enhanced the ability to restore power to many customers after the first full day of restoration efforts. We believe Florida's leading role in system hardening and its demonstrated benefits will serve as a model for utilities and regulators throughout the country as they plan and implement their own hardening programs. It was a little more than a year ago that we closed the acquisition of Blattner, and I can tell you that we are more excited about the key drivers of the transaction now than we were then, including the value proposition to our customers, the multiyear growth opportunities available to us, and the strong operational and cultural fit between the organizations. Since closing, we have largely completed the integration. Our teams are working collaboratively. We have enhanced existing customer relationships and created new ones. We are jointly pursuing project opportunities that leverage our expertise and industry-leading position. We have accomplished a great deal with Blattner over the last year, but more importantly, we believe we are just getting started. Our Renewable Infrastructure Solutions segment performed well overall during the third quarter, led by solid performance in high voltage transmission, substation, and interconnection work. The utility-scale solar industry faced increased levels of supply chain delays during the third quarter, which impacted our revenues, but our operations managed through these dynamics. We are optimistic that these conditions are shorter term in duration and will resolve themselves over the coming quarters. We continue to collaborate closely with our customers on our renewable build plans for 2023 and beyond. While still early in the process, we are beginning to see a more normalized cadence with respect to limited notices to proceed for renewable projects moving to contract in 2023 as well as forward movement on projects that were delayed in 2022 that are now slated to be built in 2023. According to the Federal Energy Regulatory Commission, or FERC, there are approximately 1,400 gigawatts of proposed generation, mostly wind and solar, and energy storage projects that are actively seeking interconnection to the U.S. power grid. These create both opportunities and challenges for our customers, and demand for Quanta's comprehensive solutions and collaborative delivery model is increasing as a result. Further, there are several large renewable energy-related high-voltage electric transmission project opportunities that we are pursuing, which we believe we are well positioned for and could be awarded over the coming months. Furthermore, this past August, the Inflation Reduction Act, or IRA, was signed into law. It includes nearly $400 billion of tax incentives and financial support designed to accelerate the country's energy transition to a low-carbon economy. This legislation is considered by many to be the nation's most ambitious legislative action ever taken on climate, which we believe should have a meaningful positive effect on a number of our end markets for at least the next decade. In particular, we believe the IRA will drive investment in the development and construction of utility-scale renewable generation facilities and the transmission and substation infrastructure required to support them. Additionally, there are attractive financial incentives in the IRA to expand domestic manufacturing of key renewable energy components such as solar panels. This could reduce the country's reliance on overseas manufacturers and, in turn, reduce supply chain risk by ensuring domestic product availability to meet the growing demand for renewable generation development in the United States. These are just some of the dynamics that give us a high degree of confidence in our ability to meet or exceed long-term growth and earnings targets. Our Underground and Utility Infrastructure Solutions segment continues to perform at a high level. Revenues grew strongly, and margins demonstrate solid execution across our operations in the segment. Our industrial services operation continues to execute very well and experienced robust demand as capital spending resumed and pent-up activity from two years of deferred maintenance moved forward. We also continue to experience solid demand for our gas utility and pipeline integrity operations, which are executing well and are driven by regulated spend to modernize systems, reduce methane emissions, ensure environmental compliance and improve safety and reliability. For several quarters on our earnings calls, we have discussed our views about the emerging opportunities within the segment that center around the evolving and increasing efforts of our customers' strategies to reduce their carbon footprint and diversify their operations and assets toward greener business opportunities. To that end, the IRA includes incentives that are designed to support and accelerate certain technologies as part of the energy transition for the traditional energy and industrial industries. For example, there are significant production tax credits for clean hydrogen that can make the energy source cost competitive today, which is expected to accelerate interest and investment in hydrogen technology as another tool to produce clean power and reduce carbon emissions. The IRA also includes incentives to invest in carbon capture projects and technology. Prior to the passage of this legislation, we had been supporting several customers as they pursued hydrogen and/or carbon capture projects and believe the IRA will further encourage a broader set of current and potential customers to accelerate their pursuit of opportunities around these technologies. As we discussed at our Investor Day earlier this year and as I hope you take away from our comments today, demand for our services is robust across our portfolio and driven by what we believe are long-term, visible and resilient megatrends. We are successfully executing on our strategic initiatives to drive operational excellence, total cost solutions for our clients and value for our stakeholders. We have profitably grown the company and executed well this year and expect to continue to do so. Our strategic initiatives are designed to uniquely position us to not only capitalize on the megatrends of our end markets, but also to enhance our customer relationships and market positioning. Quanta's infrastructure solutions are at the forefront of the energy transition in North America. Our customers are leading the effort to transition towards a lower carbon economy, which industry experts believe could require trillions of dollars of investment in renewable generation, energy storage, and grid investments, all areas where Quanta is an industry leader. In order to meet the needs of our customers and capitalize on the large and visible opportunities ahead of us, Quanta is investing in resources necessary to do so. We are innovative with our safety, training, and recruiting efforts to ensure we have a world-class workforce and adding to and enhancing our operations leadership and management. We are also making and evaluating value-creating acquisitions that further our strategic initiatives and investing capital in equipment and facilities to support organic growth. As a result of our solid year-to-date financial results and continued overall favorable end market drivers, we remain confident in our 2022 consolidated financial expectations. We also believe that our business and opportunities for profitable growth in 2023 are gaining momentum, driven by our solutions-based approach, the growth of programmatic spending with existing and new customers, growing renewable generation activity, and opportunities for larger electric transmission projects. We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution and best-in-class build leadership. We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta's diversity, unique operating model and entrepreneurial mindset form the foundation that will allow us to continue to generate long-term value for our stakeholders. I will now turn the call over to Jayshree Desai, our CFO, for her review of the third quarter results and 2022 expectations.

Jayshree Desai, CFO

Thanks, Duke, and good morning, everyone. Before I get into the results, I wanted to quickly thank Duke and Derrick for their support last quarter. I'm incredibly excited to expand my leadership role as we deliver against the multiyear plan we laid out at our Investor Day earlier this year. Today, we announced record third quarter revenues of $4.5 billion. Net income attributable to common stock was $156 million or $1.06 per diluted share, and adjusted diluted earnings per share, a non-GAAP measure, was a record for the third quarter of $1.77. Our electric power revenues were $2.3 billion, a quarterly record and a 14% increase when compared to the third quarter of 2021. This increase was primarily due to growth in spending by our utility customers on grid modernization and hardening, resulting in increased demand for our electric power services as well as approximately $85 million in revenues attributable to acquired businesses. These increases were partially offset by approximately $175 million in lower emergency restoration services revenues. Electric segment operating income margins in 3Q '22 were 11.2% compared to 12.6% in 3Q '21. The margin reduction is largely attributable to lower emergency restoration service revenues, which were a record level in the third quarter of 2021. Also included within our electric segment are our communications operations, which grew over 25% year-over-year. Communications margins in the quarter were mid-single digits, an improvement compared to 3Q '21, and we remain on pace for upper single-digit to double-digit margins for the year. Renewable Energy Infrastructure segment revenues for 3Q '22 were $979 million, a substantial increase from 3Q '21 primarily due to $480 million in revenues attributable to acquired businesses. Operating income margins in 3Q '22 were 9.1% compared to 10.8% in 3Q '21. The margin reduction is due to normal project variability and a change in the mix of work as a result of the acquisitions, but otherwise was in line with our expectations. Revenues, however, came in lower than we were anticipating, driven by continued supply chain challenges as we alluded to on last quarter's call. Underground Utility and Infrastructure segment revenues were $1.2 billion for the quarter, 17% higher than 3Q '21, reflecting increased demand from our gas utility and industrial customers as well as an increased contribution from larger pipeline projects. Operating income margins for the segment were 8.5%, resulting from the solid performance by our base business activities, notably gas distribution and industrial services, and the impact of a favorable project closeout. Below the line, we recorded an unrealized loss of $26.5 million associated with our common equity interest in fixed wireless broadband technology provider Starry Group Holdings. As required, we remeasure the fair value of this investment based on the market price of the publicly traded company stock as of September 30, 2022. At that time, our investment had a fair value of approximately $15 million. Although there has been further deterioration in Starry's equity value, we remain committed to our partnership with Starry to provide high-speed, affordable Internet access to underserved markets. Our total backlog was a record $20.9 billion, an increase of $1 billion compared to last quarter. The increase is primarily attributable to additional awards and an increase in expected volumes under MSAs. Our 12-month backlog is also at a record level of $12.4 billion, which we believe is another indicator of the steady, growing demand for our base business solutions. We remain confident in our ability to capitalize on opportunities that can lead to new record levels of backlog in subsequent quarters. For the third quarter of 2022, we had free cash flow, a non-GAAP measure, of $256 million compared to $40 million of negative free cash flow in 3Q '21. The strong free cash flow for the quarter was led by the collection of a significant portion of the receivables associated with the large Canadian electric transmission project that we've discussed in prior quarters. Regarding the other Canadian renewable transmission project that we've discussed in prior quarters, we continue to work with the customer to address the contract asset balance. Discussions with the customer are progressing, and we remain confident in our cost position. The resolution of certain of these amounts will likely extend beyond this year and will continue to impact cash flow and DSO in the near term. DSO measured 81 days for the third quarter of 2022, a decrease of 8 days compared to the third quarter of 2021. The decrease was primarily due to the aforementioned collection associated with the large Canadian electrical transmission project as well as the favorable impact of the acquisition of Blattner, which historically operates with a lower DSO than certain of our other larger operating companies. As of September 30, 2022, we had total liquidity of approximately $1.8 billion and a debt-to-EBITDA ratio of 2.5, as calculated on our credit agreement. As of October 31, 2022, we had repurchased approximately $127 million of our common stock since the beginning of the year, and as we mentioned in today's release, we continue to identify and execute on strategic acquisitions. Also of note, during the quarter, we commenced a commercial paper program, which is backstopped by our credit facility and allows for up to $1 billion of borrowings outstanding at any time. The program provides access to short-term borrowings at a cost below our existing credit facility rates. We expect continued earnings growth and cash generation to support our ability to efficiently delever over the coming quarters while continuing to create stockholder value through incremental capital deployment. Turning to our guidance. We've executed nicely through the first nine months of the year, and as we close out 2022, we remain confident in our ability to execute within a tightened range of our previous expectations. However, the composition of our revenue and earnings continues to shift somewhat as we react to certain factors impacting our end markets. Overall, we believe our ability to deliver against our plan reflects the benefit and strength of our portfolio of solutions. Demand for the services across our electric segment remain robust, and we now expect revenues to range between $8.8 billion and $8.9 billion, a $300 million increase from our previous range. With respect to segment margins, it's important to note that the second half of both 2020 and 2021 had significant emergency restoration revenues, which contributed favorably to margins in those periods. As it stands today, we expect 2022 emergency restoration revenues to be around $300 million for the year, over 30% lower than prior year levels. Despite this reduction, margins are expected to be at double-digit levels, ranging between 10.6% and 10.8%, consistent with our previous guidance. Regarding our renewables segment, on last quarter's call, we raised our expectations for the segment with a view that the anti-circumvention moratorium would revitalize solar construction activities in the second half of the year. Unfortunately, panel delays due to other tariff dynamics persisted and remain problematic today. Additionally, owners are reviewing and repositioning their project pipelines in light of the positive changes in the Inflation Reduction Act, or the IRA. The combination of these dynamics resulted in several projects pushing out of 2022 and into 2023. In light of those near-term delays, we now expect full year revenues for the segment to be around $3.8 billion, a $300 million reduction from the previous midpoint. The revenue reduction has also pressured margins as we continue to invest in the resources required to execute on the growth opportunity in 2023 and beyond. For the year, we now expect segment margins to range between 8.5% and 8.75%. Despite the delays in 2022, we remain confident in our 5-year outlook for Blattner and believe that the passage of the IRA both accelerates and extends the growth opportunity associated with renewable energy infrastructure. Our underground segment has performed well over the first three quarters, and we now expect full year revenues for the segment to range between $4.2 billion and $4.3 billion. The strong year-to-date performance was led by our industrial services, which delivered significantly improved results following two challenging years across their end markets. However, we expect a pullback in industrial activity in the fourth quarter driven by reduced scopes of work as refiners defer maintenance efforts to capitalize on current market conditions. With this expected reduction, we now see segment margins ranging between 7% and 7.25% for the year. In the aggregate, our consolidated expectations for full year diluted earnings per share attributable to common stock are now expected to range between $3.19 and $3.43 and full year adjusted diluted earnings per share attributable to common stock, a non-GAAP financial measure, to range between $6.15 and $6.39. Additionally, we now expect adjusted EBITDA, a non-GAAP financial measure, to range between $1.65 billion and $1.70 billion for the year. We expect free cash flow for the year to range between $600 million to $700 million, narrowing around our previous midpoint. This free cash flow range represents 35% to 40% of our expected adjusted EBITDA, consistent with our previous guidance of cash generation during periods of double-digit revenue growth rates. For quarterly commentary and additional details on our financial expectations, please refer to our outlook summary, which can be found in the Financial Info section of our IR website at quantaservices.com. From a long-term perspective, our end markets continue to strengthen, with utilities investing heavily in grid hardening and modernization and North America investing in the infrastructure required to deliver a carbon-neutral future. We believe we are uniquely positioned to deliver comprehensive solutions to the markets we serve and continue to have the opportunity to deliver significant stockholder value through organic growth and strategic capital deployment. I'll now turn back to the operator for Q&A.

Operator, Operator

The first question today is coming from Andy Kaplowitz of Citigroup.

Andy Kaplowitz, Analyst

Maybe just starting with the bigger picture question. Could you elaborate on your comments regarding significant backlog growth as the company enters '23 that should support your expectations for profitable growth next year? How would you characterize your visibility at this point in the year for next year's potential bookings and EPS? I think you've guided longer term to 7% to 10% organic growth, double-digit EPS. Any reason to think that you couldn't do that despite the recession fears that are out there?

Duke Austin, President and CEO

Thanks. When we look at it, when we look at the business long term, we stand by our adjusted 10% EPS growth using all levers of the balance sheet. We still remain confident on that. What I would say is based on what we see today, we believe those metrics move in, we see more business quicker. We continue to see all aspects, all macro markets, kind of the megatrends that we talked about in our Investor Day coming to fruition here. And when we look at backlog, when we look at what's in front of us, we see significant growth. I don't know how else to say it. It's significant. And I think it will continue, and our backlog will continue to set records. So that's what we see. We see it long term. We're looking into '24, '25. The company has great visibility against these macro markets and trends.

Andy Kaplowitz, Analyst

That's great to hear, Duke. And then Duke or Jayshree, can you give more color regarding what you're seeing across your renewables markets? Obviously, Jayshree, you just mentioned you're lowering revenue a little bit for the year, but your backlog is up. Have you started to see your customers get their act together in solar? Because I think they do have relatively robust plans. And then maybe you could give us more detail regarding what you're seeing in wind.

Duke Austin, President and CEO

I can provide some insights on renewables, and then Jayshree will elaborate. We have some clarity regarding the long-term Production Tax Credit associated with the Inflation Reduction Act. However, there's still a need for clarity on what this means in practice. While we have a long-term view, there are still ongoing interactions with your panel suppliers. As those panels arrive and manufacturing capacity increases, clarity improves for both developers and the signing of long-term Power Purchase Agreements. This situation does lead to some complications. Currently, we're waiting on panels for six projects, while everything else is ready. This causes some interruptions in our supply chain and production efforts. Nevertheless, we anticipate a resolution to these issues fairly soon as we progress through 2023, and I'll let Jayshree add further details.

Jayshree Desai, CFO

Yes. Thank you for the question, Andy. I agree with what Duke mentioned. We believe that the short-term supply chain challenges, particularly regarding solar panels, have postponed some projects. However, developers maintain a very optimistic long-term outlook, especially following the passage of the IRA, which finally provides the industry with the long-desired long-term visibility and investment opportunities in both solar and wind energy. As you noted, our backlog in renewables is beginning to increase, and we anticipate this will accelerate over the next several months. We are very confident in our long-term prospects for this segment. Regarding wind, the IRA has had a positive impact on the long-term outlook. In the short term, solar benefits more significantly from the IRA in terms of competitiveness. Wind will take some time to gain momentum, but I expect it will start to pick up in the latter half of the decade as the IRA allows for greater advantages, although it will take developers some time to rebuild their wind project pipelines to compete with immediate solar projects.

Operator, Operator

Our next question is coming from Adam Thalhimer of Thompson, Davis.

Adam Thalhimer, Analyst

I just wanted to ask, Duke, about the carbon capture opportunity. What are some of the individual projects that you're seeing? And when could that revenue actually hit?

Duke Austin, President and CEO

Yes, we are consistently discussing carbon capture and hydrogen projects. These types of projects can be challenging, especially when they involve linear construction and permitting. While we're engaged in these conversations, I don't focus on them too much. If they materialize, I see them fitting into the long-term trends we've discussed, contributing positively. The customer base involved in these projects is strong, and we have excellent relationships and engagement in each project from the outset. We have adopted a long-term strategy for hydrogen and carbon capture and have previously established carbon capture lines. In my view, whether we're constructing pipelines for water, carbon, or gas, it’s essentially the same process. Our capacity to build efficiently and collaborate with developers and carriers will continue to drive success in this area.

Operator, Operator

The next question is coming from Justin Hauke of Robert W. Baird.

Justin Hauke, Analyst

I guess I wanted to ask just on the underground segment because it's been so strong in the last couple of quarters, at least kind of relative to your expectations. I know you talked about an earnout there. And I guess I was just hoping to clarify that and maybe just level set. So as we think about '23 and the margin expectations or potential for that segment, just how material was that in the quarter?

Duke Austin, President and CEO

Yes. I'm not certain about the earnout. We had an acquisition, and that's all I know. There might be a small earnout involved, but I'm not familiar with it. I don't think, Jayshree...

Jayshree Desai, CFO

No, I'm not sure what you're referring to regarding the earnout. But go ahead.

Duke Austin, President and CEO

I believe one comment to mention is that we had a small release during the quarter related to some contingencies, which might explain what you observed. We had considered this as we move forward, taking a conservative approach to our projects. When outcomes occur, they happen. This is certainly our strategy for managing project work going forward. The key point is that we are achieving operating leverage through a portfolio approach across the company, as we mentioned we would. We believe we can deliver upper single-digit growth in this segment, and we continue to achieve that through operating leverage. I take pride in this as a company, and the portfolio we are establishing allows us to address various challenges in our macro markets, such as supply chain issues and tariffs. We are capable of navigating these challenges effectively through the portfolio, as previously discussed.

Justin Hauke, Analyst

Okay. Yes, that was what I was referring to. I guess my second question, so obviously, it was good to see the free cash flow come in, and I know you guys talked about that. The AR that's tied up on the remaining Canadian renewable project that you guys are seeing is probably a '23 resolution. How material is that? Or how big is the collections associated with that? And is that project done? Or is that going to continue to progressively build until that's resolved next year?

Duke Austin, President and CEO

Yes, I'll provide some details, and then Jayshree can clarify the financial specifics. We mentioned last quarter that one of our Canadian projects has been completed and we're working through the claims for that. The second project is still ongoing, and we anticipate finishing it in the second half of 2023. I expect we'll make headway on our accounts receivable as we complete milestones and work through the necessary documentation. This is typical for a large Canadian project, which demands extensive documentation. We're currently engaged in that process, and I foresee multiple collections happening along the way, with final resolution in the second half of next year. We're making solid progress through a collaborative approach, and there are no issues. We take a conservative stance on all our claims. Now, I'll let Jayshree discuss the financial amounts.

Jayshree Desai, CFO

Yes. I think we talked about this in the last quarter's call that the impact of the Canadian project is affecting our DSOs around 5 to 6 days. That's still what we're seeing today. And as Duke talked about, we baked that into our forecast for the year, and we believe that going forward, we'll be working through that for the rest of the year, and we'll be able to make some progress around that as the project commences.

Duke Austin, President and CEO

I was thinking about this earlier and would like to emphasize that we are not a litigious company. We approach our projects by getting everything in place, building, executing, and moving forward. When it comes to claims or similar matters, we usually engage in a collaborative process, which means we avoid becoming embroiled in litigation.

Operator, Operator

The next question is coming from Alex Rygiel of B. Riley.

Alex Rygiel, Analyst

A very nice quarter. A couple of quick questions here. To some degree, your business is driven directly by overall economic activity such as new home construction and whatnot. Can you address this and your thoughts on how an economic slowdown moving forward could impact your business?

Duke Austin, President and CEO

I would say, in general, the economic slowdown always impacts your new builds, your kind of new construction. Small piece of the business at this point, when you look at what's happening to modernize the grids and infrastructure, it doesn't rely so much on your economics. Again, it does from an interest standpoint at times, you could see some areas of constraint. But the way that carbon capture, batteries, EV, the way that, that's coming to market, it's different than it's ever been in the utility industry as well as all the renewable industries. If we're moving at a pace that we're moving towards a carbon-free footprint, your manufacturers of vehicles, chip manufacturing, the load growth that you're seeing will not allow a stop at this point unless there's significant change in the way we view carbon. And I don't see that happening. We have long-term outlooks. I mean we're looking at '24 or '25. While it might slow down a little bit, the offsets are much, much greater than any kind of economic offset at this point.

Alex Rygiel, Analyst

Thank you for your insights. Regarding inflation, you've been dealing with it for the past year. It seems we might be moving past the worst of it. How do you view inflation in 2023 compared to 2022? It appears that fuel prices might benefit you somewhat, although there could be slight challenges due to labor costs. I would like to hear your thoughts on this.

Duke Austin, President and CEO

Yes, I believe it does help. However, the impacts we are facing are primarily driven by the supply chain, particularly with transformers, which have had a challenging year. We need to increase manufacturing capacity, and we're beginning to see some improvements. The sequencing of work and the normal cadence of operations present more challenges for us than any inflation-related issues. I am confident that we will manage to move past these difficulties this year. In 2023, we plan to address the transformer supply challenges. Large AC/DC transformers are also a long-term concern as we observe rising demand. Our larger clients seem to have their situations under control, while the smaller ones are still navigating through it. The rapid growth, with over 1,000 new employees being added each quarter, against a non-standard supply chain cadence can lead to occasional difficulties. Nevertheless, my team has performed exceptionally well, managing to overcome these challenges and maintaining a collaborative approach with our clients.

Operator, Operator

The next question is coming from Noelle Dilts of Stifel.

Noelle Dilts, Analyst

Kind of piggybacking off of that, Alex's second question. I'm curious if you've been able to make an estimate or sort of quantify how much you think the supply chain disruption has impacted margins this year. Basically trying to get a sense of how to think about how some of that might reverse as we get into '23 and the opportunity for margin expansion.

Duke Austin, President and CEO

Thanks, Noelle. I would just say, in general, it's caused us issues. I can't really quantify it. I mean I think our margins are good. Can we do better? Yes. Is there some small issues? Yes. But I do think those things, it's mainly the growth against your employee base against the intermittency of supply chain coming in. It's those two things where they're not perfectly aligned where normally you would build against what you know from a supply chain standpoint, the unknown and the pushout of 30 days, 60 days type things give you issues. So I think it's hard to quantify that in my mind, Noelle. I don't think anyone can. I would just say as an industry, we've been able to overcome it for the most part, and there is some upside if we get this thing resolved.

Noelle Dilts, Analyst

Okay. Additionally, I believe we discussed during the last call the expected wage rate increases. I think it was projected to be in the mid-single digits for 2023. Is that assessment still accurate?

Duke Austin, President and CEO

Yes. I mean we bake in 3.5% to 5%. So you're probably on the upper end when you go through it now. And we typically are in multiyear agreements across the board. So I'm not too concerned with that.

Operator, Operator

The next question is coming from Sean Eastman of KeyBanc.

Sean Eastman, Analyst

It was a strong quarter. I would like to revisit the discussion about renewable revenue and the timing of the projects. Are you indicating that the growth in renewable revenue will likely exceed the targeted range as we approach next year due to these timing factors? I'm also interested in understanding your perspective on this in relation to the supply chain.

Duke Austin, President and CEO

I’m not prepared to provide guidance for 2023 at this moment. However, I can tell you that we see a strong long-term market. We mentioned Blattner's projected $3.5 billion in 2026, which I believe is moving closer. I’m not certain about the exact timing right now, and I need the next few months to better understand 2023. That said, the incoming calls we’re receiving, our pipelines, and the growth trajectory in that sector—not just for Blattner—are very strong, likely the best I’ve experienced in my career. We are in the early stages of an energy transition, and we are in a prime position to witness this growth. We are approaching 2024 and 2025, and we typically don’t plan that far ahead with our clients, as we need to ensure we can meet the industry’s demand. I believe we are managing that well. Once we navigate the speed at which panels can arrive in the U.S. and address the panel supply issues substantially, it will be much easier to provide specific insights. While the overall market shows promise for significant growth, I’m unsure how the IRA will impact this in 2023. Until I can clarify that situation, I can’t provide detailed guidance, other than to emphasize that the market is strong; it just depends on how much more growth we can achieve.

Sean Eastman, Analyst

Okay. And then on the electric power margins, just this dynamic of now there being a sequential step-up from 3Q to 4Q. I assume that's the storm dynamic. Maybe you could talk about that a little bit. And then also just the outer year target, the midpoint is 11%. The midpoint of this year's guidance is intact at 10.7%. Just kind of understanding what that 30 basis points is would be helpful as well.

Duke Austin, President and CEO

There are a couple of factors at play. We're seeing a decrease in storm-related revenue year-over-year, with numbers around $300 million compared to $500 million or $600 million from last year. This results in a decline of over $200 million year-over-year, as anticipated. Large storms occurring over multiple years can influence utilization rates, which have increased. Additionally, as I mentioned earlier, we're training around 1,000 people each quarter and deploying them in the field, but supply chain disruptions hinder efficiency. While there are some challenges, we're focused on building long-term relationships with our clients and are not looking to squeeze them for short-term gains. Although there’s been some pullback in this area, I believe we’re beginning to see a normalization as we approach next year.

Operator, Operator

The next question is coming from Jamie Cook of Credit Suisse.

Jamie Cook, Analyst

It was a good quarter. I have two questions. First, regarding your base earnings, if I look at your projected earnings for the second half of the year, the run rate is around $170 million per quarter. If you multiply that by four, it suggests that $680 million is a solid baseline for 2023. I'm curious if you consider that a reasonable foundation for your earnings, taking into account the run rate for the latter half of the year and the lack of major projects significantly impacting it. That’s my first question as I try to outline 2023. My second question is for Duke regarding Blattner. I’m interested in understanding your progress in diversifying the customer base and whether you're shifting your business model from one-off CapEx projects to aligning with your customers' long-term capital plans. Where do we stand on that?

Duke Austin, President and CEO

Thank you, Jamie. To start, we are not providing guidance for 2023. The future could be better or worse, but I can't commit to anything specific at this time. However, regarding Blattner, I believe that our long-term relationships and collaborations have strengthened as demand has increased, particularly with larger clients in the industry. As these clients either pursue developments or focus on their substantial long-term goals, it’s essential for us to remain actively involved. Additionally, we are examining how we can assist at the queue level with utilities and provide effective solutions. Over the past six months, the company has made significant progress in leveraging synergies with Blattner, leading to a smooth integration. I am optimistic about our position and the unique opportunities that lie ahead.

Operator, Operator

The next question is coming from Steven Fisher of UBS.

Steven Fisher, Analyst

I wanted to follow up on the commentary regarding backlog growth. How widely do you anticipate that backlog growth will apply across your segments? Additionally, what is your expected timing for this? Are you anticipating it to begin in the fourth quarter, or when you mention into '23, are you referring more to the first half of 2023?

Duke Austin, President and CEO

I can't provide specific timing. We see it coming, but we're not going to specify when exactly. However, I anticipate significant growth throughout 2023 and even earlier. Some of the opportunities we are examining are expected to come sooner rather than later, although we have some longer-term prospects as well. Overall, I can confidently say we have major projects and significant master service agreements that are imminent in the first half of 2023 or the fourth quarter. While I can't pinpoint it precisely, I can certainly see it unfolding, and I'm ready to discuss its significance, which is not typical.

Steven Fisher, Analyst

And was that across your segments? Or is that mainly focused on the electric side?

Duke Austin, President and CEO

I see broad-based growth.

Steven Fisher, Analyst

Okay. If I could follow up on Sean's question about the visibility in renewables, I'm aware that you want to take as much time as possible, the full 4 or 5 months, before commenting on the full year. However, I'm curious if you can share how well your customer base is positioned in renewables for the first half of 2023. Have they indicated what projects they have planned for that timeframe and how well they have access to panels at least for the first half?

Duke Austin, President and CEO

It's not about the projects or the verbal awards. The focus is on understanding the IRA and what it means for panel deliveries, especially since there has been a backlog in solar side deliveries that has caused some disruptions. We cannot provide clarity until we have a better understanding of the IRA and its impact on our developers' backlogs. Meanwhile, we are capable of performing the jobs and are simply waiting for that long-term clarity. Once we have it, I believe there will be some backlog from 2022 that will carry over to 2023, and we will see significant demand in 2023. The first half may have some activity, but we expect the latter half to be strong heading into 2024 and 2025.

Operator, Operator

The next question is coming from Michael Dudas of Vertical Research Partners.

Michael Dudas, Analyst

Duke, you mentioned some good progress in telecommunications during your prepared remarks. Could you provide more details on what you anticipate for 2023? What are the key factors you're observing? Is the industry gaining momentum and increasing spending? Additionally, are the targets you've set still relevant for what we expect over the next few years to achieve your business goals?

Duke Austin, President and CEO

Yes, I believe we are growing the business at a double-digit rate and will continue to do so. We are pleased with our position. As I’ve mentioned previously, our growth has come primarily from organic investments rather than acquisitions. I see long-term growth opportunities here. However, the market is not regulated and can be unpredictable, which is a concern for me regarding telecom stability. On the positive side, there is funding available from RDOF and a significant demand for bandwidth in areas such as self-driving vehicles and the expansion of small cells and 5G technology. This demand will support our infrastructure services. While the macro market is favorable, the timing can fluctuate due to the nature of our industry. Therefore, we remain optimistic but will maintain a cautious approach, keeping in mind that double-digit growth is achievable.

Michael Dudas, Analyst

And on the margin side and utilization?

Duke Austin, President and CEO

We can operate at parity and we're very close to that now. If not this year, we should be able to operate at double-digit growth moving forward. I've mentioned before that in that market, we utilize our assets for both gas and underground electric, regardless of the specific area. Therefore, if it means focusing on gas work with higher margins, that's what we will do. If it means concentrating on underground electric with higher margins, that's our approach as well. This strategy will offset some of the telecom, but overall, the company will benefit. I'm not overly concerned about the margins from a single telecom segment.

Operator, Operator

The next question is coming from Gus Richard of Northland.

Gus Richard, Analyst

Just on the underground utilities. Is some of the strength coming from LNG? And in terms of the IRA, is there some provisions where you're going to see an increase in pipeline work?

Duke Austin, President and CEO

I mean I think when you look at the gas market, LNG market across the globe, you see a tremendous amount of demand, not only war driven, but in Europe and things like that. So I do believe you'll start to see some pipe to feed LNG. Also, I think your carbon capture pipe will be there. That's certainly something that's new. Your hydrogen, there's a lot of money in the IRA against hydrogen, the development thereof. So that's there as well. It's still difficult to get permit, a piece of pipe. It just is. And the company has been in that many, many times. And I would say all that would be upside for us. We're thinking about it. We're on it. We're in front of it. Can I guide to it? No.

Gus Richard, Analyst

Got it. And then just in terms of the refiners, how long can they hold their breath on maintenance?

Duke Austin, President and CEO

We saw some maintenance early in the year, a lot of replacements, things of that nature. I do believe that you'll start to see that same kind of sequence in the first half of next year. You'll see some maintenance and things of that nature start to happen. They're going to run them as long as they can in high markets, and they'll see a bunch of maintenance. But I do believe the view there is longer than people think. Your 20, 30 years of refining capacity that you still are going to have to think about. So I don't think it's short term in nature. I think it's longer term. And we will see the plants that are in existence run longer. That said, they'll take more maintenance.

Operator, Operator

Ladies and gentlemen, this brings us to the end of the question-and-answer session. I would like to turn the floor back over to Mr. Duke Austin for closing comments.

Duke Austin, President and CEO

I want to express my gratitude to our team in the field who have performed exceptionally well despite challenging conditions and storms. Their commitment, even while being away from their families, is greatly appreciated by our management team. I also want to acknowledge Jayshree for her first call, and I’m confident that the stock will respond positively. Thank you all for your participation. This concludes our call.

Operator, Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time, and enjoy the rest of your day.