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

Great. Thank you. We'll move on with the program here at the D.A. Davidson Conference. Very excited to have MasTec do a chat with us today for the next 30 minutes. I have the entire management team here, Jose Mas, CEO; George Pita, CFO; and Marc Lewis, Vice President of Investor Relations there as well to take some questions. So Jose, George, Marc, thanks for the time today.

Thank you, Brent. Thank you for having us.

Jose, maybe just kicking off with the Clean Energy business. Just a lot happening this year and even in the last few months that I think is interesting to talk about right now. I'd love to just get your initial thoughts, how you think about the industry implications and implications to MasTec, just related to the Quanta-Blattner transaction since they kind of bump up against you in your space?

Yes. Look, I mean, we've obviously been very bullish about the business for a long time. We started in the business around 2010, early on in a wind cycle when wind really first started to get legs. The business has changed drastically since then, right? Initially, a lot of the business was around tax equity and tax credits, and they're still very important obviously in the business, but it's changed a lot. The types of developers over the last 10 to 12 years has considerably changed. So we've learned a lot from it. I think we're very early on in the solar cycle, very similar to where wind was 10 or 12 years ago. So I think there's a lot of similarities there that we're going to be able to benefit from. But overall, I mean, we're incredibly bullish on our customers' desire for continued pushout of renewables, right, whether it's wind or solar. Wind has its transmission challenges. I think there will be pockets of wind that open considerably with the number of different T lines that are going to be built. Solar has its own set of issues, right, when we think about the tariff issue and some of the supply chain issues that exist. But overall, the businesses are fantastic businesses. I think there are incredible growth opportunities for our industry. We expect our renewables piece of our business to be considerably bigger in the future than it's been, and it's been a pretty meaningful business as it is. So we're very excited. The Blattner acquisition for us, I think it's a validation of our strategy. We've been in this business for a long time. We've really taken an approach of building solar from an organic perspective. I think we're obviously a direct competitor of Blattner. I think we're 2 of the largest in the space. And the fact that Quanta paid $3 billion to get into the business, I think, validates the value of what that business is to MasTec. I don't think we get anywhere near -- anywhere type of that amount of credit from a valuation perspective, but I think it shows what the business can ultimately do from a margin perspective as we keep building it. And again, I think the market is in a great place. So we're very excited about the future. We're very excited about how we think of our customers and the customers we think we have strong relationships with and their desire to build and what their plans are. So in the solar market, just like wind a long time ago, we've got a lot of different developers that are building. I think the bigger utilities will ultimately be the 800-pound gorillas in the business like they are with wind. And I think in that lies enormous opportunity for MasTec, and I think we'll execute on that and really take advantage of that over the coming years.

Yes. And Jose, this is kind of expanding that because you guys have taken some steps to expand what you do for utilities, particularly this year. Now they kind of offer this renewables EPC, full-fledged electrical tie-in services. Do you think -- I mean, does that enhance your competitiveness in the market? Is it take the relationship with the customer to the next level? I'd just like to get your thoughts around that.

No. Look, I think we've taken it a step further, right? So I think when we think about our strategy over the last year, we believe in everything that's happening around the grid. We think the grid is going to look dramatically different in the future than it does today. So we've invested a lot in really growing our capabilities around that, but we're also investing in trying to find solutions for our customers, right? So power generation is going to change dramatically. So I think you have two forms, right, you have power generation, you have power delivery. So on power delivery, you have transmission, distribution, substations, and I think there's tremendous growth and opportunities in that market. We all know the reasons why everything from EV to the advent of renewables and other renewable sources of energy that are putting strain on the delivery side. Then you have the generation side, right? And there's no question that wind and solar are important components of generation, but they're not the only components, right? So we've done a great job of building what we think is a biofuels business. We think hydrogen is going to play an important role in the future and all of the different biomass opportunities that exist with different fuel sources. So we think we truly offer our customers end-to-end solutions, right, because we can walk in and every one of our customers isn't only doing wind, isn't not only doing solar, they're doing a lot of different things. And we're capable of doing them all for them, from the inception, from that generation point all the way to the distribution point, whether it's transmission, distribution, substations. So I still think we have the best value proposition when it comes to full turnkey [ advanced ] solutions. Now every customer is different, right? Not every customer needs it. There's some customers that only do generation. There are some customers that only do power delivery and then you have the companies that do both, right? So they're all potential customers. They're all customers that we're really trying to build a product offering around. And again, I think we're going to have tremendous success with that in the coming years.

Okay. And Jose, you talked about the targets for the business in terms of margins over time for clean energy specifically. I'm seeing kind of that from Blattner in the most recent year. You've been hiring and managing pretty rapid growth here over the last few years. What else will it take sort of get MasTec up to those levels and those targets you've been talking about?

Yes. Look, I mean, when we look at our wind business specifically, our wind margins are roughly in line with where Blattner's are, right, with what's publicly disclosed. I think that the rest of our business needs to improve and do better. A lot of that is the fact that we've organically grown it, right? We're newer to the space. We're building it fast. We're adding a lot of people. We're throwing enormous costs for training and hiring people to gear ourselves up for the growth. That's having a significant margin impact on us. We've talked about that at length. So I think what's important, right, when we look at -- when you look at some of the people that have been out there for sale in the market, this is a double-digit margin business, right? I think that's what this proves out. Blattner is not the only company making double-digit margins as a business. We're obviously not. That's where the opportunity in MasTec lies, is our desirability to get to a margin profile that's more in line with the market. And if we do and when we do, right, it's where the real discrepancy in valuation from MasTec is, right? So I'm convinced that when we can get our businesses to the margin levels that we've talked about and we know we can achieve, the valuation of MasTec [ is going to fall will create ] a significant discount to our peer group. And that's about it, right? When we can show that and we can consistently show that and prove that out, I think the upside to valuation in MasTec is as good as any company in our space.

Jose, one of the other questions I get on clean energy is just -- you do a lot of things within it, but I guess there's some concerns maybe wind takes a little bit of a pause next year in terms of wind installations. Now there's planning going on in '23 and beyond, obviously. Maybe help us flesh out how you think the business can still grow through that, if that turns out to be the case next year?

Yes. I mean we've been talking about our wind business that's somewhat flattish in '21 and '22. So if you look at -- we didn't have a lot of growth from '20 to '21. We -- that was our expectation. We don't expect a lot of growth in '22. Wind is constrained by transmission. There's a lot of wind going on, right? There are -- there's a lot of wind available to be built that's not tied to transmission, but there's a lot more wind available to be built that is tied to transmission, right? So there's a couple of transmission lines that are going to be key to really open up what we think are wind corridors that are going to have substantial work in '23 and beyond. You know I know Quanta kind of lowered their view on revenues on the wind side of the business going into '22. I think that's more company specific based on their activity in '21. I don't think they saw the flatness in the business in '21 because of particular projects. I think the rest of the industry did. So I think the rest of the industry is going to be flattish in '22 and really preparing for what we hope to be a lot of growth in future years.

Okay. And maybe one more on clean energy, more strategic, but how do you think about potential M&A in the business, if at all? Is it to find an entity that serves something unique you're not doing? Or is it to build some more scale in a particular area, whether it's solar or something else? How do you sort of approach that?

Yes. Look, I mean, our main approach is, we think we can do everything we've said organically. So we're building the business from within. We're having a really good growth here from a solar perspective in '21. We think we're going to grow substantially in '22 off of the base we're at in '21. So I mean our plan is coming together. Obviously, if there's a company out there that we think can kind of supercharge that and allow us to get there faster or brings a different set of relationships with customers or it gives us an access to labor that we might not have. Otherwise, I think those are all interesting things to look at. There are a lot of companies in the space. There are a lot of solar construction companies that have been built over the last few years. And I go back to the early days of wind, right? Because you have so many different developers, you have a lot of solar contractors that are all different sizes. As the business gets more complex, as these projects get bigger, you're going to see a subset of those contractors that secede. A lot of the smaller guys will end up just doing work for smaller developers. So I think in that are opportunities for us, right, to look to enhance our service offerings and our geographic footprint. But again, it's something we can do. We strongly believe we can do it on our own. If the right transaction comes along, that we think creates good value and we can get it for a fair price, we will.

Okay. Want to take some time on the other segments, too, here. Maybe Communications. You had a huge quarter for bookings in the second quarter. As you said, that was kind of across the board, wireless, fiber, fulfillment. What are you hearing from customers now, Jose, that sort of supports this late '21 ramp-up in activities? And do you hear it from a lot of different customers? Or is there some key ones in particular?

Look, I think it's very similar to renewables, right? The business is really hot. The plans, the future plans of our customers are massive. They're very concerned about labor issues, so they're contracting early. They're doing unique things to try to tie contractors up for longer periods of time. That plays very well into what we try to do with our relationships and the customers that we have. So I think long term, the view -- honestly, it just gets stronger and stronger every -- we keep seeing new programs come out. We keep seeing different customers talk about different types of plans. So the level of activity is continually increasing, which is pretty dramatic considering the high levels of where we were at. With all that said, right, I mean, all this does take time, right? So we're not -- a lot of these projects, there are '22 projects, a lot of these projects are going to ramp throughout '22. I think '23 is going to be a much bigger year than '22. So you've got wireless -- obviously, we've got a very large wireless segment and a wireline segment. And a lot of what I described is the wireline side. The wireline side is very active in bookings today, but I still think your -- activity is increasing, but it's going to continually increase over the coming quarters. So where I think we get to a really, really high run rate in '23. On the wireless side, we're still living with the slowdowns from the Verizon/AT&T spectrum auction [ bill deducts ]. We're starting to see the activity pick up relative to those. I think there's no question that we expect a really strong fourth quarter, right? We've talked about that at length. I think it's going to be historically a very strong quarter. Everything is muted by supply chain these days, right? So we're -- we feel good about where we stand with it, but we're cognizant of it. We know that the risk exists. We're trying to manage that as best as we can, but we're excited. I mean there's no question that we're about to get into what we think is going to be a very big and long-term cycle, and I think we're incredibly well positioned for it. So we're really doing everything we can to prepare for what we think is going to be substantial growth in that business for us.

And Jose, as you said last quarter, T-Mobile is growing really fast for you. I mean how do you -- so small terms, I guess, but how do you think about the longer-term opportunity with them, especially, I guess, against some of your historically larger telecom customers, whether it's AT&T or someone else?

Yes. Look, we've always talked about diversity within our business. And for a long time, AT&T was our primary customer on the wireless side. I think we've done a fantastic job over our T-Mobile relationship. It's -- they've become a very big customer for us and we hope that they become a bigger customer for us in the future. I think we're going to have some really nice gains with Verizon on the wireless side, which we historically haven't done a lot. I think our AT&T business is going to be solid. So I think as we look out over the next 12 months, I think we're going to have a bigger wireless business that's better diversified amongst the key players. I think even DISH is going to play -- is going to be potentially a very important customer for us over time. So I'm feeling great about where we sit in the industry. I feel great about the customers' perception of MasTec and their knowledge of MasTec, especially on the wireless side. There's 4 major carriers. I think all 4 of them understand what our strengths are and what we can bring to the table. And I think because of that, over time, we're going to win some nice work.

And Google Fiber has been out, at least publicly, talking about some new markets they're penetrating. Are they an opportunity for you?

Look, everybody that's out there is an opportunity, right? There are a lot of people that are out there building. So there are a lot of clients that we're in discussions with. You get to the point where obviously the more activity that exists, the better it is for the industry. It creates more challenges from a labor perspective. Quite frankly, we think that's an area of strength for us, right. We've tried to build MasTec to be an employer of choice, which we've done a lot in training our resources and really preparing our people to get ready for what we think are spikes in the industry. We know we can't do everything for everybody, but at the same time, the sentiment that exists out there in the business is really, really strong and we find that to be really positive. And I think if there's a company out there that needs somebody that can deliver for them and be on time and on budget, I think there's few that can perform the way we can. And I think our customers know that, so I think we'll be successful across a broad range of customers.

Okay. And in past sort of industry investment cycles, Jose or George, I guess, you've had the install-to-the-home business in the Communications segment results. And this time around, it's just not as significant as it used to be as a percentage of the business. Is that something we need to consider when we start to think about the margin potential of the business versus looking at it historically? In other words, could margins be better this time around because you didn't have the business? Or you won't have as big a percentage of the business?

Yes. Look, I mean, for us, it's -- we're still big believers in that business. At the end of the day, we've got an installed network that we've got a lot of trucks out on the road every day visiting people's homes. We think there's a massive market around that, right? We've done a good job consolidating within the DIRECTV space. DIRECTV is now a stand-alone business, which we think is going to help us from that perspective. The business is as strong today as it's been in years, so it's kind of stopped. For a long time, it was a business that was just a decline quarter-over-quarter-over-quarter. That's kind of stopped right now, and the business has performed relatively well in 2021. But more importantly, I think it's what we have, right? We have a nationwide footprint of thousands of people that can visit people's homes to do in-home activity. And we're working with lots of different customers today. None of them are large scale, none of them are -- really move the needle in a big from a revenue perspective. But I think that the opportunity exists. I think all of us are going to continue to buy more direct product, we're going to continue to visit retail stores less and have more stuff done direct. For somebody that's in the consumer business that needs product delivered to a home, and needs product installed to the home that needs smart homes to be able to understand what's happening and talk within the networks. I mean it's a fantastic business. It's a business that's developing. I think we're right in the middle of it because I think -- again, I think we're the largest third-party fulfillment business in the country that's not affiliated with a retail brand or product. So I have high hopes for that business, and I still think that we're going to unlock a lot of value in that business over time. There are some private companies that are much smaller than we are that have traded in that space at massive valuation by multiples of revenue. And we think it's an undervalued component of our business that people don't fully understand, but it's an important one. And I think over time, we're going to maximize the value one way or another.

Okay. Well, maybe one more just on thinking about the -- where margins can go for the business, and you've already made some huge inroads there in terms of how we look at it year-on-year. But is this a business -- I mean, overall, for the Communications segment, where we can get somewhere beyond 12% to 13%, especially in the heat of this sort of investment cycle? I mean what are the sort of levers we need to consider there?

Yes. Look, I mean, first, right, we've talked about hitting 12% to 13%. That's our goal, right? I think we -- I think 13% is a very achievable number for us. Do I think it can exceed 13% in a cycle? I do, right? But I think we're going to be careful as to how we talk about that because we haven't done it yet, right? So we want to get there. We want to get there consistently, and then we probably want to set another goal. But based on the ramp that we see over the coming years and the challenge that labor is going to be and how our customers are going to ultimately react to that, I feel great about our ability to, over time, continuously improve margins there. But 13% would be a great start. It will be significantly higher than where we've been consistently. I think the last 1.5 years, we've done really well. But we still have another 100, 150 basis points that we can pull out of the business to get us to 13%. And I think once we're doing that consistently, then we'll definitely start talking about other targets. George, anything you'd like to add?

I think the opportunity, we're investing as we grow. We're growing -- we think we have a $2.5 billion business today that we think is sizably larger than that. And over the next 24 months, we think that's going to expand significantly. And with that, we will improve our margin profile certainly. But also with that will come investment as part of that, so I wouldn't anticipate. So the way I think about it is we're making investments in the business over the next 24 months. As you start getting towards a larger run ramp, could we have an opportunity for higher margins? I think the answer would be absolutely. But we've got a ramp-up to flow through, and we think we're going to do that while improving margins, but we are certainly going to be investing in that growth in the next 24 months.

Okay. The transmission distribution business, maybe just an update on your restoration activities, I guess, associated with Ida. And historically, has INTREN been active in restoration work? In other words, are you deploying more crews than you typically would for something like this?

Well, look, again, we talked a little bit about the distribution transmission space earlier. It's a space that I think is going to be fantastic. I think there's so many changes and so many issues that our customers have to deal with, whether it's storm hardening, whether it's fire hardening, those are areas of the business that there's significant demand for. And I think all of us in the industry have to figure out ways to bring new people into the business so that we can achieve our customers' targets. So the base business is fantastic. INTREN has performed great since we've owned it. From a storm perspective, it's obviously part of the business. I think when you have strong storms, especially when they go through areas where we're very active and we're an active player in both, it has a negative impact on our business for a period of time. And then obviously, to the extent that we can get recovery effort work, then there's a positive impact. So I think net-net, it will have a positive impact from MasTec on the quarter. We've got a lot of different businesses. Every business isn't positively impacted. But I think overall, it will be a net positive. We probably have more people in the storm than we had on any storm before. INTREN didn't really respond in a significant way there. They're -- they have to be released by their customers. Some of their customers didn't release them or felt that the storm could potentially harm some of their networks. So in a lot of cases, they didn't get the amount of people [ who lose ] that they would have liked to at one point. But I think we did a great job. I think the customers have been very happy with our response and the things we were able to do, and it's definitely been an area of the business that we focus more on and think we can have a lot more success in the future.

Okay. That's great. And it looks like INTREN, I mean, as of the last quarter, is definitely performing to what you hoped for. What the -- I think we talked before, they came with an acquisition pipeline. Is that something you guys are starting to cultivate a little more? How are you thinking about strategically growing out this business going forward?

Yes. Look, we've taken a few months to really integrate them to really understand their strengths or weaknesses, that they've been a fantastic add to the company. They had a number of targets that they were talking to that I think complemented their services. I think we talked about our M&A funnel being very strong, and I think that's obviously part of it. The challenge with M&A today is valuation expectations, right? And I think to the extent that we can find companies that we think have significant growth in part of them, that we think we can help them add value and really achieve their results on an expedited basis and we can get at a good value makes a lot of sense for us. So I do think you're going to see us be active in M&A through the balance of the year. We'll definitely have some that I'm pretty sure will get done. We're looking at a lot. So it's a consequential pool, right? They got to meet all our metrics. I think we're partly disciplined with our capital. So to the extent that we can find the right ones that we think make sense for us, we'll execute on. And it's a pretty [ active climb ], including what INTREN brought to the table.

Okay. Great. Definitely an exciting area for the business. The oil and gas side, I mean, you've offered some pretty explicit views on the business to The Street already. Jose, just maybe just an open floor in terms of your views on the business over the next couple of years, your opportunities and challenges. Maybe what's the latest you're seeing within the business?

Yes. Look, we talked about the challenges in the business. I think '22 is going to be a tougher year. We've said that we expect revenues and margins to be down in '22 versus where they are in '21. We kind of set a midterm goal of hitting $1.5 billion to $2 billion a year in revenue. I think that's kind of where we're going to end up in '22. I think the surprising thing for us is the sentiment in the business beyond '22 is a lot better, right? Commodity prices are way up, drilling is really active, again, both from oil and gas. So I think the demand is going to be there. I think we've got a lot of customers talking about projects that have kind of been either mothballed or canceled all together and they're all coming back. I don't -- I just -- I don't feel comfortable thinking that they're going to hit in '22. If they do it, it would be great, but I do think a number of those projects are going to hit in '23. When you talk about carbon capture and what's happening across the country with a number of different projects, and the opportunity for us, it's exactly the type of work that we do. There's some massive projects being discussed. I think most of those are slated to start in '23. And we've got hydrogen right behind that with a number of projects that are being discussed. So I can envision a '23-'24 time frame where our oil and gas business, it might not be called oil and gas by that time, but it gets back to historical levels from a revenue perspective just based on different technologies and different things that are out there. So the last 6 months have been incredibly invigorating in that market because all these new things are coming into play that take the exact types of resources and work that we've been doing for such a long time. But I think we're going to manage through it, right? I do think we're going to see a dip in '22. It will be a good opportunity for us to really plan out our future with some of the new technologies coupled in with the oil and gas work that we've done. And I'm incredibly bullish about what we're going to be able to do there in '23 and beyond.

Okay. That's great, Jose. Maybe I just want to ask on cash flow and cash conversion. George, you talked about this higher level of MSA work and driving sort of a quicker collection cycle, strong cash flow from the business. Your DSOs were kind of around 80 days last quarter. With the mix changing at MasTec, which looks to be the case in the next few years, I mean do you think those DSOs shrink even more and we start to see cash conversion improve even more from here?

Thanks, Brent. Listen, before I do start, we forgot to say at the beginning. Obviously, we have our website. We have our investor presentation available on our website, Investor Relations section at www.mastec.com. And please make note of the safe harbor statement that's included in the web presentation. Look, relative to cash flow, I think, firstly, we're fortunate in that we've -- I think we've exhibited over the years that we have a very consistent, strong cash flow profile. We've consistently generated -- despite strong levels of growth over these years, consistently generated excess cash and that's come with our current mix, right? And then to your point, our current mix, I think of it as a working capital profile and then I think about a capital profile. And what I would say is on the working capital profile, which is the net DSOs, DPOs, et cetera, generally speaking, we have very a very consistent performance. And in part due to our contract structure, there are a fair amount of MSAs. And even in general, our contracts typically are done within a short duration of time frame. So we don't -- we're not -- we don't typically have multiyear large projects at a fixed price that can potentially tie up a lot of working capital. That said, as our business changes, the levels where it's changing on the communications front is pretty much all MSA-driven, which is unit-based and smaller increments of invoicing and billing and collections. Likewise, on the electric distribution side, similar profile. So you could sort of make a case that as our business transitions into communications and electrical distribution, that there is an improved working capital profile with that. So I think there is some slight benefit to our working capital profile. As a result, I think more significant would be the fact that as our business transitions and we have a smaller piece of our business tied to pipeline services, that has historically been our largest capital-intensive business. And therefore, as you would go forward, you would look at a business that would have a greater free cash flow profile because the capital intensity would reduce. And we've communicated that in the past, and that's certainly our view as the business goes forward that that will improve what is already a very strong profile. And what we've looked at over the years, obviously, we've invested -- you asked Jose about M&A. We've reinvested in the business through M&A. We've done share repurchases. We've delevered. I mean we're fortunate that the cash flow profile gives us significant flexibility to take advantage of the opportunities in front of us. And that's something that I would expect to continue. And actually, given a better free cash flow profile, actually improve as our business transitions here in the next 12 months to 24 months.

Okay. Appreciate that, George. I know we're in our final minute here, so maybe I'll turn it to Jose or George for any closing comments.

Yes. Look, I mean, we're thankful for everyone's participation. We're blessed to be in the position that we're in. I think we've got tremendous tailwinds behind us, and we're excited to get moving. We're excited to see what ultimately happens with the reconciliation bill because I do think it adds to our story. We've kind of talked about -- everything we talked about has been really without the impact of an infrastructure bill or a reconciliation bill. And I think we're getting really closer to seeing some of that happen, which I think will have a meaningful impact to our business and make it even better. So stay tuned. We've hopefully got a lot of good things to announce in the coming quarters, and I'm pretty excited about where we are. So Brent, thank you again for having us today.

Thank you for joining. Appreciate it.

Thank you. Appreciate it.