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

Okay. I think we're live now here. So thank you, everyone, for joining us on day 2 of our industrial conference. My name is Justin Hauke. I'm the senior associate covering facility and industrial services. And presenting next, we're going to have MasTec, pleased to have them. They are a leading specialized contractor delivering comprehensive infrastructure solutions for the utility, renewable energy, communications, pipeline and energy industries. So this has been a rapid growth company for many years. They've consistently expanded their portfolio into new verticals. Today, the energy transition market hugely are touching each of MasTec's businesses, so a lot going on. And obviously, we've got some attractive funding dynamics over the intermediate term. So presenting from MasTec, we've got George Pita, he's the CFO; and Mr. Marc Lewis, who is their Vice President of Investor Relations. So we're going to do this as a fireside. I'm going to let George give a little bit of a commercial on the company first, and we'll go back from there. So I guess, George, take it away.

Good morning, Justin. Thanks for having us. I'm in South Florida, I suppose it will be a central air conditioning side chat than a fireside. Thanks, everybody, for joining us. Happy to be here today. It's a very exciting time at MasTec. We're obviously going to get into it. But we feel like we're on the cusp of a number of megatrends that are across our business, including on the clean energy front, what that does to both facilities, clean energy as well as electrical transmission distribution are major megatrends that are going to give us significant opportunities going forward for a decade or more. That, coupled with what's going on, on the communications side with 5G. I guess, obviously, we'll get into it in a bigger way. It's also another major, major megatrend. That's a big opportunity for us. And I think, frankly, as we -- maybe it's not a megatrend yet, but one of the things we're thinking about on the pipeline services side is we are seeing a lot more of what I'll call carbon-friendly usage for pipelines that are developing. And that's not today's megatrend yet, but that certainly seems to be in the fairway with the rest of the trends that we're seeing. So very excited to be here. Great opportunity. We've got a slide deck on our website that has information that we'll talk about today. Also please note the forward-looking statement piece is on there as well. And just a little bit, you mentioned about how diverse we were. I guess one last thing I'll throw out is when you look at MasTec and you look at the markets that we're in, right, in the communications space, wireless and fiber and all the items, all that's associated with that megatrend as well as now you look at the clean energy front and wind, solar, biomass, transmission, distribution, we're in leading positions in all of those markets. But the way we got here is probably worth noting. When you look at our business, many of the markets that we're in today, that we're in leading positions on, we've been in for maybe a little bit over a decade. And what that tells you is that the markets that we're in today, which have these trends, it's not by happenstance. It's really by thoughtful interaction with our CEO as far as where trends are going and by establishing entry points in markets over time that we then have been able to turn those entry points into much bigger growth patterns and accelerate and those -- and take advantage of those opportunities. And I think that's one thing that's fair to say, I think it's in MasTec's DNA, right? We have, over the years, have done what I think a thoughtful strategic point -- entry points into developing trends. And we typically look at M&A and try and make 1 plus 1 equals 3, right? We can talk about examples of that over and over again. But that's something that is in our DNA. Our cash flow profile is strong. We generate a lot of cash each year. We're talking about even more access to capital here, hopefully, in the near term as we were anticipating some movement on our ratings. So I think we're very opportunistic and a very entrepreneurial company that is taking advantage of trends, and I don't see that changing going forward. That said, I don't think we need a lot more verticals right now. We're certainly in ones that have significant opportunity for us for the next decade plus.

Yes. Kind of -- and that was actually where I was going to go first, you kind of elaborated on it. But I mean, maybe just to kind of set everyone's expectations, I mean a decade ago, MasTec was really mostly just telecom and did a lot for AT&T specifically. And it's really been kind of a portfolio shift over the last couple of years. Maybe just talk about some of the [indiscernible] that you moved into and how long you've been there?

Yes, if you go back, when you look at the picture, right, MasTec in '07 was -- 13 years ago, was a $900 million company. It did basically 2 things. We did underlying -- underground fiber and underground extension of plant because fiber wasn't a big issue back then, and we did DIRECTV services, right? And both of those are in our communications business. Since that point, entered into the wireless space. Today, we're the dominant wireless contractor in the country with the largest expansion of network and capacity throughout the country, entered into electrical transmission, recently expanded our distribution business. We'll talk about that. That's a meaningful shift. It's a good example of where we think 1 plus 1 equals 3, right? Because when we see the trends that are happening on the electric side, a lot there are tied into the renewable generation and EV distribution, we think, is going to be a much bigger portion of the -- both transmission and distribution, but distribution will be an equal opportunity, if you will, for significant growth in need from our customers' perspective. So we expanded in a very cautious and opportunistic way. Our entry point into that market through the acquisition of a company called INTREN. That's an example, right? And over the years, whether it be entry into, at a time, the pipeline business or whether it be entry into the renewables business both organically and -- I'm sorry, both through M&A and sometimes organically, we've already done the solar expansion organically. We looked at the field, didn't like what we saw relative to M&A and basically said we're going to do this organically. And yes, it's cost us a little bit on margin. But ultimately, that's the right -- the cheapest way of getting into a market, and we feel like it's going to pay dividends in a big way. I think the key is that our CEO and our group is always really looking at trends within either businesses that we're in or things that are peripheral to what we do. And looking to try to establish growth points and take advantage of those opportunities. And I think we do that in a very measured way, in a very effective way. Hence, when you look at our business where it was $900 million in 2007, today, it's going to be $8 billion. That's not $7 billion of growth that we acquired. We acquired 3 and a change, and the rest has been postacquisition growth. So that's definitely the way we do it, and it's something that I do remain to point up front, but I think it's something that -- it's in our DNA, and you can assume that, that continues going forward. If someone were to stay in the future, there's a developing trend on X, will you be in it? We're obviously evaluating it. We're looking at it. We're determining if it fits the risk profile of what we do. And if it does, we're going to find the entry point, whether it be organically or through M&A, and we're going to expand in that capacity, right? Something peripheral to what we do. That's the way we operate all the time, and it's been very successful for us, and we expect it to be very successful going forward. It's put us in a position today where we're front and center and right in the midst of what I call some pre -- once-in-a-generation kind of trends. both on the telecommunication side and on the power side. And we're certainly poised to take advantage of it.

Well, let's talk about some of those trends. I mean, I guess, let's go through all your end markets, but I'll start with communications. 5G is obviously the thematic point that's out there, but there's a lot of fiber rollout that still is behind that as well on the wired side. Maybe just talk about what are the biggest drivers in that business, how MasTec is differentiated versus peers? And then maybe the other thing would just be to talk about your customer concentration and the different carriers and how you've expanded to working with different players there.

Sure. Look, I think when you look at the telecommunications side of the business, right, there is a dramatic investment cycle that's starting here in '22 relative to a 5G expansion and a 5G transition of the wireless networks. We're front and center there. We do -- we're the largest contract in the country. That build-out is a much more expensive and complicated build-out than any of the other Gs, 2G, 3G, 4G. And why is that? Well, it's really -- it's being built on a hub-and-spoke kind of model. There's going to be towers like what's behind Marc right now, that are going to be added, and you can see 5G equipment added to those towers. Very well positioned, Marc, thank you. And that's a part -- certainly a part of the mix. But because of what is the attempt to really increase the density and the speed of the network, you're going to see significant fiber investments to move data because the data is expected to grow dramatically. And you see small cells and small cells are going to be put in major metro markets. Small cells change the game, right? I mean right now, if your network in the country is a couple of hundred thousand cellular towers. There's a ton -- there's decades worth of work to move to put capacity on those towers. But then if there's a couple of hundred thousand of those, there's 5 to 10x of many small cells that are going to be put in place. The difference is those only travel in terms of 100 feet instead of miles. So it's a much faster capacity, but it's a smaller destination. So the combination, that's why I say hub and spoke, right? That's what's how it's going to be built. And that's why it's different and more expensive. The question you would ask yourself is, why would carriers do that, right? What's the payback? Why would someone go through the effort of changing the network? And it's really because 5G is meant to be a very transformational use of the wireless network. Today, it's mostly handheld and individual to handheld and whatever you're doing, whether it be your ring doorbell or your open table or over seat or whatever it may be, right? 5G is not necessarily built to make that faster, although byproduct of all that is that it will be faster. But 5G is really about machine to machine through the wireless network, whether it be the Internet of Things; smart cities where traffic systems are based on flow of cars, not on time; telematics; drones; robotics; surgery, where you can do surgery remotely with a surgeon that's in a different city can come in and do surgery with someone in a different spot through machines. It's about all that. And consequently, the build-out and the need for density and capacity is bigger. So that's why. Now when you look at it from a customer's perspective, the other side of that is none of those applications really exist today. And when those develop over time, it's going to give them a whole new different revenue stream opportunity that's not selling another handheld or selling another tablet. And thus, our customers look at this and say, 5G is a transformational technology that will drive a whole new revenue stream for me, therefore, I'm doing growth capital to invest in this, so I can get paid back, right? And that's going to -- that's ultimately what's behind it. That's why when you think about it, all cellular traffic moves ultimately through fiber underground, right? So if you're in Miami and you're a Verizon customer, you're going to transmit using spectrum from your phone to a tower. And that's the spectrum part that's going from -- over the airwaves to a tower. When it hits the tower, that tower has to have fiber capacity so it moves the data underneath the existing telecommunications network. The underground telecommunications network are not as developed as they need to be in order to support what is the increased capacity that's expected to occur with a lot of the things I just talked about. So you've got carriers now investing not just on its tower part, which obviously is going to drive a lot of our business in a big way. But also on the fiber part. I'm not even talking about fiber-to-the-home yet. We'll get into that in a minute with Rural Development Opportunity Fund, et cetera. But there's -- you've seen other customers, Verizon and now AT&T, they're all building out underground networks, and then you add to that small cells and those small cells need not just to be put up on telephone poles, but they also need power and fiber connectivity. Consequently, you've got a major cycle coming, right? And we're right smack in the middle of it. I think when you talk about what differentiates MasTec in that environment, I think a couple of things. One is the scale that we have and the ability that we have to service across all fronts, right, whether it be what I just talked about on the wireless tower side, whether it be on the underground side, whether it be in the small cell side, whether it be a distributed antenna system. We're capable of providing services across all different gamuts for our customers. And then I think, secondly, when you look at the nature and size and scale of the demand that's coming across multiple carriers, carriers -- this is a theme. You'll hear me say this in a couple of other spots. Our customers are as concerned about capacity to build and ability to build as they are necessarily trying to get the last penny. I'm not saying they're not trying to get the last penny, but there's certainly a strong consideration given to having a customer or a partner that you feel you can trust to deliver on your plans versus one that might sell you a low upfront bid and then not deliver and then have to be taken off. So I think consequently, in this cycle, and I think that also applies to transmission and some other things as well, you see that there's a balance, right? There's obviously pricing, there's always pricing concern, but there's a strong element of a concern on capacity to build and the ability to build. And I'm not sure -- I hope you can hear me, it says my Internet connection is unstable, which is kind of quite on point.

You were -- just for a second, kind of cutting up there.

Okay. Good segue, right? So that -- there's a huge opportunity, right? And what you're seeing governmental-wise, right? I mean you saw that the government sold a lot of C-band spectrum to carriers. That was sold early part of 2021. It's really slowed the implementation of spectrum throughout the market throughout most of 2021 because, a, you had to win the spectrum figure out what you're going to get; b, once you've got it, then you had to plan for what you felt you could deploy when, which is really what's been happening most of this year; c, the government had to clear the spectrum that you want. So what you're seeing so far in '21 has been a tepid kind of spend relative to the communications side because there's been a transition occurring, right? And it makes sense. It's no different than when Sprint and T-Mobile combined, right? What -- first thing you do is you assess your tower portfolio and determine where you want to add and where you want to take out the duplication and what you want to do. That same thing is occurring now in the C-band side, maybe not exactly the same but similar concept. And consequently, it's made for a slower '21, not unexpected from our perspective, we pretty much saw it. But that's where we're looking now as we move out to the end of '21 and '22, we're seeing a huge opportunity for expansion as we really start moving to deployment on that. And then you add to that, we're starting to see deployment on the Rural Development Opportunity Fund. I think most folks know what that is. It's a program by the government where they're funding carriers or creating effectively carriers that will create broadband to the home in rural areas. I think it's a $26 billion program. I think about $9 billion has been issued to date that doesn't do it justice because the reality is when the government is giving these programs out, the $26 billion is meant to be a portion of the overall spend. So in other words, if you're a carrier, you might say, I'll spend $9 billion and you spend $9 billion, right? And that's kind of the way it plays out. So it's really a much bigger overall initiative. And we're starting to see awards on that. It's been moving our backlog a little bit, and we're starting to see that move to deployment in 2022 as well. So we're expecting the big things in 2022 relative to the services we provide here. And I think it's the start. I think if I had to guess, I think '22 is a good year, a great year and '23 is even better as these things develop, and that's not yet even considering what might happen with the latest reconciliation bill, which I think the way we look at these bills is they're all supportive and additive to what are some megatrends in a lot of our businesses. These kind of help amplify them is the way we would think about it. And I think it will take some time. With the infrastructure bill has just been passed, you're not going to see -- you'll see some stuff maybe come to award in '22 and maybe some work in '23. So it will take a little bit of time. But there's a ton of work and plenty of work coming regardless of that, that has us very excited.

Yes. I mean I think there's $65 billion specifically for broadband that's in there so I mean it's...

And to put that -- and to put that in context, AT&T spends about $20 billion. I think T-Mobile is similar, let's call it. So let's call it the industry today, amongst the big 3 to be somewhere anywhere to $50 billion and that's not including the Rural Development Opportunity Fund spend, which is another amplified number. So there's significant. I think one of the things that the COVID outbreak has done, we're sitting here today doing this virtually, right? And you saw my Internet was unstable. I mean it's really -- it's really changed the -- it's changed the dynamic, right, in terms of the discussion on the importance of broadband and ultimately, wireless infrastructure. And what that does right, from both a telecommuniting and telework standpoint. And that's a trend that I think is significant. It's frankly carbon-friendly, right? I mean you're minimizing commutes, et cetera, et cetera. So there certainly has been a developing trend there as well.

All right. Just in the interest of time, I want to -- or we could do communications all day, but let's talk about some of the other end markets that you're in. I guess I want to go to clean energy next [indiscernible] a couple of times. And this is a business that you've been in for a while. You had Wanzek, I think, was your acquisition that kind of got you in on the wind farms originally. But this business has really grown from being kind of a side project. It's on its way to being kind of your #2 kind of core vertical. So maybe just talk about the breadth of services that you have there. And the other thing, I guess, I want to touch on is it seems with the rapid growth, the margin profile hasn't necessarily hit its potential yet. So maybe where are margins today and where can they go? And how do you get there?

Sure. I mean, look, I think when I had the intro, and I talked about us looking at developing trends, right? This is a fair example, not simply with the acquisition of Wanzek, and I guess it was 2012 or '13, which was the start of power generation and primarily a wind operation at that point in time. But also the decision we made about 24 months ago, where we looked at the market and felt like we needed to expand that business. I think maybe more than 24 months ago, probably 36. In 2017, we were a $300 million business, which is wind only. Today, we're a $2 billion business. And that's wind, solar, biomass infrastructure. It's a broad-based service platform. And that change in platform was a very strategic discussion and thought point that was done, anticipating some of the trends that are starting to develop today. And these 3 industries are guiding where our thoughts are. We'll take advantage of that now and significantly grow with this trend that is clearly expanding in a major way. In this case, we looked at the market and said, when you go back and you look at what is the expectations for solar and what the capacity that exists for solar is in terms of construction and ability, it really doesn't exist in a meaningful way. There's not a lot of existing resource out there that has expertise. So we really felt like we needed to develop it internally. Consequently, to get into that business rather than doing it through an M&A beachhead acquisition, we decided to do that organically. And that's cost us margin. There's no question, right? I mean as we've grown this business from $300 million to $2 billion, we've been doing it organically, we've been adding capacity. We're taking people from other segments that are not as busy. For example, we have folks that are in the oil and gas facility space that have capacity. We've taken those crews and those people and have moved them over to solar projects and have taught them and are teaching them -- probably I shouldn't say past tense, teaching them the solar business, right, that has come at the expense of some margin. Now when you look at it, that's a very explainable and understandable change, right? It's something that is a good use of margin, if you will, right? And it's something that, from our perspective, made a lot of sense, we feel like we've gotten into this business in a very capital-efficient way because we did it organically. We didn't have to necessarily come in, pay top dollar for an acquisition to get into the market because we're in the market, and we've established those operations over time. Our -- now that said, our charge today is to improve the margin profile. We get that. When we look at the margin profile, there's a lot of reasons why it's been less than ideal. I'd say 2 primary, right? One has been what I just described earlier. We are constantly adding capacity. So we're taking guys from the oil and gas business and pushing them over and putting them in solar and teaching them how to do solar piling. And then taking -- once we get those guys somewhat proficient, we're taking them splitting them out to different crews, so we can add more capacity because we know that the demand is there for that in a much bigger way. That's the right kind of usage of margin dollars, if you will, but it is a usage of margin dollars. And then secondly, I think this year, we've seen some impacts on some solar -- early solar jobs that are now pretty much mostly behind us or are behind us, where we had some learning curve in terms of, I'd say, execution and/or some -- even some contract terms that we learned on, right, in terms of certain types of risks that we should protect ourselves from, et cetera as we started getting into this business. And what we see today is -- one of the things that MasTec does is we make a mistake but we learn from it, right? And we certainly learn from those. We're applying that going forward, and that's where we see a confidence level that we think we see a much different and a much better margin profile going forward. The wind business is established at this point for us. There's a recent public acquisition that was done of a large wind and solar contractor that showed double-digit margin EBITDA profile. We know that business well. That's a profile that exists in this business and is very capable once you get past some of the learning curve issues that were -- that we've been dealing within the last year. So we're super excited about where it's going. It's the -- it's another example, if Jose didn't have the foresight that he did or does, we'd be talking about how do we get into these markets today. Instead, we're well entrenched. We've already gone through the learning curve, and we're getting ready to take advantage of what's coming.

Yes. Yes. And let's see, we're kind of getting close to end of the time here. I've got several more. I do want to touch on electric transmission because that's another one that -- it's actually -- it seems like it's coming into its own now. You did an acquisition there and maybe it's the blueprint of where the margin profile can go. But you talked about doing some distribution on that side as well. So maybe just what did INTREN bring you that you didn't have before? And are you kind of at the point now where you've got critical mass to have sustainably these high single-digit into double-digit margins?

Well, I mean, obviously, look, we had a historical distribution business. It's about a $500 million business. We think the trend on the distribution side of the house is significantly accelerating again, not just with dollars necessarily from different bills, but also from a governmental understanding and acceptance that you really can't top renewables without talking transmission. And if that just does what it should relative to the permitting environmental side of that house, it's going to make a significant difference. But there's no question. I think over the last 12 months, you've seen a much greater acceptance and understanding that the 2 are tied right? And with that comes significant opportunity that we think we're very well positioned. That's what we've been angling for in terms of a major distribution -- or major transmission spend that we think is coming. That's separate from transmission work that's required to underground things for storm hardening and fire hardening, which are also related, right? But there's no question major distribution trend, we think it's a big business. When you go back our slideshow, we have a chart that talked about us getting to $10 billion, and we had a $500 million electrical business going to $1 billion to $1.5 billion. And we're sitting here today at a run rate of about $1.2 billion, and now we have a much bigger distribution business. I think if you look at that chart today, and we're redoing it, that number on the top side for the opportunity is much bigger than $1 billion to $1.5 billion, it's probably double that, right? Because we now have a business that's gotten much -- that has much more capacity on both sides. What INTREN brings us is an expanded and broad distribution capacity. Distribution capacity, we think, is also another developing trend, primarily because of EV. You can't understate the amount of change to the grid that EV will bring to the last mile distribution. INTREN allows us to really participate in that in a bigger way. And I think we like to do deals that were 1 plus 1 equals 3. The reality is we have an established distribution -- established transmission business with skill set of customers that we regularly work for. INTREN has an established distribution business with customers that we do less work for. We think the combined entity is much stronger and gives a lot of cross-selling opportunity over time that's going to give us a significant opportunity to take advantage of a very strong developing trend. To me, the clean energy trend and the transmission distribution trends are somewhat tied, right? They're both basically the same trend, right? You can see on the periphery, talk about different things. There's also a storm hardening on transmission, distribution, et cetera. But basically, the renewables and the generation -- the once-in-a-generation kind of change is happening with the power side of American electric power. It's where we participate in from both these segments in a major way. And the acquisition of INTREN, which was done a very capital-effective way we did a very reasonable upfront multiple is one that I think is a good example of getting in and then allowing us over time, not quite to take advantage of developing trends and significantly grow operations, both on our existing organic plus the acquisition that we brought in.

That's great. Marc, I'm glad you put this slide up because we're getting at the end of the time, but this $10 billion in target kind of where you see your business, the only one we haven't talked about, maybe just to give 2 seconds on it, but obviously, it's been a huge driver of your profits for years. You guys have moved where your profit profile is coming from, but -- and you talked about some of these longer-term opportunities that emerged. But this $1.5 billion to $2 billion of base business that's in oil and gas, maybe just talk about the mix and what that is and the visibility.

Yes. Well, look, we put this out because we wanted to show that our end markets have the capacity where we can grow significantly while our oil and gas business really might stay, if you will, muted or in a tepid spot, right? And we did this about a year ago. And again, one of the things that ultimately we'll have to consider is what's the name for the segment because I'm not so sure that pipelines are really only about oil and gas anymore. But what we did was we showed this picture saying, we think the baseline for a oil and gas business is about $1.5 billion to $2 billion. That was as constructed. That's -- when you look at it today, there's certainly a lot more opportunity there on a base business outside of what I'll call carbon-friendly pipes that I think is strong for that area. I don't know that what you're seeing today is obviously a very strong commodity price. We're seeing a lot more bidding activity, a lot more discussion about reinvigorating projects that had been mothballed in the past to move that capacity and move the distribution in an effective way. I think we wouldn't necessarily predict that that's going to move in 2022. I think 2022 is in this range of $1.5 billion to $2 billion. But there certainly is a lot of green shoots on the oil and gas side that I think give opportunity for that. What's developed and changed and expanded in the last 12 months has been the developing case for carbon-friendly pipelines, right? And what I mean by that is I mean both combination of carbon capture projects, which from our perspective would give us opportunity both on the infrastructure or clean energy side where we build facilities as well as the pipeline side where there's large projects that are moving thousands of miles of CO2 over pipes into culverts. And that gives our pipeline division, a much bigger opportunity than existed, let's say, 12, 18 months ago. I think that's a developing trend certainly worth watching that. And also on the hydrogen side, where we're looking at hydrogen facilities that potentially would be in lieu of our natural gas or combined natural gas and hydrogen plant. We're building 1 today that's a combined hydrogen -- can burn both hydrogen and natural gas. Those -- the pipeline needs for those facilities are different because of the corrosive nature of the element. And therefore you need additional pipeline infrastructure for those. So what I would say on that is we think that the oil and gas pipeline business is going to be in this range, $1.5 billion to $2 billion for 2022, but I think it bears watching for '23 thereafter because -- there's certainly a lot more green shoots and a lot more opportunity for the pipeline group that I think has existed in quite some time.

Well, unfortunately, we're actually a minute over. So I think we're going to have to end it there. There's -- like I said, obviously, a lot going on. I really appreciate you guys being here. Next up, we've got Middleby Corporation, Trex Company, Regal Rexnord, Methode Electronics, American Airlines, NINA and Corning Incorporated. So thank you, everyone.

Thank you for joining us this morning. Thanks, Justin.

Thank you.