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

Welcome, everyone. Again, this is Andy Kaplowitz. I'm U.S. Sector Head for Industrial Research at Citigroup. Welcome, everyone, back to Citigroup's Global Industrial Conference. We are really excited to have MasTec with us. I've known Jose, George and Marc for a very long time. And obviously, this company has grown dramatically over the years, very successful, operating on all cylinders. And so I'm really happy to have you guys with us. George, I'm going to turn it over to you first, and George Pita, who is the CFO. And he's going to make some quick prepared remarks, and then we're going to get right into Q&A. So again, appreciate you guys being with us.

Thanks, Andy. Thanks for -- everyone for joining us today. Before I turn it over to Jose, I just want to remind everyone, this conference, this presentation is being webcast. We have presentation slides available at www.mastec.com on the Investor Relations section. Please make note of the forward-looking statements disclosure that we have on our presentations, and thank you again for joining us. With that, I'll turn it over to Jose.

Well, good afternoon, everyone, and thank you for joining us. Andy, thank you for having us. For those of you that aren't as familiar with the MasTec story, I'd just like to give you a quick introduction as to who we are. We are an infrastructure construction company. We specialize in 2 areas: telecom and in power. Within telecom, we really got our roots in terms of building out fiber networks, building out the wired networks for our customers. We're able to expand and grow that into the wireless side. Today, we're probably the largest wireless contractor in the country working for all the carriers building out their towers, putting up their antennas, doing the cabling. On the power side, we kind of operate in 3 different areas. The first is in oil and gas pipeline. So we build pipelines all the way from the distribution in cities to long-haul pipes from the generation side. We've got a big high-voltage transmission group that focuses on the transmission side of the business. And then we've got our fastest-growing business, which has been our Clean Energy and Infrastructure business, where we do things like wind power, solar power, biomass and then associated infrastructure like civil, a little bit of transportation vertical. We're very excited about where we are. We've had a great run over the course of the last couple of years in terms of being able to execute on our business and taking advantage of the opportunities that we've got. We're sitting in a really good spot in the end markets that we serve. Obviously, between what's happening on the clean energy side between carbon footprints and people growing their renewable standards to what's happening in 5G with telecom, we think we've got some great growth drivers that are going to drive us into the future. So look forward to spending a little bit of time and having you learn a little bit more about MasTec with us today.

Jose, that's great. So look, maybe we could just get started with, I don't know if you want to update us at all in the short term. That's fine if you do or, fine if you don't. We got earnings next week. But stepping beyond that, you've talked about the sort of $10 billion target, right? And you and I have talked about this before. You've always talked about the potential for the company to grow double digits, but rarely have you put out sort of a longer-term target. So maybe talk about the timing of this. And you've given actually specific segment-level revenue as part of that $10 billion. Maybe talk about what you're most confident about when I look at the pieces, whether it's Communications, Clean Energy, Oil and Gas. What are you most confident about? And if there's any of the segments in terms of targets that you're maybe less confident about?

Yes. So it's a good point, Andy, right? We've -- I think we've done a great job of growing the business. I became CEO of the business in 2007. We were a $900 million business, doing roughly $50 million, $60 million of EBITDA at the time. Fast forward 12, 13 years later, we're doing north of $7 billion. We're doing north of $800 million in EBITDA. So I think we've done an awesome job at growing the business. And in that entire time, we really never took the time to put out specific guidance longer term to the market industry. And part of the reason for doing that last year was obviously all of the issues that we were facing in terms of COVID and how the world was changing, but more importantly was the confidence we were feeling around the business and what the opportunity set in front of us was. We thought it was important to articulate it and to really give a plan as to what we look like. We -- no question, 2020 was a challenging environment on the pipeline side of our business. And we wanted people to understand what our business can look like in a depressed pipeline environment. So our commentary, what we've been saying for a long time now, basis is really based on an Oil and Gas pipeline business, that's in the $1.5 billion to $2 billion range on an annual run- rate, which is something we think is sustainable. There's -- a lot has happened in the last few months, right? We're seeing commodity prices through the roof. We're seeing what's going on in Texas in the last couple of days. So I think there's more excitement, and maybe that's not the right word, but I think there's much better visibility into that business than we would have thought at this point. So we're not changing our forecast. We still think $1.5 billion to $2 billion is the right long-term way of looking at that business. We're hopeful that maybe we're way too conservative there and it will be better, but I think that's what we're focused on. When you look at the rest of our business, right, we've got just over a $2.5 billion telecom business. We've talked about taking that to $3.5 billion to $4 billion. That's really on the back of what we see coming between 5G and fiber. We'll talk about it later, but one of the things that we're most excited about is for the last few years, there's really only been 1 or 2 people spending money at a considerable rate in that space, right? So we had Verizon with their One Fiber program. Nobody else is really building any fiber in any significant capacity. On the wireless side, you have Verizon and AT&T spending, but you have T-Mobile and Sprint that were in the middle of their merger and weren't spending. Right now, you have T-Mobile spending. You've got Verizon and AT&T waiting on the spectrum auctions. So there's been a lot of transition in that business. But as we look to the second half of '21 with the spectrum auctions behind us, with T-Mobile's plan well underway, even with DISH Network starting up, it's going to be the first time as long as we can remember that everybody is building at the same time, that everybody is busy. On the fiber side, you've got a renewed commitment from AT&T to push that. You got $9 billion in RDOF funding coming through the system that's going to make its way, and we'll see a lot of activity in the second half of '21. So all of a sudden, you've got an industry and a business where you have significant capital dollars all being spent amongst a lot of customers, all starting at the same time for what we think is going to be an extended cycle. That's a great place to be. On our Clean Energy business, which this year, we expect it to be just north of a $2 billion business in '21. We talked about taking that business to $3.5 billion to $4 billion, right? And if you think about our business longer term, historically, we were a wind provider. Our wind business is roughly $1 billion of our business today. We think solar is going to be a similar size. We think biomass is going to be similar size. We think we're going to have an infrastructure business that gets into that $0.5 billion to $1 billion range over time. So that's how we get there, right? So we have tremendous confidence in both of those to be able to say, "We feel really good about our targets." On our transmission side, which is roughly a $600 million business this year, we've talked about getting that to $1 billion. We've won some bigger projects that are going to start, hopefully, within the next 12 months that are going to give us that first catalyst to get that revenue growth rate going. So if anything's changed in the last 6 or 7 months, right, it's the speed at which we think we can ultimately achieve these targets, right? We -- when we were first talking about it, we were talking about it being a 3- or 5-year target. I think we're feeling more and more bullish that, that's attainable faster. We've assumed that all of this is going to happen organically. The reality is there's some really interesting M&A opportunities out there for us that could really help us expedite and get there even faster. So again, I mean, we're viewing this as an opportunity to really take advantage of what the market is offering us. I think MasTec is going through its next transformation. I think this is inevitably part of our future and what we will become, and it's an exciting time for us.

Jose, that's all great stuff. So let me ask -- I mean, there are a lot of follow-ups that can come from that. So let me ask you first on the Communications side in the sense that, as you know, like there's been a lot of this stuff that seemed on to come, but it still seems like it's kind of slow to ramp up, I guess. But like the reality is, is that your fiber/wireline business has been very strong, and we're still sort of waiting for 5G. So as we think about the next couple of quarters, is that sort of how we should think about it, number one? And number two, you did mention like the T-Mobiles of the world are spending. So it does seem like there's more opportunities to inflect. So are you more confident about the inflection in '21 than you were even in '20? And maybe that's the easy way to ask the question.

Yes. I think we're feeling really good about the second half of '21 because I do think all this is going to intersect at the same time, right? I still think you've got -- going into '21, you still have AT&T and Verizon. I mean the reality is the spectrum auction results haven't been publicly announced. We would assume that our customers know what they're getting, but it's not public yet, right? So -- and it will take time, right? You've got to go through engineering. You've got to go through [ side act ] for a lot of that stuff to get going. The good thing is it's over, it's going to happen, it's coming, but I don't want people to get ahead of themselves either. We've done a good job of growing our business, right? With the exception of our DIRECTV business, which has been shrinking, our telecom business has actually grown despite it not being -- so it isn't a matter of whether we can grow or not, it's a matter of rate of growth, right? And I think what investors really want is when does it actually start growing at a meaningful number, not at a single digit or even a low double digit. When do we see step-ups in revenue? And I think the first opportunity for step-up will be when everybody is working at the same time, which I think happens in the latter half of '21.

Does the -- I mean, we don't really need to talk much about DIRECTV, but just the comparison, it just seems like it's easy now and install to a home at least as a flat to up business as we go forward? Is that the way to think about it?

It is. I think this will be the first year in a long time that we don't have a headwind facing us there from a revenue perspective, right? It should be flattish. It could even possibly be up a little bit. Obviously, they're in the middle of rethinking about what they do with that asset. That could be a very positive thing for us. So we'll see what happens.

And then you did talk in the last call about Comcast and the cable operators in terms of the opportunity there. And for those of us who've covered the company for a long time, we haven't seen those guys be a big customer up until now. So that kind of gets us interested and excited as we go forward. So I noticed you didn't mention them in the prepared remarks, but they're a bigger customer, I think, than Verizon right now.

They are.

So interesting turn of events. Like how do you think about that?

Look, I think it's important, right? I think the landscape is changing in our business as we think about the customer base. The cable operators also participated in the spectrum auction. It's going to be interesting to see what they actually won and what they do with it. So this is outside of their wireline business, right? They were very active on the wireline side. Obviously, with what happened in 2020, they were a big beneficiary of people staying at home and Internet connectivity because their Internet connections are so strong. They have big deployment plans over the next couple of years to continue to try to keep their market edge relative to that. So it's a very healthy business and one that we've been able to grow, tap into. We're working hard to identify other areas in their businesses as they continue to grow and really get outside with their traditional businesses to be able to help them. We -- again, we haven't publicly talked about it, but one of the real premier opportunities that we face as a company is everything that's happening with smart cities. I mean smart cities is going to have massive investments in all of these things that we do with different customer bases than the ones that we typically talk about. But you're right. I mean the customer -- the customers are changing a little bit. There's many more customers when you think about what 5G ultimately entails and all of the ins and outs on that. And we've got to take advantage of that.

So I might as well ask you on the margin side just since we're still talking about Communications. Obviously, you had a nice increase in margins toward the end of last year. And you said, like, look, we can't train people as much or we already trained them, I guess, to some extent. So is it -- do you think that there is upside here as we go over the next couple of years, given the leverage that you do expect in that business? I think you've talked about 13% margins as a target. Why wouldn't we get there sooner versus later if we do start to see the good growth that we expect second half of '21 and beyond?

Well, look, margins in '19 were roughly 8%. In 2020, they're going to be well north of 20% -- 10%. Sorry, I wish they were 20%. So we're going to have a 200-plus basis point improvement in '20 versus '19. When we talk about the expectations for the second half of '21, there will be costs associated with us having to ramp for some of this stuff. And it depends on how quickly it comes, right? While margins were great in '20, right, we sacrificed growth. Had the growth been there, the margins would have been a little bit more impacted. So in '21, we're going to make a lot of investments in people. We're going to -- especially in the second half, we're going to train people. We're going to put some money in it. Despite that, we expect that '21 will be at least 100 point -- 100 basis points better than '20 from a margin profile. So we're still expecting to improve our margins in '21 despite a pretty significant increase in training. That leads you to believe, right, that as we get into '22 and the same thing we talked about, right? You've got your people are trained, they're working, they're productive, they're utilized. At that point, I think 13% becomes a realistic target. And quite -- and if the industry keeps going in the direction that it's going, there's really no reason that it should stop there.

Great. And so you did talk about Oil and Gas. Let me just ask you in this context, Jose, like if I think about in the Oil and Gas business, I saw Brent touched $65 over the weekend. WTI is over $60. You mentioned the issues in Texas. So does it seem like -- I mean, your business is pretty diversified actually within Oil and Gas. Yes, it's a couple of large projects right now, but you've got a lot going on there. So have you seen either more conversations, just more flat-out activity as oil prices have turned a little bit or not yet?

Look, I don't want to overreact, right, because I think that's how we always get in trouble. I think that companies made a commitment to The Street, right, all of our customers, whether they're producers or midstream operators, that they were going to improve their balance sheets, right? And that's, for sure, their #1 focus. And these commodity prices helped them dramatically get there a lot faster, get there in a more expedited manner than they were expecting. But I still think that's the focus, right? I still think those companies have to get their balance sheets in order. They've got to get The Street comfortable with their debt profile. With that said, right, the only way those companies grow is by deploying dollars and by building assets, right? At the end of the day, that's their business. So as their balance sheets improve, it only benefits us long term because it makes their businesses a lot healthier, which they're going to be able to make future investments. Do I think there's opportunities that have arisen because of this? Like are there short-term opportunities where something pops up and it's very profitable for them to do because there's no competition, because nobody is deploying capital? The answer is yes, right? To the extent that how much of that gets filled, we're going to see, right? Again, it's early. The longer this sustains, the longer prices stay above $60, if prices go to $70, right, all of that helps. So there's no question, we're in a dramatically better position today than we were a year ago, right? And at this -- well, maybe, I don't know, 9 months ago, right? Nine months ago, we were in a very different spot than we were today. Six months ago, the sentiment was very different than it is today. The sentiment has dramatically improved. Now how quickly does that turn into real dollars and work, I don't know. So we're going to stick to our $1.5 billion to $2 billion, which we think is a very conservative estimate. And hopefully, we're wrong and hopefully, it's a lot better.

And Jose, maybe one more follow-up there. You and I have talked about this a little bit before in that with the Biden administration coming in, obviously, there's a move toward clean energy, which we'll talk about. But at the same time, the first day, you know what he did to Keystone. So my question to you is you do have a couple of large projects that are sort of flowing through. How do you -- I mean, I understand that like the business in '22 -- '21 might be larger than that $1.5 billion to $2 billion, but how do you replace those large projects in a Biden administration world? Like are there still several pipelines that could be done? Like how do we think about that, if you may?

Yes. No, I think you're going to see those long projects not be part of our portfolio, right? I think you're going to see the smaller projects are going to -- there's a lot of smaller projects that are going to be built, right? A lot of laterals that are going to be built because they're always built. Distribution work is going to be really good. You're going to have a lot of midstream operators taking advantage of particular opportunities. That's where our business is going to come from, right? So we're well aware of that. I think we've done a good job of shifting our focus, of preparing ourselves for that. I think we're in -- we're well on our way to get there. But I don't think it's -- you're not going to see billion-dollar projects flowing through MasTec's P&L, which is not right. It's -- they're not going to be there.

Yes. And then on the Clean Energy side, we had Earl on earlier this morning, and he talked about sort of the growth in solar. You mentioned wind still being a big part of the business. When I think about the incremental opportunities, again, as the administration is still relatively new, I mean, Congress is literally just getting back to business again now. But are you starting to see -- like, obviously, you've had massive growth already. Are you starting to see a new level of conversations because it just seems like everything is accelerating? Or am I getting too excited?

Look, I think the biggest surprise for us has been the rate of adoption of our Oil and Gas customers, right, because that was unexpected. So every one of our Oil and Gas customers today is talking about neutral carbon footprint. They're talking about renewables. They're talking about getting in the space. They're talking about how do they grow that alternative fuels business for them. And that's fascinating because that wasn't even in the cards a year ago, right? So now you have this whole customer subset of people that we think we've got great relationships for, we've done a lot of work for. They trust us. We do a good job for them. And now they're getting into a new business that, by the way, we're actually pretty big in that business and we can help them achieve their goals or at least talk them through it. And so that's very exciting because it's a whole new subset of customers that we were never expecting in that industry. If you take them and put them to the side, right, the real customer base for us here are the big utilities, right? And I don't know that the big utilities have changed their mindset because of the administration yet because the administration hasn't done anything, right? So it will be interesting to see what the administration does to support renewables, right? Is it tax credits? Is it direct investments? What are the things that they're going to do to move the needle? Do I think that will impact the business? I do in a big way, but we don't really know what that is yet. So I would -- again, I don't -- we always get caught up and we expect something that doesn't come and then we think it's -- our thinking was flawed, right? But it's not. It takes time, right? So I think it's more important to wait to see what the administration does, understand the impact of it and then look for the opportunities around that.

And let me ask you about the margins in that business because they -- you've been doing pretty well there, but you probably remember not too long ago where it's a much lower-margin business. And the opportunity there is to get that margin higher. So how do you do it? Is it really just scale and continuing to grow and then you get your people in and then you sort of stabilize a little bit, and you maybe can get to double-digit margins? Or maybe give us sort of the prognosis for the margin progression there.

Look, we're investing an enormous amount of money in that business today in terms of hiring people, training people. And it's -- unfortunately, this is our business, right? We don't -- and if you think about what's growing in the Clean Energy business, it's solar. It's things that didn't exist. So it's not like you're going and stealing people from somebody else because people don't exist, so you actually have to train them to do this type of work. So if you look at our margin profile over the last couple of years, in 2019, we were just under 4%, right? We're going to finish 2020 over 5%. We've talked about getting close to 7% in '21, right? So that's nice margin progression over a 3- year period in a high-growth business where the growth isn't subsiding anytime soon, right? So we've got dramatic growth. And yet despite all these investments that we're making and these inefficiencies that we're creating on ourselves and the lack of productivity because, quite frankly, when you bring people in new, it takes time for them to be fully productive. The fact that we think we can get to 7% and we've got a good game plan to get there, despite all that, I think really bodes well to the opportunity to get that business to double digits, right? We look at the business in a couple of different ways, right? And what we do is we look at project level. So when we can see that this project can perform just as well as a project in another area, right, if at a project level, you can sustain double-digit margins, over time, as you gain scale and you reduce the inefficient spending which is usually hiring people, then the margins come up. So we feel really good about our ability to get this business to double digits. We think we're well on our way. We think '21 is going to be better than '20. But it does take time, right? Again, we want to take it from $2 billion to almost $4 billion. That's going to take a lot of investment if we do it all again.

No, it's very helpful. And is there any particular area within Clean Energy that is more, I don't know, exciting is maybe the wrong word, but is it solar that has the most growth? Or is it biofuels? Like where do you actually see the biggest driver of growth for Clean Energy?

I think it's in both of those, right? When we think of wind, obviously, wind is a little bit more mature of a market. It was a market where the tax credits were on the way down. It will be interesting to see what the new administration does. I think that is one area that could be a lot better than what we're thinking depending on government interaction. But solar and biomass are taken off, right, and biofuels are taken off. And I mean, that's where our growth is coming from. That's where we're seeing our growth this year in '21. That's where we expect a lot of our growth to come from in '22. So it's really building those businesses to be equal in size with wind, right? If we could have a renewable business where all 3 of those legs are roughly the same size, inevitably, one is going to be bigger than the other, but it could be any of them. And that's what's nice about the business, right? All 3 of those have significant opportunities in front of us that we can take advantage of.

And Jose, to your point, you've got to kind of train a whole host of new people to do this stuff, right? So if I look at just the numbers, you're up to almost 70% individual construction projects versus MSAs the last quarter, which is a pretty big number for you guys. And you know what I'm about to ask you, like I was getting a little nervous around execution when you're doing that many individual projects, but you've done a great job, I mean, over the last few years. And so how do you sort of manage project risk in such a big growth environment within Clean Energy?

Yes. Look, it's -- I think it's a misleading fact, right? Because what happens is what we've done really well is work with customers in terms of programmatic spend, right? So at the end of the day in a perfect world, we have customer X who's building x amount of megawatts of wind, x amount of megawatts solar, x amount of biofuels. And we want to be one of 2, 3, 4 players on that system that's getting its fair share every year. And that's how our customers are awarding us, right? So our customers are saying, expect to do 300 megawatts a year with us for the next 5 years. So while that may not be an MSA because each of those projects are individual, that's exactly the way an MSA works, right? So it's much more MSA-like driven. Although they're individual projects that make up those MSAs, the reality is we're committing to a customer, and we think a customer is committing to us for long-term programmatic work. And so -- and then you get where you -- it's repeatable, right? You're doing the same activity year over year over year for the same customer. You get to know their teams. They get to know your teams. We both become a lot more efficient together. And I think that specific -- we don't consider that an MSA, but quite frankly, we probably should, right?

Yes. No, that's fair. And what's interesting is that we're having this whole big discussion about Clean Energy, and I still don't get a lot of questions around MasTec gas and ESG play. So maybe talk about how you get more notoriety like that? What are you guys doing about sort of pitching the sustainability angle, which seems very important for you guys now?