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

Fireside today with MasTec. And from MasTec, we have the CEO, Jose Mas. The company has a large presence in communications and is expanding into a lot of areas of energy transition. So we're excited to have a conversation about all of that with him. I'm Marc Bianchi, Cowen's energy and sustainability analyst. Sustainability is a core value for Cowen. We've been in a process of transitioning our research coverage to have more focus on sustainability, and MasTec is one of those examples. So hopefully, Jose can talk to us a bit about that today. So I'm going to go through it. I've got a whole bunch of questions. We'll hopefully have some time for Q&A. So if you do have a question, please raise your hand, and we'll try to get around to you.

So with that, Jose, maybe just starting off, can you give us a few minutes just what is the company? How did you get started? What's your background? And maybe what do you see as your competitive advantages?

Sure. So good morning. Again, my name is Jose Mas. I'm the CEO of MasTec. MasTec is an interesting company. It was a company that was originally founded -- the predecessor company was originally founded by my father. He was an immigrant from Cuba. So I'm a first-generation American. My parents came from Cuba, fleeing what was the government at that time, and my father came here to join the Bay of Pigs Invasion. So he was recruited by the U.S. Army, along with a lot of other young Cuban men. They trained at Fort Bragg. They got on ships and a lot of them ended up never disembarking in Cuba, kind of turned around, found themselves on different shores across the country, a lot of them in Miami, really couldn't go back to Cuba, so they had to kind of reinvent themselves and find a new life. So my father arrived at this country at the age of 20, didn't speak the language, didn't have a penny to his name, worked a bunch of odd-end jobs, worked as a stevedore, worked as a shoe salesman, and he eventually became a milkman. And he had a milk route that was fairly successful. He had a refrigerated milk truck. He used to sell milk to people, used to take milk to people's houses. And a couple of years later, he had some friends that had gone from -- that had ended up in Puerto Rico, and they had started an underground construction business, basically putting in telephone cable at the time. This is in the '60s. And they had opened a branch in Miami. They were working back then for what was AT&T, the previous AT&T. They were losing money. They were about to close it, and they came to my father and they said, "Hey, we think you're an honorable guy. Do you have any interest in running this business? And by the way, if you turn it around, we'll give you half the business." So my dad had never done any of this, had no idea what he was doing, but he figured I don't really have a lot. So half of something sounds pretty darn good. So he took the business over and started growing it. And through this late '60s, '70s, '80s, we built probably a really strong family-owned business that focused on underground telephony in South Florida. So you think about Miami-Dade, Broward, Palm Beach, all the way into the Keys, we were the dominant player in that market over those years. So again, it went from -- there was a lot of changes, right? You went from AT&T to Southern Bell, to BellSouth, back to AT&T. But early on in those years, it was truly the world was changing. Long before the fiber days, most of the work was placed in manholes, a lot of cast-in-place manholes, and the City of Miami was growing, so it was a great account. Fast forward, I was in high school. And when I -- me and my brothers were in high school, my dad used to make us go out. We used to dig pits with a pick and a shovel. That was our introduction to the business. It was -- I hated it, but it ended up teaching me some incredible lessons throughout my life, and I actually learned the business really, really well. In 1992, Hurricane Andrew came through Miami. It was a 200-mile an hour storm, devastated the southern portion of all of Miami. And we were what they call the master contractor at the time. So we were the contractor responsible for helping the telephone company replace its infrastructure. So if you think about, just about 90% of all telephone poles fell from Southern Point South, and they took advantage of the storm and they ended up undergrounding a lot of the systems in the southern part of the community. And we were the master contractor, that kind of led that effort. We brought in other people to help us from around the country, other big contractors. Back then, it was a very mom-and-pop dominated industry. There weren't a lot of big providers nationwide. So we bought what we thought were some of the biggest at the time, which was a company called Burnup & Sims and another one called Henkels & McCoy. We took about 2 years on storm activity. And when the storm activity was over, we looked at ourselves and said, "Hey, at this point, we were all out of school. We were all out of college. We all wanted to do something more than just have a local family business, so we decided to build MasTec." And the first part of that was we did a reverse merger with Burnup & Sims. A long time ago Burnup & Sims was behemoth in the telecom space. They started investing in the beverage business. So they used to make a beverage called Shasta. And they thought that the future was in beverage versus construction. They went on to build a company called National Beverage Corp. It became -- today, they make something called LaCroix Water, for those of you that are familiar. So they've been very successful. But we kept all of the construction communication assets. We renamed the business MasTec in 1994. We did a reverse merger. It was our vehicle of going public. Back then, it was really the only way to raise significant capital, and we decided to try to take this nationwide. So from New York to California, our vision was we can be a provider that can provide telephony services to a consolidating customer base, and we started building that way. Fast forward, many years later, we've really diversified the business. Once we got past the 1998 Telecom Act, our business grew a lot. The dot-com burst and bubble really affected us, right? Our telecom business significantly shrank from the late '90s to the early 2000s. And at that point, we really decided to try to build out a more diversified portfolio. So telecom is still a huge piece of what we do as a company. Today, we do just over $3 billion in our telecom business. But today, we also have a bunch of other verticals, mostly in the power space. So we are one of the largest builders of renewable assets in the country. We build wind and solar. We do some other renewable-type assets like biomass. We're working carbon capture, hydrogen. We also have a large oil and gas infrastructure business, where we build pipelines. So we're one of the largest builders of pipelines in the U.S. And then we've got a very large power delivery business, where we do distribution and transmission work for energy customers across the country. So back in -- I became CEO of the business in 2007. At the time, 95% of what we did was telecom-based. Today, our telecom business next year will be about 25%, 30% of what we do. So really transitioned the company, but telecom still a huge piece. In telecom, we really focus -- we still focus on infrastructure construction. So we're one of the largest builders of wireline and one of the largest builders in the wireless community. So we work for just about every major provider that's out there building, been doing it for a long time, kind of where I grew up. So pretty excited about what's happening in the industry today.

Great. And I want to talk about that portfolio in a few minutes because I think that's an important distinction about what's going on, but mostly communications-focused group here. So I want to really get into that part of it. You guys -- with this recent acquisition, you did, you updated guidance, took down some of the previous guidance for the back half of the year, outside of the Communications division. So Communications was holding up pretty well. What's going on there? How come the inflationary pressures that we've seen in the other parts of the business aren't showing up in Communications? And just what's the general outlook there?

Sure. It's an incredible market, right? Again, you think about what we do, we're basically building infrastructure, right? So there are so many companies today, especially with the RDOF funds that have become available that are expanding their fiber networks. Even if you think about all things, 5G, even the big wireless companies, they're still putting in a ton of fiber right now. So it's been a huge growth engine for us. We started predominantly as a wireline company. Over the course of the last 5 to 10 years, we probably became more wireless dominant. So our wireless business became bigger than our wireline business. And it's almost flipping again, right? Our wireline business has grown tremendously in the last few years. I almost feel like wireless is slightly behind in terms of their 5G evolution and the work that they need to do relative to small cells and really the infilling of all the sites that they're going to build. So for us, the last couple of years have been tremendous years of growth, right? We're having a hard time actually keeping up and managing the growth. I'd argue that we have seen the same inflationary pressures in telecom, although the business is performing well just because of the sheer size and magnitude and growth that we've been able to enjoy. During the pandemic, we actually aggressively hired and trained resources through 2020 through 2021 because we knew the influx of work that was coming just based on even what we knew back then, obviously, with everything that happened around COVID and the pandemic and the amount of focus they got put on the residential side of the business that hadn't been there in a long time, I think, also changed the industry, then you got the government spending. So there's just been so many things that have really locked on to each other over the last few years that have benefited us. So we're undergoing tremendous growth opportunities. Our biggest challenge is people. With all the hiring that we've done, we still have a hard time finding people. I think the demand for the services that we provide is greater than what the industry can offer today. So customers are trying to do things that are very creative to make sure that they have the resources they need for the next few years.

How much is people as a proportion of your costs generally or maybe just break down your costs a bit more for us, if you could?

Yes. For us, our customers provide a lot of the materials, and it could be different for a particular customer. But I'd say roughly almost 60% of our work is labor-driven. So labor, equipment, small pieces material, and the balance is kind of your overhead structure. But people on the field is by far our biggest expense, single line item expense in the company.

And how are you able to get those people right now, right? We hear about challenges everywhere in the economy about getting people and labor availability and wages, just what's the game plan?

Well, wages are up. There's no question about it. I think it -- we started seeing it at the end of '20. Getting people to come back to work out of the pandemic was difficult. In a lot of states, unemployment benefits were almost as high as people's wages were for a long period of time. So getting them actually back into the workforce, I think, created that first wage pressure. I think it's subsided a little bit in early '21. And then at the end of '21, it really started again. So I think for all intents and purposes, right now, it has somewhat topped out. I think we're going to see a more stable wage bill as we think about the next couple of years, but it's bringing new people into the industry, right? The people that know what they're doing, the people that are experienced are busy. So truly today, it's about adding resources. So we've built a number of schools across the country, where we bring people in who have never really been involved in the business and train them, whether it's on doing directional drill work, whether it's climbing towers and really everything in between. We think it's important. We think we have to add resources into the industry to make a difference. We've got a number of programs where we've been trying to bring people from different countries. So for a long time, we've got a fairly large presence in Puerto Rico. And before the storm, Puerto Rico was really slow. So we were able to bring a lot of people from Puerto Rico to the same -- it's part of the U.S., so it's very easy to move in and out of. More recently, we've actually been working a lot of Latin and Central America to try to bring people that have a lot of coax and copper experience from those countries back into the U.S. because we're seeing that with some of our customers. So we're trying all different kinds of things to really move forward.

How about on the customer side? So you mentioned the customers handle materials. But to what extent is that causing any disruptions in sort of the cadence of the work that you're doing? And what's the outlook there?

Look, it's a challenge. Whether it's fiber or whether you get into some of the optical gear, radio equipment and wireless towers, depending on the customer, depending on where they are in their cycle and depending on the geographic area, there's always material issues. So I couldn't sit up here and say that we're not facing them, we are. We're having material issues that we have to manage through every day. I think the difference is there's so much work that -- and there's so much work that's planned ahead of time that if a job is missing a particular set of material, you can swap it for another job within the same geographic region to at least keep going. We're seeing a lot of that. I do think that the supply curve has gotten a little bit better as '22 has gone on. But mid '21 into '22, definitely a challenge. We saw some customers relook at their capital plans and move dollars around to kind of move it to where they had material availability.

Okay. Great. So the Communications business, I think, for '22, guided to about $3.2 billion of revenue. Is there any way you can help put that into buckets for us? How much is fiber? How much is sort of what's going on with the wireless and the wireline carriers and any other categories you want to talk about? And then as we look to '23, I think your guidance kind of contemplates 9% at the midpoint. What areas of those buckets are growing the most, and sure are going to get there?

So within our comms business, we have one piece, which is pretty much an in-home installation arm. And there, we do things like we -- we've been DIRECTV's largest installer for a long, long time. So we actually show up at your house. And if you're a DIRECTV customer, we do the service call, we do the upgrade, we do the install, obviously. When you think about the video business, the video business is in decline. So that's been a business in decline for a long time, but it's still about a $300 million business for us. We're now working for lots of other customers in that space, from security companies to anybody that's got an at-home product that they're trying to sell. We try to upsell. We have the technician at the home. We try to do that installation at the home. As an independent workforce, we think we're -- outside of Geek Squad, we think we're one of the largest in the country to do that. So we've got a lot of relationships with a lot of different companies, and we've got a lot of things in beta in that business as we move away from strictly television to other products. Our wireless business is roughly about $1.2 billion. And there, we support all of the major carriers. So if you think about AT&T, Verizon, T-Mobile, DISH, we do everything from their tower climbs and the installation of all their antennas on the big towers. And then when you think about everything that's happening with small cells, we touch every piece of that, from the power component, to the fiber component, to the actual installation of the antenna, and then maintaining their networks and whatever they've got from a maintenance need. So that's been a pretty steady business for us. Obviously, it's a business that is going to rapidly increase. T-Mobile has been, probably, we think the carrier that has been most aggressive with 5G to date. But AT&T and Verizon are quickly ramping, and we think those are going to be big movers for us in 2023. And then the balance of our business is what we would call wireline, right? And we've got a little bit of power distribution in there in some offices where we do joint work, but the majority of that is on the telecom space and really working for anybody that's doing aerial or underground installation of cable, right? So we work for all the big box, the AT&Ts, the Verizons, the Frontiers, the Charters, the Comcast, and lots of small municipal and co-op based companies as well.

And so I guess, keep going with the targets. There's also a $4 billion sort of near-term target that you've got for the business. So $3.2 billion in '22, 9% growth in '23 and then $4 billion near term. What are the drivers of kind of reaching those targets? And then for investors that are looking at the long term, there's this period of growth that we've got from fiber-to-the-home, from RDOF and so forth, from the build-out of 5G. What's sort of the base level growth? And then how much do those sort of near-term growth drivers add to that?

It's one of the things we're most excited about. When you think about what's happened on the wireless side of the business, it's all about densification. So if you look at your typical architectural grid a few years back and you look what it's going to look like 5 to 10 years from now, you're going to have hundreds of thousands, millions more points, right, across a network. And each one of those has a maintenance requirement. So one of the things that I think gets really misunderstood with our story is the bulk of our revenues for a long period of time have been maintenance-driven, right? If you think about LTE to 5G, there hasn't really been a lot that's happened in the last 5 to 6 years. Obviously, the early parts of 5G on the wireless side, we've seen in the last 1.5 years or so. But for the most part, for a long time, it was just LTE maintenance. It was adding capacity. Capacity adds was probably the biggest component of our business. Fast forward 5, 10 years from now, with all of the touch points that are going to exist on our network, we think the opportunity for maintenance is going to dwarf what our historical maintenance opportunities were, right? So we see an enormous amount of growth on that side of our business. For the long term, when we think about the next few years, our wireline business has almost doubled in the last 3 or 4 years. Our wireless business is actually kind of plateaued, so we're now much bigger today in wireless than we were 2, 3 years ago, and we think that has a lot to do with just the deployment, right? We know that the deployment cycles for some of the carriers is going to significantly increase in '23. We'll be a big beneficiary of that, and that's going to lead to pretty significant growth on our wireless side. coupled with the growth that we expect on our wireline side is how we get from $3.2 billion to hopefully $4 billion.

Okay. One of those drivers, right, is there's some significant government funding, right? We've got the Bipartisan Infrastructure Law, which I don't think we've seen much of yet and then RDOF and Rural Americas. Can you talk through those numbers? And how much has been disbursed or when the investment community would maybe get a better handle on the timing of those disbursements?

Yes, it's remarkable, right? I think that of all the dollars that have been allocated, very small portion of -- of all the dollars that have been talked about, when you think about not just the original RDOF funding, but what came through in the Infrastructure Bill, we've only seen a very small piece of that actually distributed right or awarded, not even distributed, just awarded. And even within those awards, it's one of our biggest challenges as a business because if you're a company that kind of try to win RDOF funding, you're probably going to do some part of construction activity related to those funds. So we're in a really advantageous position that we get to see lots of those businesses, right? We get to see them not only from a services perspective, but in many times because of the sheer size of our balance sheet, we get a lot of requests to participate, to help fund, to be an early investor, to all kinds of different requests we might get. So one of the challenges for us has really been that to determine who are the winners and the losers are going to be. And where do we allocate our resources? We have a finite number of resources. We wish we were in a position where we could offer our services to everybody that's trying to build that we can. So we've got to pick. And one of the challenges has been a lot of those early RDOF recipients have had a hard time really getting off the ground. And this is a hard business, right? If you're actually trying to deploy a fiber network, there's a lot that goes into that, right? There's a lot -- not just from the permitting side, but when you get into municipalities and cities and having to deal with all of the existing incumbent people that are engaged there, you may have the legal right to do things, but actually getting to constructability is very difficult. And for us, it's really trying to identify within those companies, what kind of teams do they really have? Like what kind of support are you going to get as a contractor? Are they outsourcing all or most of that to us, which is one ticket, right? And it's something that we would consider doing. But most of the time, they keep a lot of things in-house. And depending on what they're keeping in-house really dictates how much we want to allocate resources to them because we think a lot of them are going to struggle, right? So to date, we think that the largest spenders on RDOF have been some of the larger companies. I think Charter has been probably one of the biggest spenders relative to the RDOF funds that have been awarded. But I think that's part of the process. There's a lot of funds to be awarded. I think the government is going to look at the success rate coming out of the initial RDOF recipients. And I think those that do well will continue to do well. And I think we're going to see a lot of the bigger companies. They've been working really hard to try to figure out ways as to how they can get allocated some of the dollars that the government is going to have available.

Okay. Part of your -- recently, I guess it was more in the beginning of the year, there was some discussion of building out some cost to sort of support the rural build-out. Talk to us about that, where are you in that evolution? And maybe how much of a drag is that right now versus what it could be once you're fully utilized?

So we opened probably 2 to 3 dozen new offices early in the year, just geographies that we didn't historically serve. We're one of the biggest in the country. So we had a great geographic presence. But even then, we had the opportunity to significantly expand it earlier this year. So we opened new offices, hired new people. Obviously, there's a lot of expense that goes in with that and your productivity really takes a long time to catch up. So definitely been part of our margin drag, even though we've done well in the business. It's a business where we think we can do substantially better. To kind of put it in perspective, even from first to second quarter, I think we added 1,000 people in that business, which is about 15% of the workforce. So we're rapidly growing, not just our physical space, but our personnel. I think we're -- today, we're about 8,000 FTEs in that business aside just direct employees. In addition, we use a lot of different subcontractors and people to help us. So it's definitely been a drag.

Okay. One of the concerns that some investors have talked about is the fiber-to-the-home build-out and just general investment in infrastructure like that in a rising interest rate environment. What are you hearing from customers in terms of focus on moving forward with projects given the higher interest rates? I mean, interest rates, 10-year treasury went up to 3.3%. We're back to 2.8 or so now. So we've gotten some relief, but still higher than we've been over the past couple of years?

So a couple of things. A, I think every carrier has significant plans for a long period of time. I think that they're all trying to find ways to accelerate, which is interesting in this environment. Again, one of the big challenges they all have is labor. You churn it, I think that when you look at the dollars that are available from a government spend perspective, they're not free, but they're really inexpensive dollars relative to the percentage of costs that they're putting on top of the project. And I don't think this is something that's going to be around forever. I think customers understand that. And I think we're in an unbelievable position today if you're a developer or a carrier to actually take advantage of the government funding to help you build out what you're trying to do for your network.

Okay. So nothing in the '22, '23 guidance that contemplated any slowdown in that?

Not a chance.

Yes. Cool. Maybe we'll just see if there's any questions from the audience before I move on. Feel free to raise your hand. Paul? I think we got a mic for you. We got a webcast. I want to make sure it gets caught in there. There we go.

I appreciate the insight. Going back to the massive amount of money that's available, and it's not just the couple of funds that Marc identified, it's far more than that, you throw an ARP and several others. If you take the Infrastructure Act, for example, first funding won't roll until late '23 at the earliest, probably not until '24, with meaningful funding not until '25. My question to you is, have you internally -- with MasTec, have you all done the analysis of the runway, the duration that this massive amount of government funding will drive in terms of healthy growth in your business for many years to come?

Well, I think even if you take a step back and you look at the Rural Digital Opportunity Fund, you look at some of the 5G dollars that were available that I think added up to the total program is about $30 billion. Of that $30 billion, a small fraction has already been allocated, right? When you add on the $50 billion in the Infrastructure Bill, it hasn't even been touched. So I think the order of magnitude of the future dollars that are coming relative to the past, it's 6 7 to 1, right? So I think we're just scratching the surface at the beginning of what we're going to see. So I don't think that -- and I agree with you. I don't think we see any real physical activity probably until '24, '25 with the infrastructure dollars just because you have so many dollars in front of it that have to get allocated, right? So I think it's going to be a challenge for the government to figure out where to allocate it, where to give the dollars work and the dollars have the biggest benefit in the shortest amount of time. But I think this is a very long cycle. I don't think this is a 3- or 4-year cycle. I think this is a 10- to 20-year cycle based on the dollars that are available.

And if it's '24, '25 when the work gets done, when would you be hearing about it from the customers? When are they calling you to line you up?

Well, I think customers are already trying to find ways to get dollars allocated. And in that, we're involved in certain parts of that, right? So we're out. We're pricing dozens of different scenarios for customers today on things that are not immediate. They're not things that they're going to build in the next year or 2, but this is part of what they're trying to get allocated dollars for long term.