Earnings Call Transcript - PWR Q1 2023

Operator, Operator

Thank you, and welcome, everyone, to the Quanta Services First Quarter 2023 Earnings Conference Call. This morning, we issued a press release announcing our first quarter 2023 results which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2023 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, May 4, 2023, and therefore, you had 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 and including all statements reflecting expectations, intentions, assumptions or beliefs about future events or performance or that do not solely relate to historical recurrent facts. You should not place undue reliance on these statements as they 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. We'll also present certain historical and forecasted non-GAAP financial measures. Reconciliations of those financial measures to their most directly comparable GAAP financial measures are included in our earnings release and slide presentation. Please see Slide 2 and the appendix of the slide presentation for additional information regarding our forward-looking statements and non-GAAP financial measures. 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 like to now turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

Duke Austin, President and CEO

Thanks Kip. Good morning, everyone, and welcome to Quanta Services first quarter 2023 earnings conference call. On the call today, I will provide operational and strategic commentary, and we'll turn it over to Jayshree Desai, Quanta's CFO, to provide a review of our first quarter results and full year 2023 financial expectations. Following Jayshree's comments, we welcome your questions. Before we begin reviewing our financial results, I would like to briefly highlight the recognition that Quanta recently received from Engineering News Record, a leading engineering and construction industry publication. In our selected Quanta for its prestigious and highest honor, the award of excellence. Quanta was selected for its safety leadership with our innovative capacity model, a unique safety and training program that is designed to not only create a work environment that prevents incidents but also build in the capacity to sell safely and it focuses on learning from mistakes in order to drive improved outcomes. Quanta is changing how we, our customers and the industry think about safety excellence, and I want to congratulate Quanta employees for their dedication to safety and their shared success in being recognized with this award. Our first quarter results, which include double-digit revenue growth and adjusted diluted EPS of $1.24 demonstrate a good start to the year. More importantly, we continue to enhance our self-perform model and remain on track to achieve our full year 2023 and multiyear expectations. Additionally, total backlog at the quarter end was $25.3 billion, a record and considerably higher than the same period last year. Notably, we see opportunity to significantly increase backlog as we move through the year, driven by our base business and larger energy transition projects, such as the SunZia Transmission and SunZia Wind projects we announced this morning. We believe we are in the early stages of capitalizing on significant opportunities across our service lines, which are driven by our collaborative solution-based approach that is designed to ultimately benefit consumers. Additionally, the growth of the programmatic spending with existing and new customers and favorable megatrends provide greater visibility into our near and long-term growth outlook. Our Electric Power Infrastructure Solutions segment continued to perform well and generated record quarterly revenues. Demand for our services is strong, driven by broad-based business activity from utility grid modernization, grid security and system hardening initiatives, as well as our reputation for consistent and safe execution. We continue to work with our customers to provide them with resources to meet their capital deployment initiatives and to help them address supply chain constraints. As we have discussed over the past several quarters, our view is that the electric power grid will require significant upgrade and modernization to handle the energy transition. We also believe that electric vehicle penetration could increase at a faster rate than expected, which could create significant grid constraints that we believe are underappreciated by many. We expect the issue in the near term and medium term in most regions will not be generation load supply availability but the inability to move supply to areas with accelerating EV-driven low demand through the current distribution system. According to estimates from UBS, United States EV car penetration is expected to be more than quadruple from approximately 4% in 2025 to approximately 19% by 2030. We believe this developing grid capacity challenge will be acutely impacted as commercial fleets, medium and heavy-duty trucks and buses become increasingly electrified. For example, yesterday, Navistar a long-standing key partner to Quanta for medium and heavy-duty trucks announced a partnership with us to provide its customers a turnkey, battery electric vehicle products and charging infrastructure solution that enables fleets to deploy battery EVs quickly and efficiently. The partnership intends to leverage Navistar's approach to delivering fully integrated e-mobility solutions to its customers with Quanta's expertise in assessing and designing EV charging infrastructure and building the interconnecting EV battery charging infrastructure into the power grid. Quanta understands infrastructure and its partnership agreement with Navistar, as an example, of unique vantage point we have into the growing challenges with the power grid as the energy transition and electrification of everything accelerates. As we have discussed on prior calls, to meaningfully reduce carbon emissions and increased electrification of the economy will require substantial incremental investment in transmission, substation and renewable generation facilities to produce and transport Clean Power and to ensure grid reliability due to the growth of intermittent power added to the system. One of the strategic reasons we acquired Blattner was because we believe the addition of utility-scale renewable generation solutions to Quanta's holistic grid solutions will transform our ability to collaborate early with our customers on their energy transition strategies over the coming decades and create a value proposition unique in the industry. To that end, this morning, we announced that Quanta was selected by Pattern Energy to provide comprehensive infrastructure solutions for the SunZia Transmission and SunZia Wind projects, which together comprise the largest clean energy infrastructure project in the United States history. Quanta will leverage the capabilities of multiple operating companies to execute these projects for Pattern Energy. We believe these project awards validate the power of our combined high-voltage transmission and renewable generation solutions and demonstrate the value of our collaborative approach to providing energy transition infrastructure solutions, which can serve as a model for the renewable and utility industries going forward. As expected, normal seasonality in the solar panel supply chain and regulatory hurdles from last year resulted in a slow start for our renewable generation project activities in the first quarter. However, these dynamics are improving and renewable generation project activity is accelerating, which we expect to continue throughout the year. For example, at the end of April, we were in various levels of construction on 28 utility-scale renewable generation projects. Further, we are in active discussions with clients about projects in 2024 and beyond and are focused on scaling our resources and capacity handle what we expect to be record levels of new renewable generation capacity additions over the coming decade, at least. Additionally, we are pursuing billions of dollars of high-voltage transmission projects that are designed to support current and future renewable generation capacity growth and overall system reliability. We are pleased with the performance of our Underground Utility and Infrastructure Solutions segment in the first quarter, which delivered double-digit revenue growth and record levels of first quarter profitability, demonstrating solid execution across our operations in this segment. Our industrial services operations executed well and experienced strong demand following two years of deferred activity during the pandemic. We also experienced 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. We continue to believe our operational portfolio is a strategic advantage that provides us the ability to shift resources across service lines and geographies, which we believe will become increasingly important as the energy transition accelerates. We believe our portfolio approach positions us well to allocate resources to the opportunities. We find the most economical and attractive to achieve operating efficiencies that enhance our operational and financial consistency. The energy transition towards a reduced carbon economy continues to progress and we believe is gaining pace. Quanta is successfully executing on our strategic initiatives to drive sustainable and resilient operational excellence, total cost solutions for our clients, consistent profitable growth and value for our stakeholders, all of which gives us confidence in our ability to deliver on our 2023 and multi-year financial expectations. 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 field 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 in the diversity, unique operating model and entrepreneur mindset form the foundation that will allow us to continue to generate long-term value for all our stakeholders. I will now turn the call over to Jayshree Desai, our CFO, for her review of our first quarter results and 2023 expectations. Jayshree?

Jayshree Desai, CFO

Thanks, Duke, and good morning, everyone. Today, we announced record first quarter revenues of $4.4 billion. Net income attributable to common stock was $95 million or $0.64 per diluted share and adjusted diluted earnings per share was $1.24. Our first quarter electric power revenues were $2.3 billion, and operating income margins were 9.2% and consistent with the directional views provided on last quarter's call and reflecting successful execution across the segment. Our base business continues to lead the way for the segment as utility investments in hardening and modernization initiatives create growing demand for our comprehensive solutions. Renewable Energy Infrastructure segment revenues for first quarter '23 were $1 billion with operating income margins of 3.5%. Revenues in the quarter were better than expected due to the acceleration of construction activities as our renewable customers move forward with projects. As we mentioned on our last call, we anticipated first quarter renewable revenues to be the segment's lowest of the year and the lower volumes would create fixed cost absorption pressure on segment margins. In light of that expected pressure from a margin perspective, we are pleased with the results from the bulk of our project activities. The overall segment margin was affected, however, by the large renewable transmission project in Canada, which we've discussed on prior calls. With over 90% of the project complete as of March 31, construction activities were quite successful during the quarter, and we believe we are positioned to achieve substantial completion after the next winter build season. Yet despite the significant progress, access delays, logistics and other issues outside of our control increased our cost on the project negatively impacting quarter margins by approximately 120 basis points. We are working collaboratively with the customer to recover the financial impacts associated with these and other issues and are confident in an equitable outcome. Underground Utility and Infrastructure segment revenues were $1.1 billion for the quarter and operating income margins were 5.7%. Continued strength from our base business operations drove the performance with margins exceeding expectations, benefiting from improved fixed cost absorption on higher than anticipated revenue levels. For additional commentary comparing first quarter '23 to first quarter '22, please refer to the slides accompanying this call. With regard to backlog, we continue to achieve record levels. At March 31, 2023, backlog was $25.3 billion, an increase of $1.2 billion compared to December 31 and did not include amounts related to SunZia, which we announced this morning and was awarded subsequent to the quarter end. Our 12-month backlog is also at a record level of $14.6 billion which we believe is another indicator of the steadily growing demand for our base business solutions. Our end markets remain robust with opportunities that can lead to new record levels of backlog in subsequent quarters. For the first quarter of 2023, as expected, we had a negative free cash flow of $31 million, driven by working capital demands from the aforementioned Canadian renewables project as well as a ramp-up of work activities following the holidays, which is typical for the first quarter. DSO measured 77 days for the first quarter of 2023, lower than our historical average, aided by favorable billing arrangements associated with certain awards during the quarter. Regarding the Canadian renewable transmission project, the contract asset balance grew during first quarter '23 and continues to pressure DSO. Positive discussions with the customer regarding portions of the balance are ongoing, which represents approximately 5 to 6 days of DSO as of March 31, and we are increasingly confident in our position. As of March 31, 2023, we had total liquidity of approximately $1.8 billion and a debt-to-EBITDA ratio of 2.5x as calculated under our credit agreement. The decrease in liquidity and increased leverage profile is due to roughly $450 million of capital deployed on acquisitions in the first quarter. We expect continued earnings growth and cash generation to support our ability to efficiently deleverage over the coming quarters while continuing to create stockholder value through incremental capital deployment. Turning to our guidance. We had a nice start to the year with record first quarter revenues and strong performance in the field. Given that strength, we are raising our revenue expectations for the year by $200 million, while our expectations for full year adjusted diluted earnings per share attributable to common stock are unchanged, ranging between $6.75 and $7.25. From a segment perspective, we continue to see Electric segment revenues between $10 billion and $10.1 billion for the year, with full year margins between 10.7% and 11.3%. We expect segment margins to be somewhat pressured in the second quarter due to challenging weather conditions throughout the northern and western parts of North America. Regarding our Renewable segment, given the strength of the first quarter and increased project awards, we are raising our full year revenue expectations for the segment by $200 million, ranking between $4.5 billion and $4.7 billion. We continue to expect margins around 8.5% for the year, with second quarter margins in the upper single digits. The increase in renewables is being offset by a reduction in our Underground segment due to a shift in the expected portfolio mix. Our segment revenue expectations are unchanged, but we now expect full year margins to range between 7% and 7.5%. We slightly modified other aspects of our guidance, the details of which are included in our outlook summary, which can be found in the Financial Information section of our IR website at quantaservices.com. Looking ahead, our end markets continue to strengthen, led by utilities modernizing their infrastructure to support increased load driven by electrification trends and most importantly, to support North America's transition to a reduced carbon future. We believe we are uniquely positioned to deliver comprehensive solutions to the markets we serve and to create significant shareholder value through organic growth and strategic capital investment.

Operator, Operator

Thank you. Our first question is from Andy Kaplowitz with Citigroup. Please go ahead with your question.

Andy Kaplowitz, Analyst

Good morning, everyone.

Duke Austin, President and CEO

Morning.

Andy Kaplowitz, Analyst

Duke, your backlog has been accelerating over the last few quarters. It seems like you are announcing more large projects are you just generally seeing an acceleration in these types of projects? And would you expect their frequency to continue? And then I know you talked about backlog continue to increase, does the higher backlog in your view raised the probability that Quanta could deliver at higher end? I think you had told us at the Analyst Day like 15% plus term EPS growth that you discussed.

Duke Austin, President and CEO

Yes. Thanks, Andy. I think when we look at the market and especially the larger projects within the market, there's a significant amount that you got to get through permitting, you've got to get through a lot of different things. More importantly, if you're going to transition the need for transmission in North America, for that matter, is significant, way more than what people will estimate. I think you hear it quite a bit where we're moving towards the transition we are. So that said, we do see large projects across the board, but you have multiyear projects as well with existing customers that are also addressing this need to provide load to the load centers from the areas where you have renewables. So those things, along with what you're doing with EV penetration and things like that are certainly increasing. Our dialogue with customers is robust. The amount of capital necessary to go where we want to go continues to grow. I don't see a path to get to anywhere near where we want to go in 2030, 2040, 2050 without significant infrastructure build across this grid. It's not meant to handle the modernization, the penetration of electric vehicles and what we're trying to do from a carbon environment without modernizing this infrastructure in a significant way.

Andy Kaplowitz, Analyst

Are we at least trending towards your higher-end target that you talked about last year?

Duke Austin, President and CEO

Our backlog growing. We don't even have SunZia and it will go up significantly. I think it will go up significantly every single quarter throughout the year. It may not be a perfect CAGR, but it will grow through this year, and I don't see that stopping. I mean we've given you good guidance on a multiyear 10% type growth at the EPS line with the ability to grow 15%. I stand by it today, even more so.

Andy Kaplowitz, Analyst

Appreciate it.

Operator, Operator

Our next question is from the line of Adam Thalhimer with Thomson, Davis. Please proceed with your question.

Adam Thalhimer, Analyst

Hey. Good morning, guys. Congrats on a strong start to the year. Duke at a high level, where do things stand with renewable - with the renewable supply chain?

Duke Austin, President and CEO

I think it's getting better. I mean you still hear Congress even today or yesterday, I can't remember. You start to see things around your reliance on China for panels. And I do think that will continue to play through this. But all in all, for what we see for what we have, we certainly have risk-adjusted kind of how we're guiding this year. So I do think we've watched it. We know what panels are in. We know what panels aren't in. I do believe that has alleviated a bit and we'll continue - so the supply chain has gotten better in many ways. Certainly, if there's any kind of regulation or things like that, it could change. But I do see more for that matter, everything being more onshore than offshore. And I do think that's a good trend for us in the way that we think about providing those solutions. Jayshree can comment.

Jayshree Desai, CFO

No, I have nothing more to add. I think the situation is improving. We are observing that the panel manufacturers are doing a better job of meeting their requirements under the tariff provisions. However, any ongoing regulation or anti-China sentiment could potentially impact the supply chain again.

Adam Thalhimer, Analyst

Okay. Thank you.

Operator, Operator

The next question is from the line of Alex Rygiel with B. Riley. Please proceed with your question.

Alex Rygiel, Analyst

Thank you, gentlemen. Real quick question here. Where do you stand on the percentage of revenue generated from self-perform versus external subs? And how could it change over the coming years?

Duke Austin, President and CEO

Yes. Thanks, Alex. I think in general, we're about 85% still. I think that remains the work mix for us. If it's more material concentric, we'll make some comment on it. Today, it's the same for about 85% of the business is still self-performed. We like that. We like that mix. I think it will continue. We certainly have to have certainty in our projects and to the client on delivery times and for our ability to provide earnings power, we need to be able to self-perform about that mix. And the constraints that we have, no one understands those and we have to make sure that we can operate through any kind of issue. So that's about the mix you'll see.

Alex Rygiel, Analyst

And then secondly, can you talk a little bit about the competitive environment, particularly as it relates to SunZia? Congratulations on that. But how many bidders were on that? And how does that compare to a few years ago?

Duke Austin, President and CEO

Yes. Honestly, I don't have any idea. I know we had a great collaboration with the client. It was a collaborative effort. And I believe it shows what the Blattner acquisition did for us. When you put both of us together what we can do together, what we can do for the client, the synergies that we can create for a client in a project like this. I would say it's proof of concept, it's proof of what can be done with the client to ultimate consumer and I don't think there is anyone that can do what we can do with these types of projects based upon history based upon what we're able to really think through for early in construction we can certainly create impacts and solutions to both sides of this transition, unlike any other.

Alex Rygiel, Analyst

Thank you.

Operator, Operator

Our next question is from the line of Justin Hauke with Robert W. Baird. Please proceed with your question.

Justin Hauke, Analyst

Great, thanks. So I guess I had a couple of questions on SunZia, just because it's been out there, obviously, forever, it's had all kinds of moving pieces on the financing side and the regulatory side. I'm just curious, is there anything that it still has outstanding that it needs to receive to start construction in 4Q? Or is that pretty much all cleared up? And then I guess related to that, is there any contribution that you're assuming in your guidance for this year from it?

Duke Austin, President and CEO

Yes, we anticipate some revenue from this project in our guidance for the year, though it was previously uncommitted before the award. However, the amount is minimal. We do not foresee any setbacks or a scenario where it doesn't proceed. There are numerous commitments being made, and we believe this project is definitely moving forward. It's a significant project with long-term customers like Blattner and IRA. We have worked diligently with the client to ensure this project serves as a showcase for both parties and the industry, demonstrating what can be achieved through dedication. It is indeed a lengthy project; it has taken a long time to come together. Such lengthy timelines for infrastructure development shouldn't happen in the U.S., so we are pleased to finally get it completed for everyone involved.

Justin Hauke, Analyst

Okay. Great. That's helpful. And then I guess my second question is just on the Canadian renewable job. You said it's 90% complete, and you're expecting it to complete with the next winter build. So does that mean that for the next couple of quarters, there's really no contribution on that, and so we shouldn't think of that as kind of a source of potential pressure and it won't start up again until we get back to next winter when it completes? Is that the right way to think about it?

Duke Austin, President and CEO

Yes, regarding the project, we undertook this initiative during the pandemic, and it is unique for northern regions, as we have transitioned people from fuel to renewable energy. This shift is significant when considering what can be achieved in these climates. Our team worked through the pandemic to complete this project, which is unlike anything done before. We have taken a careful and sensible approach throughout this process. I am confident in our capability to execute projects in northern regions better than anyone else globally. We are optimistic about our progress and, while we have acted cautiously, I don't anticipate any major fluctuations unless circumstances change. Our decision was to minimize risks for the rest of the year and the project as a whole, and we are very pleased with our team's efforts. This project has been a substantial achievement in an environment with fewer regulations, and our productivity has exceeded expectations. Overall, I believe it will yield positive results in the long run.

Justin Hauke, Analyst

Okay, great. Thanks.

Operator, Operator

Our next question is from the line of Steven Fisher with UBS. Please proceed with your question.

Steven Fisher, Analyst

Thank you. Good morning. Congratulations on SunZia. I wanted to follow up on that last point. It seems to be a reminder that risks can arise with renewable projects. How can we be assured that these risks can be effectively managed? What assurance can you provide to investors that SunZia will not pose an execution challenge? Blattner has previously worked in New Mexico and is making significant efforts to mitigate risks, but this is a substantial project. We are experiencing margin impacts this quarter from renewable projects. What confidence can you provide to investors that there won't be execution challenges moving forward? Thank you.

Duke Austin, President and CEO

Thank you, Steve. SunZia aligns perfectly with our strategy. We have recently completed a successful wind project and have constructed lines in that region repeatedly, so I am not worried about it. The unpredictable factor is the pandemic; if our project encounters a 24-month delay due to it, I'm unsure how to handle that at this point. I'll update you once we finalize all the settlements related to the claim. With the project in Canada, we managed to work through a 24-month pandemic in a camp located in the northernmost territory of North America, while many other projects in the region have faced significant challenges. For instance, look at what happened with Coastal Gas and Trans Mountain compared to our progress. I am optimistic about our prospects. We are confident in managing large projects, and this one fits well within that framework. I anticipate more projects like this in the future.

Steven Fisher, Analyst

Okay. Thank you.

Operator, Operator

The next question is from the line of Chad Dillard with Bernstein. Please proceed with your question.

Chad Dillard, Analyst

Hi. Good morning, guys. First of all, can you talk about what is the mix of small versus large projects today, particularly in electric transmission? And then like with the recent spate of large wins that you've had over the couple of quarters, like where do you think that mix goes over the next couple of years? And what I'm multiple trying to understand is like how should we think about the margin impact of a potential mix shift?

Duke Austin, President and CEO

When you consider the situation, about 80% to 85% of our business is base operations, which is why we've structured it this way. Large projects are expected to grow significantly, and our base business will also see substantial growth. We are securing much larger Master Service Agreements for programmatic expenses compared to the projects currently noticeable. This growth will unfold over several years. For instance, with the SunZia project, we anticipate completion by the end of 2026, although some aspects may accelerate into 2025. Additionally, we have multiyear agreements with our current customers that are longer in duration and of greater scale. We expect to see growth in both our base business and these larger projects. As mentioned, there's a stacking effect occurring due to the transition and the various accomplishments we've achieved. Overall, I believe our outlook is promising, and our strategies extend five years into the future. I am pleased with our current position and feel that we are on the right path, possibly even exceeding expectations.

Chad Dillard, Analyst

That's helpful. And then, can you give a little more color on the Navistar partnership? Is this something where it's exclusive for Quanta? And then just like at what stage of the sales cycle is Quanta brought in? And is this like the type of like pro work that you've been talking about?

Duke Austin, President and CEO

Yes. When we consider the Navistar contract, it highlights our collaboration with suppliers. This partnership fosters initiatives aimed at developing the safest truck in the industry, exploring aspects like automated driving and other innovations. It has also prompted discussions on building the infrastructure needed for electric vehicles. Navistar holds a substantial market share in school buses across North America, and many school districts, once they transition to electric buses, may see a higher load at their depots compared to the town's overall load. This situation presents a considerable opportunity for growth. By collaborating with our utility clients and municipalities at the initial stages, we can achieve cost-effective solutions and create a pathway for everyone to progress towards carbon neutrality.

Chad Dillard, Analyst

Thank you.

Operator, Operator

Our next question is from the line of Jamie Cook with Credit Suisse. Please proceed with your question.

Jamie Cook, Analyst

Hi, good morning. Congrats on SunZia. I guess first question, is there any way you could size the number of projects or in dollars, what you're bidding on, where you're bidding both the transmission and the renewable side sort of like SunZia, so we can see how many more opportunities that are out there? And to what degree are you worried - or I know you've been investing in labor for some period of time, and you always have, but that you need to ramp your investment in labor even more? And could that be a risk to margins in the short term? And then my second modeling question is just on within renewables, understanding the first quarter margins were below your expectations, and you explained that fine, but I think you maintained your renewable margin guidance for the year despite the first quarter being lower. So I'm wondering if that implies potentially the rest of the business is performing at a level slightly better than you expected? Thanks.

Duke Austin, President and CEO

Good morning, Jamie. I want to highlight that we currently have 25 renewable projects underway, all of which have interconnections. In the past, when we didn't have Blattner, we were primarily focused on interconnections for utilities or developers. We're now moving towards a combined approach, and as we present the economic benefits, particularly for larger projects, we find it increasingly cost-effective to integrate wind, solar, and client interconnections. There are many ongoing projects driven by utilities that are working towards bringing wind power to the East Coast from Canada, and we are typically involved in both aspects. It’s beneficial when these elements are combined. Our role is to illustrate the economic advantages to our clients and demonstrate how we can deliver projects more efficiently and cost-effectively for consumers. I see strong potential with initiatives like SunZia, which exemplifies what can be accomplished through early collaboration, ensuring success for all parties involved. Regarding the margins in renewables, I believe they were impacted slightly by the Canadian project. However, as we continue scaling in the renewable sector, it’s important to note that there was a pause in activities lasting six to nine months due to regulations in 2022, along with the introduction of the IRA. As we move forward with the IRA, we will establish a more consistent growth rate. I anticipate we won't see the same growth pattern from the first quarter to subsequent quarters as before. It's crucial for us to improve on the back end compared to what we delivered at the front. Based on historical performance, I expect our margins to remain stable moving forward. While there may be some seasonality in the first quarter, I foresee growth in the fourth quarter, although the second quarter may face some impacts due to project mobilization. Overall, I expect things to smooth out into 2024 and beyond.

Jayshree Desai, CFO

Yes. And we are seeing better performance in the rest of our business, Jamie. When you see the impact of the Canadian project at 120 basis points. The rest of the business, we were we were pleased, as I said, the performance there margins are doing better than we expected. And as Duke said, as we move out of first quarter into second, third, you're going to have more volume, you're going to have better fixed cost absorption and you're going to just have better productivity as a result of getting into better climates.

Jamie Cook, Analyst

Well, not to push you, I'm just wondering if the back half margin implied double-digit if that's a new run rate going forward given just what you're seeing in the market?

Duke Austin, President and CEO

We don't have enough history to provide that information. If I can get 12 months of consistent performance on renewables, I'll be in a much better position to offer some insights, but if you do the math, it certainly suggests we should be seeing double-digit growth in the latter half of the year.

Jamie Cook, Analyst

Okay. Thank you.

Operator, Operator

Our next question is from the line of Marc Bianchi with TD Cowen. Please proceed with your question.

Marc Bianchi, Analyst

Thank you. How much should SunZia contribute to backlog here in the, I guess, second and third quarter? And then how is your - how does that constrained, if at all, your bandwidth to take on additional work? Is there a level where backlog gets filled up and you're probably just going to continue to work on that level for several quarters?

Duke Austin, President and CEO

I believe we will continue to increase our backlog. We won't disclose the size of the job, but we mentioned it is the largest renewable project in North America, so it's quite significant. We will include it in our backlog next quarter, and you can form your own conclusions from that. That being said, we're aware of the constraints present in the market. The company has been adding around 1,000 employees each quarter, and we are nearing 50,000 employees at this point. I am confident this growth will persist. We are prepared to meet the existing demands. I haven't witnessed demand exceeding our ability to grow efficiently; we can allocate resources to projects without any issues. We are capable of handling everything currently available in the market and even taking on more. I would challenge the supply chain to match our capacity for labor performance, as that is where the challenge lies.

Marc Bianchi, Analyst

Okay. Thank you.

Operator, Operator

Our next question is from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Neil Mehta, Analyst

Good morning, Duke and team. My first question is about the cash flow, specifically the progression of free cash flow throughout the year. How should we interpret the guidance of $750 million to $1 billion? Are you on track, and where do you see yourselves within that range?

Jayshree Desai, CFO

Yes, we are on track to reach the $750 million to $1 billion range, and we remain confident about it. Our first quarter was negative, which is usual for us due to the working capital needs after the holidays as we ramp up. We also experienced some pressure in the first quarter from retainage and material procurement that affected our DPOs. However, this is still within our expectations, and as we see an increase in work with more renewable projects coming in, we anticipate cash flow and revenue to follow. We still expect to be in that $750 million to $1 billion range, and if you ask me where we stand today, I would say we are right in the middle. We feel good about our position and see no reason to alter our outlook.

Neil Mehta, Analyst

Okay. That's really helpful. And then the follow-up is just on one of the core competencies and capabilities of your organization has been around making strategic acquisitions, not just large ones like Blattner, but also smaller bolt-on ones as well. What's the opportunity set in the M&A market for tuck-ins, recognizing big strategic points are probably less likely as you are working to integrate Blattner right now?

Duke Austin, President and CEO

We made three acquisitions in the first quarter that are very strategic. They address the mid-market solar sector and other areas as well. I believe we have the capability to navigate these trends and support families looking to sustain their businesses. We'll certainly consider this against our plans for organic growth as we evaluate the market. There are definitely opportunities available. Regarding cash flow, for every $100 million in business growth, we expect to generate around $12 million in free cash flow. So if we increase our guidance by an additional $500 million, we could generate another $60 million to $70 million in cash. It's important to understand that exceeding our growth expectations will lead to increased cash flow.

Neil Mehta, Analyst

Thanks.

Operator, Operator

Our next question is from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Sean Eastman, Analyst

Hi, team. So it's great to see the later kind of revenue synergy story coming together with this big SunZia win. Duke, you had alluded to the economics to the customer being better when you guys kind of come to market with this combined transmission generation solution. Could you give us a little more color on that and kind of what the go-to-market pitch is? And what the benefit to the customer is here?

Duke Austin, President and CEO

Yes, there are significant synergies, Sean. It's like a secret recipe that I'm not going to disclose. The key for us is, when we engage early, we can create a construction-led engineering package that drives the industry forward. This approach enhances safety, optimizes supply chains, and addresses all aspects of the build process. We have a deep understanding of what it takes to construct various projects and know who will execute this work. When those individuals collaborate with the customer from the start, it typically leads to positive outcomes.

Sean Eastman, Analyst

Okay. Interesting. And then a little bit more granular. We haven't hit on the Underground segment. The first quarter margin performance was quite a bit better than we expected. And then I think the guidance for the full year has come down. So I just want to understand what's happening under the hood around that mix shift you described.

Duke Austin, President and CEO

I think in the Underground segment, when we assess capital spending from our customers, we may see a shift from gas utility distribution companies to electric or between electric and underground as we move into the latter half of the year. Overall, the total portfolio could increase, although some minor overhead costs may arise. In the gas and industrial sectors in the second half, we need to be cautious. We have clear visibility for six months, but beyond that, forecasting becomes uncertain, so we hesitate to make projections without concrete data at this time. We'll continue to monitor the underground business. That said, I believe shifts in our service mix will occur, leading to continual portfolio adjustments from year to year. The difference between creating electric energy from renewable sources versus traditional methods is minimal; it primarily depends on the type of work and the clients we are serving. Therefore, at times, we may grow the electric sector faster than renewables and vice versa. This dynamic will also apply to the underground business, where we might work on telecommunications one day and gas projects the next, highlighting the versatility of our portfolio. If the company maximizes its operating leverage, we can anticipate continued shifts in the underground segment, but with increased margins from electric and telecom services, which is a positive outcome.

Sean Eastman, Analyst

Okay, interesting. Thanks. I'll turn it over.

Operator, Operator

Thank you. Our next question is from the line of Michael Dudas with Vertical Research. Please proceed with your question.

Michael Dudas, Analyst

Good morning, Kip, Duke and Jayshree.

Jayshree Desai, CFO

Good morning.

Michael Dudas, Analyst

Following up on, you mentioned telecom. Maybe you could share it seems like your revenue expectations remain what they have been. What are some of the trends you're seeing, anything that's been more beneficial Quanta? And could you - there any visibility into, say, 2024 on some of the programs and where you guys can get involved?

Duke Austin, President and CEO

Yes, Mike, we're noticing an increase in programs from non-traditional customers. I believe we are close to achieving nearly $1 billion in double-digit growth, which is our goal, and we might even exceed it. I think we are managing our growth well and will continue to leverage market opportunities. However, we're not heavily investing in acquisitions right now; our focus is mainly on organic growth. This strategy allows us to expand other initiatives in that market. We are pacing our growth and see significant opportunities in 2024 and beyond. While 2023 is looking good, we will keep monitoring the situation as it can become unpredictable at times.

Operator, Operator

Thank you. Our next question is from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Brent Thielman, Analyst

Hey. Thanks for taking the question. Duke, curious the outlook for sort of other new wind bookings opportunities. It seems like solar is kind of in the hot market last few years. Wondering if you're seeing RFP is picking up and wind and maybe that's another significant lever, I guess, beyond some from bookings in the coming quarters and years. And I guess, of that, too, are the economics of those projects more attractive than solar? Because it seems like it would be a less saturated sort of competitive environment given the technical necessities there.

Duke Austin, President and CEO

Yes. I mean we're seeing more opportunities in the outer years. And when I mean the curves to the cards work and what you need so your battery projects are going to pick up significantly to handle some of the intermittence fees as well as the wind in certain areas. You have to have transmission interconnects and things of that nature. So a lot of it is the transmission cues as you get these larger lines built, you'll start to see more wind behind them. But they're not going to build the wind if they don't have anywhere to put it. And repowering certainly is a big business that we'll continue to see that repowering market is nice. And I'll let Jayshree comment on this.

Jayshree Desai, CFO

I would like to add that wind energy is gaining traction. It's still more back-loaded in terms of project timelines because they need to navigate permitting and interconnection challenges. As Duke pointed out, there are complexities involved in transporting wind power to the demand areas, which makes it a longer and more difficult process. The Inflation Reduction Act will also support the wind sector, making it competitive with solar energy. However, projects must progress through the development phases before they can be built. Economically, we feel confident about both wind and solar. Blattner, in particular, has a strong track record in constructing both wind and solar projects and has demonstrated success in both areas.

Brent Thielman, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Our final question this morning will be from the line of Marc Bianchi with TD Cowen. Please proceed with your question.

Marc Bianchi, Analyst

Hi, thanks. I wanted to ask on the back half renewable margins here. You mentioned the, I think, 120 basis point burden in the first quarter. I'm curious what that Canadian project would be burdening the back half by just so we could get a sense of what it would look like once that's out of the backlog?

Duke Austin, President and CEO

Yes, I think it's not material, if anything, on the back half. It's in the '22 a bit. So I think when you look at '22, it's down a bit and it won't - Canadian has been an impact in that segment. So there's not as much Canadian content in the back half of our year. And so we're confident in the historical performance of both sides of the business to be able to perform double digits in the back side of this - of the year.

Marc Bianchi, Analyst

Okay, super. Thanks so much.

Operator, Operator

Thank you. At this time, we've reached the end of our question-and-answer session. And I'll turn the floor over to management for closing remarks.

Duke Austin, President and CEO

Yes. I want to mainly thank our people in the field. We had a really, really nice quarter through a tough winter that the foot of snow in places, these guys, women in the perform in northern climes better than anyone in the world and what they do every day is remarkable. They're building the nation's grid. And I'm real proud of where they're at from a safety standpoint and where we're at. And I'd like to thank them and you for participating in our conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call.

Operator, Operator

Thank you. You may now disconnect your lines at this time. Thank you for your participation.