2018 was another strong year. We continue to emphasize the strength of our workforce and our self-perform capabilities across strong end markets. We believe our investments in craft skilled labor will continue to pay dividends for many years, as demand for our base business work continues to drive our top and bottom lines and the large project bidding environment remains robust.
Upon transitioning into the CEO role in March 2016, our five-year plan to create stockholder value included the following key elements:
- Focus on the base business to increase earnings stability;
- Improve margins in each segment;
- Generate $1 billion of repeatable and sustainable adjusted EBITDA;
- Provide solutions to our customers through deep collaboration;
- Create growth platforms through service line expansion in the utility, industrial and communications industries
We have grown revenues considerably over the last three years. But more importantly, we have increased profits faster than revenues during that time and improved our return on invested capital. Many of the goals we accomplished in 2018 moved us well down the path of achieving our five-year goals.
Numerous Accomplishments in 2018
Quanta accomplished a great deal in 2018, and while we are proud of these achievements, we remain focused on getting better. We continue to believe there is opportunity to create significant stockholder value as we execute on our strategic initiatives, which include continued margin expansion, adjusted EBITDA growth and improved return on invested capital. Some of our significant accomplishments in 2018 included the following:
- We increased adjusted EBITDA by 27% as compared to 2017, surpassing $900 million for the first time in Quanta’s history;
- We ended the year with record backlog of approximately $12.3 billion, which includes record twelve-month and total backlog for our electric power segment. This is noteworthy and demonstrates the strength of our core operations, considering we burned off significant backlog from the Fort McMurray West electric transmission project in 2018, the largest project in Quanta’s history.
- In response to several major severe weather events and wildfires in California during 2018, we deployed more than 5,500 line workers to support and assist multiple customer’s power restoration efforts.
- We continued to focus on positioning our base business for long-term profitable growth, as evidenced by 21% growth in master service agreement (MSA) revenues, in 2018. We accomplished this through new program agreements, increased MSA share and service line expansions with many existing customers.
- We ended 2018 with communications backlog of approximately $760 million, a 20% increase from 2017. Our U.S. communications operations added 13 new customers, more than double the prior year, and we increased our penetration with a number of large communications providers. Importantly, our U.S. communications operations significantly improved their profitability in the fourth quarter of 2018, and we expect them to grow both top and bottom-line results in 2019.
- We demonstrated our commitment to stockholder value and our confidence in Quanta’s prospects by acquiring $451 million of our common stock during 2018, and declaring an initial quarterly common stock dividend in the fourth quarter of 2018, the first in Quanta’s history.
Well-Positioned in Large and Growing End Markets
Quanta’s end markets remain highly active, as evidenced by double-digit revenue growth in both of our segments in 2018, and we continue to believe we are in a multi-year growth cycle. While larger projects capture the headlines and generate excitement, smaller projects, maintenance services and everyday work drive much of our growth. We estimate this type of work grew more than 20% and accounted for approximately 80% of our revenues in 2018. Looking forward, we expect these services to remain robust and be the foundation of our business, and they currently account for approximately 90% of our revenue guidance in 2019.
We operate in a variety of large addressable markets, and in the aggregate, these markets account for more than $100 billion dollars in annual spend. We believe opportunities within our end markets could grow capex and opex spending at a mid-single digit compound annual growth rate over the medium term, with opportunity for double-digit growth in some periods.
Quanta has strategically focused on diversifying its operations across services lines and geographies. This approach is designed to help mitigate many aspects of risk in our business, including customer, labor, project, permitting, geography, execution, and weather risks. We believe Quanta’s diversity, scope and scale and execution capabilities are unique in our space and set us apart both operationally and as an investment. We believe our portfolio of companies, services and geographic diversity position us to profitably grow over time and through various business cycles.
Business Model Evolution to Meet Changing Customer Needs
The traditional electric utility model has evolved over the past 20 years for many of our long-standing customers, from being heavily focused on fossil fuel-based electric power generation, to an advanced integrated utility model that has a heavy focus on electric transmission and distribution investment, an increasing focus on gas distribution and increasing ownership interest of pipeline infrastructure. Quanta has strategically evolved forward with our customers, meeting their needs and making them stronger. This has allowed us to collaborate with our customers and create unique solutions throughout the value chain.
Our utility customers continue to deploy capital into electric and gas transmission and distribution programs for grid modernization and reliability. Our utility customers are accommodating a changing fuel generation mix toward natural gas and renewables, replacing aging infrastructure and strengthening systems for resiliency and to support long-term economic growth. These programs are multi-decade modernization initiatives intended to create robust and reliable delivery systems for the future.
Quanta is embedded in the fabric of the North American utility industry and an important resource supporting our customers’ efforts to execute capital programs that are designed to benefit the rate payer. These dynamics should provide Quanta with a transparent and large regulated end market that is growing and resilient to economic uncertainty. In fact, more than 60% of Quanta’s revenue is directly tied to regulated electric and gas utility customers, which is repeatable, sustainable and core to our business.
Communications Infrastructure Services – A Growth Opportunity
Currently, our communications infrastructure services operations are reflected within our electric power segment. These operations, in particular our U.S.-based communications services, ended the year on a strong note, with revenues growing more than 50% in 2018 as compared to 2017. We expect our communications operations to generate approximately $500 million in revenue in 2019 with mid-single digit operating income margins on a full-year basis. We continue to believe we have the opportunity to operate this business with a double-digit margin profile over time as we continue to scale our operations.
Pipeline and Industrial Services
Our pipeline and industrial operations grew strongly in 2018, driven by base business activity in our natural gas distribution, pipeline integrity and industrial services operations, as well as significantly greater larger pipeline project activity. We continue to optimize the segment and remain focused on improving its margin profile. Furthering these objectives, we have taken steps to exit certain oil-influenced operations and assets, which we believe will have a favorable impact on margins going forward. Our gas distribution and integrity operations expanded their margins in 2018 as organic investments during the prior year began to pay off. Further, our industrial services group had a record year in 2018 and is well-positioned for 2019 and beyond.
We anticipate activity levels for the larger pipeline project market to remain elevated for at least the next few years, as there is a need to move the record volumes of hydrocarbons being produced throughout North America to demand locations. Additionally, the potential for LNG export could extend this cycle, as LNG facilities are the largest consumers of natural gas and many would require new pipelines to feed their facilities.
Continued Commitment to Our Customers and Our People
We believe our industry-leading training and recruiting initiatives will ensure that we have the very best craft skilled labor and enhance our ability to collaborate with our customers on future workforce needs. This further differentiates us in the marketplace as a strategic solutions provider.
In 2018, we continued to lead the industry in safety, which we believe starts with training. We incrementally invested in our training efforts with the acquisition of Northwest Lineman College, or NLC. Since acquiring the college, we have complemented their lineman curriculum with new communications infrastructure and natural gas distribution services curricula, which is allowing us to place employees in the field faster and increase their productivity when they get there. In 2018, NLC and the Quanta Advanced Training Center at Lazy Q Ranch trained more than 5,000 Quanta employees through various programs.
Man hours worked increased 18% in 2018 to record levels, and we ended the year with 39,200 employees, an increase of approximately 20% over year-end 2017. Despite these significant increases, our incident rates continued to trend downward and remain well below the industry average. This is a credit to every employee in our organization and their diligence to own safety and drive continuous improvement throughout our company.
Ready for the Next Twenty Years – Let’s Go!
Quanta performed well operationally and against our strategic plan in 2018, which yielded record results. Our end markets are strengthening and our visibility into those markets is improving, and we continue to believe we are in a multi-year upcycle with opportunity for continued record backlog and results in 2019.
We expect our base business to continue to grow. We see opportunities for larger electric transmission and pipeline project opportunities to materialize this year. There are continued opportunities for multi-year alliance programs over the near and medium term, and we expect robust growth from our communications infrastructure services operations with improved profitability.
We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution and best-in-class field leadership. We will pursue opportunities to enhance Quanta’s base business and leadership position in the industry and provide innovative solutions to our customers. We believe 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 of our stakeholders.
To close, we appreciate the ongoing support of our stockholders and your confidence in Quanta. Special recognition is owed to our family of Quanta employees, whose commitment to excellence resulted in another record year. As 2019 kicks off our third decade of operations, I believe it represents opportunity for the type of year that Quanta was originally founded for 20 years ago and establishes a new base against which we can measure ourselves. Let’s go!
