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

I guess we can probably start -- get started here. We're pretty close. So all right. Perfect. All right. Thank you, everyone, for sticking around towards the end of day 2 of Baird's Industrial Conference. I'm Justin Hauke. I'm the senior associate covering our specialty contractors like MasTec here and then I work with Andy Wittmann on the engineering construction and facility services companies. So MasTec, for those of you who don't know, long history in a lot of different industries, very successful in kind of moving to wherever growth is. Not without growing pains, but has found long-term success over time. We have Jose Mas, the company's CEO. For how many years, 16 years?

16 years.

Yes, 16 years. And then Paul Dimarco, who's been with the company for a long time, 16 years as well, but he's kind of newer in the CFO role. So why don't we just start off with some introductory remarks. I know we have a -- we were going to have a breakout, but I think because they've got an early flight. We're going to leave a couple of minutes at the end for some group Q&A, too.

So look, first, thank you for having us. Happy to be here, happy that all of you have joined us here at the end of the day, My name is Jose Mas. I've been, as you said, CEO of MasTec since 2007. At the time I became CEO, the company was about $900 million, just under $50 million in EBITDA. So I think we've done a great job of building the business. Really, our mantra over the course of the last 15 or 16 years, was trying to find businesses that we thought had significant fundamental growth behind them where we could add value. We started as really a telecom contractor. Those are the roots of the business, supporting telecom growth either be -- we started with copper, obviously, over time, really push it to fiber. And that was our focus all the way up until I became CEO. When I became CEO, one of the initial things that we really tried to accomplish as a business was to diversify our services and get ourselves into businesses that we thought had better growth and margin profile. So that really led to the expansion of our business into wireless. Today, we're the largest wireless contractor in North America. We -- on behalf of the carriers, we build out their network. So the antennas, the lines, the -- potentially the towers, although some of them are owned by the tower companies, we build that on behalf of the carriers. We expanded into the pipeline space. We became a very large oil and gas pipeline business through a very early start at the Barnett Shale. Today, we support all the different shales across the country. We started building renewables by building the collector systems on a wind farm a very long time ago. We ended up really building our portfolio along not just doing the collector systems, but ultimately being able to build the entire gamut of what a wind farm entailed from the roads and the turbines, the foundations, erecting the towers, putting the blades up. We, over time, took that business and expanded into the solar market, doing utility-scale solar. And then over the course of the last few years, we made a big bet in increasing, not just that business, but increasing our energy business and the work that we do on behalf of utilities, predominantly on distribution and transmission. So that's kind of how we're segmented, each of those business has its own segment. And today, we think we're first, second or third in any of those businesses relative to our market position and size today.

Great. Maybe talk about some of those platform acquisitions you did, I guess, Henkels & McCoy, IEA, what they brought that you didn't have because you were in these businesses, just maybe not at scale. So how that kind of changed the portfolio.

Yes. So if we take a step back and you think about the pandemic in 2020, we were coming off a really good '19. The pandemic hits in '20. There's a lot of concerns around the pipeline business and what happens in oil and gas over a longer period. A lot of talk about decarbonization and what the new world of energy was going to look like in this country. And we were predominantly -- we were heavy on oil and gas. So a good chunk of our revenues and earnings were coming from our oil and gas pipeline business. We were worried about what was going to happen post pandemic on that business. And while we were already in the energy space, we were in the renewable space, we were in the distribution transmission space, we were a small player in distribution transmission, relatively good wind business, but didn't have a big solar presence. So really, post pandemic, we made the decision to really invest in this in what we think is a -- quite frankly, almost a once-in-a-lifetime opportunity. It's the first time in my lifetime that I think the way we generate power and the way we deliver power is changing, the grids are actually changing for the first time. So we made -- we started with the investment of a company called Intren. It was actually based here in Chicago. They were a distribution transmission contractor, predominantly union. Was a woman-owned business, had good history, and I think it's been a fantastic platform acquisition for us. It's grown -- so we made that acquisition in early '21. Fast forward a couple of years, business has had tremendous top line growth, performed really well. Our margins expanded its geography. And with the very early signs we were seeing from that acquisition, we had the opportunity to buy a company called Henkels & McCoy at the end of 2021. Henkels & McCoy was a family-owned business, 100-year history, one of the pioneers in distribution and transmission, probably one of the oldest historical businesses that started in that space. Very strong family presence for a long period, but it also wasn't performing well. At the time that we bought Henkels, we talked about it being a 5% margin business. We've now owned it for just under 2 years, substantially moved the margins upwards. So we think we've done a great job from a margin profile in the integration of that business. It hasn't come without challenges. Some contracts in that business needed to be either rightsized or some work we had to give back. But we think what it's done for us in the power delivery space, it's really repositioned the MasTec brand, right? So where we were originally thought of as probably a more geographical based relatively strong in certain geographies. This really has given us a nationwide presence. So we do a lot of work in the West Coast. We do work in the Northeast. We do work in the Southeast, the Mid-Atlantic, the Southwest. So it's really elevated our presence across all utilities. We think that in this space today, we're the second largest and with tremendous opportunities to grow as we think about everything that's happening with the grid. So if you think about grid hardening, responses to storms, responses to fire, what's happening with electric vehicles and the changes needed in the grid, what's happening with just overall energy consumption as you think about computing and data centers and AI and everything that goes with it, tremendous opportunities for us. So we -- those acquisitions are done. We're 1.5 years in. We're actually really happy with the progress. Again, hasn't come without its bump and bruises, but we feel really good about our trajectory, both from a revenue growth perspective there, and more importantly, from a margin opportunity expansion subset. At the end of '22, we had the opportunity to do a deal with IEA. IEA was the first public company that we've ever bought. It came with a different set of challenges, some of which, quite frankly, we weren't prepared for. And the biggest challenge for us in IEA has been the revenue deceleration. So we have 2 big renewable businesses. We had our legacy business in MasTec that last year did about $2 billion. This year, it will be about $2.2 billion. So it's up about 10% on a year-over-year basis. And then we had the legacy IEA, which did about $2.4 billion on a full year basis the year we owned it, we only owned it for a couple of months. And this year it's going to do 1.7%. So a significant revenue deterioration in the business in the year that we've owned it. And when we peel back the onion and we really try to understand why, the big challenge with the business has been the conversion of assumed project wins into hard backlog and into constructability. So this is predominantly solar projects. They're -- historically, IEA was a very strong wind company, did a lot of wind revenue. They were converting a big chunk of their portfolio to solar. And if you think about all the issues that have happened in the solar market this year, starting with the panel circumvention issues from a year ago to everything that came from the IRA. So the IRA, the Inflation Reduction Act is going to be a huge catalyst for our business. It's a huge catalyst for renewables. But in the short term, it's created a world of have and havenots, right? So you have all the tax legislation associated with IRA that makes projects -- the return profile for products better for developers. Comes with its own set of challenges because the rules haven't been fully written. And for a number of developers who need to sell tax equity in the market. The market has been very difficult for those that have been able to carry that tax liability on their books and carry the tax credit on their books, it's been somewhat of a different world. So our challenge over the course of the last year was really project selection, understanding the risk of those projects and really counting on projects that we probably should have known better relative to the risk profile that we were seeing. The way we've looked at '24, we've fundamentally changed the business. We have one go-to-market strategy. We've got one renewables business today. We track every project. We understand where the projects sit from an interconnect perspective, from a financing perspective, PPA perspective, material procurement perspective. And we're obviously trying to focus on those projects that have the highest probability of moving forward in the shortest period. And that's kind of how we came to our 2024 kind of rough estimates that we've put out today. So really important for us. Obviously, 2023 has been a very challenging year. We've taken a lot of pride in how we built this company, and quite frankly, for years and years, we were very consistent in terms of how we report it, how we earned. And we've taken that outlook to '24, and we're actually trying to create a floor that we think we can absolutely hit and then build off of as the market improves.

Right. So a lot to unpack there. That was a great overview of a lot of things. But I mean, it is important to stress, I mean, this is not your first rodeo. I mean, I know when Andy and I picked up coverage, you had kind of a customer concentration issue with AT&T and DIRECTV and really transitioned the business then very successful. And then in your oil and gas business, the EBITDA contribution has come down 75% from its peak and you're kind of back to where that EBITDA was through these other things. So even with the growing pains, I mean, this has been done before. But I do want to -- I want to obviously talk about that because that's, I think, where the focus is. So you talked a little bit about with IEA specifically the coming in short of expectations and the backlog that was there. Is it a customer issue in that backlog? Is it a project issue? How much visibility do you have now that's different from when you first acquired them?

Yes. And look, one of the message that we're clearly trying to get across is we do not believe this is an IEA customer issue, right? When you look at the quality of the customer base at IEA, it's a high-quality customer base. It's filled with developers that have done gigawatts of renewable development. So we're not going to blame it on our customers. We actually think this is much more of a MasTec issue in terms of the project selection that happened behind it, as you think about the projects that IEA selected. So many of these customers that IEA worked for had other projects, some went, some didn't, right? So -- there's definitely some bad luck in all of this in terms of they pick some projects that unfortunately didn't go for lots of reasons, but it should have been managed better, right? We should have known the risk profile of those projects better than what we did to better assess whether those projects were ultimately going to hit revenue in '23. And that's been our biggest challenge, right? It's not -- we actually are super encouraged by the customer base that we've picked up. It's made up of some of the biggest name in renewables. The flip side of having a very bad year is we've had a lot of time to spend with those customers. We've been at the most senior levels of those customers, building a relationship, understanding what their plans are on a go-forward basis. They understand the pain that we went through in 2023. And quite frankly, they want to work with us, right? They want to see us be successful. They know we're a large player in the space. Irrespective of these issues, we built billions of dollars of renewables in 2023. So it's not like all projects went away, a subset of the projects went away. So I think we've used this in a way to really strengthen our relationships with our customers, change the relationship style. Today, we're trying to very actively with our customers, do things like alliance agreements and put people in their offices to help them with their plans in constructability and ways to save money in exchange for having some rights to future projects or in exchange for trying to get a certain percentage of the work. We think it's really a win-win situation. So again, we -- when I think about IEA, '23 was incredibly challenging. We're very disappointed with the results. But I think we will look back on this acquisition over time and feel like we got great value for what we paid. So we paid about $1.1 billion for IEA, hasn't contributed much in '23, but the reality is it's a business that should be generating hundreds of millions of dollars of EBITDA. So as we get this business working, as we get it to where it should be and looking back on the multiple that we paid, I actually think we'll be comfortable transaction over time. It's just causing a lot of pain today. But again, I think a lot of this is self-inflicted. The industry has its challenges for sure, right? Financing of projects and tax equity is an issue for all developers. All developers use it, whether you're the biggest developer or the smaller developer. If you can hold it on balance sheet, you're in a very different position than somebody who's forced to sell it. So the projects are different, but we're -- I don't think people realize the strength of this industry. There's -- when these issues get resolved, when treasury finally puts out its final verdict on where tax equity stands and the ability for people to sell their tax equity, there is going to be a massive release of projects that I don't think people realize. I don't think the investment community realizes the size of this market, the pent-up demand and the opportunities that people in our industry are going to have once this happens. So while we're obviously very disappointed with 2023 and where it went, we're very optimistic about the future and where it's headed.

It's interesting because, I mean, some of these projects have moved forward. I guess I'm just curious, now that you've kind of integrated the businesses to one renewable platform. These tax equity issues, they resolve themselves. I mean, because from a financing standpoint, they can wait a little bit to be able to enhance the returns by getting a little bit more tax contribution in it. But how on the hook are you with the projects that you've already committed to developing versus other ones that might come out that are maybe further along? I guess what I'm asking is, I mean, do you have to like maintain a base there?

It's a great question, right? So we've -- all year, we've talked about deferral of projects and these projects that have been deferred. And I think one of the things that's important is -- we haven't had deferrals from backlog. So when we actually put a project in backlog and we call it as backlog, those projects have actually built. So we actually have very stringent requirements on what we put in as backlog versus a job that has verbally been awarded or a job that we think we're going get awarded, which is a lot of what we're talking about. When we think about 2024, we're not counting on these deferred projects to be what generates revenue for us in the future. We've actually taken all these projects, and we've dumped them in with all the other projects that we're tracking, and we've reprioritized. And the truth is that we're reprioritizing to those projects that we think have the highest likelihood of working in '24. Some of those might be those same deferred projects, but the reality, most of them aren't. We are not obligated contractually to do any of those, right? As these projects ultimately get financed, get finished, they will get repriced because it's been a long time, so they'll reprice everything from materials to labor. In some cases, customers won't put that out. It will be a one-on-one negotiation because we've done a lot of work on them. In others, we may not want to do them, right? So the reality is that while they're important and they're a piece of what we're tracking and looking at, it's not what we're depending on for future work, right? We've kind of -- we're reprioritizing the workload as it sits today and really focusing on those projects that we think have the highest propensity to build in '24. And that customer selection, I think it's critical to the industry. We've got a lot of questions on so and so isn't talking about issues or you look at the supplier base and some suppliers are really performing while some suppliers aren't. And the challenges that everybody is having in the industry, again, is it's not an industry problem, it's not a customer problem. It's a project problem. And if you're good about your project selection and if you happen to work on the right projects that get built, your year is going to end up being really good. And for those that had challenges with the projects that were in the portfolio, they're years ending up not being as good. So really our focus for '24 and what our job is, is to make sure that, that customer selection process is as solid as it can be, as predictable as it can be.

All right. So not to continue to beat up on IEA, we'll move some of the other things. But some of the other areas that I think have been more pressured than where original expectations were on power delivery, particularly this last quarter. And then in telecom. The telecom market is you've got a wireless side and the wireline side. So just flesh out the issues that are going in those markets and how they're -- are they project specific too? Or are these more industry dynamics?

Look, power delivery for us, the power delivery market is a fantastic market. I mean if you look at utilities all over the country, their spend plans are increasing. The issues that they're having on system reliability, the hardening projects that have passed through public service commissions and have been committed to and in some places more than others, the business is actually doing well. We've had -- we did have an issue in the third quarter. I think the industry had an issue. I think others have collaborated the same thing. I mean storm on a year-over-year basis was radically impacted. We haven't had the slowest storm season in 4 years.

And just to -- because I mean, the margins on storm are much -- double maybe.

They're significantly higher, which impacts -- but it impacts revenue and it impacts margins, but it impacted us on both places. And that's a very clear number for us. We know exactly what we did on storms last year. We know storms were virtually nonexistent this year. On a year-over-year basis, there was a significant drop in both revenues and margins. But the reality is the storm also has impacted our customers. And we probably didn't understand this well enough, and let me explain. So you're a utility and you're a utility in an area that's not storm affected and you're predominantly on the East Coast because it's closer, you have cooperation agreements with all the other utilities. When a storm comes, you allow your linemen to go work that storm to get that area up and running. In some cases, utilities send thousands of linemen to the storm. So -- and this has been happening every year for years. So all of a sudden, your utility, call it in the Northeast and you've created a budget for your year. When you think about the third and fourth quarter, you build into that plan that there's going to be some level of linemen that are going to leave to go work storms. because again, it's been -- it's happened consistently. Well, this year, it didn't happen. So all of a sudden, the budget that you had for the year is consumed faster because none of those people left, so the work got consumed, and now there's less work for the balance of the year. Rather than -- and I think one of the differences that we're seeing this year that we historically wouldn't see, in that situation, we'd see a lot of customers pool work in from the next year because there's just that much demand. But with interest rates where there are, in some cases, companies are going through rate cases, we're not seeing the pulling in of the next year's budget to offset that, and that's impacting capital spend in the back half of the year for some of our customers, predominantly on the East Coast. Not really a West Coast issue because they haven't really traveled for storms. It's been more of an East Coast issue. And I think that's specifically a '23 issue that we'll see go away in '24. We normally don't budget a storm season aggressively. So if you think about the level of storm activity that we would have worked on last year, we wouldn't have expected to work on that level this year, but we wouldn't have expected it to be 0 either. So I think that had a -- at least for MasTec, and I can't speak for the others, it had a significant impact to the latter half of our third quarter and the beginning of our fourth quarter than we would normally see.

Yes. I mean I think it's -- because we haven't seen utilities cut CapEx budgets -- so -- and if anything, I mean, the outlook for them over the next couple of years is higher than it would be normally just because they're dealing with load growth that they haven't dealt with in 20 years.

But if you even look at our peers, the acceleration of growth in the second half versus the first half shrink across all of them. So it's not -- so while maybe MasTec was more or less impacted than anybody else, the industry was impacted. And I truly believe that everybody was impacted by storm, but I don't think people realize the impact on the utility side and how that would affect our contractors on a go-forward basis. As we think about '24, look, we hope there's no storms and it's a very easy year-over-year comp. But the reality is that we would expect more storm activity than what we saw this year in a normalized year. On telecom -- to answer the Telecom question. Look, I mean, the telecom wireline business is -- and this is where MasTec started. We started as a telecom wireline contractor. I've been in this business. I was in the business in high school, I've kind of grown up in the business. This is where I started. I've never seen the level of activity that exists in wireline today in the communications sector in my entire career. RDOF, which is the main driver of that is -- has the monies out. We're seeing dozens of customers use RDOF funds to build out broadband systems and we're in very early stages of that. So the reality is that the -- so much of the activity that we've seen to date is engineering, it's permitting. It's a lot of the prework things that you would need to get a project going -- and we're -- some have started construction, but so many are converting to construction in the first half of '24. And that's going to be a huge catalyst for the industry because there's -- the construction drives so much more of the revenue than the engineering does. So -- and then on top of that, you have BEADS funding, which was in the infrastructure bill, which is 3x the size of RDOF, where the first dollar still hasn't been awarded to a company to actually build something. So and we expect to begin to see that in '25. So our outlook for wireline, not just in the short term but in the longer term, it's probably as good as it's ever been. On the wireless side of the business, which is a big piece for us, '23 has been challenged. It is one of the places where carriers can cut CapEx. There's not a ton of places for them to cut CapEx, but in difficult economic times, and we've seen it happen a couple of times in the last 15 years. It's an easier place for them to moderate CapEx. All of the carriers have said they expect '24 to be flattish with 2023. We talked on our call about an award of a large expansion award that we received in one of our wireless customers of about $100 million a year. And our initial '24 outlook said we will be flat including that award. So we think we've built ourselves a really nice buffer relative to our expectations in wireless. And if they are actually flat, then we'll actually perform better than what we said. If they're down slightly, we should be in line with what we've said.

So maybe that's a good bridge. I mean we haven't talked about oil and gas, but you're talking about '24, and you guys did give a '24 outlook -- a framework, mid-single-digit to high single-digit revenue growth and a margin 7.5% to 8%, which would be versus this year that's in the low 7s, something like that. So it's obviously assuming growth. You're saying telecom expectation flat. Oil and gas, MVP has been a big contributor, that's pushing a little bit into '24 as well, but you've got a little bit of a headwind there. So with backlog being down sequentially, what's the visibility into setting that as your base expectation for growth for next year?

Okay. I think it goes back to what we said earlier, right? I think we take a lot of pride in having built a company that for years and years consistently performs. We not only performed our expectations, but we were in a very common rhythm of beating and raising. And when we think about how we set our '24 plan, it was with that in mind. We absolutely hate the position that we've been in, in this last year. We hate having to come to these conferences and talk about underperforming relative to expectations. So at the onset, that's how we thought of '24. I mean you generalized '24 because you took it in a total bucket. But if you break it out by buckets, right, our telecom business, when we said and we thought we were very conservative in our guide for wireless, we think we're very conservative in our guide for wireline because we have the projects that are going to considerably expand relative to construction. Our margins in that business are down slightly in the second half of the year partly because we've had somewhat of a slowdown in wireless we didn't expect. First half of the year this year actually overperformed relative to where we were expecting. That's a double-digit margin business for us, right? It's been a double-digit margin for us for x years in the past. And there's no reason why that business shouldn't be there, especially in an environment where revenues are growing. When we look at our oil and gas business, what we said was we'll do about $2 billion this year at a reduced rate of -- in '24 of $1.8 billion. We're going to earn exactly what we earned in 2020. So what we've said is, from a margin dollar perspective, we expect the year to be flat year-over-year. Why is that? While MVP did help revenues, they hurt margins. When we look at the work activity that we have booked for next year, when we look at the projects that we either have in backlog or we know we're going to sign, those are projects where we perform at a much higher level than what we performed at MVP. So while MVP was a contributor to revenue, it really impacted our margins because it's cost plus...

Right. Because it's not an execution issue. It's just a mix of it.

That's right. And we'll have some of it go into '24, right? But the reality is that the business that we'll be doing in '24 is higher -- at least gives us the ability to attain higher margins than MVP would. When we look at our power delivery business, I mean, we're talking about mid-single-digit growth that it actually -- we hope that the business allows for considerable more growth. We talked about on our call about having certain consolidation efforts that our customers have done, where we've gained market share. So we've just gone through some RFP processes where we've picked up a bunch of territory that we didn't have on the utility side. So we're very encouraged about what their plans are, what the go-forward market is there and our ability to perform and execute. Again, we've talked about the margin appreciation of Intren and Henkel since we bought it 18 months ago. We think that's going to continue. We think -- again, we've said multiple times, that should be a double-digit margin business for us, and we're going to grow into that. And then I think you get the clean energy where, obviously, we've had a horrible year relative to what our expectations were. And all we've said in that business is we expect to grow it at double digits, which we think is -- when you think about all the issues that we faced in '23, we think that's a very realistic target. And we're trying to get it to a base margin level. We're not getting to high single digits. We're trying to create a bridge from where we are today. If you add in a bunch of the inefficiencies we've had, that's kind of what we're guiding for margins in 2024 in that business.

Okay. I know we're getting close to time. We don't have a breakout, and I promised questions. But Paul, maybe you could talk a little bit about where leverage is, cash flow and also maybe just the tenor of earnings for next year within that framework.

Sure. So from a leverage perspective, our nominal debt balance is going to end the year relatively close to where we expected it, even through the prior iterations of guidance. The issue from a leverage component is really the denominator, right? So our earnings are not where they need to be to get back down to the 2.5x target that we had put out for the end of the year. We'll be in the low 3s at the end of 2023. And then we think with both strong cash flow in Q4 because of the seasonality of the business and into Q1, we should see a more nominal debt reduction. That allows us to get below 3x relatively quickly into 2024. And then the earnings opportunity that we foresee that Jose laid out that we think is pretty achievable allows us to get back down to the 2.5x pretty quickly in 2024. So a lot of focus on cash flow still, the mix of businesses or the mix of revenue going into 2024 also contributes to that. The clean energy business has a lower working capital requirement than like our Communications segment, for example. So there's a little bit of accretive dynamic there relative to cash flow as that business becomes a higher growth opportunity relative to our communications segment next year. And we think getting to that cadence of continued cash flow in Q4, Q1, probably a little bit of consumption in Q2 as we ramp puts us down to the 2.5% level within the time -- the framework that we've laid out into kind of the back half of '24.

All right. I'm going to open it up to questions. I know we're kind of at time, but...

Two quick ones. Do you have a proper incentive compensation structure in place for those individuals that Mas Tec are entering into contracts in terms of the proper risk and reward framework. And then the second question is you ran at 11% EBITDA margin for 3 years in a row 2019 to 2021. Given the current mix of business, can you get back there? Or is the mix so different now that you [indiscernible]?

Yes. So the question was, it was a twofold question. The first was do we have the proper compensation structure for people that are entering contracts on behalf of MasTec, I guess, bidding contracts on behalf of MasTec and the second was we ran 3 years in a row at roughly 11% EBITDA margins. Is that a target that we can get back to. So I'll start with the second part. Look, I think that we're in a dynamic industry that is rapidly -- all those segments that I talked about have tremendous opportunities, maybe not as we just think about '24. But as you think about the next 3- to 5-year cycle, there's going to be an enormous amount of pricing pressure in the industry that's going to allow us to, over time, creep up margins. So I'm not going to say that we could never get back to the 11%. But when we think about the business mix that we're running today, when we laid out long-term guidance, we laid out high single, low double as our target. I think 11 is on the high side. We're talking about 7.5 to 8 for next year, right? So the reality is how do we get -- how do we step there to 9, 9.5, 10, and then obviously, over time, try to shoot for more. From an incentive perspective, look, I think everybody in our company is aligned. One person doesn't have the ability to mandate our contract structure for us. So it goes through lots of different iterations from bidding to understanding what execution. Our execution teams are aligned with our bidding teams as we go after projects. And at the end of the day, we don't -- nobody's incentive to get revenues in our company, all of our incentives are around profitability. So if somebody goes out to win work for the sake of winning work, there's no financial incentive to do that. If you want, we can open up a breakout session for a few minutes if anybody has got a question because I know we're over time.

As long as you have a couple of minutes, then we'll go ahead and do our regular breakout, which is right next door, I think.

Thank you, everyone.

Thank you.