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

Welcome to the fireside chat with the MasTec management team. My name is Guru Gupta. I run the infrastructure investment banking practice for Morgan Stanley. This afternoon, I have with me, Jose Mas, the CEO of MasTec; and George Pita, the CFO of MasTec. Before we dive into our session, there are a couple of disclaimers that we need to go through. So on Morgan Stanley's site, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. George, I believe you have a disclaimer from MasTec.

Yes. Thanks, Guru, and thanks, everyone, for joining us today. Good afternoon. We have an investor presentation deck on our website at www.mastec.com on the Investor Relations section. Today's comments will be covered by the safe harbor statement, the forward-looking state harbor statement that's shown in that presentation deck. So thank you. And with that, Guru, I'll turn it back to you.

Thank you. Thanks, George. So Jose and George, welcome to the conference. You've been a regular participant over the last few years. Still, we have some new audience members. So why don't we start with a quick overview of your operating segments where the business is today, and then we'll dive into each of the business segments. And after that, I would want to dive into your capital allocation philosophy and some of the risks that you see for MasTec and the opportunities that lie ahead of you. It's been a phenomenal year. Your stock is up 35% year-till-date. The company has had record earnings. But for the benefit of our audience, if you could give a short introduction on where the business is.

So first of all, Guru, thank you for having us and thank you for the invitation, always a conference we love attending. So for those that aren't as familiar with MasTec, my name is Jose Mas, I'm the CEO. We are an infrastructure construction company that really specializes in 2 markets, the communications market and the energy market. On the communications side, we really focus on both wireline and wireless construction. So on the wireless side of the business, we work with the major carriers in the U.S., building out their towers, putting their antennas, running their cables and maintaining their networks on their behalf all the way from front-end design to more probably an optimization and integration. On the wireline side, which is kind of where we got our start from, we do all kinds of fiber installation. We do aerial work, underground work. We work for all of the different regional operating companies, helping them build their networks. Obviously, the big driver there is what's happening with fiber, both fiber from a 5G perspective and really the additional fiber needed to densify networks on behalf of the carriers, as well as really providing broadband Internet at higher speed. So whether it's a telephone company or a cable TV company or there's a big drive today with the rural operators with the Rural Development Opportunity Fund that's funding a lot of rural opportunities, we have a number of customers and we help them with their network needs. On the energy side of the business, I think we've done a great job of really positioning ourselves to provide our clients with whatever type of resource they need from power generation all the way to power delivery. So we've got a distribution and transmission group that focuses on the distribution side and focus on electrical utilities and helping them with their network. So as you think about storm hardening and fire hardening, we're doing a lot of the work associated with that on their behalf. But as they build out new subdivisions or just upgrading their plant, those are the kind of activities we do for them, both on distribution and transmission. We have a clean energy and infrastructure group that does everything from power generation to more typical infrastructure. So on the power gen side, we focus on renewables. So we build wind, we build solar, we build biofuels. We're doing hydrogen turbine installation today. So we feel we have a very broad-based and a very diversified renewable mix portfolio within our capabilities. And then we also do some civil construction as well associated with that. And then finally, our last segment is what we call our Oil and Gas pipeline segment. It's predominantly a gas pipeline business where we've been building gas pipelines on behalf of our customers for a long time. And we do everything from midstream to long haul to a lot of distribution work. So overall, the business trends for us are fantastic. We see an enormous amount of growth related to 5G as it relates to our communications business. The trends in the clean energy space are very positive, and the opportunities that we see in clean energy across all the different generation sources provide us where we think it's going to be really long-term growth opportunities. We see the same thing with distribution and transmission projects. And finally, our Oil and Gas business, which we've really laid out our path in that business and we do expect that business to decline over time, about $1.5 billion to $2 billion annual forecast, although we did little bit better than that this year. We optimistically are seeing some things that I think will improve that business. We're seeing a lot on the carbon capture side of the business. We're seeing a lot on the hydrogen side that I think could really take the place of a lot of the Oil and Gas route that we did in the past. So that's kind of our business mix. I've had the opportunity to be the CEO of the business since 2007. At that time, we were doing just under $900 million of revenue. We should finish this year at just over $8 billion. So we've really had a nice period of growth here in MasTec and based on the businesses and where we sit and the opportunities in front of us, I think the best years of MasTec are yet to come.

Jose, thank you for that overview. So maybe you dive into each of your segments, especially on the 5G side, there's a huge opportunity now that the spectrum auction is over. How do you think MasTec is positioned and over the next year or so, what will be some of the opportunities that investors should watch out for?

Yes. Look, it's been an interesting couple of years, right? We had the COVID impact in early 2020, which affected a lot of our customers in terms of their ability to build in certain cities and certain cities were shut down -- municipalities and cities were shut down. I think a lot of the byproducts of that was what happened with people having to work remotely and the internet usage that resulted from that. So I think a lot of our customers really refocused on their wireline business and on their fiber facilities and how to proactively provide higher speed Internet to our customers. In the meantime, 5G was rolling out. Both AT&T and Verizon had some spectrum issues that they needed to fix through the balance of the year, spectrum auction that happened at the end of 2020, where they both won a significant amount of spectrum. So we knew that there was going to be a low in the first half of '21 related to their spend. When you look at our business, we've done a really good job of building our T-Mobile business during that time frame. They've been very active because they didn't have spectrum issues. We're seeing an excellent order flow from both Verizon and AT&T as we look in the back end of '21, which is our expectation. We think '22 is going to be a very solid year in the wireless year for us. So we think all of the trends in that business are positive, right? So they're pushing 5G. They're pushing it from a macro tower perspective. 5G is ultimately the densification of the network. So we're going to see thousands of antennas all through our communities, right, every couple of hundred of feet we're going to have antennas. It's called the densification of the network. That's where ultimately 5G will have its high success rate. Every one of those antennas need to have power, every one of those antennas need to have fibers associated with them. So that's where a lot of the fiber buildouts are coming through. We've been building our fiber in anticipation for what's going to happen on the wireless side. So really those sides of our business, both on the wireline and the wireless side, we see phenomenal run rates, phenomenal growth rates, phenomenal opportunities around the customers and their need to provide that level of service to their customers and obviously, the network growth that goes with it.

Okay. Then shifting towards Clean Energy and Infrastructure business. I have a two-part question. It looks like there's a lot of excitement in that space. Quanta just announced a big acquisition. Where do you see growth coming for your business? It's already a business that's up 5x. And second, in your Q2 earnings call, you talked about getting that business to double-digit EBITDA margins. What is the process? What's your confidence level with that?

Yes. Look, when we look at the industry, we thought that Quanta's acquisition of Blattner was a good deal. Obviously, they paid $3 billion to get into a space that we're in. So we think when we look at the value of our business, I think it really validates the strategy that we've had for a long time in building our clean energy business. I think Blattner has performed well from the margin profile as well. So I think it really gives a real good outlook on what the margins could and should be in the renewable space. So we've talked about getting that business up into the high single digits. We have a lot -- we have a different mix, right? Our renewables business is big, we've got other mixes in that business. So I think the renewables are definitely a double-digit margin opportunity. I think as we grow the other components of renewable, over time, we'll also get to double digits. So a lot of our issues have been within organically growing that business. We've been hiring a lot of people, which has been more expensive. We ultimately think it's a less expensive way to build the business, but in the short term it affects margins. So we feel very good about where we stand in the business. We feel good that we're going to ultimately generate double-digit margins. We talked about exiting this year at high single digits or mid- to high single digits. And look, I think this is one of the biggest issues with the MasTec story, right, is we've obviously performed very well for a number of years. I think people see that our business is shifting away from oil and gas in some of these other sectors. There's a lot of concern about our margin profile and our ability to hit the margins that we've been talking about. So for us, it's an execution story. If we can execute on the margins in clean energy, if we can execute on the margins in transmission, I think there's a significant multiple gap between us and our peers. And the way we close that multiple gap is by delivering on these businesses. So we get it. We understand. We feel very confident that our clean energy business will deliver similar margins to the business that Quanta bought over time. And I think that's really the opportunity that exists in the MasTec story, right, is if we can get our margins to where they need to be and where we said they're going to be, again, we think from a valuation perspective, there's an enormous amount of room for us to grow into.

Jose, you touched upon a great point. So historically, the pipeline business used to be your most profitable group and mostly from natural gas pipelines. But it looks like now O&G will become increasingly a smaller piece of MasTec story. So is that your intentional focus? What's your outlook look like as people think about the overall mix of your business over the next 2 years or so?

Yes, sure. I mean, we laid out a plan about a year ago, right, this time a year ago where we kind of laid out a footprint for how we get to a $10 billion company in a declining oil and gas market environment, right? And if you think about September of last year, obviously, we were 6 months into COVID, the demand for both oil and gas was down significantly. The expectation for the business was kind of dropped considerably. So at that moment in time, we kind of laid out our path and said, we think we can deliver a $1.5 billion to $2 billion annual run rate in that business, irrespective of what's happening in the overall environment. Obviously, in '21, we've done better than that. We've had some projects that kind of crept in from kind of rollover from '20 and '21. But as we look at '22, that's kind of been our outlook, right? We think we can have a sustainable Oil and Gas business at $1.5 billion to $2 billion, that does everything from distribution work all the way back into midstream, doing some projects that our customers are going to need. Since that, right, I think it's important to talk about this, the sentiment is changing, right? Oil -- commodity prices are [ lower ]. We've got a very active drilling cycle going on right now in the United States again. And we're having a lot of our customers talk about projects that have previously been mothballed or put on hold and talking about bringing those projects back. So we'll see. We're feeling a lot more optimistic about that. We're not changing our view for '22. We still think our outlook is valid. I think we could potentially start to see some of this up to -- in '23. But more importantly, right, when we think about this business long term is really what we're seeing on the technologies, right? So between hydrogen and carbon capture and the opportunities associated with them and the pipeline opportunities associated with them, I mean I think we've got a path to really build a really solid pipeline business again, irrespective of oil and gas. And that's a different place that we're probably learning, we didn't know about this a year ago, right? We had -- carbon capture wasn't getting the attention that gets today a year ago. So I think these are new things that have happened within our space that give us a lot of optimism into the future. And again, while we're not changing our expectations on that business, I think the outlook has significantly improved, especially in outer years as some of these new technologies take hold.

Thanks, Jose. And then shifting to your electric transmission and distribution business. First of all, congratulations on interim deals, very, very smart move, expands the geographical area that you serve. What are some of the key drivers for that business? And where do you see the outlook both on revenue growth and margins?

Look, so INTREN was a great acquisition for us. It was predominantly a union distribution business. Historically, we've had a significant presence in the non-union distribution piece and then we've got a transmission substation piece. So as we look at our business going into the future, I think we've got a great mix that we can pretty much offer any customer regardless of where they are geographically. We can meet their needs, right? Again, storm and fire hardening are big issues. Or issues that are getting a lot of attention. There's a lot of spend following them. Even just from -- as you think about electric vehicles and the whole change in how we're going to deliver electricity, right, the networks that we currently have in cities across the country need a lot of work. They need to be rebuilt, they need to be strengthened and that's where this business comes in. So I have a lot of optimism that this business has tremendous growth opportunities, both on the union and the non-union side geographically. So I think we're incredibly well positioned. INTREN's performed really well since we bought them. We also have our transmission business right, we have $500 million, $600 million transmission business. It's grown nicely over the last couple of years. We've talked about that business getting to $1 billion. We think we're scaled to be a $1 billion business in transmission. We need to get there to ultimately achieve the kind of margin profile that we want to achieve. I think overall in that segment, you're going to see margins considerably improve in Q3 and Q4. We've talked about exiting the year at double-digit margins in that business, which I think will give a lot of comfort to our investors that we're going to really perform well in that business in '22 and beyond. So I think the outlook for that market is fantastic. And I think we're going to continue to grow it significantly, strong double-digit rates -- growth rates in that business for the foreseeable future and it's definitely going to be one of the more important segments for MasTec and our ability to grow our company over time.

So just shifting to the balance sheet, George, you've done a phenomenal job in generating cash flows, doing acquisitions, but not really increasing the leverage. You've been very, very disciplined. What's your target metrics on leverage now?

Guru, I think it's important that we talk about how we're able to maintain our leverage profile given the investments we've made. If you look at our presentation deck, we've invested over $3 billion in M&A, share repurchases, et cetera, other capital kind of investments in the last decade. And obviously, have delevered the balance sheet during that time frame. We're fortunate that the MasTec business is structurally set in a way where it generates what we call -- what I think is a very dependable cash flow profile. And that's, I think, because of the combination of the high percentage of MSA work that we have, which is unit-based, which continually generates significant billings and collections on a recurring basis. And the fact that most of our project activity is really done within a short period of time, so we don't tend to have long multiyear contracts that tie up a significant amount of working capital. And consequently, if you look at our performance on the cash flow perspective from the last decade plus and certainly the last several years, you'll see we have a very strong working capital cash flow profile and a very strong free cash flow profile. I think it's important to note that, as Jose mentioned earlier, that we're transitioning our business or our business metrics are transitioning. We put our view of a $10 billion enterprise and a strong double-digit EBITDA margin with a mix of our business changing, right? The non-oil and gas segments, then the communications, the clean energy and the transmission distribution growing. And, let's say, a more measured pipeline services group. And in that picture, it's important to note from an investor perspective that I think our working capital profile stays the same, maybe slightly improves, right? I mean there's certainly -- on the communications and on the distribution side for electricity, you're having a lot more MSA. So it tends to generate, I think, a little bit faster working capital payment cycle. But then also, certainly, on a free cash flow perspective, the MasTec profile improved significantly because our most capital-intensive business over the last several years has certainly been the Oil and Gas pipeline business. And as our business shift -- our business has shift and we have more growth in those non-oil and gas segments, our free cash flow profile certainly improves. Relative to our debt metrics, I mean, we ended the second quarter at 1.4x net debt leverage. We've done that after deploying it this year somewhere in the neighborhood of $0.5 billion of acquisitions. And still have -- when I say 1.4x net debt, I'm not pro forming any 12-month acquisition EBITDA, I'm doing this based on our run rate. And we would certainly expect that we will delever some from there between the second quarter and year-end. So we'll end probably closer to a little over 1x net debt leverage. There's no reason absent acquisition that our business can't be run at 1.5x thereabouts, maybe a little less than that in terms of net debt leverage. And again, I think the key point on that is to note that the free cash flow profile of the business is very strong. So even as we have times when we do some acquisitions and we might go above our kind of our target level, if you will, we generally have the ability to pay that down pretty quickly and have shown the ability to do that certainly over the last decade plus.

So George, what's your philosophy around capital allocation given such a strong free cash flow generation? Is the focus going to be on buybacks, dividends? How do you think about that?

The way we think about it, and I'm sure Jose will jump in. The way we think about it is really what do we think is the best way to maximize shareholder value, right? That's the ultimate goal. At different points in time over the last 8 years that I've been here, that's been different things. There's been time that we've deployed M&A and we've been active on that front, there's been times when we think there's a significant disconnect and we do -- we've done share repurchase on a very opportunistic basis, and there's been times that we've considered -- we actually just delevered the balance sheet, right, when that was the appropriate time to do it. So between buybacks, share repurchases, deleveraging, I'd say, we consider dividends but historically, have not gone to that process just yet because we believe that there is significant opportunity for growth in our business. So the dividend is kind of going to the latter part -- to the lower part of that list. But we're looking to -- depending on the opportunity that we see in front of us, looking to maximize shareholder value. At different points in time depending on where that is, it's going to be a different application. And certainly, we've talked pretty publicly now that there is a pretty significant -- like there's a lot of activity on the M&A front. Obviously, we've done about $0.5 billion worth of acquisition in the first half of this year. And given the growth profile of a lot of our end markets, if there's an opportunity for us to reinvest to expand and become a bigger participant in some of the areas that are significantly growing by step -- by increasing our geographic presence or customer relationship or service categories at a reasonable price, you can count on MasTec to do that. I think that's one the key things that MasTec over the years has shown and has shown great discipline in approaching M&A because it's not M&A just to grow, it's M&A to maximize shareholder value. You could take a step back and look at the markets that we're in today and say, "Wow, MasTec is well positioned because they're in clean energy and they're in transmission distribution, et cetera." But if you take a step back, those are all businesses that we've gotten into in the last decade, right? And we've got into them because we've gotten -- we've established entry points reasonable -- as a reasonable upfront multiple, like the INTREN acquisition. And we hope that the M&A process where it's 1 plus 1 equals 3 because together, we can generate more revenue and generate more opportunity than we could individually. And that's something that I think is a key core competency for MasTec and something that we would -- you would certainly expect to continue. I don't know, Jose, do you want to add anything to that?

Yes, look, I think one of the uniquenesses of MasTec is our family's ownership so my family has the largest stake in the company. I think we're incredibly aligned with our shareholders and the goal of increasing shareholder value, as George mentioned and we've mentioned that a lot. We're opportunistic as it relates to the opportunities that we see. So if you look at the stock buybacks that we've done historically, they've been opportunistic. They've been in areas where we think the market has been very disjointed versus reality and we think we've done very well on that, and we'll continue to do that in the future. In the current term, I guess, I think we've talked about this a lot, the M&A activity is incredibly strong. There is a lot out there. There are a lot of good companies available. And because -- maybe because of our ownership, we're very conservative on [ threshold ], we're going to buy under the method that we think is best, that we think that has significant shareholder value, right? We're looking for companies that we think we can add something to, that we think we can help them grow, that we think can help them get us to where we need to be faster. Again, we're going to do that in a conservative nature. And if we can achieve that, we'll do it. We don't need to make acquisitions to meet our plans and to meet what we've talked about out there. We think we can do that organically. The market is strong enough. But there are certain M&A opportunities that I think really expedite our ability to do it and enhance our ability to execute and we will look at those. And if they make sense, you could expect us to do something. And I would probably expect to do some more M&A activity before 2021 is over. From a leverage perspective, to your earlier point, I don't think we're leveraged it all. We've -- obviously, our balance sheets are incredibly strong. We have the opportunity to lever up if we needed to for the right opportunity. And again, we do that in a very mindful way and in a very conservative way. So just like our shareholders, this is where my capital is, this is how -- the value of MasTec is very important to me and to my family, and we're going to defend it and protect it and grow it as best as we can.

Yes. Well said, Jose. And you've delivered very, very consistent performance and very solid results quarter-after-quarter. But over the last few weeks, the stock has pulled back. It does appear to be a lot cheaper now. As the largest shareholder as well as the management team, when you think about it, what is it that investors are missing today in MasTec's story?

Yes, look, I think that -- I actually think it's a very simple story, right? I think it's a story in which we're in the process of going from being very strong from an Oil and Gas margin perspective. A lot of our earnings have come from Oil and Gas. We've transitioned from that into clean energy and transmission and distribution have become much larger pieces of the pie for us. And we've got to deliver on the margins of those 2 segments. We know that. I think we've talked about it a lot. We've talked about the good to bad and the ugly as it relates to that within our own business. I think we're very confident in our ability to execute to that. And I think when we demonstrate that, the market is going to follow from valuation perspective, I've convinced them actually, right? So for those that believe in us, for those that believe in the story, that believe that we're going to execute the way we say we're going to do, I think there's an incredible opportunity here to own MasTec stock because the valuation gap is so much different. And at the end of the day, that's it, that's MasTec's internal story. We know that -- we know the third quarter is going to be important relative to that and the fourth quarter is going more relative to that. And we can demonstrate that we can consistently get double-digit margins in those businesses, that the story of MasTec completely changes. And that's what we're here to do, we're here to execute, we're here to continue to work hard in our business, to take advantage of the opportunities and deliver on what we say we're going to do.

And Jose, you've done -- you've led the company through the pandemic recovery. The company has done extremely well. Is there something that you worry about?

Yes. Look, I mean, as CEO, I think I'm supposed to worry every day about -- just about everything, right? I think -- I feel we have amazing people at MasTec. And at the end of the day, what we sell is people, right? We're a people organization. We're out there every day working hard. The sacrifices that our people have made, the commitment that our people have made, the safety to our customers, putting themselves at risk of times to deliver on behalf of our customers' customers. I'm inspired by the people who work at MasTec, I'm honored to lead the people that work at MasTec. And we have an incredible team, and that's what makes our company successful. So I worry about our people's health. I worry about changes in the pandemic and making sure that we're keeping our people safe every day and we talk about that all the time because by far, they are our most important asset. Outside of that, attracting talent and bringing new talent is a very important part of our future business. I think we work really hard, we're trying to make MasTec the employer of choice. We really try to make this an organization where people come for career. It's not just about a job. You can come here in one role and hopefully you can go to your family and provide a better future for your family when you're able to -- before you join MasTec. That's really the MasTec story. That's our family story. We believe that's something that we want the culture here to be like. With that said, I think our businesses are going to be great. We have plenty of work out there. It's all about winning the work and then hoping to execute with having the right people in place, giving them the right tools to be successful and ultimately executing the work, generating the best financial results that we can with the opportunities that we have.

Okay. Jose, I think we're almost out of time. Thank you very much. It's an incredible story, a phenomenal success over the last 14 years or so now as the CEO, and we want to wish you good luck for the future. Looking forward to MasTec getting to that $10 billion mark. Thank you, Jose. Thank you, George.

Hopefully, the next 14 years are even better.

Yes, absolutely, Thank you.

Thanks Guru.