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

Yes. Jose, you've focused on diversification of your business over the last couple of years. Your INTREN and Henkels & McCoy are almost done at this point, and you've got IEA in the hopper in terms of the integration. How do you think about the portfolio capabilities? Is there a need for more M&A going forward from here? Are there holes you need to plug? Or is that geography benefit that you're looking at?

Yes. Again, for those of you that aren't as familiar with our story, in 2020, we were about a $6.5 billion business, a majority of our revenues and our earnings were coming from what we call our Oil and Gas pipeline business. Again, largest pipeline contractor in the U.S., came out of a great 2019, had huge expectations for the future around LNG and LNG export, and a lot of lines that were being planned. 2020 hits, the pandemic, obviously, demand for those commodities significantly dropped. And the concern was we may never build another pipeline in the United States again. So we took a hard look at ourselves, set out a goal to be a very different company and started a path of really focusing on the power delivery side and the renewables side of the business, made an acquisition in early 2021 of a very large electrical distribution transmission contractor in the Northern Midwest, followed that up with another very large transaction at the end of '21. And then last year, towards the end of the year, did our transaction on the renewable contractor, IEA. So fast forward a couple of years, this year, we'll do hopefully over $13 billion in revenue. Oil and Gas has gone from about half of our business to less than 15% of our business. With all of that said, right, we we're in an industry today where you look at our power delivery business, you look at our renewable business, you look at our telecom business, which I'm sure we'll talk about. And even if you look at our pipeline business, and we've got tremendous tailwinds across all the segments that we operate. So we've gone through a massive transformation in 2 years. We've had our bumps, we've had our hiccups along the way, but we think we're incredibly well positioned for the future, especially with everything that's happening around us and with the federal dollars and really where the country is trying to go relative to its electric infrastructure. So the question about future M&A. We're trying to digest. We've levered up a little bit on our balance sheet. We think we're going to generate amazing cash flow this year. We think we'll be down roughly into the low-2s and leverage by the end of this year. So we think we've got significant capacity for us, our business is a people business, right? So we've got a higher talent. And to the extent that today, as we think about M&A, it's talent-related. So if there's companies out there that we can pick up where we can pick up significant talent, re-purpose their talent and move their talent. Those are things that we'd still look at. The reality is that in a rising interest rate environment, there are other companies out there that are struggling. We had a lot of competitors that 2, 3 years ago, might have sold out, private equity, might have bought. Companies got levered up. Maybe they had some performance issue, and all of a sudden leverage that was 4 or 5x has turned into 9 and 10x. Those are companies that are in a rising rate interest environment are going to really struggle because they're going to have a hard time paying off their debt. At some point, that's going to create a lot of opportunities in our industry, either to re-purpose those assets or potentially see some of those businesses fail or close that creates further opportunities for the more stable contractors. And I think in those kind of opportunities, we would still be aggressive around M&A.

Can you also touch on the unionized labor, the nonunionized labor dynamic around that? And I think with a lot of these acquisitions, now you've got a footprint in both end markets. It's a lot tied to the geography. So maybe just touch on what geographies you might be able to expand into, and need to expand into or is it also set in terms of your presence now?

Yes. So starting with the union labor comment. One of the interesting things about the IRA is that there are bonuses in place if you use both prevailing wage and our apprenticeship programs. So historically, when you think about prevailing wage and apprenticeship, those are unions. So one of the real drivers for us doing the IEA transaction was IEA was predominantly a union-based renewable contractor. Historically, we were a nonunion renewable-based contractor. It gave us a lot of challenges as a business because most of our customers built both. They would go into a geography and build nonunion, but they had projects where they needed to build union. And we couldn't offer a full set of services to those clients. We could only work on their nonunionized renewable assets. So the acquisition of IEA opened up a significant customer base for us because it gave us the ability to perform both of those services. You tack on the benefit of IRA having bonuses for using unionized labor, which both include prevailing wage and apprenticeship programs, and we think there's going to be a push towards more unions relative to where it makes financial sense. So developers will look at it, they'll look at the bonus, afforded to it. All of the rules aren't written yet. So there's still some ambiguity around that, which is part of what delays some of the IRA from impacting. And then they'll make a decision, right? Is it financially feasible to pay the extra rate required for this relative to the bonus that I'm getting. And I think that's a huge advantage that we have today that we didn't have prior to the IEA transaction. So that's very important.

And the last one around M&A. A big part of what you talked about with both these acquisitions was these were lower-EBITDA-margin businesses. So part of the logic was you can kind of high-grade the margins to be consistent with the rest of your portfolio. Where are you in that process?

Well, you look at Henkels. Henkels was the biggest acquisition that we've ever done. It was roughly a 5% business when we bought it on a trailing basis. If you look at our performance this year in that segment, we're going to perform at just over 9%. So I think that the transformation that we were able -- and we acquired that business roughly the first of January of last year. So within the first 12 months, we were able to significantly change our margin profile. We've got great growth opportunities. We're investing a lot in that business. So I think there's going to be tempered improvements in margin as we go forward. But the reality is that we were able to quickly rationalize customer bases. There was certain customers that they had been working for a long time where the returns weren't there. Today, the reality is that those that have the labor are going to win. I mean we are in a labor-constrained market in the industries that we serve, albeit forget about unemployment rates, just having the skilled labor with the knowledge to be able to do the work is really the key driver in our business. So being that provider of those labor services makes a huge difference and then being able to re-purpose that labor into the best possible accounts and relationships that you can have. It's not just about margins today. It's about building relationships with customers that you think you can build a great book of business with -- over a long period of time. And we started transitioning some of that this year. We'll continue to do so, but we're really excited about the opportunities that are in front of us.

Thanks, Jose. Brian, let's talk a little bit about ESG and the evolution and moving to ESG 2.0. And 1 of the things that you've been an advocate of is for ESG funds to resist more of an exclusionary framework and move towards more engagement. Why do you think that's important? And then talk about whether that's being embraced or resistant?

Yes. Sure. So we do think that the energy reliability issue really preceded the Russia-Ukraine war, but have only been exacerbated over the last year are causing a mindset shift, and one I'll see it all in a day. That it's causing a mindset shift in sustainable investing. And we call it from aspiration to action that it's no longer good enough to just desire to support goal, sustainable goals. There's now greater urgency to accomplish them. And if we're trying to get from point A to point B, one has to look more holistically across the supply chain at where there are needs for investment to do that. If we look at where ESG fund assets are today, parked, they're highly concentrated in market [ weight ] positions and market bellwether stocks, the Amazons and Microsofts and Googles of the world. Or the overweight positions are highly concentrated in solar wind water, where we could walk out on the streets of Miami and there would be no debate about their impact. We love solar, wind and water. There are also opportunities earlier in the supply chain as well, and that's where we see a lot of opportunity for discovery value. The response that we've gotten as we've talked not just here in the U.S. but in Europe and Asia, is I agree with you, but I'm scared. And to kind of put it in -- to paraphrase multiple investors' comments. I don't want to spend 1 -- I don't want to spend 50 minutes out of an hour-long client meeting defending why I own 1 stock in my portfolio just because it isn't the purest of the purest. So how do we get through this instead of FOMO we call this FOME, fear of misaligned exposure. How does one get over that? And it's really data and quantifying what that impact could be. That's a lot of what we've been trying to do at GS SUSTAIN is to try to look and provide resources and data tools, which by the way, are available to all of you as clients that can quantify what is the revenue impact that could be exposed either to regulations like the EU taxonomy or to individual sustainable development goals. What is the CapEx that are -- a percent of CapEx that are exposed? How does that look in the future with your help, Neil and [indiscernible] forecasting greenhouse gas emissions and emissions reductions by year by company, forecasting green revenue mix and green CapEx mix. We think those are going to be essential tools trying to measure what that impact is that can justify and offset and mitigate some of the fear of misaligned exposure that may be out there that would be consistent with fund objectives. So we think that's the direction of travel. We don't think exclusions are going away. But we do think we're going to see a greater push towards engagement over time that's going to broaden the investable universe.

That would be healthy. Jose, let's talk about some financial considerations as we think about 2023 -- you've already done a great job of kind of outlining some of the moving pieces going into '23. But for the audience, maybe you can rehash your expectations for next year?

Sure. So again, we're expecting to do about $13 billion in revenue for '23. Our margin profile in '23 should be up somewhere between 75 to 100 basis points in '23 versus '22. Some of that will be second half driven. So if you think about our first half to second half, our first half margins for the year should be up about 0.5 point, our second half margin should be up about 1 point. One of the challenges that we do have going into '23 is we did buy IEA. IEA had a lot of margin pressure. They have a lot of margin pressures in the first quarter. So if you look at the first quarter of 2022, it adds in about $400 million to MasTec. They lost about $17 million in '22. We think it will be better in '23, but it's dilutive to our margins. So we think our margin profile in the first quarter of '23 will be flat with '22 despite that. And then in our Oil and Gas business, we're going to start our pipeline services business. We're going to start really prepping for what we think is going to be a big year, second half growth. So we'll have some expenditures in that business as we gear up. But we feel great about our portfolio. The reality is we've looked at our mix of business in a very conservative way. We think there's a lot of room for upside potential both from a revenue and a margin perspective. And we try to do as best as we can since the company has changed so much to give very clear direction on how we see the business for the full year, how we see it in the first quarter, how we see it in the first half, how we see it in the second half to really align everybody with how we see the business and how we expect to perform.

And Jose, does that guide include Mountain Valley Pipeline in there?

It doesn't. So we've talked about our pipeline business going from about $1.2 billion in 2022 to $1.7 to $1.8 billion. We are the builders of Mountain Valley Pipeline. We've got a lot of work left to do there. But the reality is we don't know when that's going to restart. That probably has a $700 million to $800 million impact on our business. So if that went, it's going to obviously improve. And at some point, we're very confident that, that line will finish, whether it's in 2023 or not, we don't know. So we've kept it out of guidance.

Thank you. Atiq?

I think Jose for '23, Mountain Valley, like you said, is not in the numbers. So on the Oil and Gas side, what kind of activity are you actually expecting towards the back end of the year?

Yes. So a couple of things, right? In Mountain Valley, we're still working on the right of way because we've got to keep it the right of way safe. So there is activity in Mount Valley just not to complete it, which is where the big dollars are. Outside of that, what we've seen is we've seen a massive increase to demand, especially in the southern shale. It's really everywhere, right? So the takeaway capacity that takeaway capacity issues that existed 5, 6 years ago, they're bad, right? We never expected that to happen so quickly post-pandemic, but the reality is drilling has increased. And there's a lack of takeaway capacity for gas in most shales, specifically the easiest one is the permitter in the South. So we've seen a dramatic increase to work activity related to that. We've got a lot of projects that are starting in '23. And quite frankly, we've got really good visibility into '24 and even '25, which is -- we never thought we'd be able to say again that we'd have 2, 3 years of visibility in that business relative to where we were just a year ago.

Jose, on the communications side, you've got a pretty decent presence in that market. And then we've been talking about 5G for some time. There's some activity happening. But I think most of the wireless activity is expected in 2023. So maybe talk about the dynamics there. What are your customers saying? Where do you see like the dollar allocation happening? What does the trajectory of the 5G look like in '23, '24 maybe?

Yes. So we -- our roots in our business started as a telecom contractor. So we do everything related to wireline and wireless activity. So on the wireless side, we're the largest builder of wireless networks in the country. We work for all of the major carriers, AT&T, Verizon, T-Mobile, DISH building out the networks on their behalf. So you've got tower owners, Crown Castle, the American Tower that might own sites. In some cases, we build them. In all cases, we're putting up the equipment for the carriers on sites. So whether they're specifically owned by the carriers or owned by the tower companies. [Technical Difficulty] different than any of the historical technologies that we have. So it's a densification play. So if you think about historically, you have these major cell sites, these big cell sites across the country, they transmit very broad coverage. And that's how we got 2G, 3G, 4G, even into LTE. The big difference [Technical Difficulty] we're putting antennas every 500 feet. So to have true 5G capacity [Technical Difficulty] 500 feet everywhere across the country. And all of these antennas need to be connected with both power and fiber, which is one of the biggest issues because the fiber network to support that doesn't necessarily exist. So what did we see? Post pandemic, we saw a huge move by a lot of the telco and Internet providers to expand speeds in people's homes and businesses, obviously, with so many people working remotely. People needed to have access to high-speed Internet at home. There's been an enormous amount of funding and buildout relative to the wireline assets of the business. So whether it's AT&T or the cable companies like Comcast and Charter, they are deploying a huge amount of capital in both rural and nonrural areas. There have been specific federal funds allocated for some of this. So for example, you have what they call RDOF, the Rural Development Opportunity Fund, which was a $10 billion -- which a $20 billion program to promote -- expanding fiber into rural markets. Of that $20 billion, $10 billion got awarded, about $7 billion is actually made it into the Street. It's had a massive impact on the industry. So we -- the wireline side of our business today is as active as it's ever been, going back to the late '90s, early 2000s when the Internet was being expanded, and you had all the fiber being late for the Internet. We're in a very similar cycle to that just with that investment. Post the RDOF funds, there have been another $60 billion of allocated federal dollars that are going to go into the broadband space between the Infrastructure Act and IRA, the reality is that, that's such a massive number relative to where the industry, I'm not really sure where it's going to go or how it's going to get spent, but it's going to be split between a lot of what's happening is on the wireline side, and it will eventually play into wireless. So one of the issues that the wireless companies have is they're dependent on these fiber networks that are being built to ultimately expand 5G to the full capacity that it needs. And I think we're beginning to see that. So both are growing very rapidly. The wireline business probably growing at a more rapid pace in the wireless industry. But today, you've got AT&T and Verizon and others significantly ramping up their 5G spends to be able to give you capacity. Most of you -- you pick up your phone, it will save 5G on it. But if you -- the reality is that to have full coverage and have full capacity, you need a much more robust and densified network.

Jose, on the margin comment again from earlier, 2023 is going to be a lot of that margin expansion story. But some of that also comes on a year-over-year basis if you compare it to a couple of industrial projects that were challenging in the year, and then you had a couple of tweaks that you had to make to the contracting strategy. So maybe talk about that. I think the industrial project is supposed to be over in the 4Q, just give us an update on that. And how do you think about the margin progression?

Yes. So one of the things that we did in 2020 as we really thought about transforming the businesses is we got more active in the industrial space. So what does that mean? So we were doing a lot of mechanical work. We started doing turbine installations. We've built some of the first dual-burning turbines in the U.S., which burn both hydrogen and gas. So they start up as a gas engine, and they're ultimately capable of burning hydrogen. We got into a number of projects. Some of it went really well, and some of it didn't, right? We've been very vocal about that. So we've had our bumps in the road, our learning that we've had to do in the last 2 years that have impacted our margins in that business. As we kind of move into '23, we've talked about a lot of that business shifting to a cost-plus environment. So the majority of our industrial business in 2023 will be driven by cost plus. It's been an expensive lesson, but quite frankly, we think it's uniquely positioned us when we think about the future. And we think about hydrogen and the hydrogen hubs that [Technical Difficulty] think about a company like MasTec and where we fit, we actually -- most of those hydrogen hub projects have huge renewable components to them. Again, we're one of the largest, if not the largest, renewable contractor in the country. We tick that box when you think about pipelines and the pipelines that are going to be needed to function those hubs, we build the pipelines. And again, we have the industrial capabilities of having dealt with hydrogen in the past. So I think we're the only company that actually ticks all those boxes and that has the capabilities to do that for a lot of those projects. Those are massive projects are not necessarily projects that we would be looking to take on in their entirety. But when you talk about IRA and really some of the things that IRA is going to support hydrogen is a big component of that. And I think we've got a great real avenue to play in that space in a meaningful way. So very important for us and something that we've really worked on. So while it's been challenging, I think that industrial has added something to our resume that truly makes us somewhat unique in the industry.

Brian, I'll close with you here, which is on the Inflation Reduction Act to build on Jose's comments, we featured MasTec as a compelling idea to play the theme. But for the investors, what are other ideas in your view to get exposure to what is a huge [ Bill ].

Yes. I mean, look, as I mentioned, there's opportunities through the supply chain. And if we think about some of the areas that are most transformative, you've got a number of the battery storage stocks that Brian Lee you hear about here and in Brian Lee's coverage on the green hydrogen front, you can run the gamut between the highly under-weighted ESG funds, Air Products and Lindes of the world that know hydrogen well, to the more overweight or less underweight companies that are more on the pure-play side, like the Nels and De Nora. Infrastructure contractors, MasTec and our green CapEx work, one of the things that we did was try to look at companies that infusing both ESG metrics and financial fundamentals together and looking for companies that have revenue exposure of greater than 25% or 30% to given a related sustainable development goal, aren't in the bottom 20% from an environmental and social performance, but have corporate financial returns. We looked at cash return on cash invested that are better than their industry peer average, and are buy-rated by analysts like yourselves. And MasTec was one of them there. On the carbon capture front and then also on the energy efficiency front, it's really a lot of the more of a services oriented and that expands beyond services as we're talking about here at this conference, but would also include a number of the industrial companies, carriers, Rexels of the world that are beneficiaries as well or beneficiaries of broader energy efficiency. So there's really, I think, a lot of stocks through the supply chain, some of which are the pure-play companies in the solar wind arena and battery storage, some of which are more diversified companies that we think are attractive, and we'll get tailwinds from the Inflation Reduction Act.

Great. We've covered a lot of ground in a short period of time. Thank you so much, Jose, for having us in your town.

Well, thank you for having me here, Neil.

And then Brian, for sharing your wisdom, as always.

Thank you.

Thank you.

Thanks.