Quanta Services Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Kip Rupp, Vice President Investor Relations
• Earl C. "Duke" Austin, Jr., President and Chief Executive Officer
• Derrick A. Jensen, Chief Financial Officer

Analysts

• Ian MacPherson, Piper Sandler Companies
• Sean Eastman, KeyBanc Capital Markets
• Andy Kaplowitz, Smith Barney Citigroup
• Adam Thalhimer, Thompson Davis
• Michael Dudas, Vertical Research
• Brent Thielman, D.A. Davidson
• Alex Rygiel, B. Riley
• Jamie Cook, Credit Suisse Group AG
• Neil Mehta, The Goldman Sachs Group, Inc.
• Noelle Dilts, Stifel Nicolaus
• Justin Hauke, Robert W. Baird
• Steven Fisher, UBS Group AG
• Chad Dillard, Sanford C. Bernstein

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the Quanta Services First Quarter 2022 Earnings Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Kip Rupp, President, Investor Relations. Thank you. One moment.

[Kip Rupp, Vice President Investor Relations at Quanta Services]

Thank you, and welcome, everyone, to the Quanta Services First Quarter 2022 Earnings Conference Call. [Operator Instructions]. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO. Duke?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Thanks, Kip. Good morning, everyone, and welcome to Quanta Services First Quarter 2022 Earnings Conference Call. On the call today, I will provide operational and strategic commentary, and will then turn it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a review of our first quarter results and full year 2022 financial expectations. Following Derrick's comments, we welcome your questions. Our first quarter results show that Quanta is off to a great start this year with quarterly revenues of $4 billion, each segment generated strong revenue growth during the quarter despite the impact of normal seasonality, with GAAP and adjusted diluted EPS of $0.57 and a record $1.37 respectively. Additionally, total backlog at the quarter end exceeded $20 billion for the first time, which continues to support our 2022 financial expectations. We continue to see opportunities across our service lines, driven by our collaborative solution-based approach. The growth of programmatic spending with existing and new customers and the favorable megatrends that we discussed at our recent Investor Day, which provides strong visibility into near- and long-term growth.

Our Electric Power Infrastructure Solutions operations continued to perform well during the quarter, driven by broad-based business strength from ongoing utility grid modernization and system hardening initiatives and solid and safe execution. Additionally, our communications operations are moving in the right direction, and performed well during the quarter. Our Electric Power outlook remains strong, driven primarily by increasing service line opportunities and market share gains on our base business. Further, we continue to actively pursue large new master service agreements, or MSAs, that are designed to modernize the grid and to support growing electric vehicle penetration and other needed technology adoption and to harden the system to be more resilient to wildfire and severe weather events. We believe these trends provide opportunity for materially greater backlog levels this year. Our conversations about Quanta's EV charging program management solutions continues to advance with companies throughout the electric vehicle ecosystem. Our revenues from EV charging infrastructure work are relatively small but are expected to increase significantly this year and beyond.

We believe EV charging infrastructure opportunities are on the cusp of accelerating and are only just beginning. Additionally, we believe the need to modernize and enhance the power grid, to enable higher levels of load growth and continuous power demand caused by growing EV penetration could create significant opportunities for Quanta. Our Renewable Energy Infrastructure Solutions segment performed well during the quarter. Many of the macroeconomic uncertainties we are managing through today were known unknowns when we announced our intention to acquire Blattner in September of 2021, and we have prudently taken these risks into consideration for our full year 2022 guidance. We also believe Quanta's and Blattner's market-leading position, scope and scale and technology and geographic diversity, positions the company to manage through times of uncertainty. That said, we reiterate that we did not acquire Blattner for 2022. The addition of Blattner's utility scale renewable generation solutions to Quanta's existing holistic grid solutions transforms our ability to collaborate early with our customers on their energy transition strategies over the coming decades, which we believe creates a value proposition unique to the industry.

We are increasingly confident in our strategy to position Quanta as the infrastructure solutions leader in the energy transition. We are pleased with the performance of our Underground Utility and Infrastructure Solutions segment, which delivered strong revenue growth and profitability in the quarter. In particular, our industrial services operations executed well and are experiencing strong demand as the global economy continues to recover and two years of pent-up demand from deferred maintenance and capital spending resumes. We also continued to experience solid demand for our gas utility and pipeline integrity services, which are driven by regulated spend to modernize systems, reduce methane emissions, ensure environmental compliance and improve safety and reliability. Looking to the coming years, we continue to see emerging opportunities for Quanta's Underground Utility and Infrastructure Solutions operations play an evolving and increasing role with customers as they increasingly pursue strategies to reduce their carbon footprint and diversify their operations and assets towards greener business opportunities. As we discussed in detail a month ago during our 2022 Investor Day in New York City, Quanta is successfully executing on strategic initiatives to drive operational excellence, total cost solutions for our clients, profitable growth and value for our stakeholders.

Our strategic initiatives uniquely positions us to not only capitalize on the megatrends but also enhance our customer relationships and market positioning. As a result, we are able to collaborate with our clients to execute their capital deployment plans, even during challenging conditions like the ones we face today including supply chain, inflation, COVID-19 and regulatory uncertainties. These dynamics are not easy to navigate, but we expect to continue to successfully manage through them. It is during these times that Quanta demonstrates its resilience, which we believe shows the strength of our operations portfolio, strategic initiatives and platform of solutions. Furthermore, we are developing new solutions throughout the supply chain, which we believe will be a differentiator and will expand our customer base. We believe the glass is half full and see these challenges as opportunities for us to take strategic actions to further differentiate our solutions and mitigate risk for our company and our customers. Quanta is a portfolio of exceptional companies with geographic and service line diversity.

We are anchored by our commitment to cross-skill labor and our self-perform capabilities and remain dedicated to growing and enhancing our portfolio of services, which strengthens our ability to capture more of a customers' large programmatic spending programs and to operate in a responsible and sustainable way while maintaining a strong financial profile. Looking to the medium and long term. As energy transition and carbon reduction initiatives accelerate, we believe the infrastructure investment and renewable generation necessary to support these initiatives are still in early stages of deployment and that this is arguably the most exciting time in Quanta's history. We have profitably grown the company and executed well and expect to continue to do so. Demand for our services is robust across our portfolio and driven by long-term visible and resilient energy transition and technology enablement megatrends. We are confident in the strategic initiatives we are executing on, the competitive position we have in the marketplace and our positive multiyear outlook. As a result, we believe Quanta has built a platform with the opportunity to deliver a 10% organic adjusted earnings per share CAGR and a strategy with the opportunity to deliver a 15% or better adjusted EPS CAGR through 2026. 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 built 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 Derrick Jensen, our CFO, for his review of our first quarter results and 2022 expectations. Derrick?

[Derrick A. Jensen, Chief Financial Officer at Quanta Services]

Thanks, Duke, and good morning, everyone. Today, we announced record first quarter revenues of $4 billion. Net income attributable to common stock was $85 million or $0.57 per diluted share and adjusted diluted earnings per share, a non-GAAP measure, was a record for the first quarter at $1.37. Our Electric Power revenues were $2.1 billion, a quarterly record and a 28% increase when compared to the first quarter of 2021. This increase was primarily due to growth in spending by our utility customers on grid modernization, resulting in increased demand for our electric power services as well as approximately $75 million in revenues attributable to acquired businesses. Electric segment operating income margins in 1Q '22 were 9.5%, a 30 basis point improvement compared to 9.2% in 1Q '21. However, margins were slightly impacted during the quarter for certain Canadian projects due to substantial COVID delays. That said, our U.S. electric operations continued to perform well, delivering another double-digit quarter. Also included within our Electric segment are our communications operations, which delivered mid-single-digit margins during the quarter and remain on track for upper single-digit margins for the year.

Renewable Energy Infrastructure segment revenues for 1Q '22 were $876 million, a substantial increase from 1Q '21 primarily due to $470 million in revenues attributable to acquired businesses. Operating income margins in 1Q '22 were 8%, in line with our expectations for the quarter but lower than the 11.8% in 1Q '21 due to the change in the mix of work as a result of the acquisitions and due to normal project variability. Underground Utility and Infrastructure segment revenues were $951 million for the quarter, 48% higher than 1Q '21, reflecting increased levels of activity across all of our segment operations. Operating income margins for the segment were 5.1%, 370 basis points higher than 1Q '21. The margin improvement was largely due to the increase in revenues and improved performance from our industrial operations, with COVID-related headwinds previously impacting these operations largely absent in this segment for 1Q '22. One below the line item I want to mention is our 1Q '22 other income and expense. As I mentioned last quarter, we hold an investment in a fixed wireless broadband technology provider that in March of 2022 became Starry Group Holdings, Inc., a publicly traded company, at which point our interest became a common equity interest in the publicly traded company.

We've remeasured the fair value of this investment based on the market price of the publicly traded company stock as of March 31, 2022, which resulted in the recognition of an unrealized loss of $8.4 million during the quarter. The value of this investment must be marked to market at each quarter end as long as this investment is held. On the non-GAAP adjusted earnings per share and adjusted EBITDA basis, we've removed the unrealized loss associated with this investment for the quarter and plan to continue adjusting our non-GAAP measures for mark-to-market volatility in future periods. Our total backlog was a record $20.5 billion at the end of the first quarter. Additionally, 12-month backlog of $11.5 billion also represents a quarterly record. Although backlog includes some nice project awards during the first quarter, our backlog growth continues to be driven primarily by multiyear MSA programs with North American utilities, which we believe reinforces the repeatable and sustainable nature of the largest portion of our revenues and earnings. As expected, for the first quarter of 2022, we had negative free cash flow, a non-GAAP measure of $16 million compared to $49 million of positive free cash flow in 1Q '21.

Net cash provided by operating activities during the first quarter of 2022 was lower due to higher revenues and corresponding increases in working capital demands compared to 1Q '21. Days sales outstanding, or DSO, measured 80 days for the first quarter of 2022, a decrease of nine days compared to the first quarter of 2021 and the same as year-end. The decrease from 1Q '21 was primarily due to the favorable impact of the acquisition of Blattner, which has traditionally had a lower DSO than certain of our other larger operating companies. This positive impact was partially offset by continued elevated working capital requirements associated with two large Canadian transmission projects driving an increase in contract assets, which we've discussed in prior quarters. Both projects were incrementally impacted by COVID during the first quarter, increasing our change order positions. In total, the amounts being pursued are currently impacting DSOs by as much as four to five days. However, one of those projects reached substantial completion during the first quarter, and we expect those contract assets to be built and collected over the remainder of the year.

As of March 31, 2022, we had total liquidity of approximately $2 billion and a debt-to-EBITDA ratio of 2.3 as calculated under our credit agreement. We expect continued earnings growth and cash generation to support our ability to efficiently delever over the following quarters while continuing to create shareholder value through our dividend and repurchase programs as well as strategic acquisitions. Through the date of this earnings release, we've acquired approximately $21 million worth of stock since the beginning of the year as part of our repurchase program, and we continue to evaluate potential acquisitions that fit our strategic objectives. Turning to guidance. I'm pleased with the start to our year and have little change to our overall expectations for 2022. We now expect Electric Power revenues to range between $8.3 billion and $8.4 billion with margin expectations unchanged, ranging between 10.7% and 11.3%. Similarly, we're increasing our Underground revenue expectations to range between $4.1 billion and $4.3 billion with margins expected to range between 6.5% and 7.5%, consistent with our previous expectations.

Our Renewables segment revenue and expectations are unchanged. However, with the uncertainty on project timing attributable to potential supply chain disruptions, we have widened our operating margin range a bit to 8.5% and 9%. We believe these dynamics are short term in nature and the opportunity to overcome them and deliver margins at our original 9% level and above continues to exist. Additionally, higher interest rates on our variable rate debt are resulting in increased interest expense for the year, which we now expect to range between $113 million and $117 million for the year. In the aggregate, our consolidated expectations for adjusted EPS and adjusted EBITDA remain unchanged for the year, reflecting the strength of our portfolio. For additional information, 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, as we laid out in April at our Investor Day, the tailwinds behind our end markets and our industry-leading solutions present management with the opportunity to deliver significant shareholder value through organic growth and strategic capital deployment through 2026 and beyond.

And speaking of management, as we disclosed in today's additional release, I'm pleased to announce my planned transition from the role of Chief Financial Officer, to the new role of Executive Vice President of Business Operations. Transitioning into the role of Chief Financial Officer is Jayshree Desai. Jayshree has been a valuable partner to me and Duke and all of our leadership team since she joined the organization in 2020 and she is well suited to guide our financial organization going forward. It has been the highlight of my career to serve as Quanta's Chief Financial Officer over the last 10 years. As the longest standing employee of Quanta, I spent almost half my life helping to lead our financial organization and support our world-class operating leadership. I'm incredibly excited to continue supporting our strategic growth in a different capacity going forward. I'll now turn the call back over to Duke for closing remarks.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Thanks, Derrick. Before going to Q&A, I wanted to thank and recognize Derrick for his many years of continued dedication to Quanta and for his partnership. This is a purposeful transition and is a role that will enhance our ability to reach our targets. I am grateful Derrick embraced and led this transition and look forward to driving operations together. It is congratulations today, but maybe condolences later. I also want to congratulate Jayshree on her new role as CFO. She has been a great addition to our senior leadership team. I am excited about Quanta's future and look forward to working closely with Derrick and Jayshree in their new roles. With that, I'll turn the call back to the operator for Q&A.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Ian MacPherson from Piper Sandler.

[Ian MacPherson, Analyst at Piper Sandler Companies]

Thanks, good morning team. Congratulations, Derrick and Jayshree, on your new postings. And I guess, Duke, I wanted to ask first was I thought the mix of your backlog was a pretty interesting here for the quarter, especially the accelerated growth in backlog for Renewables and for Underground. And I wanted to get your perspective on maybe what the drivers were there in Q1 and what your outlook is for relative growth across your three verticals over the foreseeable time frame this year?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Yes. Thank you. When we look at the business, we do look at it as a portfolio and we saw a broad-based growth across all segments. Sometimes the shift backlog within the segment is lumpy a bit, but the continued MSA growth from our base business on both gas, electric, telecom as well as renewables continues, and I don't see that stopping. And we continue to see inbound calls daily on capital spends and how can we help in a programmatic way. So the company is in a really good position. And I do believe backlog will grow -- continue to grow, and we've talked about the growth of the company on an EPS basis. So we stand by it.

[Ian MacPherson, Analyst at Piper Sandler Companies]

That's fine. I mean I think we probed a little bit at the Analyst Day around maybe the sensitivities for REIS bookings this year, given tariff uncertainty, and you spoke to the flexibility of the large operators across their portfolios as well in terms of developing solar, wind and storage at sort of flexible cadences maybe. And I guess the tariff issue is still very much up in the air. But have you seen more of a surge in rotating some capex towards the wind side in the front half of this year? Or is that maybe a misperception on my part?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I mean, the tariff commentary is valid and it's out there. So let's address it. When we talked about Blattner, we talked about the acquisition, we talked about megawatts, gigawatts. And it's still the same. It's megawatt, gigawatts that we can change with our customers. It's much like MSAs and the larger customers, we can flex to wind. We can flex the solar, we can flex the batteries. The segment is much bigger than just Blattner. It does have some of our larger transmission projects in it as well. We really like our positioning in these type of markets. It allows us to collaborate and provide solutions to the client, which ultimately puts us in a different position than others with the scale of the company. So in saying that, with times of -- we've been through a pandemic, we've been through many, many things and through this company's existence and we've continued to provide those solutions back to the client and collaborate.

That's who we are, that's who Blattner is, and we continue to be incrementally positive about the markets. That said, look, it's -- the solar is up in the air due to the tariff. And I do think it's -- we've got incrementally positive news as these memos continue to come out. We believe that ultimately, the energy transition is happening, solar will be a big piece of that as well as wind and batteries. So that said, long term, the demand is -- outpaces anything and any kind of movement you would have in solar would go into '23, '24 build. So we stand by our '22 guidance that we've given on Blattner $2.5 billion, and stand by -- continue to stand by with the tariff, without a tariff. And the future is -- just continues to get better.

[Operator]

And our next question comes from Sean Eastman from KeyBanc Capital Markets.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Thanks for taking my question. So a nice start to the year. It does appear that you guys are running ahead of schedule relative to that more or less intact full year guidance. So I know you guys are going to hate this one, but what should we take away from that? Is it that the balance of the year is now softer or more variable? Or is it that we can kind of consider the rest of the year having more cushion after the strong first quarter? How would you frame that?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Sean, as always, I think we take a prudent approach to our guidance and we're three months into the year with certainly some regulatory impacts and things of that nature that we see. So that, supply chain, everything else, we didn't feel like it's prudent to step into -- let's raise guidance, let's get out there on this. We took a prudent approach to it, hit it down the middle. Can we beat it? Should we beat it? Are we striving to beat it? Yes. But that said, there's factors out of our control that are out there that we want to be prudent about. And I do believe we've hit the guidance number and what we thought for the year right down the middle and opportunities to beat it as well, and there's a range in there that we stood by. So I like where we sit. I do think it's nice to come out and have a strong first quarter. But again, you have some pull in a bit from the second and as well as strength to the later half. So we've got to deliver on the backside of it, third and fourth quarter are always our biggest quarters. So that's where the bulk of the earnings dollar is. And we need to make sure that over the next three or four months, it sets the way it should. I believe it will.

[Sean Eastman, Analyst at KeyBanc Capital Markets]

Okay. And clearly, there's some noise around solar development pipelines and timing there. But I'm just curious, as you look out over the balance of this year and into next year, what you're seeing from a sort of a capex toggling perspective? Are you seeing evidence that those capital dollars that would have gone into solar over the next 12, 24 months are kind of actively pivoting to T&D, wind, battery? What are you seeing there even just anecdotally? That would be interesting.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I mean I think if they fit into any of those markets, we're in a great place. So those pivots allow us to be extremely flexible with the client and it says much about who we are and what we continue to say is our scale and scope and flexibility along megawatts, gigawatts and renewables as well as our T&D infrastructure is why that we believe that the Blattner acquisition really puts us in the forefront of this energy transition, exactly your commentary. And the portfolio that we've built as a company allows the growth in the growth platform even in an environment like this. As I said in the script, the glass is half full for us, and we just need to deliver the solutions to the client.

[Operator]

And our next question comes from Andy Kaplowitz from Citigroup.

[Andy Kaplowitz, Analyst at Smith Barney Citigroup]

Good morning everyone. Congratulations, Jayshree and Derrick. Duke, can you give us more color into the drivers of your Electric Power organic growth in the quarter in the low 20% range? It seemed like a material step-up from where you've been. I know you mentioned just more general spend on grid modernization, but do you see that large U.S. transition project on last quarter start to ramp up? Or is this really just a pickup in sort of your MSA spend, that all of your customers are within their existing contracts increasing their level of spend given the environment?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I mean the larger project we discussed last quarter is in the Renewable segment, so it's not a part of the Electric segment. The overall company, if you look at an organic growth basis, is up 23% year-over-year. So I do think we're doing the right things. Do I think that's sustainable? No. And we've talked about the growth rates that we believe are possible within the company. And look, we've got a good head start on growth rates with kind of a 23% organic growth. That said, we still will be prudent about how we talk about the growth. We have done some things that allow us to organically grow this company meaningfully through our colleges and the way that we put kids in the field, young ones in the field. And I do think our safety records, the way we work with the client on the capital spends and collaborate will ultimately allow us to get those growth rates. We just -- we -- I think you can see it in the Electric segment. The MSAs are getting bigger. We talked about the megatrends that are out there around EV. The hardening in the West, it continues up and down the West Coast as well as over in the storm-prone areas. So we're in a good spot, and we continue to try to work with the client on their capital budgets.

[Andy Kaplowitz, Analyst at Smith Barney Citigroup]

And Duke, you only -- you had a modest change to the Renewables margin that you mentioned 8.5% to 9% from 9%. It doesn't seem like a big change in the context of what seems like a pretty difficult supply chain environment for your customers. So maybe just talk about sort of the confidence level. I know that you've talked about Blattner being sort of best-in-class and maybe that sort of what keeps you there. It keeps you at high levels of margin. But just talk about the confidence level to achieve those margins this year.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I mean, I think we stand by the numbers, and when we were at 8.5% to 9%, we really floored it and it gave you more variable. And I honestly -- we're shooting for the top end of that. And the company strives to beat those margins and believe we can operate in double digits over time and will. So that said, I mean, I do believe we're in unprecedented times around supply chains and tariffs and wars and pandemics that we're still working through. But ultimately, as we work with supply chains, it makes us a better company in understanding the verticals of the total cost of our projects. So that said, I do believe, as I said, the glass is half full. We're working with our clients on supply chains. We've had to sequence work differently, do things differently than we ever have. But that's who we are, that's what we're trying to do with the clients and make sure that the ultimate project is a success for us and the customers. So we're doing those things. I like where we sit.

[Operator]

And our next question comes from Adam Thalhimer from Thompson Davis.

[Adam Thalhimer, Analyst at Thompson Davis]

Hey, good morning guys. Derrick, sorry to see you go. I enjoyed working with you. Congratulations, Jayshree. One of the things that stood out to me in the first quarter was the high operating margin in Underground. Can you comment on that? And was there any thought to raising the margin guidance for the year for Underground?

[Derrick A. Jensen, Chief Financial Officer at Quanta Services]

Yes. The first quarter, I mean, we've anticipated we were going to see an uptick, right? I mean, the biggest portion of pressure on Underground over the last few years has been COVID-related in the industrial portion of it. As we came into '22, we had anticipated we were going to be largely past that. You're seeing that. Typically, the Underground -- all of our segments typically have lower margins in the first quarter and most specifically in the Underground group. But combination of coming on the other side of that, industrial had a nice quarter, and then we did do some larger pipeline work as well contributing. So good, strong performance. When we think about the margins there, and we're continuing to feel comfortable we can see that up in the 7% range for 2022, and our longer term continue to see improve in our minds, more towards that further upper single digit.

[Kip Rupp, Vice President Investor Relations at Quanta Services]

Adam, I want to also say Derrick is not going anywhere, but that being said.

[Adam Thalhimer, Analyst at Thompson Davis]

Well, he won't be on the call.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

You never know. We've worked Derrick a long time. So I would say he'll be around. That said, the portfolio of the company, we've talked about and commented on it many times. And we've said that if we start doing more underground, we'll get operating leverage. You're starting to see that come through on some of the gas margins because of your operating leverage on electric into your offices, in the field, and you'll continue to see that going to get in those upper single digits, that's what we're striving for.

[Adam Thalhimer, Analyst at Thompson Davis]

Great. And then the thing struck me with zero acquisitions in the quarter. I'm not sure I've ever seen that. Can you just talk about your M&A outlook?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I think we've always said that you have quarters that are -- we have five, I believe, in the fourth quarter. So it probably moves in -- again, we're inquisitive. We look at companies, family businesses all the time. We see the right ones, we'll lean in. I don't -- there's nothing to think about it. We're not out looking but we do have holes in regions. We do have things we would like to do as a company. We'll either organically grow it or look at acquisitions, not to signal the thing. It's the same process we've used for the last six years, and we'll continue to do so.

[Operator]

And our next question comes from Michael Dudas from Vertical Research.

[Michael Dudas, Analyst at Vertical Research]

Well done, Derrick. Duke, just two thoughts. One, a lot of activity, certainly given higher natural gas prices here and abroad. Any observations on what the activity in the Gulf Coast, some of the LNG opportunities? And what your customers on the industrial side, are they feeling much better? They're moving through that deferred maintenance backlog pretty quickly. And then on the communications side, are -- it seems like things are working in a good measure there. Are the opportunities and some of the workflow against -- you should start to accelerate as some of the 5G issues we've been reading about start to alleviate?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Yes. Thanks, Mike. The industrial base, we've talked about it before, when it was back in '08, '09, and they came out of it, '11, '12, '13 is really kind of a bust. I think you'll see those type of numbers come through here. There's some capital projects for your plastics coming in online, big capital projects along the Gulf Coast as well as LNG. So all those things provide opportunities for us around -- really every one of our service lines on the industrial side. So we're excited about those. And I do think we've said all along, we have a great management team that really understands markets and position us quite well to take advantage of these opportunities as the market changes. So we like our positioning. As always, we stayed with it. We really work at that even when it causes a little bit of margin degradation. We keep our people, we work through them and make sure that we're lean as well as can -- and capture the opportunities that we see for it in the industrial space, which we do.

As far as communications, it's a robust market. The technology changes daily. I do believe we see more carriers working together around fiber, around high band, high bandwidth-type scenarios. And so I do think that will ultimately drive the macro market for the foreseeable future or certainly around our wireless capabilities. We've invested there. We're working on that vertical as well as many others. So we sit nicely, we talked about $700 million plus this year in telecom. We stand by that and the margins are improving. We've got a nice start here for the year. We like where we're going.

[Operator]

And our next question comes from Brent Thielman from D.A. Davidson.

[Brent Thielman, Analyst at D.A. Davidson]

Great, thank you. All the best as well, Derrick. I guess, first question just on the Underground business. It looks like look to me like a big jump in the total backlog, just versus the 12-month backlog quarter-over-quarter. Just wondering what was driving that. Did you pick up some sort of longer-term capital projects? Anything to read into there?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

No, I mean, there are some opportunities in Canada we took advantage of. We talked about that before on the large pipe side and some of that came through as well as just, in general, our backlog there on the MSAs, and I do think it will continue to grow and our industrial base has moved upward and will continue to do so in that segment.

[Brent Thielman, Analyst at D.A. Davidson]

Okay. Appreciate that. And Duke, the slide deck mentioned that it seems like utilities are talking more and more about it at least, but the hydrogen blending just among gas utilities. I mean, what kinds of opportunities could come from that for Quanta? How do you play a role in terms of affecting that?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I mean I think we're right in the middle of that and in front of it. And in fact, we see unique opportunities there. It's early, but there is some blending going on. We're seeing some -- one of our partners in Canada, I saw an announcement yesterday on some hydrogen blending there on -- around buses and other things that are out there. So you're starting to see that as a fuel source. You'll continue -- I believe, continue to see that as part of the solution on the transition, and we're right in front of that. So I like where we sit.

[Operator]

And our next question comes from Alex Rygiel from B. Riley.

[Alex Rygiel, Analyst at B. Riley]

Thank you and very nice quarter gentlemen. A couple of quick questions first. As it relates to EV charging stations, can you quantify the annual revenue opportunity of this business either over the next year or over the next couple of years? And what the margin profile of that could look like?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

It's difficult for us to say exactly what -- the way we see that working out because a couple of things. One is we want to participate on the larger scale of the high voltage charging -- one of your larger scale charging stations. So to say what that number is, I'm not -- I'd be remiss at this point. It's not -- it will drive the business. It's not something that is a $1 billion type number, I don't believe. So we'll see. That said, what's behind it on the grid is, I believe probably one of the bigger drivers that we'll ever see and will ultimately change this period and almost rebuild it in many ways on the distribution networks. As well as when you start moving back and that load of the distribution networks, you're also loading back on your transmission throughout. So I do believe that incremental fact is what we see more so. But we'll take advantage of our partnerships with the OEMs as well as the batteries, the way we can scale and our programmatic spends and capture as much of that spend as we can. But it does set us up to do other things as well the size charging in a programmatic way, which we like a lot.

[Alex Rygiel, Analyst at B. Riley]

And then as it relates to the telecom business, how has the backlog changed over the last quarter or so? And how do you think backlog could change between now and year-end?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

We paced the backlog. I mean, it's up quarter-over-quarter. It continues to look better. The markets are better. We've been prudent about how we -- how we've taken backlog and what kind of backlog we have on a go-forward basis, due to the fact that when we started, we got some larger projects that obviously weighed down a bit. And we've said it before, we'll say it again, we need to get ourselves up in the upper single-digit margins to double-digit margins at parity with the Electric segment, and we can and will. So with that said, we'll take advantage of those opportunities in the cities that we're dense in as well as some of the wireless capabilities that we have now and obviously, our investment in Starry and that technology, we're excited about and how we look at that in a programmatic way.

[Derrick A. Jensen, Chief Financial Officer at Quanta Services]

Against to year-end, backlog is relatively flat. It's about $1.2 billion, but it's continued to grow throughout from a year ago into today for certain.

[Operator]

And our next question comes from Jamie Cook from Credit Suisse.

[Jamie Cook, Analyst at Credit Suisse Group]

Hi, good morning. Congrats on quarter and promotions. I guess my first question. The margins in Electric Power were a little lighter. I know you talked about the projects in Canada and COVID, but any way you can quantify that? And then it also struck me, you maintained your margin guidance despite that. So if the underlying business, the profitability is trending better than your expectations? And then second, Underground Utility had better margins than I expected, which doesn't usually happen. I understand a lot of that stronghold, but any way you can parse out what is stronghold versus what the -- how the profitability of the rest of the business is trending?

[Derrick A. Jensen, Chief Financial Officer at Quanta Services]

Yes, Jamie. So we had anticipated to have a lower margin in the Electric Power in this quarter, right? And when we talked about being around 10% in our original guidance, came in about that 9.5% overall. That is largely influenced by the Canadian work. The U.S. margins were effectively double digit. Telecom did quite well, although that's slightly dilutive overall, but still well. But it's just that COVID dynamic that we leaned into in those two projects. We're trying to take a conservative approach. We feel like we have every reason to see -- I believe we have recoverability there, but that Canadian weather type dynamic depressed it. You saw Canada in kind of almost a -- clearly a low single-digit to even breakeven type dynamic associated with those two projects, but are largely driven by those two projects. But that's quarterly only. That doesn't relate to any about the overall profitability for the year. Continue to feel quite confident in our ability to execute to the risk of Electric Power through the year, giving us confidence that actually, like you said, to reiterate the overall margin guidance for Electric Power.

Underground, we had commented explicitly that we thought that coming out of a COVID environment, that the Underground group would be able to be back into a margin profile closer into that 7% type range for the year. And it's really that lower first quarter dynamic that we've always seen in Underground associated with the seasonality. But that second, third and fourth quarter continues to see the ability to have that higher margin profile averaging against it, getting it into that annual margin perspective. Industrial was a nice contributor to the first quarter, but honestly, across the board, we saw solid margins for the first quarter for the remainder of the group as well.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Going to let you cite a little bit to you. We're on-boarding quite a few people, and I do think when you're on-boarding and also resequencing some work. It certainly just a bit, but we don't see that on a go-forward basis and have ourselves set up nicely for the rest of the year.

[Operator]

And our next question comes from Neil Mehta from Goldman Sachs.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Good morning team and congrats on the promotions in the quarter here. The first question was related to the current labor market conditions. As it pertains to Quanta's ability to scale up for higher activity over the next couple of years, has labor market tightness start to wane a bit? Or is it still an elevated headwind in the industry broadly? And then how do you think about your own competitive advantage as you have an advantage capability as it relates to labor relative to some of your competitors?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I mean, we're up 9,000 year-over-year employees. So I do think we have the ability to scale that significantly with the colleges with what we've done and what we've invested in cross-skill labor, which is the core of this business. It really allows us to not only train but getting the fill faster. And we like a tight labor market in many ways. It separates us for the investments that we do put into our safety and our training. So I like it. We're in good shape. And I do think we can grow with the markets as we see them and work with our clients on their capital spends.

[Neil Mehta, Analyst at The Goldman Sachs Group]

The follow-up is just around Blattner. It's been a couple of months now since that's been brought into the portfolio. We spent some time talking about the uncertainty on solar development. But could you talk about cultural integration, how you're feeling about the achievability around targets as well from a financial perspective. And has it impacted your ability in your go-to-market to your customers to have a more comprehensive platform?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I think when you look at the pandemic, the war, everything that you hear and maybe you've heard and you see where we're at in results and how we're moving forward and reiterating guidance on Blattner as well as the company. We sit in the very forefront of this energy transition. Blattner made us better and it allows us to have a different conversation around the transition on a go-forward basis for many, many years to come. I think it -- they've made us better. And culturally, they're very much -- you could take a mirror and look and you would see Quanta on their -- the balance of plant renewable solar. It's megawatts, gigawatts and I say, tight dialogue with their clients. Flexibility, scale, everything you'd want and our ability to think differently and differentiate in markets that are, in many ways, hyped from supply chain as well as regulatory effects. We can certainly be flexible. So that's a different discussion. It's something that we can provide to the client that separates Quanta even better than we were before.

[Operator]

And our next question comes from Noelle Dilts from Stifel.

[Noelle Dilts, Analyst at Stifel Nicolaus]

Hi and thanks for taking my question. First, I just wanted to go back to labor a little bit and maybe ask a question from a slightly different perspective. But I know that given your majority union labor, particularly on the Electrical side, you have visibility into wage increases. But I'm just curious if you could comment sort of on what you're seeing from a trend perspective in terms of wages within T&D. And again, if you could revisit the visibility you have into those increases.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

It usually runs 3% to 5%. So I would say the upper end of that at this point, you're seeing 5%-type increases across the board. Some more in certain areas, but that's relatively what we see and what we plan for as well. And I do think when we look at it, that's in many ways for us to see that -- to see it coming a long time ago allows a different conversation. We do have resources, Canadian resources and other ways that we can look at labor. So how we go about it, how we think they're going to work and work plannings will matter on a go-forward basis. It separates Quanta, our ability in the field to think differently and differentiate in these markets are something that we like.

[Noelle Dilts, Analyst at Stifel Nicolaus]

Sure. Okay. Great. And then kind of recognizing your -- all of your guidance commentary already on Blattner. I was just -- I'm just trying to get a better sense of like how to think about if we're seeing delays yet, if -- MYR Group came out and kind of talked about the amount of work that they've seen that's pushed a little bit to the right. I don't know if you could comment on if you're seeing delays today. I guess what I'm trying to think about is if we do see some projects kind of put on pause, does that hit more in the third quarter and the fourth quarter because a lot of the channels for the projects that are happening now have already been sourced? Could you just talk about the timing and sort of what you're looking for as you think about the range of potential outcomes this year?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Yes, Noelle. I think the difference is, I've said this before, is we're doing in 30, 40, 50 type projects, just utility scale type projects on a given day. So where we couldn't really think of. If we have a certain amount of customers that we work with, we can certainly broaden that customer base out and provide the same type of service that we have to our other customers. And the inbound calls are certainly exponential without -- if we had any gap. So we feel good about the guidance. We feel good about where we're at. We have the ability to win solar, battery or largely that segment is made up of much more than just wind, solar, battery. And we have long-haul transmission and interconnections, all kinds of things. And as a portfolio, we continue to believe we're in a really good spot for this transition, and it has not impacted Blattner or Quanta at this point.

[Operator]

And the next question comes from Justin Hauke from Baird.

[Justin Hauke, Analyst at Robert W. Baird]

Hi, good morning. I guess since we're all congratulating Derrick, I'll ask a question here for you. But I was just curious, you talked about the unapproved change orders on the Canadian jobs. The balance last quarter is $370 million, and that's up from -- it has been pretty steady to $150 million. So I guess I'm just curious what's the balance as of today? And then how much of your $650 million to $850 million guidance for the year is kind of conditional on getting those cleared this year?

[Derrick A. Jensen, Chief Financial Officer at Quanta Services]

Yes. So the balance that you're making reference to is the 10-Q disclosure, which includes more than just the changeovers associated with these projects. That's an aggregate disclosure. That number is grow a little bit, it will exceed $400 million at this stage in the game as an aggregate disclosure. I made reference to the specifics of these, unique to these two projects being about the four- to five-day impact at the DSO. So it is the majority of those balances, but it is not all of those balances. And then I'll tell you that we do believe that one of the positions is something that we'll be looking to bill. That project is -- has reached substantial completion, we'll be looking to bill and some of that within 2022. The other project will actually continue on into '23 and even into '24 a bit. So I think that you'll see some of that cash flow drift into there. Relative to the overall cash flow guidance for the year, the one that we -- as I commented to, that we look to be billing this year, that is included as part of the '22 cash flow guidance.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

This is Duke. I would say on the Canadian projects, when we think about it, long-standing customers on both projects. We're working with them. Many of the things that were anticipated at the start such as your pandemics, the way that we bill, the way that the billing milestones, all those different things, the pandemic certainly impacted those things as well. So we're working on the client now on cash flows and things of that nature. We do not see any issues with that. We'll continue to collaborate there to get paid. And ultimately, I believe those will be good projects.

[Justin Hauke, Analyst at Robert W. Baird]

Okay. Okay. That's helpful. I guess the other one I have here, and I know this is kind of a moving target, but of the $3 billion of the Renewable segment backlogs, can you quantify how much of that is solar projects, how much is wind, how much is battery? Or just any color you can give on kind of the breakdown of that as it stands today?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I can, but I'm not. And so one thing about that, what I would say is your LNTPs, like your lumens notice proceed, I think we're stacking the LNTPs a bit, too, on a go-forward basis because of the unknowns in many areas of commodities as low as tariffs. So I do believe your backlog will be -- always be a little bit lumpier, but you're seeing exponential. So our exponential negotiation, verbal awards and LNTPs is much larger than it's been over many years. So you will see that come in. And if it doesn't go in '22, it's going to go in '23, '24. So it's just building in many ways and we still reiterate '22, reiterate guidance. We took a prudent approach to start with. Our dialogues with the customers is fantastic. How we're working with supply chains, how we're working with them on sequencing, variability, our ability to move and scale, I think, is there. It's more about how do we do all the work in '23 and '24 more so than worrying about '22 at this point. That's the way we see it.

[Operator]

And our next question comes from Steven Fisher from UBS.

[Steven Fisher, Analyst at UBS Group]

Thanks and add my congratulations on the role changes. And just continue this discussion on the renewable side. I mean it seems very clear that you think you could change your mix fairly seamlessly within Blattner to the extent it's needed. I guess I'm curious how do you factor the supply chain situation into that seamlessness? Like if you needed to shift to wind, is there enough lead time with the supply chain to manage that within 2022? And then I guess related, how varied is the response from your customer base in terms of when the solar impact might be? Is it more -- is it consistently -- this is a 2022 uncertainty? Or is this maybe more '23 uncertainty?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Now, Steve, you're primarily talking about panels. So there's a lot of different things you can do around about the plant besides panels. So some of it is resequencing, some of it's moving wind, some of it's repowering, there's many things -- some of it's moving into T&D. We can do all kinds of different aspects of this transition within the energy space and even in the Renewable segment. So our concerns were -- is to work with the client to make sure anything that gets pushed into '22-'23 we have the ability to deliver. And that's the bigger concern is making sure that we have that capacity as well as what's ongoing in '22. We felt comfortable when we gave guidance. It was down a bit from the three-plus that had been done with Blattner. We said that from the start.

We felt like the supply chain we pushed a bit on it, and it did. So that said, it's reiterated. We believe we have every ability to work through the supply chain aspects as well as the tariff. And every day, the tariff gets a little bit clearer. And I do think that it's short term because of the way that the memos are coming out, the things that we see are incrementally positive around pristine wins and things of that nature. I don't want to get in the weeds on it, but I do believe that it's better. And you can't get to where you want to go in this transition without clearing these things up for the developer for ultimately the utility customer, which, in many ways, your energy, your geopolitics around energy, your renewables certainly is a piece of that, that would clear some of that up.

[Steven Fisher, Analyst at UBS Group]

Got it. And then it seems like there's some momentum building on the pipeline piece of the business. I'm just curious where you see the biggest opportunities forming based on your customer discussions. Is it more things in Canada? You mentioned about the big booking there earlier this year. Or is it the U.S.? Is it maybe traditional oil and gas? Or is it the carbon capture? Where is the biggest momentum building on the pipeline piece?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I think we're working with the client on their -- the way that they view carbon-free, the way that they're transitioning to the cleaner fuels and how we're going to use pipe through LNG, all those kind of different aspects of it. So we're working with them quite a bit on what I would consider their profiles around the carbon environment. So you will see carbon sequestration. You'll see hydrogen blending. You'll see LNG pipe. We've said it all along, we'll be around the edges on that. Our Canadian business is going well today. I do think the Lower 48 have some what I would consider opportunities, and we'll stay on the front side of that. But the portfolio itself, our LDC business, our industrial business, the way that we're moving what I would consider typical gas-type resources over into electric is certainly something that we're doing and doing it well. So we're pleased.

[Operator]

And our last question comes from Chad Dillard from Bernstein.

[Chad Dillard, Analyst at Sanford C. Bernstein]

Hi good morning guys. So I want to go back to your EV charging opportunity that you talked about earlier on the call. So how differentiated is the programmatic approach that you guys are taking versus your competition? And then just in terms of customers, I have to imagine that you're expanding a little bit beyond the utility customers that you typically service. And I just want to understand your go-to-market approach with these guys? And then lastly, just margins for EV charging, how does it compare versus your broader Electric Power segment?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

When you look at EV charging, either from the OEM or from the chargers themselves as a business, it's certainly early. And I do think you're starting to see battery manufacturing, you're starting to see your OEMs move all towards batteries and probably, in my mind, much quicker than anyone anticipated. That said, the charging stations or high-voltage charging stations need to go quicker. And as you start to move into bigger vehicles, such as your trucks, your heavy-duty trucks -- we've signed a partnership with GM to the west on battery Silverados. We've done a lot of things internally. So we're very close to the OEMs on what they're doing and believe that charging is here.

It's coming quicker than thought and our ability to work with the utilities on how we build out that infrastructure is something that we sit right on the front of, and I do believe it provides significant opportunity not only for the charging station itself, but also on the backside of your grid and which is even, what I've said before, exponential in nature. So the opportunity is there, how we -- they are smaller projects, so you couldn't go do a one-off project in every city, it doesn't make sense. So you need a program to really for us to really scale it. And I do think those programs are large in nature and where we have density around the country, we're able to do these smaller type projects with the underground groups that we have. So lots of it makes sense for us, and we'll take advantage of those markets.

[Chad Dillard, Analyst at Sanford C. Bernstein]

Great. And then just a second question, just going back to the two Canadian projects with change orders. How big of a margin drag is baked into your guidance for those projects?

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

I don't think when you see those projects, it's more cash drags than anything. It's just cash flows. And obviously, Canada is lower than the -- we took a prudent approach to it because we need to execute the contingencies, but that said, I mean, it's -- Canada is down from Lower 48 a bit. When you look at the margin profile, so it's always been that way. It's not something that's new.

[Derrick A. Jensen, Chief Financial Officer at Quanta Services]

Yes, which is just the broader aspect of what we see from a Canada perspective versus what's happening unique gross margin in those projects. The projects put a little bit of margin pressure in this quarter because we dealt with some conservatism relative to the new COVID impacts, but the projects themselves are profitable and nice projects.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

And we're able to pursue those resources in Lower 48 as well.

[Operator]

Thank you. That does conclude our Q&A. I would now like to turn it over to management for any closing remarks.

[Earl C. "Duke" Austin, Jr., President and Chief Executive Officer at Quanta Services]

Yes, I want to thank Derrick for really standing by me as a partnership for the last six years as CFO, and he'll be by me with -- in his new role. So I'm looking forward to working with Derrick. Jayshree is exceptional and she'll do a great job as CFO and as a team. We have a solid management team. The men and women in the field and what they're doing on a daily basis make Quanta, Quanta. So we're excited about it. We're excited where we're going. We appreciate what they do. And I want to thank you all for participating in our conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our thought.

[Operator]

[Operator Closing Remarks]