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

My name is Guru Gupta from Investment Banking division at Morgan Stanley. I'm pleased to welcome MasTec management team, Jose Mas, the CEO; and Paul Dimarco, the CFO. Jose, welcome back to the conference. You've been here a few times. Paul, you've been at MasTec for a long time, but your first time here. Congratulations on your new role.

Maybe we can start with your quick background, what you have done at MasTec? And in your new role, how do you see your priorities?

Great. Well, thank you for having us, Guru. We've really enjoyed our time here over the last couple of days. So as Guru alluded, I've been at MasTec for about 16 years, predominantly, most of that time was in corporate finance, various supportive M&A, different functions, and then I've been Treasurer since 2011. Most recently, post some of the acquisitions that we did in 2021 in our Power Delivery segment, I was CFO of that segment for about the last 1.5 years until Q1 of this year, which was a tremendous opportunity to really understand some of the challenges and opportunities that we have from a finance organization in our company. And I think that's really leading a lot of the things that I'm focusing on as I move into the CFO role. We've got a lot of opportunity around the standardization of data, the standardization of project monitoring across our company and a little bit better focus on what we used to -- what we've historically been very strong at, which is just generating really strong returns on the invested capital that we bring in from our investors. So that's where I'm spending a lot of my time, understanding how we can, as a finance organization, better support our operating partners to make them more effective, to allow them to react quicker to opportunities or challenges that they're seeing on their projects.

Thank you. Jose, some of our audience may not be all that familiar with MasTec and your leadership position in all of your 4 verticals. Maybe we can start with just a quick overview of all of your verticals?

Sure. So again, Guru and Morgan Stanley, thank you for having us here today. For those of you that aren't as familiar with MasTec, MasTec started as a family-owned business. My father actually started the predecessor company to MasTec. Our roots go back to basically digging trenches for the different RBOX across the country. So we got our start basically putting cable on the ground, conduit systems, manhole systems for the telephone company. Grew that business substantially through the Telecom Act of the late '90s, grew a lot during the first phase of really the fiber associated with the Internet expansion in the early 2000s; got into a number of different businesses, including with the predecessor company to DIRECTV and became a very large installer of their business. So a big part of our business was actually rolling trucks to install DIRECTV satellites on people's homes to the service calls with them. And that business grew and evolved during the 2000s. I had the opportunity to become CEO of the business in 2007 and kind of grown up in the business as a family-owned business. And one of the things that we knew at the time was we were highly dependent on telecom. Telecom was changing. People were going away from using home phones, from using second lines. And we knew we needed to diversify the business. We needed to diversify both from a revenue opportunity and more importantly, a margin opportunity. So we got into a number of different businesses in that late 2000, early 2010 time period. First and foremost, we became a large provider of wireless infrastructure. So we were one of the contractors for AT&T when the iPhone first came out and they had exclusivity to the iPhone. So if you remember when Apple first came out with the iPhone, AT&T had exclusivity for a period of time, deployed and grew their network substantially during that period. We were one of the contractors that helped doing that. And since then, we've taken what we think is a leadership position in that market. So today, we're the largest wireless infrastructure construction partner for the wireless carriers. We work for AT&T and Verizon and T-Mobile and others deploying their network. So everything from new site builds, to building a new tower, to all the work that happens on those sites post construction. So installing antennas, installing the cabling. So as you think about all of the migrations of technology, all the capacity adds that have to happen over time, we're the guys that do that. We're the guys that maintain those with our -- the wireline portion of our business. We take fiber to all of these satellites. When you think about small cells in the future, they all require fiber, they all require power. And we continue to do that on the wireline side. So there's an enormous push right now to push broadband out, both in rural and suburban neighborhoods, a, to support the wireless network from a fiber perspective and a backhaul perspective; and then two, to expand broadband capabilities. So we're under a number of different programs where there's significant overbuild happening in multiple parts of the country. We're supporting our customers in that, and it's still a big piece of what we do. But aside from telecom in that 2010 time frame, we made a real push into energy, into all things energy. And you fast forward over the last 13 years and we have built a really good distribution transmission business where we support utilities and developers building and maintaining those systems. So we have distribution crews that go out for the utilities that maintain their infrastructure that do their market expansion, do their upgrades. We do the same thing with transmission customers. We grew into the pipeline business around the same time frame. It was when really the shale started to be discovered in the country. We used to dig trenches for telephone companies. So we figured we could dig trenches and put pipeline in the ground. Fast forward many years later, we're probably the largest pipeline contractor in North America, predominantly natural gas. We are pretty optimistic about the future of all of the different things that are going to require pipeline usage like carbon capture and hydrogen in years to come, LNG facilities that are being built across this country and others and what that means relative to pipelines feeding them. So we feel good about that business. And in the roughly 2000 time frame -- 2010 time frame, we acquired into the renewable sector. So we bought a company that was predominantly doing wind. We became one of the leaders in wind construction. From 2010 on, we've expanded that into doing solar over the years. And over the course of the last couple of years, we've made a number of acquisitions. So in 2021, we made 2 acquisitions that really enhanced our position in power delivery on both transmission and distribution of the acquisition of 2 companies that really had nationwide reach and scope. And we acquired, at the end of last year, a company called IEA, which was another renewable contractor that gave us significant size and scale. Going back to 2007, at the time I became CEO, we were roughly a $900 million business. This year, we expect to do just under $13 billion of revenue. We've grown the business. We have about 35,000 people across the country in hundreds of locations. So we've got great geographic coverage across the different market segments that we do. We focus and view ourselves as a builder of infrastructure. So we feel we're an infrastructure construction company and can tackle all types of projects. We think the market segments that we're in afford us great long-term growth. So we're pretty excited not just about what we built historically, but what's to come.

Thank you. So let's talk about your recent performance. You had a pretty strong Q2. Margins were up in all segments. Big win on Mountain Valley pipeline project. But there were some stoppages, especially on the renewal side related to IEA. Stock has reacted since then. Do you think markets have overreacted? And what went wrong on the renewable in IEA?

Look, it's interesting. We are in the midst of what I would think is probably one of the greatest times in this segment of our business. When you think about what's happening in renewables and where renewables are going to go in the future, it's incredibly exciting. The Inflation Reduction Act, or IRA, is going to be a huge catalyst for that. It's going to create an enormous amount of opportunities and growth over a long period of time. But in the short term, it's created its own sets of challenges, right? Because a lot of the rules, a lot of times, these big bills get passed. They have significant opportunities for developers and our customers to take advantage of them, but the devil's in the detail, right? The devil's in the detail. Language around tax and what does it mean, and the reality is that there's been some confusion, some delays relative to how that tax language allows our customers to get the ultimate benefit of those tax credits. That's created somewhat of a pause as our customers try to figure out how to use that, how to maximize their returns relative to those tax incentives. And we've seen some projects slip because of -- projects slip because of that. We've been very vocal about it. But at the same time, right, when we think as this gets finalized, as the rules get ultimately finished and understood, we're extremely bullish about what's going to happen in '24 and beyond. So we're at the precipice of what we think is going to be a massive growth within both our wind and solar business, coupled with the other businesses that we're in. So unfortunately, IEA is a great company. We think we bought one of the leaders in the field. We think, combined with MasTec's assets, it really puts us in a very unique category as one of the leaders in clean energy and really renewable build-outs in the United States. For 2003 (sic) [ 2023 ] specific, it's a challenging year, right? The issues that we've had with project delays and project execution have challenged us, but we feel really good about what it's going to mean for the future and the opportunities that it's going to create over the long term.

Maybe, Paul, you can talk about how the integration is going with IEA. And now that it's been almost 1-year anniversary, how do you feel about the acquisition?

Yes. So as Jose mentioned, we had 2 large acquisitions in '21 as well. So we've been in a pretty heavy integration cycle over the last 2 years or so, 1.5 years at least. And they were different. I think we're very far along in the integration on Power Delivery. It was a number of smaller businesses coming together to create that $3 billion segment today. On the power -- on the clean energy side, we had about a $2.5 -- $2 billion-plus business in our legacy segment, and we acquired a business that did just about $2.5 billion in 2022. So it was much more of a merger of equals in the segment perspective. So we've spent a lot of time evaluating management on both sides, evaluating operational practices, systems, the types of project management tools. And that led into the first part of 2023. We've kind of now forged forward with the management team that's going to run the consolidated segment, taking advantage of the best talent across the organization. And now we're focused on driving that consistent execution of where we can find the best set of tools and set of procedures across the consolidated business. So it's a big organization. So it is a complex integration. I think we're happy with the progress we're making. But as I alluded to, it's been a tough year. We're carrying extra costs because of all the demand that we see forthcoming. So we're trying to be more thoughtful about the longer-term demand opportunity despite some of the underutilization that we're seeing in 2023. But we think that's the prudent decision for the amount of visibility we have for demand for our services on the clean energy side.

Okay. So clean energy is definitely a very exciting market. And Jose, you talked about the IRA as well as the Infrastructure Investment and Jobs Act. There's plenty of government subsidy and tax incentives for all of your segments. How do you think you're well -- how do you think your positioned with both the union customers and nonunion customers as you look into the next year?

Well, the union activity was a key driver for us in our decision to acquire IEA. So one of the challenges that we had pre IEA was, on the renewable side, we were really a non-union contractor. So we worked for companies that had projects in nonunion areas. And the reality is when they had a project in a union area, we weren't able to bid it, we weren't able to perform on it. And a lot of our customers had both, right? A lot of our customers have programmatic spends, where some years they may have one-on-one or one -- more of one or more of the other or both, right? And we were somewhat limited on what we could pursue on behalf of those customers. What IEA gave us was really the opportunity to provide our customers with full turnkey capabilities where it didn't matter where the project was, it didn't matter what type of labor you needed, we could perform those services. You add on to the fact that in the IRA, there's a lot of -- there's labor bonuses as well, right? There's domestic labor components on the bonus side, which go around apprenticeship programs. So apprenticeship programs are programs that have long been used by the unions. They qualify on behalf of this federal spending. There are potentially ways to get some of those credits on the nonunion side as well, but they're easier to get on union. So a lot of our customers will be using union labor to ensure that they get some of those bonus tax dollars. So it was very important, right, for -- as we looked at our business and as we looked at our business long term, having the capabilities to do both and to do both at scale was a key driver of the acquisition. I think, as we've sold our services, as we talked to our customers over the course of the last year, I think it's panned out, and I think we're really in a great position to really increase the share that we have with existing customers, both from IEA-centric customers historically and customers that MasTec had that also did union work that may or may not have been worked with IEA. So it's really opened the broad base of opportunity subsets for us.

So maybe, Jose, we talk about the Power Delivery. You've done a couple of acquisitions in that segment, too. And now I think you're the #2 player in the country. What's your acquisition strategy and outlook for that segment?

The acquisition strategy for us going into this was really having scale and having geographic coverage. Historically, we were predominantly more of a niche space, maybe Southern-based contractor. And with both the acquisition of INTREN and Henkels & McCoy that we made in 2021, it really gave us national geographic scope. So whether it's the Northeast, we have a huge presence out here on the West Coast. And when you look at the fundamentals of what's happening in that business, you have a significant spend towards hardening. So in the western cities, you have a lot of fire hardening because of all the fire issues that have happened. In the East Coast cities, you have a lot of storm hardening because of the hurricanes. You have massive growth related to transmission because of renewable needs. So the fact that we were able to scale our business and really create a national footprint with scale was very important. As we look forward, one of the -- one of our mantras has really been, we've got tremendous organic growth opportunities in front of us across the customers, both that we serve and new customers. So I don't think you're going to see us as active from an M&A front. I think we're going to really focus on organically growing our business and mining margins out of that business. We have great cash flow profile. So as we generate cash and there might be potential uses of that cash for tuck-in acquisitions here and there to help us with a particular customer or with a particular geography. But I think we're really focused on organically growing our business.

And outside of the hardening work which gets captured in the rates for the utilities, how do you see the spend on T&D? And how are you positioned in that segment?

Well, I think for so long, there was an underinvestment cycle across utilities across the country. And I think one of the most fascinating things about our business, as I sit back is, for the first time in my lifetime, we're changing the way power and power delivery exists in this country. We're changing the way generation works, right? We're changing the methods of generation. And where that power is being generated is different than where power used to be generated. And then as you think about the delivery of that power, it's also changed because now you have the advent of things like electric vehicles, which are going to take a significant amount of consumption at homes and businesses. So as people think about the grid and as utilities think about their grid, there's significant changes that are happening in every market. There are significant changes as to how they deploy capital dollars, where they deploy them, where do they need more capacity, how do they provide that capacity. And we get to be in the middle of that. So all of those things are significant drivers towards the capital the utilities are going to spend in the future. And we have the capabilities of being involved in all of them and then providing the services to build regardless of where they decide to make their investment decisions.

And switching to your Communications segment, looks like 5G spending is plateauing, although there is still a lot to be done. Where are you seeing most of the opportunities over the next year? Is it wireline? Fiber? Where are the dollars being spent by telcos?

Sure. So the markets are relatively different, right? When you think about 5G and where we are in that cycle, I think there's been some investment. There's obviously 5G capabilities, although I'd argue that there's still an enormous amount of capacity requirements to get full through 5G capabilities. I think that both the carriers' ability to monetize 5G and ultimately, the products required to run on 5G haven't necessarily played out the way that everybody expected. So I do think that 5G deployment is taking somewhat of a pause. I think it will come back. I think one of the challenges is there isn't enough fiber, right? So if you think about [ true ] 5G, you need massive densification, you need a significant number of small cells installed. Those small cells could be on everything from street light poles to billboards to whatever it may be, and fiber capacity to really infill that has been challenging. So as this fiber gets deployed, that's going on in the wireline side, it's going to ultimately make it easier for wireless carriers to expand their network. The flip side is the wireline business, again, is very, very strong. The amount of federal dollars that have been invested in the deployment of wireline assets is somewhat unprecedented. And we still haven't seen the bulk of the dollars, right? The bulk of the dollars are coming in what they call beads, which is really a lot of the infrastructure spending that's going to go to the states and then use to deploy from a broadband capital perspective. We expect -- we actually don't even expect to see a significant amount of that money until 2025. And yet with the money that's already been deployed to date, mostly through the RDOF funds, or the Rural Development Opportunity Fund, is where we're seeing a lot of the activity that we've seen today, and it's as active as we've seen probably in my career. So as we get into '25 and you have that much more incremental spending happening, we're very bullish about where that market is going and the strength of that market over time.

And Jose, on 5G, are there really long-term maintenance opportunities besides just the new installation for you?

There's always been, right? So the bulk of our business has always been a maintenance-related business. So when you think about our wireless business, we went from 2G to 3G to 4G to LTE to 5G. And just because the installation cycles come and go, but the maintenance of those networks continue. So capacity is a huge issue for all of these technologies. Our need and thirst for broadband continues to grow. The amount of things that we do on our cellular devices grows and thus, the need for capacity grows. So that's really the biggest spends for our -- the carriers is actually meeting the demands of its customers. They do that through adding radios and adding capacity at cell sites, and that's the bulk of what we do, which we would consider a maintenance exercise.

Great. So moving on to your last segment on oil and gas. MVP restart was a good news. There is a lot happening in Europe because of the LNG. Where are you seeing most of your activity right now in that segment?

It's incredible. If we think about MasTec in 2020, we were about a $6.5 billion company. Almost half of our business was skewed to oil and gas. The thought that oil and gas was going to disappear at that time really made us pivot and rethink about our business. So you fast forward 3 years, we're roughly a $13 billion business, where we've roughly doubled the size of the business while significantly descoping the oil and gas as a percentage of total revenue. So we're really proud of what we've done. And we did it based on the fact that we really thought oil and gas was going to be -- we're going to see it continue to shrink over the time. And the positive over the last couple of years is we've actually seen a strong resiliency to that market. I think there's been a realization that fossil fuels continue to be required, albeit as we try to move to a greener economy, and an economy that's fundamentally generated through the renewable assets. But it's still an important part of what we have, and there's going to continue to be investment around it. So we're pretty excited because we're seeing increased level of investments in 2024. We're having a really good '23. Obviously, the restart of MVP was a significant event for our company. But we're seeing strong activity levels for '24. And then again, one of the things that excites us is the fact that all these alternative fuels are going to require pipelines to move. So whether it's carbon capture technologies and the pipelines associated with that or whether it's hydrogen, the base of what makes up our pipeline business, the services that we offer, we think are in great shape. And whether it moves to alternatives faster or whether we see greater propensity to LNG and pipelines required for that, we're in a really good spot where a lot of people got out of that business. As the market started to significantly decline in 2020, we've been able to keep our resources busy. We've been able to generate strong margin profiles from our business despite the slowdown. So we really like where we're at in that business and the opportunities set going forward.

Jose, it feels like if you continue to transition into green economy, you may have to change your segment from oil and gas to green economy pipeline.

We might. We might have to change our name to GreenTec.

Yes, exactly. Maybe we shift to the capital structure and balance sheet. Paul, you took some debt for IEA acquisition. What is the current leverage? And what is your target over the next, say, 2 or 3 quarters?

So at Q2, leverage is about 3.5x. We've been pretty public about our objective to get that back below 2.5 by the end of the year, which is in line with our financial policy. That's been well received by the rating agencies. We think we have a pretty clear path towards that. And then low 2s is kind of the longer-term sustained level that we expect. It will bounce around plus or minus 2, depending on our capital deployment opportunities and what we're seeing in terms of attractive return on investments. But we think we feel good about that low 2s, and then we'll move on from there.

So with your current mix of end markets and looking at the historical performance, where do you see cash flow generation to be trending?

Yes. So Jose mentioned the propensity of revenue and margin that was generated from our oil and gas segment in the past. One of the trade-offs of that is the capital-intensive nature of that business. A lot of our growth is coming from segments that have less capital intensity. And in fact, clean energy, for example, has less than company average working capital metrics. So DSO is a little bit better. DPO actually is a little bit higher. So as that segment grows, we think there's an opportunity to reduce the incremental working capital need. We also think we'll see a little bit of a less seasonal impact in the foreseeable future. We think some of the benefits of the IRA, for example, is a little bit more of a normalized curve on our construction activity over the course of the year and less capital-intensive businesses. So we think we were very successful in turning our earnings into cash throughout the 2010 period. Have had a little bit of a slowdown in recent years as we work through the integration on these acquisitions and some of the costs associated with that. But we feel really good about both the revenue profile -- sorry, the margin profile and a little bit of improvement on the working capital and CapEx requirements to continue that trend as we move forward.

As you think about bidding for your projects, like what is target margin or cash flow profile you're thinking? How do you make your decisions when you bid for contracts?

Well, there's some trade-offs, right? Our customers have their own objectives. And in different markets, their desire to carry a little bit more of that working capital balance at the contractor level can ebb and flow, right? There's obviously a cost to that. That cost is higher today than it was a couple of years ago with the higher cost of capital that we're facing. So that's the trade-off that we face with our customers, right? We can balance their working capital needs, but we have to factor those costs into our bid profile. And so there is an opportunity around better working capital parameters of a project to provide a project at a more attractive price to our customers. And that's the trade-off and the dialogue that we have with them as we're pricing both renewals on existing contracts or new project-based activity.

And when you think about the projects that we're working on and the projects of the future, just projects are getting a lot bigger, becoming more complex, our customers need certainty, right? Our customers need certainty around the ability to execute, the ability to meet time frames. And companies at scale are the only ones that can deliver that. And I think our ability to build at scale across all the segments that we work in and the financial strength that we have from a balance sheet perspective gives our customers tremendous confidence in our ability to execute. And with that over time, right, that also becomes part of the trade-off. So I think customers have to understand that we're in this to -- be a viable business, we're in this to make money, and everything needs to be fair. And I think that having that really sets us aside from so many others to be able to provide that and then be compensated fairly for that.

Yes. And that's fair. And that's why congratulations on moving towards investment-grade balance sheet. Great. We have a couple more minutes left. I'll open it up to the audience. Any questions?

You mentioned earlier there that 5G deployment is taking a little bit of a pause. I mean, any expectation of that restarting? Or is it just kind of like scuttled for now and focused more on wireline?

Okay. I think our customers aren't immune to what's happening in the overall economy. There's -- when they look at their business portfolio, they're trying to manage where -- what pieces of their business do they continue to invest in and where do they or do they not slow down. Across so many of our businesses, right, there's a piece of the business that's tied to housing, right? So if you think about when a new subdivision gets built, telecoms expand and as subdivision power companies expand, there's been a decline there, right, because new housing stocks are down. But that's one place where, obviously, spending has moderated. When we think of the big carriers, they're -- we look at their stock price and what's happening and the decisions that they have to make, we're seeing a lot of really creative things happen in the industry. So we're seeing a lot of off-balance sheet activity happening. So for example, AT&T announced a very large off-balance sheet program where we're just going to satisfy a lot of their growth and capital needs relative to fiber expansion in the future. So I don't think any of this is permanent. I don't think we're nowhere near being able to say that we've deployed 5G, and the country's fully 5G, and everybody's got 5G capacity, and everybody's got gigabit speeds on their phone because I would argue if you actually did a speed test on your phones, I don't think there's a single one of us in here that would have that kind of speed because it hasn't been built to that yet, but I think it will be. And I think that the necessity to be there, right, part of it is what do we need that speed for. So what are the applications that require that speed. I don't think the applications are fully developed, but they will be. And once they are -- and over time, again, fiber is such a key component to what 5G ultimately means that I think we've got to give it some time to play in, and we expect spending there to significantly increase over time.

Where is the senior management spending most of the time these days? Is it trying to like look at the Renewables division to see what can be done to kind of turn that around? Or is that really kind of taken care of, it's done, it's taking care of itself with the management team you have there? Or is it new business and some of the other areas that delivery or the telco side to help grow the business. What's taking most of the time or where the focus on the senior management?

Look, we're responsible for everything, right? So at the end of the day, we've got to keep our eye on just about everything. When we think about the evolution of the business, communications is a business that we've been in for a long time. Really hasn't had any significant M&A activity in a while. The business runs well. It's somewhat of a well-oiled machine. We can say the same thing about our pipeline business. Our Power Delivery business, we made a number of acquisitions in '21. We think integration has gone phenomenally well there. The margin profile of that business has improved. So we feel really good about the action that we took, the involvement that everybody had relative to that integration process and really mining both the opportunities and the margin set available to that. I still think there's a significant amount of engagement there because the opportunities are big. But today, the focus of the team is in clean energy, right, because it's where we've made the latest acquisition. It's where we have the greatest upside for both revenue growth and margin expansion. It's a relatively new customer subset. Quite frankly, not just to us, but the industry in general, there's new participants that are relatively new in the space. So we're spending a lot of our time getting to know the customer base, understanding their business because I think part of our job is truly understanding the complexities of the business, the challenges that our customers have so that we can create a product that ultimately solves their needs, which is what we're here to do. So today, we're focused on that. It happens to be in the same place where we made an acquisition. So all of the execution issues that come around that and how do we execute on these projects and mine margins out of these projects is all part of that. But there's no doubt that the bulk of our time today is spent on that group because it's the one that's had the most challenges in '23. It's the one that has the biggest upside and the one that we feel -- and the one that's going to turn very quickly, right, because it's not -- we see a significant ramp of that business in '24. So it's not that it's years away. It's here, it's coming, and we better be ready for it.

Okay. I think we are out of time. Jose, Paul, thank you very much, and congratulations on continued success.

Thank you Guru.

Thank you, Guru for having us.

Thanks, everyone.