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

Hi, everyone. I'm Noelle Dilts. I cover specialty engineering, construction and services here at Stifel in addition to a couple of other groups. So this morning, we're joined by MasTec. Always a great -- always great to have you here. Thanks for coming.

Thank you for having us.

So to my right is Jose Mas and CEO; and to my far right is George Pita, CFO. So the format will be a fireside chat. We'll try to leave some time at the end for questions. And so with that, we'll get started.

So I guess the first place I wanted to get started, Jose was around the recent Biden-Solar executive order. So I'm kind of curious what you think -- how -- what do you think is the importance of the order? Do you think it will help to accelerate activity in the market this year? Is it more '23 event? How should we think about what it means for MasTec?

Sure. So first, thank you for having us. Good morning, everyone that's in the room. We have a slide deck, I know on our website, and we have a safe harbor statement there that I'd just like to refer to. Noelle, first, it's incredibly exciting, right? I think we kind of got sprung into the industry earlier this year. There was a lot of concern across the industry as to what was going to happen there was going to be a preliminary decision in August to kind of really slowed things down. Some customers continued with their projects doing some of the things that didn't necessarily involve the installation of panels. There are some customers that actually delayed their projects until the resolution started. So the good thing is this gives tremendous visibility really for the next 3 years because if you think about developers being able to buy -- and all the rules aren't out yet, but I would assume that anybody that buys your panels by December of the second year would really grandfather in for that third year. So we view it as almost a real strong 3-year runway. We think that within the next 3 years, it will get solved long term. But 3 years is a long time in this world these days. So it's incredibly exciting. I think our customers are super excited. I think that because it's maybe a more compressed time frame, I actually think we're going to see more activity than probably we even originally anticipated, which is almost insane to say. As I think about '22 to '23, I don't know that we have the answer yet is the real answer. I think it will definitely spur a lot more activity in the second half of the year, whether it translates into project starts and revenue, time will tell. I had the privilege of being on a phone call with one of the largest solar manufacturers from Cambodia earlier this week that they had the decision. And what they told me was for 3 months, they had pretty much shut down their U.S. side of their manufacturing, right? So they manufacture for other countries. But on the U.S. portion, it was stopped. And they're going to gear back up. But it's a 3-month delay, right? So by the time that they're able to gear back up, by the time that they're able to ship that with all of the supply chain issues that exist, when does it get to the U.S.? And when does it actually ramp meaningful. We don't know. Now how many developers also will start projects without the panels being there because they know it's coming, that's another question. So I still think there's questions to be answered. So it's obviously incrementally positive potentially for '22. But it's definitely incredibly positive for '23, '24, '25.

So would you say at the time of the first quarter call, you obviously talked a lot about solar. But would you say the supply chain you were expecting a challenge, right? You were expecting the supply chain to be challenging. Was it -- would you say it was better or worse in line with what you expected as you've sort of progressed since the first quarter call?

In solar?

In solar, in particular, but just the supply chain.

Well, look, I think for lots of -- and I think we can actually say this across our entire business. There's pockets of our business where the supply chain is improving. There's pockets of the business where the supply chain is still challenging. The real issues today are almost about cost, right? It's both an issue of having the supply and then what you have to pay for it. And then on the labor side, right? So -- and they're all hand in hand, right? We want to think of them separately, but the reality is supply chain does impact labor and vice versa. So things are incrementally getting better. And I think as we look out, we see a market that's actually pretty stable, which is a good place to be today. But we're still -- there's a lot of things in '22 that we're having to manage through both as a business and an industry. So -- but I'm -- look, things are playing out really well and we're in some pretty exciting businesses with some tremendous tailwinds.

Good. I guess just to finish out renewables. There was some discussion that wind was maybe picking up a little bit more than expected in response to the solar uncertainty. Any thoughts on what you're seeing in the market? Do you think '23 should be a growth year for wind? Or does it really kind of depend on what happens on the solar side?

It's an interesting question. Obviously, as the solar market was in a state of somewhat people not really know what was going to happen. There were customers have shifted more into their wind platforms. I think that the anticipation was always wind was going to be slightly better in '23 and even better in '24 because there's a lot of transmission lines that are opening up. The big issue with the wind today is a lot of the remaining wind that exist in really good pockets don't have transmission and there's a lot of projects assigned to that. So I think wind's going to get better. I do think '23 is a growth year for wind. I think '24 is an even better growth year for wind. So I think this is again, somewhat of a trough year for wind in '22.

Right. Okay. Well, while we're on the topic of transmission, I guess we can shift over to that part of the business. First, while H&M -- well, Henkels impacts multiple parts of your business, I still think of it as obviously being most impactful for the power delivery business. So can you talk about how the Henkels acquisition is progressing? How integration is progressing? And how you're sort of feeling about where you stand at this point? And where you think -- how you're thinking about the opportunity relative to your initial expectations?

So when we think about power delivery, going into 2020, right, we -- coming out of 2020, it was roughly a $500 million business organic to MasTec, probably more heavily skewed on transmission, a little bit of distribution within that, both union, nonunion. I think '21 was an incredibly important year for 2 reasons. But obviously, we did the Henkels acquisitions at the end of last year, which I think, transformed our business. But even earlier in the year, we did the INTREN acquisition, which was also a very meaningful transaction in terms of size, scope and scale for that industry. So combining INTREN and Henkels and what we had. Today, we've got a 2.5 probably on a run rate basis, even better. power delivery business that I think -- when we think about -- it's only been, what, 5 months now or 6 months. So it's incredible because it feels like it's been a lot longer. I think everything we think about the business from the transaction to the potential growth, potential margin, customer acceptance is better than we anticipated, like across the board. I think the business is stronger than we thought it would be. I think the opportunities are better. I think things are really starting to come together. It's still -- we're still in the 6 months. So we're not ready to cry victory, but I think things are moving in the right direction. We're super pleased. I think it's going to be an incredible -- I think both of those transactions are going to be incredible transactions for shareholder value to the MasTec shareholders, and I think we're going to continue to grow that platform. I think the opportunity for growth with our customers and the way they've accepted those transactions has been phenomenal. And I know everybody talks about it, and we talk about the industry and the growth profile and the opportunities that exist. But it's -- and again, it's almost understated, right? There's just so much out there. There's so much happening. There's so many good opportunities, and I think we're going to play a big role in it. And I think that we've positioned ourselves competitively better than we could have ever anticipated.

Could you talk about the benefit of scale and having size in that industry? I mean how important is it to utility customers? I mean clearly, Quanta has had -- has been the largest player in the industry for a long time. To what extent are utility customers like looking for another really sizable player? I just want to get a better sense of the importance of scale.

I think scale is important for multiple reasons, right? Before we even get to customers, it's important for cost, right? Because this is a business that is equipment intensive, right? So you've got a certain amount of equipment that you need with the manufacturers having scale, really changes the dynamics of first and foremost, availability. Forget about pricing, just availability, which in this market is incredibly difficult. So the fact that we've been able to build our scale significantly increases our importance to those manufacturers that sell us the equipment that we need to be able to grow and be effective. So that's very important to us. It's also a question of just pure talent, right? So the fact that we're bigger, we can move talent across the country. We've got a lot of opportunities for growth within the company that were more limited when we were smaller. From a recruitment and retention tool, I think it's tremendous. So I think those are probably the 2 biggest factors relative to scale as it impacts MasTec. The third, which is also very important is the way our customers view us, right? So whether we haven't gained a dollar of revenue more with that customer, our perception of our involvement in that business changed because now we're a significant player nationwide. So even if we had a significant account with a customer where we had a lot of that work, the perception of us as a national player versus a local or a regional player for a particular customer, changes. And I think that opens up a lot of opportunities because the reality is that the power delivery business, while it's a great business individually and we're going to do everything we can to grow it, it intertwines with so much of the rest of our business, right? It intertwines with the renewables business, with the power generation side of our business on the nonrenewable side. And it even ties into the telecom business because at the end of the day, a lot of these utilities own the aerial networks where a lot of these antennas are going to be placed. So just our exposure to the market and our size within the market opens up not only opportunities there, but across the rest of our business. So I think for all those reasons, scale is incredibly important for us.

Okay. Yes, that makes a lot of sense. Specifically within T&D, I mean, we've started to hear some private -- again, smaller private players talk more about supply chain challenges impacting project timing. Also you touched on availability of equipment. We had Custom Truck One Source here yesterday, and they were basically really talking about these -- just how it's -- demand is just there. It's huge, right? But just the ability to grow is completely limited by the supply chain. And so I'm sure when you look at their supplying equipment, you would think that, that would impact the entire industry. So it's kind of a 2-part question. So one, can we talk about just that -- to what extent is even though the demand is there, does that availability of equipment really limit how quickly you can grow, right? Is it a rate-limiting factor on growth? Or how are you kind of getting past that? And then maybe second, we can start just talk about the supply chain challenges.

Sure. I think it's equipment and people. I think they're both key and they're both challenging. And I think there's -- and this is a broad statement, but I really believe there's more demand than there is availability of resources and equipment today. So I think for us, and this is a lot more challenging than it may sound, it's all about allocation of resources. So how do we allocate our people and our equipment, which we're blessed to have a lot of on those customers that we think offer us the most long-term upside, whether or not they may be the best short-term upside, right? So there's a lot of times where we have to pass what we think is a better short-term deal for what we think is going to be a better mid-to long-term deal based on lots of reasons with those customers. So the challenge today is we wish we would have the capacity to do all of the work that comes our way. The reality is we don't. So then we have to allocate, right? And we have to decide where are we putting what resources. And when we think about the integration of both INTREN and Henkels, that's a big part of it, right? It's a part of saying, the company might have had relationships with some customers for 40, 50, 60 years, but they may not be the right relationships for the right time or they may not be structured the right way. So how do you either fix that or how do you either politely over time, move those resources to other customers that we think offer higher long-term opportunities. And that's -- I mean, the reality in the first 6 months, that's where a lot of our planning and focus has been.

Okay. So shift over to communications. Starting with wireless. AT&T has been really vocal about the second half ramp in 5G spending. Could you just talk about how much visibility you have into that? We're getting towards -- we're kind of at-ish that second half of the year. So are you starting to see more of this pickup? Or is it still coming?

It's ramping in a big way, right? So -- and by the way, it's not just AT&T, right? It's AT&T. It's Verizon. And then it's the combination of all of them doing work at the same time, which we haven't had in years, right? So you've got T-Mobile that's active, you have Verizon, you have AT&T. DISH in some pockets is also very active. So the challenge with the industry, and we've lived this for a long time, right? It's easter famine. We've been -- it's been a slower industry for the last few years because there hasn't been a lot of significant deployment from 2 of the largest carriers and all of a sudden now you've got everybody hitting the market in a big way. So we're going to have a significant ramp in the second half. I think the industry is going to have a significant ramp. I think it's really just the beginning, lots of challenges with it. I think supply chain is, for the most part, in pretty good shape there. I think there's still going to be pockets of issues that come up. But I think we're a lot closer to having meaningful change and impact in that market than we've been in a long, long time. I know we've been talking about wireless 5G forever. I know people have been frustrated and have been waiting for it. But I think it's -- I think we're at the precipice. So I don't think, by any means, '22 is some -- the second half of '22 is some banner time, but it's the beginning of what I think is going to be a really long cycle. We've been gearing forward for a long time. We're as prepared as we can be. It's still going to be a challenge. All the challenges that exist in the business are parts of the challenge here, too, right? People, equipment, supply chain, those are the main issues, and we're working really hard to be positioned to excel.

In wireless, I mean, just around equipment, I would think you'd source a lot of that equipment kind of ahead of the build. So does that -- do you have a lot of that equipment now ready to go, so that should at least provide some supply chain stability as you at least start the build?

Yes. Unlike the power industry, we're -- I'd say we're very equipment heavy where we need a lot of the bucket trucks and diggers and things that really are meaningful in terms of dollars. It's not that much in wireless, right? We might have the use for some cranes, but there's a lot of -- there's more people, it's climbing. It's a lot of miscellaneous materials. The important materials, the ones that really affect build, we don't control. So it's the radios, some of the stuff that the carriers buy. And depending on who they're buying from and what carriers they have a relationship with and how long those orders have been and the challenges that they're having, the supply chain issues in that business will be more on the customer side than they'll be on our side. But the effect is the same, right? So we've got to be really cognizant of it.

Right. Yes. And then on wireline, you've been building out infrastructure in rural markets to support the coming RDOF funds. They're starting -- or rural spending, I should say, in general, because a lot of money is going into this rural spend, whether it's RDOF or IIJA. Again here, are you starting to see work with those programs ramp and cover those costs? Are you starting to get kind of comfortable with -- are you still feeling comfortable with the cost versus kind of revenue structures as you look out in the back half of the year and starting to cover some of those investments?

Well, we feel better, right, because we've been ramping for a long time. The work is here. There's no question that we're gearing up. I think the challenge, right? If we think about just going into next year, the demand doesn't stop. It's -- for -- we're still getting today, right? We still have an enormous amount of RFPs, negotiations, customers that are knocking on our door for the first time, saying, hey, we want to do this build. It's -- these builds are very significant in size. And the reality is it's the same as in a lot of our other businesses, right? If we don't have the resources to commit to all the work that's being offered, so it becomes about resource allocation., And as you're doing that, you're trying to gear up as fast as you can to take advantage of those opportunities in future periods. So I would say that we feel really good about the absorption of costs for the work that we've geared up for. What we're trying to manage is how much more work is coming and how do we gear up to measure -- to kind of have that right balance in place where you're trying to meet growth and at the same time, have -- and I'll let your cost structure get out of hand. So I think we're doing a good job of managing that. But look, those are -- that's a great problem to have because it shows the strength of the industry and the strength of what's coming in -- this is a big year for us. We talked about 2022 being a transitional year, a transformational year. We're going from a business that had significant earnings coming from oil and gas. We're switching to all of the -- to our power delivery business, our comms business. Margins should -- but this is the year where it's kind of all shifting. So there's a lot going on. And I think managing the balance between growth and cost is really important for us, especially in the second half.

Right. Yes. I mean I think it's clear that all of these markets are really strong. The question is just in the past, right, when you've ramped on some of these programs, there have been some inefficiencies. Early on. I mean it feels like you've tried to capture that in your guidance, but yes, I would think that, that would be a pretty significant challenge. I guess, last kind of just going through your final business and pipeline. One, can we just talk about some of the opportunities that you're seeing right now? What -- the activity you're seeing, it feels like it's mostly intrastate, kind of Permian pipelines. Could you just talk about what you're seeing on the kind of traditional front? Some of the opportunities that may be emerging on the bigger pipe side around LNG, but then also -- and then second, we can go into some of the more emerging opportunities.

Coming out of 2020, right, we knew the pipeline business was going to be challenged. We had both from a commodity price perspective at that time, what was happening with ESG. We changed our longer-term outlook in oil and gas. We significantly declined outer year expectations, right? We talked about $1.5 billion to $2 billion business where we were doing north of $3 billion. We felt like, over time, the business was going to shift to what we would call cleaner sources of pipeline use, which is a lot of the carbon capture, hydrogen opportunities that we were seeing at the time that we thought would be really meaningful in outer years and ultimately, over time, probably really take over the pipeline business relative to a revenue split perspective. . We still plan that through '21. We had a decent '21 because we had a lot of work still pending from '20. We were expecting to have a relatively good '22 because we still had to finish the MVP pipeline. And fast forward to today, where we're at, MVP has been pushed out yet again, right, potentially maybe there's some start in '22, but the reality is that the project is probably pushed out into '23. And then you've got, all of a sudden, everything changes, right? Commodity prices are through the roof. You google pipelines today, you'll find article after article that talks about the lack of pipeline availability, especially in the -- out of the Permian and some of the southern shales. And all of a sudden, the sentiment from our customers is completely different than it was a year or 2 ago. It's incredible, as quickly as the sentiment has changed. We're in dialogue in conversations with customers. It feels like it's 3 years ago again. I mean the amount of projects that are going to be coming in that industry we could never have predicted a year ago or 2 years ago. So I think that our outlook for '23, '24, '25 is dramatically better than it was going into this, right? There's still a lot of unknowns. I think we're also really bullish on the alternatives. So we're still bullish on carbon capture and what's coming from hydrogen. So I think the business is actually going to turn, and I think it's going to be a significant driver of EBITDA growth for us, especially second half of '23, '24, '25. But we're still managing that because as quickly as it changed in one direction, it could go the other way, right? So we're cognizant of that. But with oil and gas prices where they are today, with the amount of drilling that's increasing with our customers' needs of moving that to the areas where they need it in the pipeline not being available, it's -- the industry is going to grow again, right? So we're -- it's pretty -- I mean, it's crazy to say, but we're pretty excited about it.

And how are you feeling about some of the more emerging opportunities in hydrogen, carbon capture, water? I mean, is that just extra if you start to -- as we start to get into 2020?

Yes, it's not extra because we expect it now, right? And we actually expect real projects to come out that will hopefully have some revenue associated with them in '23, that will impact all of those, right? So it's going to be -- when we think about our pipeline business in the future, it's going to be a very -- it's going to be much more diversified than it historically was. But it's going to be strong across all subsectors within it. So we're -- again, I'd say we're still a little bit early. '22 is a really tough year because we don't there hasn't been a -- in '20 and '21, there weren't any projects. There wasn't -- there were no projects that were put out on the street. There were no projects that were bid. So you've got a really, really dry funnel coming into '22. There are industry players that were very large 2 years ago that today have basically -- they have no revenue, 0, like they basically shut down their companies, they kept their equipment, they kept their key management, they're paying them, and they're paying them to sit until the work starts again. So there'll be some absorption of that, that has to come back into the industry. But it's interesting that while those -- historically, you'd see a lot of those companies maybe sell their equipment. Now there's a lot of excitement that the industry is going to get back to a pretty reasonable level. And I think as we look into '23, especially in the second half, it's going to be active. Again, these projects take time, right? You've got a lot of supply chain issues in that industry. You got to order the steel pipe. That steel pipe isn't readily available today. So you're probably looking at some time in '23 to get it. But it's -- the conversations are meaningful, and it's very positive.

Okay. So I guess if I'm looking at your comments across the businesses, it seems like you're incrementally more positive on revenue for '22, still really positive on '23. The cost side is tougher, maybe tougher than you were maybe originally hoping for '22, but you're still feeling good about kind of that getting a lot better as you get into '23, is that fair?

That's fair, that's fair.

Okay. Got it. So George, I thought we could shift over just kind of to talk about balance sheet a little bit. Cash flow. So you've been generating really strong cash flow. Could you talk about how you're thinking about that for '22 into '23 and then touch on your priorities?

Sure. Obviously, look, we've generated -- we have a very strong cash flow profile. Our business, Jose mentioned earlier, our operations and our business mix are really going through a significant transition here during the 2022 year. Just to give you an order -- kind of some magnitude, right? When you think about our business in '21, high 30% of our business was in master service agreements, so recurring unit-based revenue. As you look out to '22, that number is going to grow in the high 50s, almost low 60s, when it's all said and done. So there's a significant transition going on within MasTec, and we've talked about it with the oil and gas and obviously, the acquisitions that we did. I think when you think about that transition for MasTec, there's 2 ways to think about cash flow, right? Obviously, there's a free cash flow concept, and then there's just a general cash flow from operations. When I think about cash flow from operations, I think that the picture as we work through this transition is probably incrementally a little bit positive, maybe, let's call it, generally the same. But our cash flow profile, our working capital, our DSO should be generally in the same range. You could argue a little bit better because of the higher level of utility spend that's on a recurring basis at a smaller level. But I think, generally speaking, about the same, maybe a little bit better. I do think though that over time, the free cash flow profile for the company does significantly get better because as you look at the transition of our business and as oil and gas or as pipeline services become a smaller component of the total revenue stream for the company. That historically has been the highest capital intensity or it requires the highest capital intensity of all our businesses. So I think when you look at MasTec as we go through this transition during '22, and you'll see a free cash flow profile that will start improving in a pretty significant way as the business mix changes. Having said all that, we generate strong free cash flow every year. We'll have strong free cash flow here in '22 again. We generate excess funds in our minds every year, somewhere between $200 million and $400 million a year, thereabouts that you can -- that are really up to us to reinvest back into the business. Over time, we've invested in either M&A, share repurchase or managing the balance sheet through leverage. We're sitting today with an investment-grade credit profile despite having invested $1.5 billion in M&A in 2021. We'll invest in some working capital here in the near term. And that will -- our debt profile will go up a little bit in the second and third quarters just because of the growth, and then we're going to end the year very comfortably levered. So our charge has really been how to maximize shareholder return, and that's a daily, weekly kind of discussion, right? So at times, and you've seen that during the first quarter of this year and early part of this year, we bought back some shares in the low to mid-70s. So obviously, we felt strong that at that point in time, there was a -- in that price range, there's a big opportunity in our stock. In many cases, because of what Jose is talking about, right? There's a lot of transition, a lot of noise going on with '22, a lot of near-term pressures. But when you take a step back and you look at us coming out of '22 into '23, and you see where we are in the -- right in the thick of a major mega trend on 5G and communications, right in the thick of, I won't call it a mega trend because it's bigger than that, whatever you want to call the energy transition concept, right? It's once in a career in my mind between what's occurring in the changes in power generation and ultimately, what that does to the power grid, which we're now a major player in. And you look at that mix of business where we are, and I think -- we think there's a significant opportunity for us going forward. So I think our profile from a cash flow perspective is going to remain very strong. Our use of funds continues to be finding the best opportunity we think to maximize shareholder value. And you've seen over the last year plus that that's morphed into a combination of M&A at times when we think it's appropriate and then as well as share repurchases. So we'll continue with that theme. It's a constant battle. There's not one answer that today it's M&A versus share repurchase. It kind of changes based on the opportunities and how things are developing. But it's something that we're -- I think over the years, we've done a very good job of managing. We're very proud of our return on invested capital. We're very proud of how we've transitioned this business over time, and we recognize that in '22, we're in the midst of a pretty -- a very significant transition. If you think about it, it's not really very different than what MasTec has done in the last 15-plus years. When Jose came on board as CEO, this was a $900 million company that did underground construction in DIRECTV, right? And over the years, what I think MasTec has been particularly adept at has been looking at trends within infrastructure and developing inroads into those trends to maximize opportunities, right? Whether that be through M&A like we've done through many things or organically like we've done recently with solar, right? And I think that you're going to count on that to continue in terms of the MasTec profile, which is very strong, good cash flow and balance sheet management and profile, coupled with a very opportunistic management team that's looking to identify trends and establish growth options for the business to maximize shareholder return.

Right. Any questions?

Yes. On the 5G build. Some of those guys are probably on the advantage of the radios or availability, major shortages. How much visibility, I mean, do you get a call on Friday, don't go out on Monday? Or is it a month or 2 months, 3 months. what sort of visibility? And then the second question I had was the availability of trucks. And then how much of a gating factor is that? It sounds like your pipeline is significant for the back half of the year whether you find it easier, tougher to get trucks.

Yes. So I guess the first part of the question, which is on radios and really how the customers interact with us relative to project timing and when projects happen. It depends on the customer. So our biggest customer in that business is AT&T. And with them, we actually get full year plans. So pending material availability, which is sometimes an issue, which forces you to scramble. The reality is we know where we're going to be almost 8 months in advance, right, almost to the site. Now there's projects that get pulled in, projects that get pulled out based on what may have equipment, but we have excellent visibility there, excellent planning. We know when it's going to be slow, we know is when it's going to be really busy. And we think we have a lot of insight to that for significantly ahead of time. Some of the other customers that are more project driven where you're doing project based, there might be a little bit more inconsistency with that depending on when they award a job versus when the materials come in. But even then, we're not getting calls on Friday to not show up on Monday, right? You might have a month from now, you might have an issue, 2 months from now, you might have an issue, but I think that's kind of the time frame that we kind of try to manage to. The more time we have, the better we can allocate resources. We talk to we're blue in the face with our customers about the issues, the more planning we can do, the more cost-effective we can be for you. So I think everybody is in line that that's the best way to operate, not always the way we operate. But for the most part, I'd say it works pretty well. When it comes to trucks, look, we've got one of the biggest fleets in North America relative to an infrastructure construction company. No question, everything is difficult to get these days. What we'll do is maybe some stuff that would have aged out, maybe some stuff that we would have sold at the end of life, we're keeping longer. And that's kind of how we're trying to manage through some of the deficiencies in the cycle, right? So if there's a particular piece of equipment we can't get, and we were slated to sell 15, 20 of those pieces during the year. We're keeping those pieces. We're extending the life even if there's a maintenance cost component with that because we just can't get it and that's how we're trying to manage through it. Is it difficult today? Yes, it's really, really difficult.

All right. Well, thanks so much for your time. Really appreciate it.

Thank you so much. Thanks for joining us.

Thank you.