MasTec, Inc. (MTZ) Earnings Call Transcript & Summary

Great. Well, thanks, everyone here in attendance, for joining us for this last session of the day. So my name is Adam Seiden. I'm the machinery and construction analyst for Barclays. In this session, we have representatives from MasTec. So to my right is George Pita, the CFO. And in the audience, we have Marc Lewis, from Investor Relations. So the format of this session, like many of the other ones that you probably attended today, will be a fireside chat. So we'll spearhead that from up here between George and myself. As we get towards the end of the last 5 minutes or so, there will be an opportunity for open Q&A. So feel free to raise your hand and we'll get you a mic. So what I'll do is I'm going to pass it over to George just for maybe some open introductory comments just to level set what, who MasTec is for those that are newer in the room. We'll probably move to audience response a bit later in the presentation. So we'll just dive right into fireside chat after that. So George?

Great. Good afternoon. Thanks for having me. Before we go any further, I wanted to acknowledge the most recent addition to the Barclays Research Team, [ Evan Blake]. Congratulations on your son on Saturday.

Thank you. I appreciate that.

Marc and I were debating on the way over here, you're either a hero or you're more like he and I, which we're dying to get out of the house after having a second child. So we'll decide from there.

Appreciate it.

Thanks for having us this afternoon. Just before I get started, our slides are available on our website. Please make note of the forward-looking statement commentary that's on there. Excited to be here today. With MasTec, we're a diversified E&C contractor in North America, primary to North America. We operate in 4 different segments. We're coming off our 2019 year. We'll be reporting that next Friday, the 28th. So Friday, the morning, if anyone's interested. And we expect, by all accounts, we'll have a record year in 2019. We've been a major growth story throughout the last several years here in North America-based infrastructure and look to continue those trends, we believe, in 2020. We're expecting record year in 2020 as well and look forward to big things. If you look at what's driven our business -- I guess maybe I'll just take a step back. When I say E&C, I'd like to point out one thing. We're in the E&C space. E&C space, generally speaking, has a couple of warts to it these days and some issues in terms of investor perceptions. And I feel like it's important to note that at MasTec, while we're in the space, we really have a different risk profile than most in the space. And I say that because about 1/3 of our business is recurring services. So we have a recurring, what we call a master service agreement business, which is different than most E&C, where primarily everything is a project-based scenario. And I think in general, when you look at our projects -- and we'll talk more about some of those in a minute, in general, our projects have a risk-reward profile that fits MasTec and I think is a little bit on the safer side, if you will, than most of the E&C space. We typically don't do multiyear projects. We typically do projects that are complete within 9 to 12 months. We typically don't have big procurement risk. So we're not trying to bet on the price of steel for several years or worried about foreign currency exchanges on projects and what labor rates or labor exchange rates might be and labor inflation might be 3 and 4 years out because our project duration is typically smaller. So I think that shows up in our execution. If you look at our history over the last 10-plus years, we've had a very steady, significant growth pattern and improvement in trend. And I think understanding a little bit about MasTec from that perspective is important. Now with that, what do we do? We operate in 4 segments. We have a Communications segment. For 2019, that's about $2.6 billion. We do 3 things there. We do wireless construction services, where we are the largest wireless contractor in the United States. We do about 30% of the territory for AT&T. In wireless services, we perform things on tower. We perform antenna systems on tower. We do small cell deployments. We do distributed antenna systems. We typically will do whatever tactic is chosen by a wireless carrier to densify, improve and maintain the wireless network. We're going to talk about that. We are in the advent of major improvements and additions to the network with 5G that we're going to be a big participant in. It's going to be a big part of our growth story going forward into 2020, '21 and beyond. So we'll -- I'm sure we'll talk more about that. We also do wireline services, fiber services, which is underground plant. Historically, that business was driven more by subdivision extensions or fiber-to-the-home expansion. And that's where you ended up adding addition to the fiber. These days now, as we move towards the 5G rollout, we're seeing increasing portion of our work being driven by underground fiber needs for 5G. Again, we'll talk about it. That's another major trend that, together with wireless and wireline and what's going on in 5G, are going to drive a lot of growth for us for many years. We also, in this segment, perform, on a limited basis, a couple of hundred million dollars to -- is we perform install-to-home (sic) [ install-to-the-home ] services. We roll technicians and perform services to -- for DIRECTV. Another segment that we have is we have our Oil and Gas pipeline segment. There we provide services in the U.S. and Canada. We do both union and nonunion work, so we're known as what's called double-breasted. And we do some facility work, more midstream shale work, long-haul pipe work, a combination of all the above. And over the past several years, we've ridden a very strong wave that's grown our business from $1.5 billion to a little bit north of $3 billion. We'll talk about it. 2019 shaking out to be a very strong year, both from a top line perspective and a margin perspective. And that business, for us, is something that we have a very strong degree of visibility in. We'll talk about it. But suffice it to say that in a market condition perspective, there is greater demand for the service we provide than there is capacity to provide it. And consequently, we have a stronger degree of visibility on future project activity than we might have should that condition not exist. So that business has been a big part of our growth for the last several years. Although we're kind of morphing into a communications story, we think that's going to stay in this low 3 to mid-3 to high 3 range in terms of billions of dollars on revenue going forward because we have a sizable need for infrastructure in the country. And then we have 2 other segments, one, which is our Power Generation group. Our Power Generation group, again, going back to who we are and as opposed to the general E&C space, does not mean we're doing some major facilities overseas that are multiyear projects. We're doing wind farms, solar farms, biomass facilities. I'd say typically between $75 million and maybe $150 million to $200 million in size and typically done within 12 months to -- 9 to 12 months. So a very different risk profile. That business has grown nicely. It was $300 million 2 years ago. As we close out 2019, right now, it's approaching $1 billion, and it's going to grow again in 2020. So we've had sizable growth in the last 2 years as we've seen trends towards distributed generation, which are smaller facilities that fit what we do, coupled with the fact that you've got renewable power standards on from various states, and we've diversified our business. A couple of years ago, we were primarily a wind contractor. Today, we do wind, solar, biomass, so we've done a nice job of positioning that business for growth. It kind of reached -- it's going to reach, we think, this year 2020, a milestone level, which is $1 billion, which is a big thing for us, given that it was a $300 million 2 years ago. Related to that business, we also do Electrical Transmission lines, and we work for all the tier -- all the investor owned utilities. The trend in that business, that's about half -- a $400 million business for us. The trends in that industry are such that we believe it's conducive for that segment to show some nice growth here over the next several years, namely, again, if you go back to the power side, the fact that the generation is now being -- coming more and more from renewable power standards and from renewable sources, which are in different locations, that requires transmission line infrastructure. So that's a trend. In addition to that, the fact that if you look at the East Coast and all the issues that are happening in terms of storm hardening and storm failures from hurricanes, that's a major trend, along with just the general aging of the grid. And if you look at the western half of the country, fire hardening and grid aging are major factors there as well. When you pull all that together, we think it's a good business for us that, again, today, being $400 million is relatively small. If our total volume for 2019 is going to be 7 and change, in terms of size, it's relatively small today, but I think both the Power and Transmission groups will be supportive of our growth. While the major story may be 5G and communications growth, I think those both segments will be good expansion points for us going forward.

Excellent. Very comprehensive. So if we -- maybe we'll dive into Communications first. I think that's probably on the minds of most folks in the room. So for multiple years, we've talked about the sizing of the opportunity in 5G and just like how big of an opportunity it could be. And the answer is big, correct? We know that. But where -- I guess, from your seat and MasTec's seat, like, are the pieces in place entering 2020 that this could be the year where you start seeing some real acceleration across the broader industry, which then would translate into some good things for you guys?

I think we certainly expect a nice growth in this segment in 2020. I'll talk more detail of this next week and margin enhancement. That's not news. That's what we've been saying for quite some time. I would look at the communications opportunity. And while I think we'll -- we're going to certainly see trends in 2020 that are developing over the year. And certainly, recent events, right? We'll talk about merger activity and approvals and whatnot are also supportive of that. The communications opportunity for us, I think, is longer term. And while we'll improve in 2020, I would, by no means, think 2020 is a peak year for my Communications segment and my opportunity. And I say that because when I look at what's happening in -- if you go back, right? Let me just take a couple of step backs and say what's happening with 5G and why. 5G is going to be built very differently than 4G, right? 4G today is based on a network of a couple of hundred thousand towers. We climb those towers. We're putting antenna systems on there throughout -- on a continual basis as throughput continues to expand. So you might have 3 antennas or 3 carriers, and then you have more throughput coming and you have to add a fourth or a fifth or sixth carrier. So we're constantly adding capacity to the network today as it's currently constructed on a tower basis, simply to keep up with the throughput growth that's happening as we use the network today. What has us excited about 5G is 5G, and our customers have said this, is much more of a growth capital spend and a new revenue source and a new utilization source of the network than what we're doing today. 2G to 3G to 4G was, in my mind, somewhat maintenance capital, defensive capital to maintain your market share. 5G is much more about robotics, telematics, drones, smart cities, traffic systems, autonomous vehicles, usage of the network that doesn't exist today. And because it's being built with that in mind, it's going to be built in a different manner. And that different manner, effectively, is being built to handle a much greater level of throughput. So as much as throughput has changed and you think about it -- go back to '07 when the iPhone was introduced and think about what we're doing today and how different that is. I would wager, if we fast-forward '15, we'll be looking back today with a similar kind of look, saying, "Wow, back then, we didn't do X. This didn't happen," because the network is meant to be revolutionary. So our carriers and our customers are looking at that saying, "I need to get in this game, and I can't fall behind because I don't want someone else to have the first-mover advantage." So there's an element of top-tier capital spend that I look at, right? I think when you think about capital dollars and they're all fungible and everyone's got their metrics and everyone has to manage their balance sheet accordingly, I think 5G capital rises to the top of the capital pool, if you will, from my customer's perspective. Now the build-out is different. I mentioned kind of why. But since -- because it's meant to improve the -- let's say, on autonomous vehicle, you can't have latency. So today's network is a couple of hundred thousand towers. You might transmit your GPS from your car to a tower a mile away, it may take 3 seconds. And when you're doing your Waze or Google Maps or whatever you're doing, and that's currently the way it operates today. Once you hit the tower, you go into the existing telecommunications network and the existing fiber, and that throughput is moved through the existing fiber. 5G will be built in a hub-and-spoke model. We will have a couple of hundred thousand towers. You're going to have equipment change-outs on all those towers with not one antenna but multiple antennas over time. So there's going to be years of tower work. And then in addition to that, 5G is going to be built with small cells. And if you think about small cells and if there's a couple of hundred thousand towers, think about small cells being 5 to 10x as many touch points as towers going forward as this develops. And those are all built -- will be built in cities on top of telephone poles, traffic lights, rooftops, 15, 20 feet in the air. And the good news is that the systems -- the wave technology you're using is much faster. So it's going to travel much faster. The bad news is it's only for a short period of time or short distance. So you have to have multiple touch points. So the network going forward is being built differently with a hub and then all these spokes. What does that mean? Well, a couple of things, right? One is all the small cells have never really been done. And frankly, I think -- well, in 2020, I would look at our forecast and think we're going to do more small cells in 2020 than we did in 2019. I still don't know that I'd characterize it as transformational, if you will, to the overall network, I think that's more '21, '22, going forward. So the small cells then get deployed and then, as I mentioned before, you have to get into the underground communications network. Where the small cells are going to be deployed, there is no connectivity, so you have to run underground power or underground connectivity to get those small cells connected. So now -- I started mentioning before, now you have underground work that's required to support the 5G network. You add to that, another thing that Verizon's doing called One Fiber, Verizon's looking at all the major markets where they're not the incumbent telco. And in that example, let's say, we're here in Miami, if you're a Verizon customer, you transmit using their spectrum and their antenna system to a tower, but when you hit that tower, Verizon has to pay the local incumbent telco to move that traffic, and that traffic is not their priority. Verizon is saying, "I'm building rings throughout all the major metro markets. And I'm going to have a better, faster underground network." Why? Because they're building for the future of a much bigger, denser need for throughput. So between the combination of what's happening on tower, small cell, now you add to that the specter of what's happening with the Sprint-T-Mobile merger, which is a positive for us. It's a positive for the industry. If you look at what's happened in the industry for the last probably 6 months of 2019, maybe into a little bit of the first half or the first quarter of this year, there really has been a minimal spend by those players in infrastructure because they didn't know where they were going. With more finality will come an increased level of spend over 2020 by those players. I think we're well positioned to partake in that in a more meaningful way. And then you have the entrance of DISH as a true fourth player, which once again, needs more tower/small cell, other work. And you put it all together and you can see why we are extremely excited about the opportunity in front of us relative to Communications and why -- while I say 2020 is going to be a good year, we're going to be much better, I don't think, by any stretch, that's the end of this period. It's going to take several years to build out. And ultimately, big picture, what drives the need for what we do is throughput. And if I'm half right about what 5G is going to be, that will drive a lot more throughput over time, which is going to drive other evolutions and other changes over time.

Now with all this work that, seems like, there is to do and -- do you have the capacity to really perform what's coming your way, whether it's from the existing carriers or maybe that, the fourth player in DISH, et cetera? So where do you guys sit labor-wise, given that you have built up your labor force a bit over the last couple of quarters here? And where does that need to go in order to execute on all this work?

Well, I think it's an issue that we significantly invested in 2019, adding capacity. We see a chokepoint, if you will, on tower crew capacity. We experienced that -- a bit of that in early 2019. It cooled off a little bit when some of the -- some players slowed spending a little bit, but there was already a push on that. And frankly, we probably could have done a fairly more increased size of volume in 2019 had we had more capacity available. So what we've done -- what we did during 2019 was we invested significant amount of time, resource and cost, operating costs in training -- identifying, training, recruiting and on-the-job training with tower crew capacity. We think that's going to bear fruit in 2020. We certainly are building that with an eye towards improving our ability to manage not just existing customers, but hopefully, new customers as well, their tower crew capacity, needs and at the same time, once we kind of roll off the on-the-job training portion, obviously, that means you now have -- think about it, let's say it's a 4-man crew. I've got 8 guys doing it in 2019 working through this because they're training with them. And they're working. They're on the job, but they're not as effective as they should be because I've got extra people. As we move to 2020, that comes off, and we start seeing the benefit of that on the margin side. So the industry is constrained, in general, on tower capacity. We've invested significant monies in 2019 in order to add to that capacity. We hope to monetize that here in 2020. And if anything, again, recent events, when you think of merger activity, that generates more work because there's integration work that has to go on tower. Obviously, a new entrant would create more work. So we think that's the right move, and we think it will bear fruit for us in 2020, frankly, '21, '22 as well.

Got it. Maybe shifting gears to Oil and Gas a little bit. I think you mentioned a low 3, mid-3s, high 3s sort of number. So how would you say your confidence then is going out into 2020, '21, given that this is -- that's kind of where you see revenues? Is there a mix shift in terms of the work that's being done? I know we had a little bit of one in 2019 to a bit more Permian work. What -- how do you see that evolving over the next couple of years' time?

Yes. Look, I think when I take a step back during 2019, right, we're going to be $3-plus billion in revenue. And our margin profile right now, if you look at the numbers through Q3, is in the 20-plus percent range. We'll be in that range as far as the full year is concerned. So that's a very strong margin profile performance. And normally speaking, we would say that we expect the margin profile of our Oil and Gas group to be in the high teens, not necessarily the 20s, right? And that's probably our view going forward, right? If we look at 2020, we think we're going to grow top line, and our margin profile should be back to the high teens. The reason for that change is not necessarily anything in terms of pricing or issues associated with jobs, it's simply a mix issue. Because what's happening in the industry, I mentioned earlier that from a pipeline construction perspective, there's more demand than there is capacity to build, right? That demand is exasperated by the fact that many of the large projects that are being built in this country, some of which -- many of which we've worked on, typically, would have taken 9 months, 12 months to build, might take now 2 years. And what's happened on those jobs is -- the reason they're taking longer to build, it's not because there's a change in the actual construction metrics, but what's happening longer is that because of regulatory, judicial or other actions, there's a lot more disruption to the actual construction, which requires move-arounds, stoppages. There's a lot more activity that's not necessarily direct production that happens on those jobs, that is increasing cost. And as a consequence of that, those jobs have morphed from what used to be a unit-based contract where we would bid a job, put a price to it. And I call it unit because it's important to understand that even our noncost-plus traces (sic) [ basis ] work is not necessarily fixed. It's what we call unit-based. We bid a job at a price based under certain assumptions. And if there is more rock or more foreign lines than what we estimated, there's an adder to the contract that then allows you to adjust price accordingly, right? So the contract kind of morphs with the conditions on the ground. In the case of some of these long-haul projects, what's happened is they've taken a lot longer to build now because of these things. They really can't predict it. That's not a risk profile or a risk that, as a contractor, we absorb. So we've morphed these costs -- these contracts into cost-plus. By nature, they become much bigger because they've taken longer. And by nature, they are on the lower end of the margin scale. They're riskless but they're on the lower end of the margin scale. So when you look at our '19 versus '20, we've talked very publicly about the fact that we moved $500 million plus of revenue, and that's on a cost-plus basis because of regulatory issues. We broke early for winter, deferred that work. We're going to start that back up now in 2020. And by moving that lower-margin work out, the margin rate for 2019 went higher, not because anything uniquely changed on my cost-plus or my unit-based projects but because the mix changed. And we -- 2020, we would expect that to be more of a normal mix. When I go back to your question on visibility, I think it's important because of the condition about contractor capacity not being up to the demand. We are in a market where we have a much greater degree of visibility about follow-on projects and future project activity than we might have if that were not the case. So we are in discussions with -- direct discussions with -- one-on-one discussions with a number of clients for activity now -- not just 2020 activity. Obviously, we pretty much got that. But 2021 and in some cases 2022, where we're having preplanning, project planning, one-on-one discussions about activity that we expect to begin in future years. That visibility and that direct line is what gives us confidence about this business being in a very elevated fashion for some period of time because we see that on individual specific projects. I mean they obviously have to come together. We got to get them. But we're in a very good position from a preplanning perspective. In some cases, as the year progresses on, we have limited notices to proceed. We have breakup fees. If we don't -- if it doesn't proceed, we have protection. So the capacity constraint is a concern that's manifesting itself and giving us visibility to future follow-on activity, which is why we feel very good about our business beyond 2020 into 2021 and maybe to as far as 2022. Beyond that, I don't know if we're sure we have direct visibility, but there's -- it's something that -- really, when you look at the country and depending on where the country goes from a production standpoint and an export standpoint, there's significant opportunity, potential significant opportunity for us as far as infrastructure is concerned to continue a significant build-out. And in general, I would tell you that as production increases, there is more of a general infrastructure need on pipe period that's less cyclical than I think the market just gives it credit to be.

Sure. So just to add, so as you sit here today, you don't have forward concerns about where that demand goes for that business?

Correct.

Okay. Cool. So maybe let's shift to the audience response questions real quickly. So there's a pump Blackberry device on everybody's table over here, including one right here.

Can I ask myself a question?