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

Good morning, and welcome to the Eighth Annual Crédit Suisse Industrials Conference. My name is Jamie Cook, and I'm the Machinery and Engineering & Construction analyst at Crédit Suisse. In terms of the format for today's fireside chat, I will moderate the Q&A with management. If you have any questions, please feel free to e-mail me at [email protected]. So without further ado, I'm very pleased to introduce the management team of MasTec. With us, we have Jose Mas, who's the Chief Executive Officer; George Pita, who's Executive Vice President and Chief Financial Officer; as well as Marc Lewis, who heads the Investor Relations effort. Just an introduction, under the leadership of Jose and his team, MasTec has significantly diversified and grown its portfolio. I've always been impressed by their ability to identify the next growth trajectory for the company. They have a market share leading position and their communications in Oil and Gas business. We think they'll manage well through an oil and gas downturn. And they're rapidly growing their Clean Energy and Infrastructure business as well as Electric Transmission business. So with that, I will hand it over to Jose for a brief introduction of the company, and then we will start Q&A. So thank you, Jose, George and Marc, for all being here today.

Well, Jamie, thank you, and good morning to everyone. Thank you for joining us today. Very happy to be here. Hope everybody is safe and healthy, and everybody had a wonderful Thanksgiving holiday and weekend. We at MasTec are pretty proud of how we've been able to weather the COVID storm. Obviously, 2020 has been a challenging year, especially early on in the year with a lot of the uncertainty that existed as to what was going to ultimately happen. I think, as Jamie alluded, our hardest hit business during the year was probably our Oil and Gas business as much for the issues on demand as well as a lot of the environmental issues that continue to exist in that business as a lot of the bigger projects that we work on are challenged. With that said, I think we've done a great job of diversifying our business, of really putting ourselves in a position to have long-term success. On our last call, on our third quarter call, we kind of gave a blueprint for how we expect to get to $10 billion in revenue from where we are today by some of the different segments and where we ultimately expect us to be able to generate growth and how we can get there with double-digit EBITDA margins. Despite a weakened oil and gas overall market outlook, we think that there's a good chance that the Oil and Gas business turns out better than what we've laid out in our longer-term plan. But I think we're taking a very conservative view. I think there's a solid book of business in the Oil and Gas business that relates to a lot of the maintenance of the existing facilities that are in the ground. But there's no doubt that our big opportunities today as a company really come from our Communications business with the -- really with the growth of 5G and what's coming from a 5G perspective are our continued expansion in the Clean Energy. Our Clean Energy business has gone from $300 million a couple of years ago, 3 years ago to we should exceed $1.5 billion in 2020. We've talked about doing over $2 billion in 2021. So the growth rate there has been somewhat astronomical. I think we're doing a really good job of managing that. And then we're very bullish about our Transmission business and where we think that ultimately goes. So when you look at the legs of the MasTec stool, they're good, they're strong. We've got a lot of growth opportunities. I think, Jamie, eloquently gave us some props at what we've been able to do over the course of the last 10 or 15 years, but the reality is we still feel our best days are ahead of us. And if we can really execute on our plan, on our continued plan in diversification and growth, then we're able to get to a $10 billion revenue company in the next few years with the margin profile that we've laid out. We think it's a very compelling reason to own our stock. We think we're extremely undervalued. When you look at that model and if we get anywhere near what our peers are currently trading at under that model, MasTec would be -- probably be close to double the share price of where it is today. And in that, we think lies the opportunity in MasTec.

Great. So why don't we just dig a little deeper around the $10 billion opportunity that you guys, I think, first started talking about more formally on your last earnings call. What are your assumptions behind each segment in the margin profile to get there? And then just, I guess, what's assumed in oil and gas specifically, like the worst-case and the best-case scenario? And then last, more strategically, Jose. How do you -- is there an appetite to concentrate the business on higher secular growth markets relative to the concerns on oil and gas, which could drive higher valuation? Or do you want to sort of prove the market that the business -- the Oil and Gas business is probably better than people assume at this point?

Yes. Look, I'll start with the last part first. I think that there's no question we've done a great job of growing Oil and Gas business. It's -- we keep calling it Oil and Gas business, it's really more of a gas business, right? 95% of what we do is gas related. I think we've done a wonderful job of really positioning ourselves in that industry. We started as a relatively small contractor in that market. And I think we're comfortably the largest in North -- at least in the United States today, possibly in North America. And look, there's an enormous -- gas is still a commodity that we're going to use for a long time, right? It's still the biggest source of heating across much of this country, right? I live in Miami, so we don't use a lot of natural gas for heating, but in the rest of the country, it's a commodity that's used a lot. There's a lot of existing infrastructure that's in place. A lot of that infrastructure needs to be replaced and updated and constantly monitored. There is a significant business around that, right? And I think between that and the activity that you see in the different shales across the country and the shales are going to move, right, depending on where the commodity prices are, depending on where the commodity is needed, we're seeing different -- I mean, today, we're seeing different activity levels in shales that we hadn't seen in the last few years. So our business is reactive to that and we're able to move and build the infrastructure. And at the end of the day, what we build is the roadway system to get gas from where it's ultimately explored to where it needs to go. I think that there's always going to be a market for that. There's always going to be a market of replacement of trucking and railing versus pipelines because it's so less expensive, so much less expensive. So we feel really comfortable that we can have an oil and gas-based business that's in that $1.5 billion to $2 billion range consistently over a long period of time. That's considerably less than what we've done in the last few years. But I think that's a prudent approach as to how we look at that business long term. So anything above that and really what we're laying out to the market is upside. We do think there's upside to that. We do think there's going to be projects that come in and out in years. I think there's going to be years where we do substantially better than that. And other years where that's kind of our status quo. So that's how we're looking at the business, right? We think we're going to be able to have a base business that reaches that level of revenue on a consistent basis, anything else that comes from it will be upside. We do think that will come over time, but it's not going to be on a very consistent basis. And then we've got the rest of our business, right? So again, when we look at communications, and we've got a slide deck that I think we've posted on our website, particularly for this meeting, and I just -- we've got our forward-looking statements on that as well as we have a chart that kind of lays out how we think we get to the $10 billion, right? But our Communications business, which is in that $2.6 billion, $2.7 billion range in revenue today and obviously been impacted by COVID in 2020 with all of the cities where we haven't been able to do a lot of work or a lot of the regulatory environment where in some cities they're having a lot of permitting and we've had permitting issues in some cities. So that's a business that we think will get to $3.5 billion to $4 billion over the course of the next few years, especially with what's happening both from a fiber market and a wireless market. When you look at our Clean Energy business, again, we've grown that from $500 million in 2017. Again, we think we'll exceed $2 billion in 2021. So we're talking about that business going to $3 billion, $3.5 billion. We think that's fairly reasonable, especially with the growth that we've had and the opportunity subset that we see within that. We've talked about taking our Transmission business to $1 billion, $1.5 billion. We've always talked about our segments being at least $1 billion in revenue. So when you add that up, right, even if we're at $1.5 billion to $2 billion in oil and gas, that kind of puts us at a $10 billion run rate. We think it's a very achievable target. We actually think it's a very achievable target in the midterm. We think we can do that organically without acquisitions. Obviously, we've also been vocal about what we're seeing in the M&A space. We think we're going to be able to accelerate that growth and accelerate our ability to get there through M&A. So look, I think it's -- there's a lot of opportunity in the market today, probably more so than we've seen in a long time when you look at the diversification of those opportunities. We think we're incredibly well positioned and we think we'll start to demonstrate that in '21.

Great. And I want to get to the Communications business, but I do you have questions coming in already from the audience. And the first question was understanding Clean Energy and Electric Transmission is a great organic growth opportunity. But does it make sense to scale in Electric Transmission more quickly on the M&A front? And then -- answer that, and then I'll get to the other question, sorry.

Look, I think -- if you look at MasTec over the course of the last few years, I think most of our growth has been organic, right? We haven't been as acquisitive as we were 10 years ago, for example. I think we made significant acquisitions in that 2010 time frame to really reposition the company into a number of different growth segments. We've added some small tuck-in acquisitions over the years, but our growth strategy hasn't been as acquisitive, right, because we've been focused on organically growing the business. Organic growth is hard. It ultimately, I think, pays off bigger dividends than M&A if you do it right and you're successful, but it's hard. It takes time. It takes a lot of investment upfront. It's why we've seen a lot of the margins in our business start off slow and pick up over time as we get scale and as we get utilization. But is there an opportunity today to look at M&A a little bit differently? I think the answer is yes. And I think for us, it's about value. So if we can buy things at the right value that we think, we can significantly improve upon whatever entity we're buying, right, or whatever entity we're bringing into the mix, and it gives us the ability to grow geographically to have a different customer base. I mean, those are the things that motivate us. Those are the things we look at from a value perspective. The value has to be right. Do I think there's opportunities today in the market to do that? Yes, I do.

Okay. And then sorry, the second question is on the solar and on the wind size -- sorry, on the Clean Energy and Infrastructure size, you're mainly a player in solar and wind. What can you do more to expand your presence in those segments and your battery and generator installation markets make sense to you? Is this a place that MasTec could play in the future?

Yes. Look, I think we've been a leader in the wind business for a long time. We're one of the top wind farm constructors in the United States. Our solar business is a lot newer. We started solar in a significant way last year, and it was an organic based opportunity that we grow. 2020 is really our first year of major solar projects. I think we're doing really well on the projects that we're doing. We're learning a lot. We're hiring a lot because our solar work in '21 is going to expand dramatically from where it was in '20. We think ultimately, the solar business is going to be bigger than the wind business in our portfolio. That's why we're so confident in being able to talk about the targets that we're talking about for Clean Energy over a longer period of time. We're also doing a lot of the alternative fuels, right? So we're doing a lot in the biofuels market. So we feel really comfortable that our growth within Clean Energy is going to be somewhat diversified. We think that's also important, right? And then when you think about battery backups and battery power, it pertains to all of these technologies that we're working on, right? It's not just wind and solar, but we're seeing it across the Board. We've had customers now for a period of time that are including that as part of the RFPs that we're working on. So we currently are working actively on projects that require battery backup both from being built into the projects that we're working as well as stand-alone projects. So today, we are bidding stand-alone battery projects. We're working with a number of different manufacturers. We've created relationships with a lot of them. The customers that we work for, if you think about the people that are building wind and solar, those are the same people that are building these battery farms or whatever we want to call them, right. So it's definitely -- storage is going to be a big component of the future of energy. We think we play a really important role in that from what we do and what we're capable of doing. We're trying to grow within that. That's a somewhat newer segment, right? So we're trying to figure out all of the different pieces of that, that we can play in. And I think even from an M&A perspective, those are alternatives that we continue to look at. What are the niches within that market that we can try to take advantage of that -- in a market that should have a significant amount of growth in the future.

And then on the Clean Energy and Infrastructure business, obviously, the top line organically has grown at a fantastic rate. The margins are obviously improving, but they're not where some of the -- where the Oil and Gas or where the Communications margins are. Part of that is a lot of the investment that you've been making in that business. So can you sort of elaborate on that? What's left in terms of investment? And when can we really see those margins start to improve on a more significant basis? Sort of what we saw within your Communications business, they will wait a little when you were investing. And now we're starting to see the fruits of that investment.

I think we've already started to see it, right? Our '20 margins are better than our '19 margins. Our '21 margins are expected to be better than our '20 margins. So we've been growing consistently at north of 100 basis points. We think that will continue. The real question is when can we get it to double digits? When -- how far above double digits going to get it? I think those are ultimately the questions that both we and investors, right, are focused on. We think it's a double-digit margin business. We think we're going to get there over time. We're making considerable -- again, I mean, a lot of this growth has been organic, and you said it, it's expensive, right? So we're hiring people in anticipation of projects. We're hiring superintendents, project managers. So the idea here isn't -- you win a project and you go hire everybody because the resources don't exist, right? So we're building resources in anticipation for the work we know or we have a good feeling that we've got a great opportunity to win and get. So we're building that. And I think that's how we've been able to grow the business. We've been able to do it whilst continually growing margins. So as -- it's not that we're investing less in the business today, we're probably investing more, but the business is a lot bigger and thus it's able to absorb a lot more of those costs. I think that when we stop that organic growth initiative, we'll start to see a nice pickup in margins, right? And I think we'll see more of it in '21. And part of it is the business gets a lot bigger, it can absorb more of those costs, right? So -- but the challenge with it, right, is we see significant growth opportunities for a long period of time and to the extent that we can do that organically without declining margins, we think is a really positive initiative and one that we need to continue pushing forward on. But we do think we will reach double-digit margins in the near future, and it's a byproduct of that.

I guess, and then -- on the heels of that, what inning of the ball game is Electric Transmission in relative to sort of Clean Energy and Infrastructure? Because that's an area, I think that the market would also assign sort of higher multiple just because of the consistency of growth in that business and then some of your peers have margins in the high single-digit to low teens range. And there's probably an opportunity for you there. How much of it is just a scale number versus geographic diversity?

Our challenge has been a little bit different, right? We're relatively new in that industry, right? We got ended in the 2011, 2012 time frame. We grew the business a lot the first few years. A lot of the growth that we had was based on big projects. So we were focused on really going after bigger projects. We did a number of them very successfully. And then there was a slowdown in the Transmission business for a number of years where a lot of the big projects kind of faded, and we had to kind of reinvent them ourselves. So we went from being predominantly a big project-based business to being a really small project-based business. So today, our business is comprised of relatively small projects working for utilities and developers on smaller task orders. We've won a number of large projects. Unfortunately, those projects, which were slated to start in 2020 have been pushed into '21. So we think we're on the cusp here of starting some of these larger projects, which will have a substantial impact to revenues. And we're already equipped to handle that, right? So I think it's another business where you'll see a step-up in revenue. That step-up in revenue is going to lead to what we think are some pretty significantly better margins, which will be in line with what you see from a peer group. We think we're on the cusp of it, right? There's a lot of project activity going on right now. So we think that our ability to be able to maintain those levels beyond '21 into '22 and the future is really high. So again, it's another business that we probably don't focus as much on. It's the smallest segment that we have. But I think when -- as we get into '21 and as we start some of these larger projects and as we start seeing significant revenue growth, I think it will be a bigger part of our story, and people feel a lot better with our ability to execute on that over a longer period of time.

Okay. And then if we can shift to the Communications business, just as were -- a couple of things. Obviously, there's vaccines that are happening, which is a positive as it relates to COVID. We also understand the political environment that will be in under the Biden administration. So I'm just trying to sort of weigh in the short term, long-term how do you think COVID impacts spend in 2021 on sort of 5G wireline and then just longer term, what do you think the Biden administration means for the Communications business? And I guess, just the broader business as well because I would think it should be a positive on multiple levels?

Yes. Look, I think that in this year, we've all realized the importance of connectivity. I don't -- we never had one of these conferences like this before, right? We've always -- has been physically present....

I was in Florida the other day.

Well, it's beautiful here. So we'd be happy to have everybody -- but it is what it is. And I think that we talk all the time about do we think these conferences will ever go back to the way they were. And I -- and there's different opinions, right? I think there'll be some conferences that probably do well. But from -- both from management teams and investors, it's pretty convenient to be able to do this call and spend the day with our investors, albeit virtually and then not have to travel and not have to spend the day before and after traveling, and that's a big deal because it saves a lot of time, right? So it saves a lot of efficiencies. It makes us all a lot more productive. So I think this is here to stay. And I think connectivity for most people is a big issue, especially in people's homes. I think what we saw early in the year was that there was a lot of pockets in America that still don't have the access to high-speed Internet to be able to do these things on a consistent basis. Forget about what we're doing, but think about kids having to go to school every day and spend 8 hours on a computer learning. And I don't think that's -- I think there's a segment of that that's always going to be around. I think our customers know it. So when our customers are rolling out their '21 plans and beyond, there's, for sure, a renewed focus on high-speed Internet going both to homes and businesses, right, because I still think there's a big component of that whole fiber build that's going to be related to 5G. But you've got a pretty intense focus on what's happening in the home, both by the existing telecom companies as well as the cable companies. So I think we're going to see a renewed investment thesis around that. We're already seeing it. We're already seeing what our customers are planning for '21. So we know it's there. And we think that's going to be great for the market. And then you still have 5G, right? 5G has obviously been slower to develop than most have expected. I think we're on the cusp of it today. I think everybody is moving rather quickly. We've got the big spectrum auctions that are happening later this month for both AT&T and Verizon. It's relatively important for, I think that's going to be, for sure, a catalyst for their businesses and what they do on 5G. You've got T-Mobile pushing hard, trying to be the leader in -- from a 5G infrastructure perspective today. I think all of that is going to culminate in '21, especially the second half of '21, with everybody having significant build plans. So we're on the cusp of having both the wireline and wireless business that are really healthy, that have tremendous opportunities in front of them. I think the macro -- all the reasons from a macro perspective for that to happen are there. So I don't think people challenge that. I think people question the timing and when it's coming and why is it taking longer than people expected, but it's there, it's coming. The carriers couldn't be more vocal about it. Every time you listen to the CEO of an AT&T or Verizon speak, I mean, they're talking about their infrastructure network in great detail both from a wireline and a wireless perspective. That's relatively new. We haven't seen that historically. So there's a sharp focus on it. There's lots of opportunities that are created because of that. So I think we're going to play in that in a lot of different ways and in some ways that we traditionally haven't. So it's exciting. It's -- again, I think along with the other segments that we talked about, I think Communication is voiced for really strong growth for the next few years.

And then just to build on 2 questions on within Communications. You said you're going to play in areas that maybe necessarily you haven't played before. So can you elaborate there? Is it more of a customer -- is it a service offering? Is it a customer preference? And then my second question is because the growth does seem to be more important today with COVID and people understanding the importance of wireline and 5G. Are you ready? Like is there another round of investment that's coming from MasTec just to prepare for what's ahead?

Yes. So first, from a customer and offering perspective, I think that -- I don't think we've ever been in a better position across a significant number of different customers, right? So you've got all the major wireless carriers. You've got all the major wireline companies, including the cable companies. You've got the Rural Opportunity Fund dollars that are coming and it opens up significant growth to a lot of different people. I also think there's a challenge, right? And one of the challenges is that all of these companies need more money than what they can probably afford from a CapEx perspective. So there's -- as you see what they're doing, right, they're starting to do a lot more stuff off balance sheet. So first, you had the towers and you have all these tower owners that have done extremely well in their business, owning and aggregating towers. I think the carriers are looking for solutions like that, right? They're looking for off-balance sheet solutions. I think we're in a position today to be able to offer very creative things to carriers that we haven't been able to do before, and quite frankly, our industry as we see it hasn't done before. So I think there's tremendous opportunities to do things differently for our customers and more creatively, and I think you'll see us do some of that. And I think because of that, it will expand both our service offering as well as the customers that we work for. And then the second part of your question, Jamie, was...

With just -- because of the ramp, is there another -- are you ready?

Yes. So look, when you look at the year that we've had, we obviously have had a good margin. Our second and third quarter margins in Communications were really strong, especially compared to what our expectations were, we went into COVID not knowing, right? So we -- I think we prudently in March thought we were going to do a little bit worse than what we were expecting coming into the year. We actually did a lot better, right? So our margins in the second and third quarter I think far exceeded most people's expectation, I think margins will be good in the fourth quarter. So we're going to end the year at double-digit margins in our Communications business, which was kind of the goal coming in. It will be a couple of hundred basis improvement, 100-point basis improvement from where it was in 2019. We think that's an incredible story, right? Part of that is, yes, we didn't go through all of the training that we had in the previous years getting ready. I think we're in a great position today to meet our customers' demands, especially in the first half of '21. The unknown is how much does it grow, right? There -- I do think at the end of '21, there's going to be another pretty significant expansion and the resource needs are going to be quite extensive. So we'll have some more training costs in '21 than we probably had in '20 as the year goes on. I don't think it's going to be to the level of -- from our numbers perspective to what you saw in '19. So I think it will be far more muted. But I think there will be some impact. And I think it's going to depend on the opportunity, right? For me, I don't see that as a negative. The more we're investing, it means that our revenues are going to grow even higher. Because I think there's a level of growth built into our numbers, irrespective of training that we're going to achieve. So to the extent that we feel we need to train more, it's because we think revenues are going to grow faster than what we've kind of laid out and that's an exciting proposition for me.

Okay. And then understanding, we only have 2 more minutes. I can't end without giving George props on the cash flow front. So George, can you just talk about the outlook for free cash flow longer term? And I guess, as the mix of business changes away from Oil and Gas, and more into Communications, Clean Energy and Infrastructure and Electric Transmission, I'm just wondering if that has any implications for just free cash flow conversion? And then, I guess, priorities, Jose and George, given where the multiple is today.

Sure. I'll talk about the free cash flow. Jose, if you want to talk priorities afterwards, you can go after me. I think you heard it on an important point. I mean, look, we've had a very -- we've had a -- this is going to be our third consecutive year with record cash flow from operations. I think our cash flow profile as our business is currently constructed today is very strong as is our free cash flow profile. We'll talk about priorities in a minute. But in my mind, we generate somewhere between $200 million to $400 million a year of excess cash flow that we have to redevelop or reinvest back, right? And whether it's in the business through M&A, share repurchase or other. But that's been our profile, and that's not necessarily changing. You're right in that if you superimpose our view of -- our prediction of a $10 billion company with a changed mix in which Oil and Gas is a smaller component, I think the working capital profile is relatively similar, but it's fair to say that the free cash flow profile would be much stronger because the Oil and Gas pipeline group is certainly our most capital-intensive group. And that scenario where that's significantly dropping as a percentage of the mix of our overall revenue and company, the capital needs we expect would drop accordingly and our free cash flow profile would certainly be stronger. Although it's very strong today, it would be stronger, I think, going forward in this environment as the mix of our business changes. Jose, do you want to cover the priorities?

Look, and for us, it's -- we feel that our stock is undervalued. From a multiple perspective, we're comparing that to the M&A opportunities that exist in the market today. We're in a really privileged position of having a significant amount of cash and continuing strong cash flow generation to have these decisions to make. So that's where we weigh. Again, I think we've been saying publicly that you can expect us to be pretty acquisitive here in the coming months. So we'll see what happens and either way we're going to act, right? We're sitting on -- we're generating too much cash not to do anything. So you're going to see some movement in one of those fronts relatively soon.

Okay.

Thank you for having us. We really appreciate the invitation.

Great. Thank you. As always, great story. Investing you and your families over the holidays. Thank you so much.

Thank you. Bye-bye.

Yes, bye.

Thanks.