Kip A. Rupp - Quanta Services, Inc. Earl C. Austin, Jr. - Quanta Services, Inc. Derrick A. Jensen - Quanta Services, Inc..

Noelle Christine Dilts - Stifel, Nicolaus & Co., Inc. Alan Fleming - Citigroup Global Markets, Inc. Tahira Afzal - KeyBanc Capital Markets, Inc. Matt Duncan - Stephens, Inc. Jamie L. Cook - Credit Suisse Securities (USA) LLC Steven Fisher - UBS Investment Research Chad Dillard - Deutsche Bank Securities, Inc.

Adam Robert Thalhimer - Thompson Davis & Co., Inc. Andrew John Wittmann - Robert W. Baird & Co., Inc. Alex Rygiel - B. Riley FBR, Inc. Brent Edward Thielman - D.A. Davidson & Co..

Greetings, ladies and gentlemen, and welcome to the Quanta Services First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . It is now my pleasure to introduce your host, Mr. Kip Rupp. Thank you, sir, you may begin..

Thank you, and welcome everyone to the Quanta Services first quarter earnings conference call. This morning we issued a press release announcing our first quarter results, which can be found in the Investors & Media section of our website at quantaservices.com.

Additionally, we have posted a summary of our 2018 outlook and commentary that we will discuss this morning in the Investors & Media section of our website.

Please remember the information reported on this call speaks only as of today, May 3, 2018, and therefore you are advised that any time-sensitive information may no longer be accurate as of any replay of this call.

This call will include forward-looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995.

These include all statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance, or that do not solely relate to historical or current facts.

Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or beyond Quanta's control, and actual results may differ materially from those expressed or implied.

For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the cautionary language included in our press release issued today, along with the company's 2017 Annual Report on Form 10-K, and its other documents filed with the Securities and Exchange Commission, which are available on Quanta's, or the SEC's, website.

You should not place undue reliance on forward-looking statements and Quanta does not undertake any obligation to update such statements and disclaims any written or oral statements made by any third-party regarding the subject matter of this call.

Please also note that we will present certain non-GAAP financial measures in today's call, including adjusted diluted earnings per share, backlog, and EBITDA. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release.

Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign-up for e-mail alerts through the Investors & Media section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website.

With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Duke?.

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services first quarter 2018 earnings conference call. On the call, I will provide operational and strategic commentary before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who'll provide a detailed review of our first quarter results.

Following Derrick's comments, we welcome your questions. This year is off to a good start, and we are pleased with our results. First quarter revenues were a record $2.4 billion in GAAP, and adjusted diluted earnings per share were $0.24 and $0.40, respectively.

We ended the quarter with record 12-month and total backlog for each of our segments and had record consolidated backlog of approximately $11.7 billion, which we believe supports our expectations for this year and bodes well for opportunities for multiyear growth.

As a result of our solid first quarter results, strengthening in markets and confidence in our ability to safely execute, we have raised our full year revenue and earnings per share expectations for 2018. Our Electric Power operations executed well in the first quarter, from both a top line and margin perspective.

The strong performance was driven by solid execution across our operations, and we are particularly pleased with our execution in Canada through the winter season. Additionally, we performed emergency restoration services during the first quarter in response to several severe winter storms.

This work helped offset adverse work conditions on projects for both Electric Power, and Oil and Gas operations, caused by these storms. This is a good example of how Quanta's diverse services and geographic presence can mitigate risk from severe weather events to our overall results.

We continue to have a positive near and long-term outlook for our Electric Power segment because of our customers' multiyear, capital budgets continue to increase, and should remain robust for some time. Demand for our base business work is strong.

Small and medium transmission and substation projects as well as distribution work remain active, and large multiyear MSA proposal activity is at high levels.

The low prices for an abundance of natural gas, the impact of tax reform and other favorable policy initiatives, are spurring plans to increase manufacturing and industrial activity in the United States, which should yield increasing demand for power in certain parts of the country.

The industrial market is a large user of power, and it's expansion is creating demand for base business work and larger transmission projects.

The number of opportunities for larger transmission projects is increasing, with several larger projects, including the Wind Catcher Generation Tie Line making positive regulatory progress and getting closer to construction. Note that we do not have the Wind Catcher project in our backlog.

We believe our end markets are strengthening and continue to believe we are in earlier stages of an upper multiyear cycle.

Long-term end market drivers such as the maintenance and replacement of aging infrastructure, generation mix shifting to more renewables and natural gas, grid modernization, and regulation aimed at improving greater liability, remain in place and are what we believe will continue to provide opportunities to grow our Electric business.

We are able to provide comprehensive turnkey solutions for these multiyear capital programs that we believe are unmatched in the industry. As we have said in the past, we believe we are uniquely positioned to provide solutions for these potential opportunities, which are the size and scope our industry has rarely experienced.

As many of you know, our communications operations are within our Electric Power segment, and last year we re-entered United States communications infrastructure services market. This initiative has been well received by our customers, and our U.S. communication operations continue to gain momentum.

For example, during the first quarter, Quanta was selected by a large telecommunications company for turnkey engineering and construction services for farther deployment throughout a Tier 2 market in Texas.

This deployment is designed to support the customer's existing 4G and developing 5G wireless networks, and the delivery of high-speed broadband services. We anticipate beginning this project later this year, with the completion anticipated by the end of 2020. Importantly, we expect our U.S.

communications operating income to be profitable in the second quarter, and believe we remain on track with our expectation to exit this year with operating income margins achieving high-single digit levels. Turning to our Oil and Gas segment.

We generated greater than expected revenues during the quarter, primarily driven by our natural gas distribution, pipeline integrity, and Canadian operations. Our industrial services operations performed well during the quarter, and they are recovering nicely from the severe impact of Hurricane Harvey on the Gulf Coast last year.

First quarter is seasonally a large quarter for our industrial services operations, and we are pleased with their performance. We believe their operations are on track to achieve the 2018 financial targets we have discussed on prior calls.

Overall, operating income margins for this segment were within our previously discussed range in the quarter, and we believe would have exceeded the high end of the range without the adverse operating conditions caused by several winter storms.

We expect activity across our Oil and Gas segment to increase as we move through the year, due to the release of customer budgets, improved weather, and commencement of scheduled projects.

We see opportunity for base business work to continue to grow over the coming years, which includes supporting midstream infrastructure, downstream industrial services, natural gas distribution, pipeline integrity, MSAs, pipeline logistics management, horizontal directional drilling, and engineering.

Since our fourth quarter earnings call, we have begun construction on several larger pipeline projects in the United States and feel incrementally comfortable with the timing of construction starts on our portfolio of pipeline projects.

We believe our spread capacity in the lower 48 could be fully utilized by the end of the second quarter, or early in the third quarter of this year. Further, we are optimistic about the opportunity for market improvement in Canada for our midstream operations, and for our larger oil and natural gas and pipeline projects moving forward.

Looking forward, we also see opportunity for a robust overall pipeline market in 2019 and beyond.

As natural gas mainlines from the Marcellus and Utica Shales are built and placed into service over the next couple of years to provide market access, we believe natural gas production will grow and our midstream operations in the Appalachian region will experience increased activity.

We're seeing multiple pipeline opportunities driven by LNG and petroleum export development in the United States and Canada and are well positioned to benefit from these growing markets. The pipeline project we recently booked in Oklahoma and announced in our earnings release this morning is a good example of an LNG-driven opportunities for Quanta.

Furthermore, I would note that LNG export industry development also provides opportunity for our electric power operations.

These facilities require massive amounts of power and our decades of experience providing turnkey EPC high-voltage transmission and substation services to the processing and industrial industries in North America position us well to capture such opportunities.

Additionally, increasing oil and natural gas production in Texas is outstripping available pipeline capacity. We are actively building midstream infrastructure in West Texas and there are a number of pipeline projects in various stages of permitting and development to move oil and gas from West Texas to market.

We have strong midstream and mainline pipeline capabilities in Texas and other markets and are actively pursuing these opportunities. That said, we are diversifying and building our base-orientated services, which we expect to be the majority of the Oil and Gas segments revenues this year.

We believe doing so will result in a more stable and consistent business profile over time that is less dependent on timing and cycles of larger pipeline projects. Quanta has strategically focused on diversifying its operations across service lines and geographies in a very deliberate manner.

This approach is designed to mitigate many aspects of risk in our business, including customer, project, permitting, geographic, execution, weather and other risk. We believe Quanta's diversity, scope and scale and capabilities are unique in our space and set us apart both competitively and as an investment.

Quanta is a construction-led infrastructure solutions provider whose portfolio of companies, services and geographic diversity position us to profitability grow through various cycles over time.

In summary, the year has started off well as a result of our solid first quarter results, strengthening end markets and confidence in our ability to safely execute, we have raised our full year revenue and earnings per share expectations.

While project permitting and regulatory challenges remain, we continue to have a positive multiyear view on our end markets and believe we have strengthened our opportunities for multiyear growth.

We are focused on operating the business for the long-term and will continue to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance Quanta's core 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 is the foundation that will allow us to continue to generate long-term value for all our stakeholders. With that I will now turn the call over to Derrick Jensen, our CFO, for his review of our first quarter results.

Derrick?.

Thanks, Duke, and good morning, everyone. Today we announced record first quarter revenues of $2.42 billion, an 11% increase as compared to the first quarter of 2017.

Net income attributable to common stock was $37.6 million or $0.24 per diluted share compared to net income attributable to common stock of $48.3 million or $0.31 per diluted share in the first quarter of 2017.

Adjusted diluted earnings per share attributable to common stock, a non-GAAP measure, was $0.40 for the first quarter of 2018 compared to $0.39 for the first quarter of 2017.

Negatively impacting the quarter and reflected as adjustments in our adjusted diluted earnings per share calculation were acquisition and integration costs of $7.2 million, $6.2 million net of tax or $0.04 per diluted share attributable to common stock primarily associated with the two acquisitions completed during the quarter.

Electric Power revenues increased 28.6% when compared to the first quarter of 2017 to $1.57 billion with double-digit or near double-digit growth across all sub-segments of our Electric Power services.

A larger increase was primarily due to higher customer spending associated with electric transmission projects and partially due to favorable performance and progress on a large electric transmission project in Canada.

In addition, we have $23.8 million in incremental emergency restoration service revenues, approximately $18 million in revenues related to more favorable foreign currency exchange rates and approximately $15 million in revenues from acquired companies.

Operating margin in the Electric Power segment increased to 9% in the first quarter of 2018 as compared to 8.2% in the first quarter of 2017. This increase was due to higher segment revenues, including a higher proportion of electric transmission project revenues.

Also contributing to the higher operating income and margins was the previously mentioned electric transmission project in Canada, which experienced favorable winter weather while we executed through established contingencies as well as incremental emergency restoration services during the quarter.

Aggregate communications infrastructure services operations, which are currently included within our Electric Power segment were slightly negative for the quarter, largely due to seasonality in our non-U.S. operations.

We expect profitable operating performance for our aggregate communications operations for the rest of the year, with margins improving sequentially through the fourth quarter. Without the dilutive effect of the communications operations during the first quarter, Electric Power margins would've exceeded 9.5%.

Effective January 1, 2018, we adopted the new revenue recognition guidance. While we do not anticipate any significant changes to the pattern of revenue recognition for our contracts, the new guidance requires a number of new disclosures.

Pursuant to this guidance, we are required to disclose, as of the end of each interim and annual period, the aggregate amount of the remaining performance obligations under our contracts with customers.

Our remaining performance obligations represent management's estimate of consolidated revenues expected to be realized from firm orders under fixed price contracts not yet completed, or for which work has not yet begun.

As of March 31, 2018, our remaining performance obligations were estimated to be approximately $5.19 billion, 80% of which is expected to be recognized in the 12 months subsequent to March 31, 2018. Our remaining performance obligations have been included as a separate component of our historical backlog presentation as of the first quarter.

Please see the supplemental data section of today's earnings release for a reconciliation of our historical backlog, which continues to be a non-GAAP measure to our remaining performance obligations which is now a GAAP measure.

As of March 31, 2018, 12 months non-GAAP backlog for the Electric Power segment was a record $4.2 billion, which was incrementally stronger as compared to the fourth quarter, and was an increase of 18% when compared to March 31, 2017. Total backlog for the segment was $7.6 billion, which was an increase of 12% when compared to 1Q 2017.

We believe these increases reflect the continued strength of our end market drivers and opportunities which Duke referenced in his comments. Oil and Gas segment revenues decreased 11.4% quarter-over-quarter to $849.1 million in 1Q 2018. This decrease was primarily due to reduced capital spending by our customers on large diameter pipeline projects.

Last year, due to the timing of projects, we had several larger diameter pipeline projects in construction as compared to this year, where larger pipeline construction activities are not expected to begin until the second quarter.

Partially offsetting this reduced spending were incremental acquisition revenues of approximately $155 million contributed by Stronghold. Operating margin decreased to 1.2% in 1Q 2018 from 4% in 1Q 2017.

This decrease in operating income and margin was primarily due to lower overall revenues in the segment, which negatively impacted resource utilization and the previously discussed lower proportion of larger diameter pipeline projects which typically yield higher margins.

These decreases were also due to the impact of severe weather on certain ongoing projects, which, as a result, experienced lower productivity.

Although we mobilized various emergency restoration services crews within the Electric Power segment that contributed positively to the quarter, these same storms negatively impacted production on certain oil and gas projects with an estimated operating margin impact to the overall segment of as much as 100 basis points.

As of March 31, 2018, 12 month non-GAAP backlog for the Oil and Gas segment was $2.7 billion, which was an increase of 10.5% when compared to December 31, 2017 and an increase of 42% when compared to 12 month backlog at last year's first quarter.

Total backlog for this segment was $4.1 billion, which was an increase of 6.4% when compared to December 31, 2017 and an increase of 63.6% when compared to total backlog at last year's first quarter. We continue to see the opportunity for additional awards and expect our backlog levels can remain strong.

Corporate and non-allocated costs increased $12.3 million in the first quarter of 2018 as compared to 1Q 2017 primarily due to $7.2 million in higher acquisition-related costs.

In addition, there were $4.8 million in higher compensation-related costs associated with increased personnel to support business growth and annual compensation increases as well as higher stock-based compensation expense due to lower forfeiture rates. Also, we had $3.8 million in higher amortization expense related to intangible assets.

These increases were partially offset by $4.2 million in reduced litigation costs associated with a matter involving our prior disposition of certain communications operations that we resolved in the first quarter of last year.

As a result of our segment performance, consolidated revenues increased $239.4 million or 11% when compared to the first quarter of 2017. Consolidated operating income in the quarter was comparable to the first quarter of last year. However, adjusted EBITDA, a non-GAAP measure, grew 15% or $20.3 million to $156.6 million.

For the first quarter of 2018 cash flows provided by operating activities were $26 million and net capital expenditures were $61 million resulting in $35 million of negative free cash flow. This compares to negative free cash flow of $45.3 million for the first quarter of 2017.

The improvements in the first quarter of 2018 was primarily due to lower working capital requirements related to lower levels of ongoing Oil and Gas Infrastructure projects. DSOs were 77 days at March 31, 2018, compared to 76 days at year-end and 78 days at the end of last year's first quarter.

Investing activities for the first quarter of 2018 included $30.7 million of net cash used for acquisitions, and financing activities included $214.6 million of net borrowings under our credit facility, which was partially utilized for share repurchases. During the quarter, we repurchased 5 million shares of our common stock for $173.9 million.

Approximately $76 million of our current $300 million repurchase authorization remains unused. At March 31, 2018, we had $102 million in cash.

We had $447 million in letters of credit and bank guarantees outstanding, and we had $882 million of borrowings outstanding under our credit facility, leaving us with $583 million in total liquidity as of March 31, 2018. Turning to our guidance.

Due to our solid first quarter performance, strengthening end markets and improved visibility into the remainder of the year, we are increasing our full year 2018 guidance. We now expect consolidated revenue to range between $9.95 billion and $10.55 billion.

The increased range contemplates Electric Power segment revenues of $6 billion to $6.3 billion.

Due to the higher than forecasted level of revenues in this segment in the first quarter, we see sequential revenues being flat to rising slightly in the second quarter, revenues to be the highest in the third quarter, and the fourth quarter potentially to be the lowest revenue quarter for the Electric Power segment in 2018.

We believe second quarter margins will be comparable to last year's with operating margins growing to double-digits in the third and fourth quarters. We expect 2018 operating margins for the Electric Power segment to range between 9.5% and 10%, with our communications operations continuing to be slightly dilutive to our overall segment margins.

Our expectations for the Oil and Gas segment are unchanged from our year-end guidance discussion. We continue to see the possibility for segment revenues to grow 10% relative to 2017, the high-end of the range. We expect revenues and margins will improve in the second and third quarters, followed by a seasonal decline in the fourth quarter.

We anticipate Oil and Gas segment operating margins between 5.7% and 6.7% for the year.

We anticipate interest expense for the year to be approximately $31 million, due to slightly higher debt levels, partially attributable to share repurchase activity in the first quarter, as well as higher working capital requirements during the year to support increased revenue levels.

As we have previously discussed, our other expense line item includes the deferral of a portion of the profit from construction activity on projects in which we have investments, primarily due to better than expected production on certain of those projects, we now expect the other expense line item to range between $30 million and $40 million for the year.

We are projecting our effective tax rate for 2018 to be between 29% and 29.5% for the year. These operating ranges result in net income between $321 million and $383 million and adjusted EBITDA between $815 million and $917 million for the full year of 2018.

Due to the share repurchase activity in the first quarter, we are now assuming around 155 million weighted average shares outstanding for the year.

We are increasing our range of GAAP diluted earnings per share attributable to common stock for the year to be between $2.07 and $2.47, and anticipate non-GAAP adjusted diluted earnings per share to be between $2.55 and $2.95.

This increase in our annual guidance is partly associated with our first quarter performance, but also due to the strengthening view of the third and fourth quarters for our Electric Power segment.

Our forecasted non-GAAP measures are estimated on a basis similar to the calculations of historical adjusted diluted earnings per share presented in our release, and please review the outlook expectation summary on our website for additional details.

We believe our expected results for the year continue to reflect our opportunities for growth and our commitment to maintaining our strong balance sheet and financial flexibility. We feel we are operationally and financially well positioned and continue to focus on our ability to execute on strategic initiatives.

This concludes our formal presentation, and we will now open the line for Q&A.

Operator?.

Thank you. Ladies and gentleman, we will now be conducting a question-and-answer session. Our first question comes from the line of Noelle Dilts with Stifel. Please proceed with your question..

Hi, thanks. Good morning. And I'm sure you'll hear this a lot today, but congratulations on a really nice quarter. So my first....

Thank you, Noelle..

My first question, I just wanted to dig into guidance a little bit more.

When you look at the high-end of the guidance, can you just give us a sense of kind of what it takes to get there in terms of thinking about uncommitted work? Or is it really just that you have to execute well on the work you have right now?.

Yeah, Noelle. I think from our standpoint, we haven't really changed the way we've looked at guidance other than the fact that we've had a quarter under our belt, and as you see the year and you see the macro markets, they're all strengthening. So it gives us a higher degree of confidence to the midpoint there.

In the high end, we see, we still have some uncommitted. We're just starting on our gas season there on the large diameter pipe. Also our Canadian winter that's in front of us as well. So as we see that and we see us progress through that season, it'll allow us to get better visibility into the other side of the year.

So that's where the high end lies, is in the backside of the year..

Okay. Great. That's helpful. And then as it relates to Stronghold, you had a couple – one competitor in particular talk about some continued disruption associated with the hurricane, so it was nice to see that you guys performed there, performed well there.

Can you give us a sense of just maybe how some of the sub-businesses are performing? And what you think helped drive some of that recovery in what sounds like is a market that's still seeing some disruption?.

Yes. You know, the Stronghold acquisition, we felt like we bought a company that was necessary, the maintenance would get performed year-over-year and that's the case. And we bought exactly what we thought we did. They performed exactly like we thought. And we're extremely pleased. We also see lots of opportunities in that market, that space.

We're not seeing the impacts that others may see. So, we're extremely pleased with how they performed and believe they'll perform the rest of the way and for the long-term for that matter. The management team is fantastic and our opportunities downstream just continue to come in..

Thanks..

Thank you. Our next question comes from the line of Alan Fleming with Citi. Please proceed with your question..

Hi. Good morning..

Good morning..

Duke, maybe you can help us understand or think about your margin guidance in Electric Power a little better. The nine percent you did was the highest 1Q we've seen in at least several years.

I know there were some storm work in there, we know what your guidance is for the full year, but starting the year out this strong, and it seems like you're executing well.

You have big projects like Fort McMurray continuing to ramp, so why wouldn't you be able to do closer to the midpoint of maybe of your 10% to 12% range this year, in a year where you base business is also growing, at least mid- to high-single digits?.

Yeah, we've said it all along that we though the Electric Power business would be in double-digits this year and it will be, from what we see. And if it goes higher than that, we'll need some pull-in from storms and such. Again, we have telecom segment that reports through there, which Derrick can give you the impact on that.

But we like the market, we like the macro market. We do think we're seeing more larger projects, we're bidding larger projects now, continue to see those verbal commitments and such. So, we like where we sit. We don't have Wind Catcher in our guidance. If something like that was to go, it creates more upward end to the margin and upward end to guidance.

So I'll let Derrick comment on the telecom..

Yeah, everything Duke said I agree with. To his point, I mean, as compared to previous periods, telecom is in our guidance at this point. It has some dilutive effect to that.

When we get to the end of the year as the individual quarter, we think we'll be into upper high-single digit range of execution, but here in the first part of the year you're in the lower single digit range and so that's putting a dilutive effect to the overall year for Electric Power.

An additional point is, is that when you saw higher levels of margin in the past, we had a larger contribution of larger transmission projects. As it stands here today, we're executing only on, for 2018, a couple to three of those larger projects. In years past, we've been executing on as many as 9 or 10.

So there's still a little bit of drag that's there for some underutilized equipment, whether that's coming from U.S. or Canada, so there's still an opportunity for margin expansion is there to the extent that we bring on additional large projects.

And then lastly, as Duke said, I mean, to the extent that we have the amount of growth that we have, you've got deployment of resources and G&A, and so as we look forward and think about the growth dynamics that are there, we think we'll have better absorption..

That's good color. My follow-up is on Oil and Gas. Yeah. Obviously there's been some concern about delays in large pipeline projects with the recent change in FERC policy.

So can you help demystify for us what you think your visibility is on mainline pipe over the next year or two? You know what the skepticism is, but do you think there's enough visibility for continued backlog growth in Oil and Gas, at least over the near to medium term?.

Yeah, this is Duke. We see the projects out there, so the opportunities are there. You have your LNG takeaways. You're starting to see in Texas and Louisiana as well as in Canada, so we're starting to see some visibility in the LNG market, which takes a lot of pipe. They use a tremendous amount of gas.

We are seeing the FERC ruling recently on MLPs where it disallows on a FERC line the tax benefit. So that is new. It's new information out there. I do not think it's changed, really the viewpoint that it's necessary to build pipe to these markets and they'll continue to build it.

It may be noisy for a quarter or two till they get it ironed out at FERC, but I do believe most of our customers are looking for venues. Either they're dissolving their MLPs, or whatever they're doing, to make sure that they can continue to build pipe to market and make sure that their rates assess the new provisions there from FERC..

Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc Capital Markets. Please proceed with your question..

Hi, folks. Congrats on the quarter, and I assume the mix shift pipeline win for yourself..

Yeah. We got a good pipeline in Oklahoma. We're proud of it, so we're happy about the award..

Yeah. So, just to get a little more granular, Duke, on the pipe side. It seems like there's some pretty big pipes tied to LNG coming forward. Your comments on Canada were interesting.

Is the (sic) Coastal GasLink perhaps what's driving your enthusiasm there? Or generally would you assume that the LNG build-out which seems a little more solid now in Canada, is really leading to a larger, broader build-out that you're getting excited about?.

Yeah, Tahira. I think if you look at it, there's a multitude of large projects out there. You have Keystone sitting out there, you have Line 3 sitting out there, you have Coastal, you have both Enbridge and TransCanada have lines that feed the LNG exports in Canada. So all those are lines that we're looking at, we're certainly around the edges on.

But beyond that, I mean it takes a lot of feeder lines and a lot of short lines that feed out of those shelves into those larger pipes, so that also is something that interest us in our midstream market. So we're seeing all that come together. We kind of said in the past though, if we saw a bunch of LNG export, you would see us – the cycle elongate.

So any of that, the old pipelines also get us somewhat more enthusiastic about the longevity of larger diameter pipe. That being said, I really like our portfolio of companies that we have. I like how we're delivering on all the macro markets.

So all that being said, just in general, I think our macro market and our ability and our earnings power of the company has never been greater. Our markets are continuing to strengthen, and I can't say it enough on all of our segments..

Got it. Okay, Duke. And then, obviously, the quarter is strong to really support that. And I guess as a follow-up to that, it's rare for you guys to raise guidance in the first quarter, so clearly a sign of the confidence you have. Going forward, as you look, what are the upside opportunities? It seems, obviously, Wind Catcher is one of them.

But outside of Wind Catcher, would you say there are equal opportunities for guidance raises potentially for the rest of the year in both segments? Or are they more pronounced in one versus the other?.

Yeah. I think, Tahira, we're looking at it long term. So if you just look at it, you look at it today, and you say our backlog's $11.7 billion..

Right..

We're sitting on Wind Catcher and other awards in excess of $2 billion today. They're verbally (37:08) to proceed whatever it may be that we see that we could possibly be in backlog depending on how we look at the next quarter and the quarters beyond. So that being said, the markets are extremely strong.

Our base business, we've talked about it, growing single-digits. The CapEx, the OpEx of the utilities continue to grow.

That's really what's driving the business is that 80% to 85% of that base business that continues to strengthen and now we're starting to see these larger projects layer on top of that and so the strength of the larger projects give us a lot of confidence in the outer years and this year included..

Got it. Thank you, Duke..

Yes..

Thank you. Our next question comes from the line of Matt Duncan with Stephens, Inc. Please proceed with your question..

Hey. Good morning, guys. Let me add my congratulations on a great quarter..

Thank you..

So, Duke, on the Oil and Gas guidance specifically, you walked through what you're seeing kind of in every piece of that business, but you didn't change the guidance and your tone is certainly growing more positive.

And if I remember correctly, your guidance in that segment assumes that large diameter revenue dollars are down year-over-year but you're saying you're going to be fully utilized with your large diameter spreads by the end of the second quarter or early in the third quarter.

Those things just don't seem to make a lot of sense together and then when I look through the rest of the business, demand for small pipe around the shales seems to be rising rapidly. You talked about that. You're also seeing good performance out of Stronghold and growth in that market.

So can you just help us a little bit with the assumptions that are baked in to this Oil and Gas guide and what really does it take to take the range up? Is it as simple as we need to get to the end of the second quarter and make sure we're on track on these large diameter jobs? Or is there something else that we're missing?.

Yeah. Matt, I mean, I think the year is somewhat inverse of last year where we had a large first quarter with Sabal Trail and we're able to give little bit more visibility on our Gas segment early.

It's inverse to that this year where you're starting to see the back half with our season's more normal this year, so you're starting to see all of our spreads or starting construction now. We're getting more comfortable that they're going to get in construction. We are in West Virginia with a bunch of work in other areas.

There's risk to those – that work and contingencies. And as we get there, we get started, our productivity rates start to run. We can see it and get more visible on it, but I think I've said in the past on that type of work.

We'll be cautious about how we guide it, but I think by the end of the next quarter we should be able to get more visibility in it and we'll take a different look at it but we're really just starting our big pipe season on the Gas business which will drive the upper end of any kind of guidance adjustment on the Gas side. So our season's just started.

We gave you early guidance, and we're in the early stages of the Gas piece. But as a portfolio of the company, in general, just take the large diameter pipe out, we're strengthening across the board..

Yeah. Okay. So and then second question on that front. You talked about Stronghold. It sounds like the year is off to a good start. I really don't think you're getting any credit for what, to me, was a pretty smart acquisition.

So can you give us an update on that business, on the outlook for that business? How much did it grow year-over-year in the first quarter? And then just downstream demand in general for your industrial services business.

What does that look like?.

Matt, I think the demand is there for sure. As far as what we've said, the $575 million to the $600 million, we'll stand by that as it sits today. They had a good first quarter, which is seasonally a big quarter for them and their own target for the year here. So we're pretty excited about where we sit.

What they do from a service standpoint is certainly necessary in these refiners, as well as the downstream market. So the company continues to take market share. Others are having issues. We continue to get people, superintendents, whatever it may be. Employer of choice. I really like the management team. We got what we thought we bought.

We'll move forward with it. It's a great base revenue business. It allows us to diversify in our Gas segment. If we get some things, some different kind of weather in the first quarter, you would start to see that even in the first quarter. But I think as we move forward and we get the large diameter pipe that that piece of business really shines..

To be clear, how much was it up year-over-year?.

Yeah. What I'd say is, is that its – you're looking at double-digit growth. We had commented that historically they've been five, six years a compound annual growth rate of double-digit. When you look at run rate revenues, 2017 coming into 2018, we're seeing that same dynamic, double-digit for both the year, as well as the quarter..

Okay. Thanks, guys. Congrats again..

Yes. Thanks..

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

Hi. Good morning. And nice quarter. I guess two questions, probably more longer term. How do you guys think about the timeline to achieve the 10% medium to long-term margin target that you guys laid out at your Analyst Day. The revenues are clearly already exceeding that expectation.

So how do we think about that? And what do we need to do to get there? And then my second question too on the communications side, you talked about mid-single digit margins in the remainder of the year.

How do we think about the revenue opportunity in 2019? And what does the revenue opportunity need to be so that this business isn't dilutive to total margins?.

Yeah. Jamie, really, from our standpoint, all the business lines are strengthening. So when we talked about at the Analyst Day, we kind of laid out a $10 billion and $1 billion from an EBITDA standpoint, $10 billion and $1 billion of EBITDA is kind of was our goals and we still stay behind those goals. We're getting closer to the top line.

We got to work on the bottom line, we know that from the margin profile. So we talked about our Electric segment getting in double-digits this year; I think we'll be in there. We're growing a telecom business. It's how much growth we have underneath that also pulls down some of these margins.

And as we look at the distribution business on the gas side, we talked about consolidating some offices, getting some strength out of those investments that we've made in distribution. We're getting that, we're seeing that.

So I think every – all those businesses are starting to enhance our whole portfolio, but I do think you need to look at Quanta as a portfolio of companies which gives us great strength as we move forward.

You've seen it this quarter in a storm where one division or one segment may get hit a little bit, but we have a storm and you get this impact of a storm.

So the portfolio of companies and the way that we're using our specialized skilled labor, the 35,000 plus or running on 40,000 that'll get out there, it's how we're doing that and the solutions we're providing in a portfolio, that allows the earnings power and the growth of the company over the long term.

And I think to put it in a little segment or a big segment for that matter, it's the whole company that's moving forward..

Okay. But three versus five years as we sit here in the growth trajectory that you have? Not to put you on the spot, but....

Well, I mean we've set $10 billion and $1 billion in our guidance, is already at $10 billion. Take out Stronghold at the high end, I mean, the opportunity to certainly get to the $10 billion; can we get to the $1 billion? We need to execute through contingencies. We need to see some larger projects come in.

But I'm not saying we can't even get there this year. I mean it's a stretch, obviously, at the high end to get to the $1 billion. I'd give it three year's timeframe..

Okay..

We see that the growth on the base business. We've said in the past that if you take out the large projects, which we can't control, we'll growth in the high-single digits on the base business, which is 80% to 85% of the business. So if you take that growth rate, I can't tell you exactly where the large projects are going to fall.

I just said that verbally or from an LNTP or Wind Catcher or whatever it may be, you're sitting on another $2 billion of backlog, so at least..

Okay. That's very helpful. Thank you. I'll get back in queue..

Thank you. Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question..

Thanks. Good morning.

Wondering if you could talk about what the mix of large transmission revenues has been in the Electric segment over the last 12 months and what's the burn of it over the next 12 months? I'm really just trying to get a sense of how long you can go before you really need to book a Wind Catcher type project before it kind of becomes noticeable that you don't have a lot of large electric transmission project in there..

Yeah, Steve, we've been running at – for Electric Power with base business in the probably 80% to 90% range now for quite some time for Electric Power. As we look forward to total contribution to 2018, I would anticipate it's going to be in that same kind of range, in that 80% to 90% range overall.

The larger projects that we have today run really through, call it, the early to mid-2019.

But from Duke's commentary, we continued to see opportunities for additional project awards and so I would anticipate this time next year, you can still yet see something that's in that 80% to 90% range of base business with continuing to have contributions from larger transmission projects..

Okay. Great. And then, not sure if you mentioned it or not, but how much did acquisitions add to backlog? And I see that you have more M&A costs embedded in your guidance for the full year. I mean, this small amount relative to what you've incurred already, so just kind of wondering what your future M&A plans are and what the strategy is there..

M&A to backlog from the first quarter was fairly nominal, call it around $20 million or so. Remember that the two acquisitions, one was a small electric power company and then the other one was actually the (sic) Northwest Lineman College which is a smaller component of overall backlog.

And then relative to – on a go-forward basis, I mean, we continue to be opportunistic looking at M&A across Electric Power, Oil and Gas, Canada, U.S., Australia. We do think that there are still yet a number of opportunities that are out there and that we continue to explore looking for ways to add strategically to the overall portfolio..

Okay. Thank you..

Thank you. Our next question comes from the line of Chad Dillard with Deutsche Bank. Please proceed with your question..

Hi. Good morning, guys..

Good morning..

Good morning..

So help me understand the change in your Oil and Gas guidance for 2Q through 4Q? After the fourth quarter, your implied guidance was $3.4 billion for that time period, but now it looks like it steps down to about $3.25 billion. So just wanted to understand is, what's driving that weakness if I'm reading that correctly..

Yeah, I think that we're saying that as it stands here today, our guidance as of the beginning of the year really remains unchanged. We're really looking forward to the second quarter and mobilizing on the individual project themselves. So I would say the low and high of our revenue expectations as well as margin expectations remain the same.

We had a little bit higher revenue here in the first quarter maybe than we were originally looking at, but that was just the standpoint of continuing to work through projects. The dilution associated with that was the headwind from the storm work, which offset that.

So, effectively, as we stand here today, the second, third and fourth quarter dynamics for us are still remaining unchanged to our expectations as to the beginning of the year. And we'll – I think we'll have a lot better visibility when we get to the second quarter on – from a confidence perspective, as well as narrowing of the range..

Got it. Okay. And as I look at my pipeline tracker, the center of gravity is definitely shifting more towards the Permian, which tends to be more open shop.

So, can you remind us how many open shop spreads you have under (49:35), maybe even like the revenue capacity with that business? Also, do you think you can grow your mainline backlog or at least keep it flat exiting 2018, 2019? And then lastly, how do you think about when LNG actually materializes as a kind of a large scale pipeline opportunity, do you think you'll be more like a construction phase in 2019 or it will be more of an award phase in 2019 for that?.

Yeah. So just in Texas we do see a lot of activity in the Permian, both union and non-union, on those larger diameter pipes you can do that work. But again, we can run a couple of spreads, non-union there, on large diameter pipe with our non-union activity. So, yes, we are seeing that. We do see the opportunities there in the mainline.

The large projects are lumpy, as you know. So, again, and when they go into backhaul, can we back fill it? It will just be a lumpy progress, how we look at it. So I can't tell you exactly how that'll come in. There's certainly the opportunity for us to maintain that level through 2019.

It just – we don't know when those projects come into RFQ, RFI type timeframes. So it will be difficult for us to kind of give you exactly when they'll hit backlog. But the opportunities and what we're seeing and the robustness of the market, we're certainly having great discussions with our customers for 2019 and beyond.

And the LNG export, as we've talked about, really it impacts Canada, Texas. It's broad-based. And your midstream business also comes back as – when you get this takeaway capacity in Appalachian. It allows that midstream business to come in. And that's not easy work, and it's big diameter work even.

You're talking 16, 24-inch pipe coming in through the mountains of West Virginia. So that's good work for us. And so we're pleased that you'll start to see that come back as well. So shell plays certainly fill up these big pipes for our LNG export. The liquids are there as well, coming out of the oil sands.

And so we're pretty excited about that market long term..

Great. Thanks, guys..

Thank you. Our next question comes from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question..

Hey. Good morning, guys. Nice quarter.

When's the last time you were fully utilized with your long haul oil and gas spreads?.

Yeah. I mean, I think you – that becomes difficult because we can do two projects in one year, we can do a multitude of different things. So just to say, hey, when are you at capacity, depends on where the projects are.

And when you're in the mountainous regions, there's only a finite number of spreads that can work through the Rockies or even through kind of in the Appalachian region, so. That being said, it's difficult. I don't think we're turning down work by any means, and I'm not sure that we ever have in certain areas.

Depending on the project, depending on where it's at, we're certainly capable of booking work at this point. But in the U.S., from our standpoint, on our mountain spreads, on the tough, rough terrain, I believe we'll be at capacity in the third quarter..

Okay. Yeah. That just struck me as an interesting comment from your prepared remarks.

And then as a follow-up, I wanted to ask about on the telecom side, the city that you won, curious if there's additional cities up for grabs and if you see backlog continuing to build in that segment?.

Yes and yes. I do think that it's a matter for us, we're starting it from an organic standpoint for the most part, so our ability to get qualified, craft skilled labor and deploy them in the field as quickly as possible and least expensively as possible is something that we're striving to do. We made the (sic) Northwest Lineman acquisition.

We were able to have telecom curriculum take those guys, put them in the field fairly rapidly. We really like that acquisition. I can't say enough about how much that does for us from training and craft skilled labor and new markets, and certainly from an organic growth standpoint, the opportunity is there.

We could book work daily, we could book more and more backlog, we could double our backlog. It depends on how quickly we can get people to the field and perform. And I'm more concerned with our performance and making sure that we create the value that we said we would for our customers and deliver.

So we're going to be cautious about how we deploy and how quickly we do, but certainly the opportunities are there. The market's very good..

Good to hear. Thanks, guys..

Thank you. Our next question comes from line of (sic) Andy Wittmann with Robert W. Baird. Please proceed with your question..

Hey, guys. Thanks for taking my question. I think I just have one for today and it has to do with the electric transmission market. And it looks like it wasn't just you guys that had kind of good awards and good results here in the quarter, but the other two public competitors also had really strong bookings.

I was wondering, with that as the backdrop, Duke, are you seeing that the market is tightening in any capacity as you move here through 2018? And is there any implications on the pricing or terms that you're taking on in the market today as you look forward?.

No. We've said in the past, it's really about utilization for us. The market it'll bear a certain amount of return and then it's about utilization and how well we can fully utilize our equipment, people, and resources. The market's there. I've said it over and over.

If you look at the CapEx, OpEx spends of the 20 (55:31) they continue to exponentially grow. I can't – the elongation, we're in very early stages. We talk about these segments and these being in 10-year cycles. I mean we're very early stages of an upward cycle in the Electric business and it's all about replacement, grid modernization.

We're doing all this without very negative low growth for that matter for the most part and most regions are at least flat.

So as you start to see any type of industrial load growth, things like that creates these larger transmission projects and layers on top of this, but we continue to provide solutions to our customers that make sense and we're real happy with where we sit there. Our guys in the field are doing a fantastic job from a performance standpoint.

I can't say enough about the management team we have there and where we sit. Our long-term outlook there is certainly strong..

Great. Thank you..

Thank you. Our next question comes from the line of Alex Rygiel with FBR & Company. Please proceed with your question..

Thank you. Nice quarter, gentlemen..

Thank you, Alex..

Derrick, can you remind us what portion of your revenue is coming out of Canada and maybe help to frame how big that business is today relative to the past peak either from a revenue standpoint or a margin standpoint so we can think about what the upside of that business is over the next couple of years..

Yeah. As it stands, Canada is still running probably in the 15% to 20% range. Of that, that's about the same mix whether you look at Electric or telecom or Oil and Gas. It really runs pretty consistent across the lot of it.

Relative to where it's been in the past peak, that's hard to answer on because of the fact that over five years ago, I mean we've continued to acquire companies in Canada. Five years ago we didn't necessarily have as much of an oil and gas presence as we do today through acquisitions.

So ultimate contributions I'd say are larger today than they were five years ago. I'm not sure I can provide really any other color than that. Going forward, I'd tell you that we continue to also see growth opportunities in Canada comparable to what we see in U.S. for both Electric Power and Oil and Gas.

And we continue to see large pipe project opportunities in Canada. So it's a growing part of our business and I would say that comparable to U.S. with the double-digit growth. I'd say maybe next year and the year after you might see it in that 20% range..

I would agree with that. I mean I think the U.S. grows too, so I think it stays in that range, but the large – we're depressed a bit on our large pipe market as it sits right now in our outlook. If that strengthens, certainly Canada would strengthen as well.

(58:28) you also have some FX there as well that was in the past the dollar – Canadian dollar was a little stronger, so..

And then secondly, can you talk a little bit about cost inflation broadly? I mean, obviously you got fuel inflation, labor inflation, materials are inflating; how is that affecting your business and your margin and how is that affecting your customers' decision process?.

Yeah, I mean, the things that I watch the closest is interest rates and things like that. We're able to kind of keep wage inflation on the Electric side around 3%, 3.5%, something like that. That's where it will iron out. That's what the market bears. The Gas side on these larger diameter projects, certainly, the labor will move.

It'll get bouncy on you, so we take all that into account when we're looking forward on these projects. And taken in – we typically don't take material inflation, things like commodity inflation. So fuel is the only thing that'll move a bit, but we're not seeing any kind of crazy numbers there. We're in pretty good shape. We like where we're at..

And as it relates to the customers' decision process, obviously some of their material costs are going higher; has it affected it at all?.

No. I mean, we have not seen that year. Certainly, everybody would – the steel kind of tariff announcement, this and that, everybody's kind of struggling on what that means, but we've not – everybody's kind of getting around what that says and what that means.

I think in general, the market's pretty stable and everybody is adapting to regulation, whether it be tax rebate or increases in steel tariff. As long as we have good visibility and understand it and understand what's coming out of it from a regulatory aspect, the industry tends to adapt..

It's helpful. Thank you..

Thank you..

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

Thanks. Good morning. Couple of quick wrap-up questions. Did, Derrick, the other expense line item, the $20 million to $30 million previously I think is now $30 million to $40 million.

Would you expect that to alleviate as we get into next year or kind of hold at these sort of levels?.

I think that as we go forward we'll continue to have other types of investments. We've said in the past that, that's a component of our business that we continue to pursue, strategic investments and the like. So I think that – whether it be 2019 or 2020, I'd have a level of expectation that's in there. From a size perspective, that – it's hard to say.

But as it stands right now, I'd probably say that I'd be backing off on that number a little bit going into 2019 compared to 2018..

Okay. And then maybe following up on some prior questions. Obviously, great margin this quarter in the Power business. It wasn't quite clear to me though because you lost a little bit of work, weren't able to execute on some work you thought you could. But you got the benefit of storm work.

I guess net-net, was the storm work in that positive margins in the quarter versus the business you lost?.

Yes..

And some of that's difficult to say, because just the way that it irons out whether it's more positive or not. But definitely from the segment standpoint it is accretive to the segment, the storm margins..

It's just generally hard to quantify exactly what the contribution is. But we do find it to be accretive to the margins for the quarter..

It's utilization, the guys are working long hours to get more utilization out of the equipment, such..

Okay. Got it. Great quarter. Best of luck..

Thank you..

Thank you. Ladies and gentlemen, at this time I would like to turn the floor back to management for closing comments..

Yeah. First I'd like to thank the guys in the field. They're performing the work every day safely and we thank them, certainly, and look forward to performing the work in the future safely. And thank you, everyone, for participating in the first quarter 2018 conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you.

This concludes our call..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..