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

All right. Great. Good afternoon, everyone, and thanks for joining us at this session of the Barclays TMT Conference. My name is Adam Seiden. I'm the machinery and construction analyst at Barclays. Joining me from my team on the line also is Aleksy Grewal. We're pleased for this session, we're joined by MasTec folks over from Coral Gables, Florida with us. For many of us -- for many, I think, are the folks on the line here and for this TMT conference, they may not be as familiar with MasTec. But I think what you'll soon learn from Jose and from George or from Marc and the crew that they're very connected to tech end markets all the way from telecom tech to clean tech. So to start off, what I want to do is actually I want to pass the floor over to Jose and to George maybe just to give a brief couple of seconds for explaining the company to some folks that may be a little bit less familiar. And then Jose and George will pass it back to me, and we'll go along with the Q&A.

All right. You got it. Thank you, Adam, for having us today, and thank you all for joining. My name is Jose Mas. I'm the CEO of MasTec. To kind of put it in a nutshell, MasTec is an infrastructure construction company. We focus on 2 main verticals, one being communication and one being energy. On the communications side, this is where the company has its roots from. So once upon a time, my father actually started the predecessor company to MasTec, and we made our business around servicing the telephone carriers building out their plant: so digging up the streets; putting in, back then, copper, now fiber; building manhole systems, telephone poles; aerial construction. That's kind of where the company started from. I became CEO in 2007. At the time, we were predominantly only telecom. It was a difficult environment in the telecom industry. So one of the things that we knew we needed to do was diversify our business and have really different segments that would allow us to grow. So we expanded into the wireless business in a pretty significant way. Today, we're the largest wireless construction contractor in the United States. And then we expanded into energy. We started on the renewable side of the business, building wind farms, really by the electrical components of them and then we built into being a full turnkey renewable players. So you'll see that we've got a pretty big, clean energy and infrastructure business where we do -- today, we do wind, we do solar, we do biomass. We got into the high-voltage transmission business. We've been doing distribution work, substation work, high-voltage transmission work for our customers, very similar to the type of business that we started in a long time ago on the telco side. And as we learn more about the business, we got into the oil and gas pipeline business and today are one of the largest builders of oil and gas pipelines, predominantly both in the shales and cross country trying to get the commodity to the places that it's most needed. I became CEO of the business. We were roughly a $900 million business doing $50 million to $60 million in EBITDA. Last year, we did just over $7 billion in revenue with about $840 million in EBITDA. So we've had tremendous growth over the course of the last 13 years. And I think we're really excited about our future. One of the things that we did on our last quarterly call was we laid out our vision and our map as to how we can become a $10 billion business in a depressed oil and gas market. So that's assuming that our Oil and Gas business is $1.5 billion to $2 billion or 15% to 20% of our total revenues. In our slides, which are available online, including our forward-looking statement, we kind of break through how we think we can get there market by market. We think we could ultimately achieve $10 billion organically with double-digit margins. And if you kind of play that forward a few years and we actually accomplish that, we think we would get a multiple, anywhere near where our peers are trading today. There would be a significant opportunity for MasTec appreciation in its stock, and that really is the investment opportunity for MasTec today. So Adam, I think we'll hand it back to you for...

Great. Thanks, Jose. So that's a good overview of the business and the history behind it, both yourself, your family and where you've taken it.

So I guess maybe to start off, let's touch on telecom, of course. You spoke to some of this in your overview, but I was hoping you could elaborate on some of the key relationships that you have in the telecom industry. How long have these folks been customers of yours? And what percentage mix of the business do they make up of you and you make up of them sort of thing?

Look, we've been in the business a long time, right? So really, our first customer was AT&T back in -- my father's first customer in the 1960s. We've been working for them ever since. Obviously, the relationship is very different today than it was more than 50 years ago, but I think we're well known, not just to them, but to our main customers. We work for all of the wireless carriers today. So we work for AT&T, Verizon, T-Mobile, DISH and even some of the smaller rural-type companies. We do -- we work for a lot of the wireline operators, right, the same big carriers as well as the CenturyLinks, the Windstreams, the -- a lot of the rural telephone companies. So I think we've -- we're well known in the industry. We're a known commodity. We've been in the business for a very long time. It's kind of where we grew up from. I think we've grown with all of those companies. So a lot of the people that we might have started with, with the relationship in some field, today, they're the executives of those companies. So our companies have grown together. We've been able to service them for a long time. So I think that we're a well-known commodity in the industry. Obviously, we expect there to be a lot of growth. We're really excited about what's happening on the fiber side of the business and the expansion of fiber, our ability to play on that and then obviously our ability to plan on the wireless side. So I think our relationships are long tenured. They're deep within the organizations, and I think most people out there in this space would know exactly who we are and more importantly what we can do.

Got it. And so when you think about -- you mentioned some of those opportunities of late and given you're on the wireline or wireless side, maybe if you can walk us through that growth trajectory of where you see that business going from particularly in a 5G economy and so forth.

Yes. Look, I mean we're expecting that business to roughly be in that $2.7 billion, $2.8 billion, $2.7 billion, $2.8 billion range next year. We talked about it getting to $3.5 billion to $4 billion. A lot of that is driven by the opportunity set that we see today. One of the -- we've had nice growth in our business over the course of the last few years, really being able to grow our top line in double digits. One of the things that's hard to see in our numbers is we have a big fulfillment business. We've done a lot of work with DIRECTV for years. We're one of DIRECTV's largest installers. That business has significantly declined. So that business went from a peak of about 800 to roughly 200, 250 where it's at today. So we've been able to grow our business in spite of that significant drop-off in revenue from that side. So even though we've been able to deliver double digits, I think if you actually tap onto that, the shortfall that we've had from the fulfillment business, the growth has been even more impressive. And when we look out over the course of the next few years, we see the growth drivers more positive and really deeper than they've been. So on the -- again, on the wireline side, we're expecting some of the carriers to have big deployment activities. Obviously, Verizon has been very vocal about their One Fiber build. And as you think about 5G and the fact that 5G is going to be a much denser network than anything that's ever been built before, so aside from just the macro towers, you're going to have all these endpoints from small cells to in-building systems that are all going to require power and fiber, right? It's just a significant amount of work that has to get done. It's exactly what we do. And again, we think we're incredibly well positioned to take advantage of that.

Got it. And so you mentioned as far as other carriers. And certainly, AT&T has been a big part of the business for some time. You have some budding new relationships with Sprint/T-Mobile now combined, DISH, so forth. So some of your peers have spoken to IDIQ contracts for some DISH work. I'm just curious from MasTec's level of participation here whether you believe that you guys would see a similar sort of commensurate work given where you are in the industry. And what's the timing on that? Is that more of a 2021 or 2022 sort of build-out that you see there?

Adam, are you specifically talking about DISH?

Yes.

Yes. So look, I think what have we done as a company, right? We -- I think we learned early on that to be really successful in this business, you have to kind of own the resources, right? So to the extent that you have the resources and people need to work and it's a tight environment, you're going to be successful. So what have we done at MasTec, right? We've significantly ramped our efforts up to attract talent, add talent. Again, I think we're one of the biggest in the industry. I think we are a company that people would like to come more for. We've got great career paths with MasTec. So we think we're an employer of choice. But with all that said, right, this is a tough industry. This is an industry that doesn't have readily available people at a win to do the work. So we've spent years, right? And we've been very vocal about it over the course of the last 1.5 years in that we've spent a lot of money adding resources to the team and really being in a position to help our customers as this growth initiative starts. And again, we expect there to be a significant ramp in the business starting in the second half of '21 across all the carriers. We think there's going to be issues with the workforce. And one of the things that our customers, I think, can trust about MasTec is when they call on us, we're going to be there. We're going to have the resources available, and we're going to be able to get their jobs done on time and within budget. And I think that with DISH, it's no different, right? We've had the opportunity to work with them. Obviously, they're still building their models and plans out. They're a little bit behind the others relative to their deployment and what they're going to deploy. So I think that the opportunity with DISH for us is the same as it is with any other carrier. I think we're well positioned. And if we can go out and if we can meet their needs and execute, we're going to be successful.

Got it. And you talked about some of the different attributes in the industry and so forth and what you guys bring to the table. But thinking about the 5G cycle and how it's ramped here, what have been some of those key impediments there? Is it permitting? Is it technology? Various other things? And then how have any of those increased or abated over time?

Okay. I think we all expected '20 to be better than what it is, right? I think COVID has been a huge challenge for all of our customers because they all have businesses that are far beyond just one piece of it, right? So they're all in -- they all have significant fiber components. They all have significant wireless components. Some have different businesses. COVID was very challenging with the municipalities and cities early on, right, as everybody was basically starting to work remote. Cities weren't capable of approving permits. And unfortunately, most of this work needs permit or you need some kind of government agency approval. And for months, that was something that, quite frankly, nobody knew how it was going to happen. And as time went on and as we got used to living in this new world and this pandemic in this virtual world, things got better, right? So there's no question that 2020 was impacted by COVID in a significant way, especially in this business. There's pieces of the business that obviously were better. As we all understand the importance of connectivity in the world today and including on this call, right, these are things we probably couldn't or wouldn't have done a year ago. So some portions of the business as it goes out to broadband deployment and having customers have the best access to Internet, quite frankly, probably improved during COVID, but other parts of the business were hampered by the challenges in dealing with those. So I'm very bullish about 2021, and I think you've got a lot of things happening in the communications space. You've got the rural opportunity fund dollars that are going to become available. You got spectrum auctions that are happening now. I mean those are all catalysts for what we expect to be significant dollars deployed. I think the second half of '21 is going to be one in which all the carriers are going to be very actively and aggressively building out their 5G plans. I think it's happening today, and we're seeing the growth today versus where it was last year but not at the levels that I expect to see in the second half of '21 and beyond.

Got it. So that's good on the second half. Second half '21 does feel like there's a ramp there. So I guess also trying to think about -- we spend a lot of time on the build-out of these networks. But how much maintenance on existing telecom networks does MasTec do? And how much does that factor into building a base of the underlying business?

Look, I think it's one of the most underappreciated parts of our story, right? If you think about our work, especially on the wireless side over the course of the last 3 or 4 years, there haven't been any deployments, right? We had 2G, 3G, 4G, some LTE build-out, but then the business has all been about maintenance, right? The bulk of what we do is still maintenance-related. It's maintaining these networks on behalf of our customers. Some of that maintenance includes adding capacity to sites. As we use more capacity, these towers aren't built to ultimate capacity day 1. Capacity is added as it's needed, right? And we know that there's going to continue to be significant increases in the usage. All of these sites are going to require more capacity. And so that's our business, right. That's really been what's been able to drive our business. When we think about the future and we think about the 5G network and how more robust that network will be, how many more touch points will be part of that network with all of the small cell sites, with all of the in-building networks, there's a huge component in the maintenance back end of this, right, that we think is going to dwarf the size of any of the maintenance opportunities we've had in the back. And we took that opportunity. About a year ago, we acquired a company that was in the -- really the optimization, the integration and optimization space of the business, which is somewhat of a specialized trade. It's -- a lot of the OEMs tend to do that work on behalf of the carriers. But think about all the optimization opportunities that are going to have to exist from the network as the network is really trying to talk to so many different network elements. We think that's going to be a huge driver of long-term maintenance. We've really started to position ourselves for that well in advance. So while I'm super excited about the deployment end of 5G and what's going to happen over the course of the next 5 to 10 years, the reality is that the back end of this is going to be dramatically bigger than anything we had in the past, and I think we're incredibly well positioned to be a big beneficiary of that.

Got it. And then thinking about what's -- shifting it from the revenue side on the top line side to a bit more of the margin framework. So you've had that low -- call it, low teens margins or so the last couple of quarters. As we get through -- as we're going through COVID and we talked -- and we get to some of this work that you're talking about that will ramp over time, I mean what's a good long-term margin target for this type of segment as you guys build out and maintain these networks?

Look, we've -- if you look at our margins last year versus this year, we're up about 250 basis points. We talked a lot about the drag that all of the training was having on our business as we were really building in anticipation of what was coming. COVID. During COVID, we obviously slowed down our training, not knowing what the future held. We think we're in a really good spot today relative to our label profile versus where we're going to need to be. There will probably be some more training requirements as we look on. We're going to finish this year at about 10.5%, which is a really nice improvement over last year. We've talked about improving again in '21 despite probably an increase in additional training. And then we publicly talked about a longer-term goal of being north of 13%. So we think 13% is an achievable target range for this business. And in the right environment, where most of the business is doing well, we think that's something that can be exceeded.

Got it. So maybe let's shift gears a little to -- on the clean tech side. So long-term target, I believe, last call, you talked about over $3 billion, which is, what, double versus where you are today, practically on revenues. So can you talk a bit about the mix of the clean tech business today? And then how that mix will vary as you guys see it as we scale up from that $1.5 billion to $3 billion or so?

Yes. Look, I think it's important to note that in '17, we did $300 million, right? So we've already taken the business from $300 million to $1.5 billion. We've talked about that business exceeding $2 billion next year just with the visibility that we have today and then further growing beyond that to a north of $3 billion opportunity. Today, in the last 5, 10 years, our specialty, the way we really grew up in this business was on the wind side. So we're one of the largest wind contractors in the country. It's still the biggest piece of what we do within clean energy. The reality is that all the other pieces are growing much faster, right? It's -- our work there has predominantly been with the utilities. So we're on programmatic work, long-term expectations of what they're going to be building from a renewable perspective. But the solar side is growing very rapidly. The biomass side is growing very rapidly. We have an infrastructure component in that where we do some civil work. It's also growing. So really, what -- we believe that over time, our solar business will be -- probably be bigger than our wind business. Our biomass business will be in the same range, and then we'll have an infrastructure piece that will grow. The reality is that each of those opportunities is probably $1 billion in segment size, right? So we could have $1 billion wind business, $1 billion solar business, $1 billion biomass business. And while the infrastructure business is much, much newer for us, it's another one that I think the opportunity subset there's huge. How we execute on it, it will depend. But if you're thinking about how do we ultimately achieve our targets, it's roughly in that magnitude, right? it's having similar sized wind, solar and biomass businesses with the growing infrastructure business.

Got it. So -- okay, so that's pretty helpful, right, on the revenue split between all 3 of those areas. A question I had was, as you think about solar, wind, costs have come down for that. Sorry, for the beeps in the background there. But costs have come down for some of that technology. Who stands to benefit? And where's the -- what's the -- where is the value capture? Do folks like yourselves capture some of the value when costs come down where your customers are willing to pass on more and you guys are in a higher margin? Or does that get really kept with your project owner?

Yes. Look, I mean our projected margins in this business are at double digits. This is not a high-teens business for us, right? This is a solid double-digit EBITDA margin business. When costs come down, the real winners, right, are the consumers, first and foremost, but I guess more importantly, is the industry itself, right? So one of the challenges that this industry has had is that it's expensive, right? When we talk about continuing to move to renewables, cost becomes a big component of that. So I don't know that -- just the fact that the prices get cheaper, I don't know that it will be absorbed by anybody. It'll just -- it'll cost less to build these projects, and thus, significantly more projects will get built, right? And I think that's our hope, right? We're not looking to hit home runs here. We're happy with the margin profile we've laid out. And if costs continue to drop, it just means that there's going to be a lot more work available. Our growth opportunity will probably increase, and I think that's how it plays out more so than just trying to obtain better margins on any particular project.

Got it. And then maybe similar to how you talked about telecom and early communications. After you're building these wind turbines, solar farms and so forth, is there any -- what type of maintenance work do you guys receive on the back of that? And as more of this stuff gets built over time and becomes a bigger pie, as you alluded to, is that something that you guys capitalize as well? And when does that kick in and be meaningful?

Yes. Look, we talked -- we started a repowering business, I guess, maybe 1 year, 1.5 years ago. And what that is, is basically going out to the first generation of turbines that were installed and actually installing new turbines. So what we see happening in this industry is the technology and evolution of the turbine has completely changed in the last 10 years. The turbines we would have been using 10 years ago are antiquated, right? The efficiency of the new turbines is dramatically different. So as a farm gets older, what developers are doing is they're either taking all of their turbines and replacing them or taking a portion of their turbines and trying to make them more efficient. Sometimes it requires a whole new structure to be built, and sometimes it can be built on the current structure. So that's a growing part of our business. You also have the maintenance component, right? You have a lot of these projects that were under warranty by the manufacturers. The wind business was new. As the warranty periods have expired, there's been a whole industry that's been created of maintaining these turbines and doing the work around that, which we participate in. So it's still a newer business since it's such a newer industry, but the reality is that there's going to be significant managed opportunities of which we're trying to build out in conjunction with the deployments.

Got it. And I had a question to ask you about whether it's all organic in that segment. But you're certainly -- you've at least talked about each of the verticals being, call it, $1 billion each for round number's sake. But when you look at clean tech, the net gets expanded beyond just those 3 areas that we're talking about. How attractive is it to add more legs to the stool on the clean tech side versus concentrating on the areas where you're in today? And is that achievable in this market just given their multiples aren't special?

Yes. Look, so I mean it's important that the growth that we've talked about today, we've talked about organically, right? We have significant opportunities for M&A and acquisitions, and that would only speed up the process as to when we can get to these targets. To your clean energy question, there are a lot of things that -- these are general buckets for us, right? But if you think about storage, storage is a component of all of those, right? So storage is a massive opportunity. That's important to wind, it's important to solar and it's important to biomass. So you could almost -- I mean it's a big enough opportunity where you could almost sit there and say, "Well, we're going to focus on it as a completely different subset." But the reality is it interplays with all of them. So we have projects today that are bidding to contain storage components to those, right? So they're building out a renewable asset, and they want to have a storage component. In doing that, right, we've met with a lot of different battery companies. We understand the technology. We understand the people that we think are going to be ultimately successful. And then we understand what role can we play, right, how can we be a facilitator or an installation arm for some of those products. So there are subsets within all of these that are going to interplay. Because at the end of the day, those are your main generation assets, right? That is what's going to generate the power And then off of that power generation, you're going to have a significant number of things that happen from transmission lines to storage opportunities, to maintenance opportunities within those, right? And those are all critical elements of what we hope to build, but I think they do fall within those subsets.

Got it. That was a quick 25 minutes. So I know we're running out of time. I'm going to -- I'd be remiss if I didn't even get to pipeline at all, question. So on pipeline, could you just talk to the strength of the margin that you've seen in that business in the portfolio. And then if nothing changes based on where market conditions are today, do we get back to that 13% target? Or what's the -- or 13% long-term target? Or what's the bogey there? And then I'm going to squeeze in one last one here, too, would be on -- we're getting a lot of questions on where commodity prices are today. Has that done anything in terms of taking interest for capital decisions -- for the capital investment decisions for next year?

Look, I think we're in a great spot in our pipeline business, right, from a competitive nature. I think we do a great job. I think we're a low-cost provider that has proven to its customers, again, that we can build jobs on time and on budget, which is critical to them. We do think that this is a capital-intensive business, which I think it's important to understand that, which is why it drives larger margins to a large extent, right? So we're very comfortable we can hit that mid-teens margin. So the 13% was more in communications, right? This business, we have a mid-teens margin, high-teens margin expectation. We think that's achievable over a long term at that $1.5 billion to $2 billion level. The reality is we have moments in time where we exceed that. We think at the end of the day, the high teens is probably the right long-term margin profile at the $1.5 billion to $2 billion. We're doing much better than that this year. We will probably do much better than that in '21. This is -- the backdrop of all of this is what we expect to be a really difficult oil and gas environment, right? We also understand that we've seen this before, right? We tend to overreact at times to whatever happens in the market. I do think the market will improve better than what maybe we all feel publicly, right, at what's happening. We are seeing drills going back to work, right? I don't know that it's going to have a direct implication on our business in the short term. A lot of our business is, is around transportation issue, so it's not directly related to drills. What it is, though, is if the drills are moving to new spots, right, as people are exploring different shales, that's really important because that creates a significant number of new infrastructure needs that may not exist. Even when you think about the Permian, right, when you think about the 2 biggest landlords in the Permian being Exxon and Chevron, and they haven't really developed that yet. So when they ultimately develop it, is the infrastructure in the ground going to be supportive of where their locations are? Or is there going to be additional infrastructure required, right? So those are the things that ultimately are important to us more so than what a rig count would be. But I do think in general, there's a more positive sentiment today than there was 3 months ago, than there was 6 months ago. Our hope is 6 months from now, right, commodity prices would have stabilized and our customers are feeling better about the future. But we've built our plan irrespective of that, right? We've built our plan on a go-forward basis, assuming that we're going to be in a difficult environment for a long period of time.

Got it. All right. I'm getting the hook from our event people. So I appreciate it guys for the time here. And thanks, as always. We look forward to hearing from you in the coming weeks and next quarter.

Thank you, Adam. Appreciate it.

Thanks, Adam.