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

Good afternoon. My name is Gaurav Gupta. I co-head Morgan Stanley's Transportation and Infrastructure Investment Banking. This evening, I have with me George Pita, CFO of MasTec. Before we dive into our discussion, I just want to read one quick disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. George, Thank you for stopping by. Maybe we can start with a quick overview of MasTec and then we can dive into a few of the questions.

Yes, thanks for having me. And I guess I can start with my disclosure too. This is being webcast, and please take note of the forward-looking statement in our presentation on the MasTec website at mastec.com and includes our investor presentation. So thanks for having me here today. As I've told you many times, is my favorite conference.

Thank you.

I love coming here.

Great weather and great location.

Absolutely. And just to give a little overview on MasTec, for those of you who aren't familiar, we're an E&C company, primarily in North America, we focus on a number of different end markets, but we work throughout the telecommunications market in terms of both wireline, fiber installations as well as 5G wireless support. We'll talk more about that, but that's obviously a big growth market, a lot going on there. We have operations within pipeline services, which includes both hydrocarbon and carbon capture sequestration type pipeline activities. So there's a lot of activity that's we're looking forward to there in '23 and beyond. And then we're in the energy space. And in the energy space, we do everything from renewable power generation, wind, solar, biomass, peaker plants to power delivery and transmission. So we are also in the electric gas distribution, transmission space. Altogether, this year, we're about a $9 billion enterprise. We've done some big acquisitions in the last 12 months. Next year, we're anticipating we'll be closer to about $13 million run rate in terms of revenue. It's fair to say that during '22, we've gone through a lot of transition. We've taken -- the last couple of years, we've taken a pretty significant change to our business in terms of the expansion on the power delivery side and the power generation side, and we're very excited about where we are positioned in an end market going forward, '22 has been a bit choppy, so to say. But when we look at where we have, where we are now positioned in some of the opportunities that exist in our end markets, we're very excited about the opportunity to exist for MasTec for '23 and beyond.

So George, you mentioned significant acquisitions you've done recently. Maybe we'd start there, IEA acquisition, you just got your approval and it should close soon. So can you discuss the factors that drove your interest in the company? And how does that change your competitive position?

Sure. The IEA acquisition was just recently approved through Hart-Scott. As you mentioned, we have a shareholder vote coming up here in the next month or so. We're very excited about the acquisition. IEA is a leading provider of wind, solar power generation services. They also have a large civil and coal ash business. We think it marries up very well with MasTec's operations, where we have similar operations. But I think importantly, it's really a big expansion of the operations in many of the cases, many of the markets that we're in. The IEA business has a renewable power generation source or power generation group that has, is based on union-based services. And that's something that at MasTec within our group, we never had that capacity. We only offered renewable power generation services on a nonunion basis. So we think that the combination of their service offerings and our service offerings together will be -- will give us a significant opportunity. Obviously, in the last few weeks, there's been a lot of discussion, the IRA Act was passed, that's going to give a lot of significant tailwinds to the market sector. And we also think that when we look at the combination of what IEA currently has, which is primarily on the renewables side, power generation services, when you marry that with what MasTec has on the power delivery side, where we have different customers that have power generation needs that have historically not been with IEA. But now with MasTec on a broader scale, we have a good customer relationship, we think that the combination of the power delivery, coupled with in substations and transmission and distribution lines and that whole skill set can be married into a one-stop shop. So we think -- we feel very good about the combination of what our groups do. It's also important to note that IEA has about approach approximately $1 billion civil business in coal ash, primary civil, and MasTec today has about an $800 million business. So together, it creates a civil business which focuses on what I'll call smaller DOT type projects, not billions of dollars, but in the hundreds of millions of dollars. And there's a lot of opportunity, we think, that's developing there both on the state level and the federal level that we think we can take advantage of. So in effect, when you look at the resource capacity and scale, that IEA adds and the components that we bring to IEA with our capacity and service offerings, we think it's a great marriage. We're very excited about it and look forward to closing this transaction sometime here in October.

Okay. so you referenced IRA in the renewable market between the IRA and long-term infrastructure incentives and infrastructure build, do you think that's going to drive customer spending here? And what sort of trends you're seeing?

Yes, I think there's no question that it will provide a significant uplift to the level of renewable power generation that's implemented in the country in the next several years. There's significant tax incentives for wind and solar. There's extensions of credits, expansions of credits. It's pretty clear that this will supercharge what has been in developing a very strong developing trend in terms of increasing the mix of able power generation within the United States. It's interesting to note. I think it also significantly provides or provide significant opportunity expansion for carbon capture sequestration projects because there's tax credits for that. No question, this bill will assist and significantly help expand the power generation shift towards renewable services in the next several years. It'll take -- it's going to take some time. There's obviously a long ways to go. There's no question, I think it will significantly enhance that and will provide a good opportunity for all providers to -- and all generators really to economically expand in the renewable space. So very excited about what that brings. We think it's a significant change and one that will give significant opportunity to our combined businesses.

And what's happening in the solar market now that the solar panel tariff investigation is behind us, that leading to a stabilization in the market?

Yes, if you go back during 2022, this year earlier, there was an investigation on potential circumvention of solar panels, and that really stopped a lot of activity from actually coming to fruition that was previously planned to be built in 2022. Really stopped that from happening because there was such risk associated with the exposure if you brought a panel in, and it was deemed to have been circumvented, there were significant penalties and they could be retroactively applied. So if you had a project that was planned in solar and you did, and you hadn't brought panels in, you really weren't going to bring them in, and that lasted for several months. So it disrupted solar construction in 2022. In our case, we lost in our minds probably about $300 million to $350 million worth of revenue that would have ordinarily course happened in 2022. It was deferred as a result of that disruption. Biden Administration came out and proposed some rules to delay the implications of that, and that has settled the market quite a bit. What you're seeing now, I think, is going to be a major impetus. You're seeing a lot of bidding and a lot of activity and planning going on for what I think will be a significant expansion of solar power generation installation in 2023. So I would expect 2023 to be a very big year from solar power as you have a combination of the IRA, and you have the elimination of the uncertainty associated with the circumvention investigation. I think that's going to lead to a very, very big year in '23, probably one of the largest years that's ever happened in terms of gigawatt installations.

Yes. And on the CE&I industrials, what sort of work do you do? What's the growth profile and margin profile in that business?

Sure. Well, that segment is changing significantly for us, right? Today, in 2022, we'll do about $2.1 billion in revenue on CE&I. And that's going to be comprised of about $900 million of renewables, about $800-plus million in what I'll call civil work and about $400 million in industrial. That level of revenue in our mind has been impacted by about $300-plus million because of the solar panel so that would have been greater. As I look forward, with the merger with IEA, their business is about $2.7 billion, give or take. So we would anticipate that the combined group should be somewhere approaching in that $5 billion range in 2023. That will be our expectation, and that would not be necessarily assuming a whole lot of potential growth. I mean it could certainly be larger than that, but I think it's a safe view of where that would be, and I think there is significant opportunity ahead of that. Where we're headed on the Clean Energy segment is we're looking to improve our margin profile. In 2022, we had a combination of a couple of things impact our margin profile in the business, some of which have hit our overall broad business as well. Firstly, I would say kind of inflation supply chain inefficiencies have impacted what are fixed-price projects. Typically, we have projects in this case that run, are completed within 9 months. Many of those were bid in mid-2021. For work in 2022, the cost structures in 2022 have moved quickly. That's put pressure on project activity, on project margins. That normalizes itself here as we move into 2023. And as new projects are being bid today at higher prices, it tends to -- it will normalize itself as we move out of '22 into '23. And then in '22, we also had some impact because, as I mentioned before, we really plan for our solar business to be bigger than it was. And in the solar industry, there's really a lack of capacity that exists in terms of crews and other infrastructure for that business. So we've been building that up. And as 2022 was going forward, and we had lessened levels of activity, we really held on to that overhead because we knew it was coming back into 2023. So consequently, our margin profile this year in the clean energy space has been depressed. It's in the low single-digit range. And our view would be that we should be able to move that to the mid-single-digit range here in 2023, as we have a more normalized environment as costs stabilize, as we don't have the circumvention impacts with a longer-term goal for this business to be in the high single digit, low double-digit range. We think that's where this can go. And this -- the opportunities that exist for us, I think, have significantly expanded with the IRA Act and give us that potential for, we think, a very good path of continued growth and margin expansion going forward.

So George, shifting gears here. On your power delivery segment, you've also done a couple of big acquisitions between INTREN and Henkels. How has that business evolved in terms of competitive positioning? And what's the margin and growth profile in that business?

Sure. Again, if we went back 24 months, MasTec was a business that a large majority of its operations were based on oil and gas pipelines. And we looked at that business 24 months ago and saw that there was going to be some air pockets in that business. Although, again, there's some interesting green shoots today with carbon capture and whatnot that I think give us a better view today. But back at that point, we established and said we needed to expand ourselves in a much bigger way in the power delivery market and then as well as in the power generation market. And the acquisitions that we've done in 2021 and now in 2022, really is supportive of that direction. So in the power delivery business we've acquired in the last 12 months, we've acquired 2 different enterprises, both of which have operations primarily centered around distribution, power distribution. And that's both in electrical and gas, okay? So we acquired INTREN, which is based in Chicago, and we acquired Henkels & McCoy were just placed in Blue Bell, Pennsylvania. And what we've been doing with those operations is as we've acquired them, we expanded in a significant way, what was very small distribution business for MasTec. But right now, with the combined -- those 2 combined groups, it's probably over $1.5 billion, maybe almost $1.7 billion of distribution services across the country and on the power delivery side. And what we wanted to do, and we're really moving towards in terms of our end market operations is we feel that the combination of an expanded distribution network and transmission service network, which what these operations primarily provide, coupled with power generation sources gives us a one-stop shop for our customers that they can take advantage of as we go through the power transition, right? And that's really our view and that's what we're moving towards. We've been integrating Henkels most of this [ '20, '22 ] Years has gone very well. What we've been trying to do there is rightsize some of the operations that were in the past and combine some things with certain existing MasTec operations. That's something that's gone very well for us. But what we've seen is a very strong expansion in the customer base and the geographic territories. For example, when we acquired INTREN, they had a large operation based in the Midwest. We didn't have that. Now we're working with all the customers in the Midwest on distribution and other factors. Those will ultimately be customers that will approach for power generation as well, right? When you look at Henkels & McCoy, they had large stand-alone offices in the East Coast and the West Coast. Again, areas where MasTec didn't have a lot of presence. And in those cases, those are stand-alone operations. We've rightsized them to a better operating model, but their stand-alone divisional operations. And we look to grow those operations both on the distribution front as well as then also see what operations we have, we can sell for transmission and for power generation services. I guess the general thesis would be, right, that when you think about renewable power generation and increasing the percentage of power that's generated by renewable sources, you really can't think about that without recognizing the significant level of transmission investment that's going to be required to support it. And when you look at things such as electric vehicles and if you want to believe that electric vehicles are going to be a much bigger piece of the U.S. fleet, if you will, you really can't ignore the significant impact that, that will have on the distribution grid, right? And again, with the combined operations that we have today, where we have the power generation source, both renewable union, nonunion, coupled with transmission and distribution, we think that we're really very much in the sweet spot, if you will, of what is this upcoming energy transition bubble, if you will, or action that's occurring. It's going to take multiple years, if not decades, to kind of really move through that component, and we feel like we're smacked out in the middle of it.

Great. And then on your communications business, it looks like 5G spending is finally ramping up. Can you talk about your ability to just scale and meet that demand?

Sure. We are the largest wireless constructor in the North American space. We've been doing this for multiple years. We've started, I think, in probably '07 with an entry point and have grown from '07 to today to be the largest wireless constructor in the country. We have also very large wireline fiber operations. We're probably the second largest in the country. And I think in general, it's one thing you'll see when you look at the markets that we're in, we have a pretty good strong market position in every market that we're in, whether it be power generation, pipeline, transmission. The portfolio what we have today, I think, has a very strong market positioning across where we go. On the 5G side, what you're seeing now is there's been -- there's the start of significant deployment of spectrum that's been awarded over the last 12 months. And that spectrum of C-band spectrum, it is going to be -- I think, we're seeing a big ramp in the deployment of that. I guess I'll back up for a second. When you think about 5G, there's a couple of things to keep in mind. The first thing is it's being built in a very different manner than 3G or 4G. And the reason it's being built in a different manner is because 5G is really about not necessarily handheld and tablets, but more about machine-to-machine usage of the network. So it's being built in a way that's much more complex and will be more costly, but it's being built in that manner because the expectation is that the network in the future will be very transformational. It will be about robotics. It will be about drones. It will be about smart cities. It will be about autonomous vehicles and all that will drive tremendous throughput. So with that, what's been happening on the 5G space is you've got a combination of tower work which is historically where all the cell, the wireless network has been, has been primarily putting antennas and equipment on top of towers, and we're starting the deployment of that now today on C-band in a meaningful way. There'll be several years of meaningful deployment of antennas to grow with 5G so that the capacity of 5G can grow as the throughput continues to expand, right? That's one piece of a 5G pie. The other components of 5G is because when you think about what happens, if you transmit from your phone to a tower, once it goes into the tower, that data has to move through the existing wireline fiber networks. Well, if the underground fiber networks are congested, it won't be able to flow through enough of the data. And if you envision that throughput is going to dramatically increase then you have to expand the wireline fiber, and that's been happening. Verizon and others have made significant investments to start expanding fiber networks to support expansion, right? And we've been doing that. The last piece of 5G program is in addition to the towers. In addition to the expanded fiber, they're now going to be small cells deployed throughout the country and the, and there'll be millions of them over time. The importance of those is that they will be in cities, they'll be running every several hundred feet, and they are very fast in terms of being able to transmit data. So if you're transmitting from an autonomous vehicle, it's going to be very fast to go to your -- the small cell. The downside is it only goes a short distance of time or short distance duration of space, right? So you have to put many more of them in place. And when you put those small cells in, which will be on telephone poles, traffic lights, et cetera, you're going to have to eventually connect them to the underground fiber. So you look at that build out, it's a very complex build, right, and a lot more involved for a very specific reason, which is it has to have the speed to be able to handle autonomous vehicles, but it also has to have the capacity to be able to handle a lot more throughput. And what we're seeing on the 5G side, and we've been scaling up for it with our tower crews is a significant expansion on the on the wireless side, which is the deployment of the C-band spectrum, which is transformational spectrum. It's incremental spectrum that's being added. And that is important because it's a combination of speed and duration. So I think it can be the start of making 5G more transformational which ultimately, from our customers' perspective, will lead the growth capital because there are revenue streams that exist today for smart cities and the things that are really envisioned 5G or before. So when we speak about 5G and how important it is, it's because really how it's going to be significantly transformational in terms of the end market use. And from a customer perspective, they need this as growth capital to develop new revenue streams coming in. We're here to support them. We've got nice growth here in the back half of the year. It's something that we anticipate will continue in 2023. And frankly, I think we're in early stages of a long-term capital spend on the telecommunications world because if I'm right and throughput grows the way it's anticipated to grow, that will ultimately drive more and more capital for capacity and ultimately, will drive more and more capital for innovation regarding speed limits.

And you've also been investing in building infrastructure in rural areas on the fiber side. Are you beginning to see government money flow into several programs there?

Yes. I mean there's -- if you go back -- most of the spend historically on the telecommunications side has been by carriers, but if you look today, there are significant amounts of governmental support, some of which have been implemented and some of which have not yet hit. So the Rural Development Opportunity Fund is an initiative being funded by the government where they will partially fund expansion of wireline, fiber and Internet into rural areas. And that -- those funds have started to flow, and we are starting to do work there. We're doing that -- you do work with a number of major carriers that have on selected areas of build-out for that. So the way that works is if you look at an area and you're going to take a rural area, it might not be economically viable to build it out. But if the government pays for 30% of the cost, it makes that expansion viable. And that is happening, and we're starting to see that, and we're doing that work today -- or starting to do that work, it will take several years, and there are multiple other areas that have not yet been awarded. So right now, we're working with a lot of the major cable and other companies that have been awarded areas, and we're starting deployment of RDOF into many of those rural markets. When I talk about governmental items, there's a number of other factors, including a significant amount of dollars in the first infrastructure build that really hadn't been deployed yet, but there's a lot of support money coming from the government to expand infrastructure. In the telecommunications space, I think as COVID happened, as we started seeing folks working from home as we started seeing Zoom and Teams and it's become more accepted that there needs to be an equal level of Internet access across the country. And to the extent that it's not economically viable, I think the government is looking more and more actively to step in and help make that viable.

And then shifting to your pipeline business. It sounds like now you're mostly doing just natural gas pipeline work. And with what's happening in Europe, with the Russia situation, there's expectation that U.S. LNG exports will grow. What are you seeing there?

The pipe -- we have historically done a lot of natural gas pipeline work. What's happened in the pipeline services market, and I'll call it that rather than oil and gas because, as I mentioned earlier, what's happening today is that our pipeline services are becoming broader for both hydrocarbon and carbon friendly uses. And what's happening on the hydrocarbon side is there is a -- there are limiting constraints in terms of U.S. natural gas production expansion from a lack of takeaway capacity for natural gas. And that's recognized throughout the industry. And there has been the start of a reaction to that, which we think starts to develop into 2023 from a construction perspective. We recently announced that we have won a major award in oil and gas, larger than we've seen in several years, which was kind of a byproduct of that because you're seeing that on the hydrocarbon side, there is a significant need for takeaway capacity for natural gas. And when you -- if you add to that, infrastructure that would be necessary for any kind of expansion or completion of a meaningful export of LNG, which there's a lot of reasons, obviously, where that would make a lot of sense, there's significant infrastructure. So that business that had been challenged for -- the challenge during '22, and we've seen some declines in the business in terms of the end markets has really come back in a meaningful way here in '22, which we think will grow in 2023. The -- again, you can look at world events, whether it be the Ukraine war or other items that show really a significant need for U.S. LNG expansion and LNG export. You add to that, what's been developing now. And again, the IRA Act helps this is there is a significant movement for carbon capture and carbon sequestration in the United States to lower carbon footprint. So right now, there are several projects that are in development that will come to 2023. They're taking carbon from ethanol plants in the Midwest and moving them up to North Dakota and burying them in a ground. There's thousands of miles of pipe that are associated with those kind of jobs. So what the IRA Act does, it gives some support, tax credit support to that level of infrastructure, which I think is very important. It was already developing, but I think that will supercharge that trend and will create, I think, a very viable carbon capture sequestration market going forward. And with that, that's giving us a new opportunity for the pipeline of services. It's interesting because, again, pipeline services were somewhat agnostic as to what flows right, whether it be oil, natural gas, water, hydrogen. There's a lot of developing needs for pipeline infrastructure in the country that I think, again, maybe 12 or 18 months ago, we would not have been pointing to. Instead, today, as you look at that business, we think there's a very bright future for it.

So almost towards the end of our time. First of all, congratulations on your investment-grade rating. Your debt level is a little bit elevated right now because of all these various acquisitions you've done, but can you talk about your guidance for capital allocation and targets?

Yes. I mean we've obviously done a lot. If you look at last year, I think we did $1.5 billion in acquisitions this year announced another $1 billion. Although that's somewhat of an impactful to our debt level. It's also been that there's been some. The results of what we've seen in 2022 with supply chain problems for both materials and equipment. We've accelerated in the first 9 months of this year with accelerated amounts, significant amounts of capital and brought it in earlier because we were concerned about delivery. So we spent some more capital there. We've also had to do similar amounts of investment either in terms of some inventory and deposits on materials because of supply chains that are changing. So we had to -- we've expended some capital in the first 9 months of this year, which have elevated our debt level to a level that's not that's higher than normal. We anticipate that will drop by the fourth quarter. So we anticipate a significant reduction in our debt levels in the fourth quarter in the ordinary course outside of IEA. But when we add IEA, which will close sometime in mid-October, our debt level at the end of the year on a consolidated basis will be more elevated than what it should be. We're committed to our investment-grade rating. We've communicated with the agencies and shown them our path towards reducing back down to approximately 2%, or 2x leverage metric by the end of '23, that's our expectation. I think we'll be taking significant amounts of free cash flow here in the fourth quarter and in the first quarter and in the 2023 period and using that to delever the business back down to what we would consider something in that 2 range of leverage. That's a very doable factor. I think there's been some unique items in addition to the acquisitions. Again, this year, we've had to fast-forward and, and accelerate a lot of purchases that we normally do throughout the year. We've brought them in early to try to address both the combination of supply chain, delivery issues and then cost escalations that you can avoid if you put deposits down and you buy things early. So those factors will mitigate some in the fourth quarter, and we're committed to the investment-grade rating. We're very proud of it. And we'll be moving in the direction of lowering our debt over the course of '23 as we absorb this acquisition that we're making now in October.

Okay. George, thank you very much for coming to this conference, looks like a lot of great opportunities in 2023. So good luck.

Thank you. Appreciate it.

Thank you.

Thanks. Bye.