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

Good afternoon, everyone. My name is Jamie Cook, and I am the machinery and engineering and professional services analyst over at Credit Suisse. We're very pleased to have with us MasTec. We have the full management team here today, including Jose Mas, who's the Chief Executive Officer; George Pita, who's the Executive Vice President and Chief Financial Officer; as well as Marc Lewis, who's the Vice President of Investor Relations. In terms of today's format, I'm going to hand it over to Jose for a couple of minutes of sort of his -- an overview on MasTec. And then we will open up the fireside chat. In terms of questions from the audience, if you do have an audience -- if you do have a question, you have to email it to me at [email protected], and I will make sure I get that question asked for you. So with that, I'll hand it over to Jose. I think he's always done a great job, in my opinion, of identifying early growth markets before the rest of the market sees it and capitalizes on it. So with that, Jose, I'll hand it over to you, and then we'll get started. And thanks again for your support in being here. Hopefully, next year, we're in sunny Palm Beach.

Well, thank you, Jamie.

Jamie, before we start, I want to remind everybody, I'm sorry that we -- obviously, we have our investor presentation deck on our website at mastec.com. And everyone should please make note of the forward-looking statement disclosures that are in that document. Sorry, go ahead, Jose.

Yes. So that was George Pita, for those who didn't know him, and he's our CFO. My name is Jose Mas. I'm the CEO of MasTec. Jamie, thank you for having us here today, privileged to be here, and again, I also look forward to seeing you in person soon. Just to maybe give a quick update on MasTec, for those of you that aren't as familiar with us, we're really focused on infrastructure construction, predominantly in 2 areas, one is telecom and one is power. On the telecom side of our business, we do everything from wireless infrastructure construction, so we feel like we're the largest builders of wireless infrastructure in the U.S. We do everything from, really, negotiating leases on sites, to building the towers, to putting the equipment on towers and then maintaining it on behalf of our clients. We work for all of the major wireless carriers. We do the same thing on the wired side of the business, so it's really where the company was founded from. So we've got a large presence in fiber expansion, whether it's in home broadband, whether it's fiber to support wireless, or whether it's fiber to support homes and businesses, a big piece of our business. Obviously, those are 2 sectors that are growing very rapidly. We've been blessed to really build our backlog for the third quarter. We think we'll have another strong backlog built in the fourth quarter, and there's obviously a lot happening in that market that we're very bullish on. On the power side, really focused on really the whole end-to-end market, from generation, all the way through delivery at the home. On the generation side, we focus a lot more on renewables. So our heavy presence is in wind and solar and biomass. We do some small peaker plant work, but it's predominantly renewables. And then we've got a very large presence on the high-voltage transmission substation business, all the way into the distribution business as you think about how it feeds into homes and businesses. We're also -- we have some other smaller businesses that we think are important. We've opened a nice infrastructure-related business that really focuses on civil, a little bit of road, a little bit of highway, a smaller piece of our portfolio, but also one that we think has tremendous potential with the recent legislation. And then we've got our Oil and Gas business, that for a long time has been a significant piece of our business. It's obviously a business that's been hampered by the impacts of COVID and demand. We expect that business to decline. We've been very public about it. It's still a business that performs very well and we think that, at a reduced revenue level, will also perform very well from a margin perspective. We're blessed today to be -- really have broad geographic coverage across the United States. We've got about 28,000 team members and just over 400 offices. And we've said this before, but quite frankly, I can't have imagined a better time to be part of MasTec, to be leading this organization. The market trends are fantastic. The tailwinds that we're seeing across our businesses are as good as I've ever seen. And I think the next few years are going to be fantastic for our industry and for MasTec. So Jamie, back to you.

You're on mute, Jamie.

Jamie, you're on mute.

Sorry about that. I think I would be a pro at this by now. So I just think, why don't we start off with the Communications business, and obviously, I think everyone appreciates the longer-term secular tailwinds that, that creates for you. But can you talk about how you see CapEx spending in 2022? And how much of the -- when does the infrastructure bill sort of get to start to help that business? And then given sort of what you see ahead of you, Jose, do we need to start investing again to get ready for sort of what's to come, and does that have any implications for margins?

Yes, look, so I'll start with the infrastructure piece, right? I think the infrastructure bill and the piece related to broadband is something that was truly unexpected. I think that our customers are still trying to figure out how that money is going to ultimately be available, and we'll ultimately get it and how that can be played, right? And I think we're obviously going to try to play as big a role in whatever excess funds come. But it's -- it truly is on top of everything else that we've been talking about for a long time. I think that a lot of the dollars that were available through the different broadband bills that have passed over the course of the last couple of years, right, there's $20 billion available through the RDOF funding. There's additional 5G Rural America funds that were available. Those dollars have really started to make it through the system, and I think that's a lot of the backlog growth that you're going to see, that you've seen through the third quarter for us, that you'll continue to see through Q4. I think we'll start seeing the benefit of that a little bit at the end of '21. But truly, going into '22, I think that's going to be a sizable opportunity for us as those projects are coming to execution. And then I think that the dollars are just massive, right? Because you still have significant amount of funds from those first couple of opportunities that haven't been fully funded out to the private industry, and then you have all of these extra infrastructure dollars, it's going to meaningfully move the business, to your point. Labor is going to become an issue. The truth is that if you're in this business today, you can almost get as much work as you want. You've got to be -- you've actually really had to think about your ability to execute and how we put ourselves in the best position to execute over a long period of time. I do think the market is going to get even tighter next year from a labor perspective. And quite frankly, that's our competitive advantage, right? Our customers know it. Our customers are expecting it. Our customers are looking for players that they can depend on to deliver their build plans and to do it at -- safely within budget and on time. And I think that because of our size and scale, we can really help them with that. So we're very bullish as to what's happening there. We understand, right, that it hasn't come through our numbers yet. We've got obviously a big wireless business that, at the end of last year in 2020, you had all the spectrum auctions that really delayed a lot of their work in 2021. So I think we're going to see an uptick in that business in '22 as well. In the shorter term, I think we're going to be very fiber-focused. I think that a lot of the dollars are really flowing under the fiber side. There's no question that wireless spend will increase, but I actually expect wireless to continue to increase at a more rapid level than wireline as we start looking at '23 and beyond.

Okay. And then just to what degree do you need to invest, you know what I mean, that, that would weigh on margins, I guess, in 2022?

Yes. Look, I think we're in a good spot. I think we feel good about where we're at. We made a lot of investments over the last 1.5 years. We've always talked about the fact that investing isn't going to be something that you do and then you stop. So we're back to hiring people, probably not at the levels that we were in '19, but we're starting to grow again. We're buying equipment. There will definitely be an investment required relative to the opportunities that we currently see. I think with investment, the thesis could change, is how much more does it grow, right? So if these infrastructure dollars, if we see them actually coming to fruition sooner, or some of these other RDOF funds become available sooner, that will probably require a more significant investment than what we currently have planned. But I think based on what we know today and based on the expectations that we have in terms of how we can grow that business going into '22, we feel pretty good about where we are from a labor and equipment perspective.

And then within the Communications business as well, I think you've done a pretty good job over the past year or so of sort of diversifying your customer base now that AT&T is [ a debt ] customer. But you have done a good job. So can you talk about sort of the -- what the long-term plan is in terms of how diverse you want to be? And how do you choose, given sort of the labor issues that you see, how are you picking the right customer or right jobs to be on?

When we think about '21, it's probably one of the best things about our story, especially on the Communications side, right? If you look at the customer base, we had significant growth with T-Mobile in '21 versus where we were in '20. I think over the course of the last 2 years, we've had phenomenal growth with Comcast. Those are 2 customers that have really grown for us. when you think about Verizon and AT&T, they're actually 2 customers that shrank in '21 versus '20. A lot of that has to do with the spectrum auctions at the end of '20 and the delays that they had on the wireless side of their business and partly, Verizon starting to get towards the end of their One Fiber program. But those 2 customers are going to be key customers for us for a long time. AT&T, they -- I think from a market perspective, everybody knows where they stand, everybody knows how important this business is to them. They're going to invest. We're going to be obviously a big participant in the investments that they make, and it creates a lot of opportunities for us. So it's not a matter of if, it's really a matter of when. And I feel the same way about Verizon. Verizon has really started to ramp here on the wireless side for the same reasons. And I think we've picked up 2 great customers in T-Mobile and Comcast, where we're going to continue to build on and grow. So today, our concentration mix, our customer mix within that space is as good as it's ever been. You're going to see a lot of new customers come on in '22 because of how some of this RDOF money got awarded, and that's pretty exciting. So I think you're going to see a really nice mix of customers with tremendous potential to continue to grow them beyond 2022.

Okay. And then as I think about, was it last year when you did this, when we were talking about the $10 billion? I think the years are running together when you put out the $10 billion revenue target and double-digit EBITDA margins, even withstanding Oil and Gas, sort of falling by the wayside. But I guess, my question is, now you have an infrastructure bill. You know what I mean? You always have the secular growth trends. Does it make you think the $10 billion, what's -- it sounds like it's moved up, but how quickly? And then how are you feeling on the margin side about where the different segments can go on that $10 billion number?

It's remarkable what a year does, right, Jamie? So we actually...

Yes. Was it only a year?

It was only a year ago. So it was probably just...

Well, I will tell you this, Jose. A year ago, people were saying there's no way they were going to make -- they were afraid that, that number was too aggressive, you know what I mean, and now sitting here, saying you -- saying to you that you'll be doing it quicker than we thought. So...

Yes, which is the amazing part of the year, right? So at the time, we were planning to do $6 billion in 2020. We obviously had a significant hit to our Oil and Gas business, and we wanted to really lay out a road map of what we thought we could become in an environment where Oil and Gas was $1.5 billion to $2 billion versus where it was. Fast-forward a year, right, we're going to do hopefully north of $8 billion in '21. Oil and Gas is down, Oil and Gas will be down again in '21. But the tailwinds in our business are fantastic. So if you would have asked me -- or when you ask me, how long is it going to take us, for us to hit that potentially $10 billion target, we always talked about a 3-year or 5-year time frame. And the reality is that we're sitting here going into 2021, and that's obviously condensed. I think from a run rate basis, we could be at the end of '22, looking at 2023, where that's probably a realistic goal. That's really exciting. When we think about margins related to that, I think the margin profiles that we've laid out haven't changed much, right? We still think we can achieve 12%, 13% margins in our Communications business over time. We think our Oil and Gas business is going to be mid- to high teens. We think our Clean Energy business will be high single to low double digits. And we think our Transmission business will be at double-digit margins, right? So none of our longer-term goals have changed. Obviously, as we get into high growth cycles and as we get into periods, we would probably have to hire a little bit more aggressively, it may have some small fluctuations to those margins. But generally, that's the margin profile that we expect to be at. Oil and Gas is going to continue to be a much smaller piece of our business on a go-forward basis, which from an earnings basis is more of a challenge because it's been our most -- our highest and most profitable business. At the same time, I think from a valuation perspective, people are willing to give us a lot more credit for the non-Oil and Gas businesses. So that's what we're focused on. I think you're going to continue to see it. And again, it's a very exciting time for us and sitting here a year later, really can never have imagined being this close to be able to hit that goal of -- in this short of a period. George, anything you would like to add to that?

And the only thing I would add to that is I think, when you look at it, we came up with a $10 billion target. We talked about an Electrical business that was a target range of $1 billion to $1.5 billion. We've acquired INTREN. We've added significant distribution capacity. I think in the last 12 months, there's been an increase in realization and acceptance of the fact that significant grid investment, both on the transmission and distribution side is going to be required in order to support renewable power generation expansion and/or EV expansion. So I look at that and feel like there's some sizable opportunity for us, especially when you look at when we're sitting here today and that cycle is just really kind of starting and we're sitting with -- on a run rate basis at a value of $1.1 billion, $1.2 billion. I would argue that I think there's some upside to our expectations on the transmission, distribution side today in our overall expectations. There's more opportunity today over the last 12 months that's expanded and developed.

I guess just building on the Electric Transmission business because obviously, the spend there looks good and your -- you would benefit. One, are you starting to see signs that some of the larger transmission projects are starting to move ahead again? And then, I guess, Jose, strategically, to capitalize on the growth that you see in that market, is organic the right way to go? Or do you think you would need a deal, you know what I mean, to sort of make you a bigger player, just to grow it quicker based on what you see out there?

Yes, so first, it's an extremely active market. We're probably -- we're seeing more larger projects in the bid environment today than we've seen in a long time, and we expect that there's going to be a considerable amount of project work announced in the next 6 months or so in the industry, of which we hope to get our fair share. So the opportunity is tremendous. A lot of it is being driven by what we just talked about, right, the advent of renewables and the focus on renewables, especially with the infrastructure dollars that are going to be supporting it, require a lot more transmission investments. So the transmission market is going to be a very, very good and healthy market for a long time. It doesn't get talked about a lot, but there's a significant amount of infrastructure dollars associated with transmissions jobs as well, which we think is going to really move the needle for some. You still have the issue of permitting and environmental that has to be dealt with, and there's a number of projects that have been in that space for a long time. We're hoping that there will be some concessions around that too, some focus on that to make some of these projects come to fruition sooner and faster. But it's a -- the market is fantastic. We think we're in a great place organically to get our share and to continue to grow at very aggressive growth rates. With that said, the M&A, we've been talking about M&A for a long time. If the right opportunity is out there, that gives us the ability to scale the business and lets us do it in a reasonable valuation level, we would absolutely consider it and hopefully, be able to execute on something, if that came along.

And then, Jose, the margins in Electric Transmission have been -- have moved around a bit. The most recent quarter, I thought we saw good margin improvement. I think your margins were like 9.6% or something like that. Are you comfortable with sort of the margins sort of being in the high single-digit range as we look at 2022 based on the growth ahead and what your backlog and health of the backlog looks like?

Yes, look, a couple of things, right? The INTREN acquisition has been great. They've performed very well from a margin perspective. Really, the margin issues have been more in the legacy business, and we've talked a lot about that as to why and they've drastically improved in Q3 as you were able to see in our numbers. We expect similar performance in Q4, and quite frankly, going into '22, we would expect to be at or very near double digits for the full year.

Okay. And then on the -- I'm just trying to see how much time I have, which is not that much. On the Clean Energy and Infrastructure side, I guess, I think the market was concerned. Wind had been more depressed, and in solar, you saw like some supply chain issues hitting the market. And so I think people are a little concerned about the outlook for 2022. What's your thought there? And does the infrastructure bill sort of, I don't know, move things ahead? And then what do you think the Quanta-Blattner acquisition means for the renewable? Any changes in the competitive landscape on the renewable side?

Yes. Lots of questions in there. But look, the Clean Energy business for us is an unbelievable opportunity. The business is growing incredibly well. The opportunities in '22 are fantastic. The business should see significant organic growth in '22 versus '21. For us, we were historically a wind business, right? That's really where we got our footing. We did well in wind. Our wind business is still probably our highest margin-performing business within that segment or within the renewable segment for sure. And we really worked hard to diversify because the new changes were coming. So we really started on our organic solar business that, right now, is growing like a weed. We were able to grow our biomass business and really everything else that we're doing as we think about all types of generation and renewables and cleaner sources of generation on a go-forward basis. So look, the market is going to do extremely well in '22. Wind is flattish, and wind was flattish for us in '21. It's going to be flattish for the next couple of years. Wind is very dependent on some of the transmission lines that need to be filled, that they need to be built to give access to a lot of those areas that are very good in wind. On the solar side, the reality is that the bigger issues on solar as it relates to equipment availability have been around some of the tariff questions as well. The tariff issues got resolved in the last couple of weeks, so I think that business is -- the reality of the solar business is I think is going to be great in '22, with everything that's happened in the infrastructure bill. It's probably the one business that really had the opportunity or has the opportunity to dramatically expand from where everybody expects it to be in '22. And I think that's where the supply chain issues will come into play, right? So if our customers had the ability, I think every one of them would significantly increase the amount of activity that they would want to do in '22 relative to solar. Some of it will happen. Some of it may get pushed because of the supply chain issues. But just with what's on the board, just who we know is going to get built, we're going to have a really, really strong organic growth rate year. And it's really just the beginning, right, because I think that the outer years are going to be even better. I think the wind business is going to come back in a really strong way. I think the solar business is going to continue to expand. And then you have all of these evolving technologies, right? When you think about carbon [ cash ], when you think about hydrogen and you think about the things that have to be required to really make that come alive, it just -- it creates enormous opportunities for MasTec and what we're doing in that space. As it relates to Blattner, they're a great company. They focus on wind and solar. We compete with them. We think -- we kind of like the acquisition because it does a lot of things, right? It validates our margin thesis around the business relative to the margins that they can make and the ones that we know we can make. It talks about valuations, right? They traded at a very high multiple. And I don't think we get that kind of credit around and not just from a multiple perspective, but more importantly, from an earnings perspective, right? Because if we can ultimately achieve the same type of earnings profile that they do, and then I think our business is extremely undervalued relative to what that transaction showed.

All right. Well, I want to get to that, your valuation. But before I go there, just same question, sort of CE&I margins, I think, were expected -- expect in the fourth quarter to start to show some improvement and then continue into 2022. That's still correct, correct?

Yes, it is. Yes.

Okay. Great. And then I want to talk about your valuation, but in -- and obviously, the Oil and Gas business weighs on the valuation. But you seem downbeat on it. I don't know, given where commodity prices are, are there any sort of green shoots? And if there are green shoots, do you steer clear of them because the markets -- think the market is going to give you credit for it and you rather invest, you know what I mean, in the other 3 segments?

Look, I don't think you're going to see us go out and make significant investments obviously in that segment today. I think we have an unbelievable brand and an unbelievable offering within that segment. I don't think that segment is going away anytime soon. There's no question that the visibility that we had in 2000 -- September of 2020, when we laid out that $10 billion and $1.5 billion to $2 billion, specifically for Oil and Gas, the sentiment has changed. I think there is a lot more optimism around what's the potential opportunity for us there. There's no question about that. Part of it is commodity prices. Part of it is that we're going to see some of the customers that we've had, that we've been working for, for a long time. They're talking about bringing some projects back. They're talking about doing different types of projects, specifically around Oil and Gas relative to where the opportunities lie today. Those companies have been unbelievably disciplined, right? Their mantra, going into '20, was we're going to preserve capital, we're going to return capital to our shareholders. I think they've done that at some point. I think those companies will look for growth, and when they do, I think it's going to create tremendous opportunities for MasTec. But irrespective of that, right, let's say that, that doesn't happen, what's happening with carbon capture and the businesses that could be built around the pipelines of carbon capture is something that we could never have imagined just a year ago, right? So the projects that are coming, and the size of the projects that are coming, the opportunities around that, there could be a day where our pipeline business is really a carbon capture pipeline business. We basically replace gas with what's happening with the carbon capture. And we think it could be a sizable piece of our portfolio. So again, the skill set that we have in that business, what we've done, the equipment that we have, the people that we have, we think we'll be able to utilize them for a long time, we think at a similar margin profile that we've been able to deliver in the past. Obviously, '22 is going to be a more difficult year for us because the oil and gas market isn't back in '22. But it's within the range that we've talked about. I think we've been laying it out for a long time. It's our expectation. And quite frankly, when we start thinking about '23 and beyond, I think we're a lot more optimistic than we've been historically on where we thought this business would go.

I mean and it's interesting because you can transition this business more into carbon capture, hydrogen, et cetera, like what's viewed as much greener, you know what I mean, like versus the traditional gas pipeline business. So...

It's exactly the same type of work, the same equipment, the same people, right? So it's plug-and-play. It really is plug-and-play.

But -- and I guess, my point is there's really not a lot of other people that have continued to focus and invest in this business, where you have, right? So...

Yes. There's a significant decline in the number of competitors, right? A number of competitors, especially when you think about the smaller players, they're out of the business. A lot of the larger players have decided to defocus away from it. So when you look at the -- if you're going to build a pipeline in the United States, I don't think there's a company that has more assets and more resources to be able to do it in a more cost-effective manner than MasTec. And I'm convinced of that statement, right? So that's our competitive advantage. So if you're going to build something, whether it's gas, whether it's oil, whether it's carbon capture, whether it's hydrogen, I don't think you can find a contractor that can do a better job for you at a better price than MasTec.

Okay. And you view that -- those opportunities more as 2023, correct?

I do. I think there's maybe some opportunity for some smaller work in '22, but I think it's more of a '23 opportunity.

And then, I guess, my other question, you did the Infrastructure side of your business within CE&I. How is that business -- and I know you did like a small acquisition there. Like how is that business sort of doing versus the Clean Energy business? And at some point, is there an opportunity for that to become another leg, so you would have like Clean Energy and Infrastructure as sort of a stand-alone segment?

It could be. We got into the business. There was a lot of rumors about an infrastructure bill. It's a market that we're interested in. What we keep hearing all over the country is that there's not enough bidders on projects. There are certain states or certain municipalities that are out there trying to get a second bidder just so that they can order a project. So when you're in an environment where you don't have a lot of bidders and there's a lot of dollars being thrown at it, we think that's an attractive environment. A lot of -- it's a good business for us. It's performing well. It's performing above our overall CE&I margins. So it has been accretive to margins so far for us this year. It's, again, it's a smaller piece of that business. But we do think it's one that's directly impacted in a more significant way by the infrastructure bill, and we're looking forward to seeing what happens throughout '22 on that.

Okay. And then, I guess, last, I think we have 2 more minutes. So George, your free cash flow, done nothing but go up...

Hello. I mean look, I think for cash flow -- sorry, go ahead.

So -- no, I was just going to compliment you on your cash flow. And I think you've said before as oil and gas declines, that's a positive for your free cash flow. So any color there? And then priorities here, just where -- with where your multiple is relative to the peers, balanced with trying to invest for the future.

I mean look, we're pleased to recently be rated investment-grade by Moody's. I think it's a recognition of the balance sheet management and frankly, the structural advantage that MasTec has as a company given our contract profile, the fact that we've got a lot of MSAs, we have relatively short duration contracts. I think it leads to -- and the execution of our folks, it leads to a very strong predictable cash flow profile, and we're pleased to see that recognized by Moody's in their rating. I think we -- you're right, we've talked about as our business mix changes, there's obviously 2 components of free cash flow. There's the working capital profile and the CapEx profile. As we move towards an era where there's more MSA-driven work, both coming from the combination of, what I would say, on the Communications side with the wireless profile, coupled with more Electric distribution work, that's -- probably will net a slight improvement of the working capital profile, right, in terms of what -- how we've been in the past, which there's less project-based business, but I think more meaningfully than when you look at a business, where Oil and Gas and the pipeline business, which is our highest capital-intensive business, is a smaller portion of the overall pie, then our free cash flow profile certainly improves. And we've generated strong free cash flow profile for multiple years here. I think the profile continues to improve going forward. It puts us in a position where we're able to invest significant funds each year back into the business or back into maximizing shareholder value and able to maintain a strong balance sheet. Over the course of this year and all the past years, we've done that, right? It's always been a combination of looking at M&A and reinvesting back in the business and determining what we think is the best way to grow the business or at points in time, has been share repurchase. We've been pretty vocal about that we're looking at a significant amount of M&A activity, and we'll go through the profile. We're constantly having the discussion points about what's the best usage of what will be a continual capital flow that we expect to generate. And we're fortunate to be in that position and expect to be able to do -- to utilize that over the course of the next few years to continue to maximize value in whatever way is the most advantageous at the time.

Okay. All right. Well, with that, I think we're out of time. I want to thank you guys again for your support. You're always a step ahead of the rest. So congrats, and have a great holiday. Again, hopefully, this year, we'll -- next year, we'll be in Palm Beach. So Happy Holidays to you all, and thank you again.

Thank you for having us, Jamie. Happy Holidays.

You, too.