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

Good afternoon. This is Guru Gupta from Morgan Stanley's investment banking team. I'm here with the MasTec management team for the fireside chat session. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for the members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any further questions, please reach out to your Morgan Stanley sales representative. With that, this afternoon, I have with me Jose Mas, the CEO of MasTec; George Pita, CFO; and Marc Lewis, Head of Investor Relations. George and Marc have been at our conference over the last few years. It's the first time for Jose. So welcome to all 3 of you and special welcome to Jose for your first time at Laguna conference.

Thank you, Guru. Thank you for having us. I think we wish we were in Laguna, though.

Yes. Me, too.

So with that, Jose, maybe I'll start with you. There are a lot of investors who may not be familiar with MasTec's story. Can you give us a short introduction and overview of your segments?

Sure. So MasTec is an infrastructure construction company. We specialize primarily in 2 areas, one being communications and the other being power. Within the communications sector, which is kind of where our history started from, my father started the predecessor company to MasTec in the early 1960s. I joined the company in the early '90s. I became CEO of the company in 2007. And our Communications businesses are made up of everything from wireline construction. So we support all the wireline operators across the country, building their plant, maintaining their plant. We're the largest wireless contractor in the U.S., supporting the wireless carriers with their wireless build-out. So we work for AT&T, Verizon, T-Mobile and, hopefully, in the not-too-distant future, DISH, and building out their network and then really supporting and maintaining what they do. We've got a fulfillment business that goes out and visits people's homes and does everything from security installations to DIRECTV installations, and that kind of comprises our telecom business. And our telecom business is roughly just under 40% of our total business, and then the balance is what we would call Power. Within Power, we operate in 3 different segments. The first is transmission. So we build high-voltage transmission lines and substations for our customers, which are everyone from the investor-owned utilities to the municipal-owned utilities and some private investors. We've got an Oil and Gas business, which is predominantly a pipeline business, where we build pipelines into different basins across the country and some interstate pipelines. And then we've got a large, what we call Clean Energy and Infrastructure business, where we are focused on renewable build-outs, both wind and solar and then any form of waste to energy. So we build biomass. We build biofuels and then we do some infrastructure-related work around really supporting industrial manufacturing. We do a little bit of road work and things like that, but it's predominantly Renewables business. We're fortunate. Since I became CEO of the business, we were just under $900 million in sales. EBITDA was around $60 million in that year. Fast forward to today, last year, we did just over $7 billion. This year, our EBITDA guidance is $800 million. Last year, we did just over that. So we've had a phenomenal run in the last 13 years. We've been very blessed to be in markets that we think are really strong and have great growth profile for a long period, and we're really excited about what the future holds. We think that the opportunity for us going forward is just as good as it's been in the past. And we've got a lot of growth drivers. I'm sure we're going to get into them individually, but we're very excited about where the company stands today.

Jose, that's a fantastic story, and congratulations on such a phenomenal track record since 2007.

Thank you.

You talked a little bit about your Renewables business, and I was surprised how much that business has grown over the last 2, 3 years. So what's all the excitement and growth that's coming in that business now?

Look, obviously, there's a shift in energy focus. We have significant renewable standards across the country. We have a lot of companies talking about clean energy, trying to dedicate more resources to clean energy. This is a business for us that, 4 years ago, it was about a $300 million business. This year, it'll be about $1.5 billion. So we've almost quintupled the size of that business in 4 years, which is pretty remarkable. Even more remarkable, we expect to have really strong growth next year. We expect to be around $2 billion in sales next year. So the growth drivers continue to be there. We started the business primarily as being a wind contractor, right? So we got -- we were in the -- it's a funny story. We were building gas pipelines a long time ago and saw that a lot of the prices of renewables and wind were around where oil was trading, and that's where a lot of the PP -- power purchase agreements were getting priced. So we got into the wind business. We really got into it by just building the conduit structures for the electrical that was being built on them. We figured it was a business we could be fully involved in. So today, we do everything from the site prep work, so we get on to a piece of land. We'll prep it. We'll put up the towers. We'll put the turbines on the towers. We do all the electrical components. We build the substations. We tie in the transmission line from that generating source to the existing transmission line system. So it's been a great business for us. It's evolved. Today, we're doing a lot more than just the typical wind and solar. We're doing stuff in the biomass fields and the biofuels. We're seeing just about a lot of the waste companies looking at how they can turn their waste into energy. So just about everywhere, we're seeing small plants being built. That's kind of our bread and butter. So we've done a good job of really diversifying the type of work and mix that we do within that group. That's led to a lot of our growth. We've continued to gain market share in the markets that we started in. And that solar has become a big component of what we do, which is a relatively newer piece of our business over the last couple of years. So I think we've done a good job of not only managing the existing business we started in, but more importantly, diversifying out to having a really broad-based business. And I think that's part of the reason we have so many growth opportunities in front of us because we touch so many different parts of that business.

And Jose, in your Communications segment, 5G rollout was the big theme. Has the pandemic really slowed down that growth? Or what trends you are seeing now in the Communications business?

Yes. No, look, I think 5G is going to be a driver of growth for our business for a long time. I don't think spend is necessarily slowed down. I just don't think spend has ever started the way we all anticipated it to start, right? So I think we're on the cusp of seeing dramatic growth. You almost have to go carrier-by-carrier and understand their strategy and what it is that they're doing. We have some big spectrum auctions that are coming in December that are important for some of our customers that I think will be a catalyst for future growth. But look, our business has been solid. We've been growing north of 20% a quarter for a while now in our base wireline and wireless business. We've been training significantly from a resource perspective to really get ready for the growth. Some of that training slowed down via COVID. When COVID hit, we kind of slowed down a little bit of that training. Our customers were committed to deploying as fast as they can. We need fiber to be able to deploy on the wireless side. So we're -- we've been impacted a little bit by some of the permit delays across municipalities all over the country. If you think about how our work works, you've got to get permits in a lot of local jurisdictions. When COVID hit, a lot of those jurisdictions moved to remote. In some areas, they did a very good job of switching over to a remote permitting facet, where you got permits in a timely fashion. Other municipalities didn't work as smoothly. So we've been battling really a permit issue through most of 2020. A lot of the backlog that we've had, we were able to work through. We've been building backlog. Things have gotten dramatically better. We had a really good second quarter in our Communications group. Margins exceeded what our plan was. Part of that is due to our slowdown in training, right? So we've been training for a big uptick in revenue. We've slowed down the training during COVID. At some point, we'll start training back up, but there's definite -- so we're having a really good year. We're having an excellent margin year relative to what we did in 2019. There's a lot of growth coming. I think we're super prepared for it. I think we're incredibly well positioned for it, and we're very excited about what the future holds. 5G is going to be revolutionary. It's going to be unlike any other build we've done. It's all about densifying the network. So it's about taking the network from the number of touch points that exist today, and it's going to be a multiple of those touch points. All of those touch points creates opportunities for us to not only do construction activities in the next couple of years but, over time, to maintain their networks. A lot of the revenue that we've driven over the last 4 or 5 years have all been maintenance driven. There hasn't really been a shift in technology. So we're excited to know that, in 5 or 7 years, we're going to be maintaining a network that is vastly greater in size than the one that we're maintaining today. And I think just in that, from a long-term perspective, there's some awesome maintenance opportunities for us from a revenue perspective around maintaining much larger networks than what exists today.

Great. And you did a QuadGen acquisition recently. What was your thinking for that service offering?

Yes. Look, we made that acquisition almost a year ago. When we think about our traditional services, we've been more on the building and maintenance side. QuadGen is more of a technology driver within the space. They use a lot of software and engineers to do optimization and integration of network. So every time -- so if we think about what's happening to these networks, when we just talked about it, there's going to be a lot more touch points on these networks. They're going to be much more complicated and much more vast. The amount of optimization that's going to be required on these networks continually to make sure that those signals are optimized, that the traffic is optimized, is going to be a huge service. It's a huge service today, and it's one that we think is going to dramatically increase over time. We've got a significant number of engineers that came with that acquisition, a lot of them based in the U.S., and a big portion of them also based in India. So what we like about this business is lots of things, right? One is it's a different service offering we offer our customers. It integrates perfectly with the work that we do. We've seen great response from our customers and their desire to use us for those services. And then it also gives us the opportunity to expand, quite frankly, internationally. Because it's a service, it doesn't require a lot of on-site people. So it's not a construction heavy workforce. It's a software engineer-based service. So we're able to offer to customers, wherever they are, optimization services, integration services, with very little on-field resources. And that makes it something very exciting for us to be able to grow into, not just in the U.S., but quite frankly, internationally, with lots of our customers that are doing things outside of the U.S.

Then moving on to your energy and pipeline segment, like the natural gas pipelines have been the biggest profit center for MasTec for a long period of time. But with the commodity price volatility, how is that segment doing? It looks like you still have a record backlog. So what are you seeing? What's the outlook in that segment?

Yes. Look, I mean, we're predominantly based on natural gas. So 95% of our business has been in gas-related pipelines versus oil. There's no question that COVID has had a big impact on demand worldwide of some of the commodities and the natural resources. So it's going to have an impact in the business, right? We're seeing a slowdown in the amount of activity of new projects as a lot of our customers really try to figure out what their ultimate CapEx plans are going to look like. A lot of our customers are working on reducing debt today, especially with where commodity prices are. We're lucky that most of our customers have good cash flow profile. So we feel confident that they'll make it through the cycle, and they'll come out stronger on the other side. We're also blessed in that we have a lot of backlog, right? So we're sitting on some large projects that are -- that we're going to be working through probably the first half of '22. So that gives us an enormous amount of visibility in a troubling time. We also are confident that, over time, pricing is going to improve. So we do think in talking to our customers that there will be a lot of opportunities that start to come out middle of next year in '21. Again, since a lot of what we do is natural gas related, we're going to see a shift of where natural gas comes from. When we think about this winter season, a lot of the natural gas has been coming from the Permian. That's been -- a lot of the gas related to the oil production that's been happening, that's kind of stopped. So we're going to see natural gas start coming from different parts of the country. A lot of the things that we do are transportation related. So they're switching to a pipeline from truck and railing, which is much more cost effective, especially in a declining commodity price environment. So we think that's where a lot of the activity is going to drive from in our business second half of '21 into '22. Our Oil and Gas business will be down this year. It'll be down about $1 billion versus where it was last year. Yet our EBITDA is virtually flat, just down a couple of percentage points from '19 to '20. So we think that's a great story in and of itself. We think '21 is going to be a good year because of the backlog that we have. So we think it'll be a very similar year from where we were in '21. We would expect some decline in '22 without a changing price environment. And we think we're well served in the rest of our businesses where they'll more than offset whatever challenges we'll have in our Oil and Gas business. So look, we were very bullish on the long-term nature of that business. We think we're in a great place. We think we have a great brand. We know it's going to be a challenging environment for the next couple of years. Luckily, the rest of our business is going to more than make up for it.

And then electric transmission, which is a smaller segment for you, what sort of growth trajectory are you seeing in that segment?

Look, today, it's around $0.5 billion segment. We've talked about winding all of our segments to be north of $1 billion. We've done a good job from a backlog growth perspective in that segment as well. We had a couple of slowdowns this year relative to COVID in some areas, where some permitting got delayed. But we're bidding a bunch of things right now. We're really excited about what '21 is going to hold for us. We expect a nice year of growth in that business in '21 relative to '20. We think that, that segment organically has the opportunity to reach the $1 billion sales mark in the next few years. We think there's a lot of M&A opportunity there as well. So we're -- again, it's -- when you look at all of our segments, with the exception of our Energy and Oil and Gas segment, we feel really good about where we're headed. The Clean Energy and Infrastructure segment is going to have a ton of growth in the next couple of years. Communications, mostly driven by 5G, is going to have great opportunities. Transmission is going to have great opportunities. So again, I think our diversified model gives us a lot of opportunities in times like these to really take advantage of those areas where we have significant growth opportunities and really manage through whatever down cycles we see in any of our others.

Shifting to financials and the balance sheet, George, a question for you. You've refinanced your senior notes maturities, which was due in 2023, and that was a big success. What was your thinking around the timing and refinancing?