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

Good afternoon. My name is Gaurav Gupta. I run Morgan Stanley's infrastructure team in Investment Banking. Today, I have with me Paul Dimarco, Chief Financial Officer of MasTec. For those who may not be familiar with MasTec, MasTec is one of the largest infrastructure services company in the country. They operate in engineering and construction of communications, utilities, pipelines, renewable energy, civil and other critical infrastructure throughout the country.

Paul, one of the biggest themes at this conference and in general amongst the investors right now, is around AI and data centers. And MasTec has a big role to play in construction, in connections for data centers. Can you tell us how you're positioned, what you're seeing in that segment?

Sure. Yes. Well, first of all, thanks for having us here. I think everyone looks forward to this conference every year. It's a beautiful location and well attended. So thanks for everyone for being here. On the data center front, specifically, I think it's a really big opportunity for us. I think the industry as a whole is trying to figure out how to develop and bring online these facilities at the cadence that is required for hyperscalers and utilizers of those facilities. So we started on kind of the heavy civil side, working with some of the hyperscalers on providing that solution. And now what we're doing is really trying to understand or help educate both hyperscalers and developers on the various services we can bring to the table, right? I mean, we can bring the power, we can bring the communications. We have capabilities around wet utilities, facility construction. So a lot of the components that are required to bring a facility online, we can do. Additionally, the biggest constraint for a new facility today is power. Everyone we talk to is trying to figure out how they're going to get the load that they need to operate the facility. So it's going to be a multipronged approach, but we're trying to provide solutions where we can, facilitate conversations with our long-term relationships with utilities or other types of generation developers. And I think we're in the really early innings, but I think the services that we can provide and the relationships that we've built over a long history position us very well for that opportunity.

So do you think some of these data centers will they connect to the grid? Or will they do sales generation? What trends are you seeing?

I mean, I think we're seeing both. I think in a perfect world, they would be on the meter, a traditional arrangement with utility. But sometimes, the pace of development is not going to be able to withstand that longer-time frame. So we're seeing more and more developers look at options for either existing facilities that we're expecting to be decommissioned, looking at other types of self-generation with a new natural gas-fired facility, for example, and that could possibly be a bridge to the ultimate solution. But I think we're going to see both avenues while the industry is sorting it out.

So as you see this increased load growth, when you talk to your utility customers, what are their expectations around that? And how does that create any secular tailwinds for MasTec?

It touches us in a lot of parts of the business. Obviously, the generation side of it, a lot of that will be driven by renewables. So that's a big, continuing opportunity for us. The time line to permit interconnection is a challenge, right? And that's something that's elongating cycles, particularly as projects get bigger, further away from the ultimate end use. So what we're hearing is, we've got to have some ability to shorten that cycle and drive increased efficiency in the development. I think there's been some overtures from the federal government to work on that, and we're hopeful that gains some momentum. But if not, that's going to just elongate the cycle. On the regulated utility side, one of the challenges that we're seeing this year is just around what has been the historical objective of the various public utility commissions, which is to keep costs very low, right? And that has a little bit of a friction with now a need for a lot of additional investment to handle the additional load, to get it to the right location. And so we've seen some challenges in the short term with utilities working with their regulators to get the right returns for those investments. I think they're short-term deferrals because the amount of work that's required to meet increasing electrical consumption in our country for the first time in decades is very, very significant. So works for being supportive, and we think it's a very robust demand environment for the foreseeable future to meet those demands.

That's great. So maybe we spend a little bit of time on your various segments. Let's start with power delivery because you've been intimately involved in all of the acquisitions that were done in 2021. How have you repositioned that segment? Are there newer wins? What are you seeing in power delivery?

Yes. So what Gaurav alluded to was, as we looked at our end market positioning coming out of the pandemic, we had a disproportionate amount of our profit being generated in our Oil and Gas segment. And coming into energy transition, we said, okay, we really have to make sure that we have the right end market exposure to be a true top tier player in the markets where we see capital flowing. We had a nice transmission business. It was about $500 million a year, but we were by nowhere near a national player from a distribution perspective with the relationships across the country with utilities that we're going to be deploying all this capital. So we made 2 big acquisitions in '21, which really gave us nationwide coverage, good exposure to all the major utilities. And we've worked to position ourselves now as we've integrated those businesses into a very collaborative and integrated solution for developers or folks that are building large transmission and the regulated utilities. And I think the benefits of that strategy are starting to show out. We announced a large award in Q2 of about a 700-mile transmission and substation project. And what we saw through that procurement was the skills, capabilities and capacity of MasTec's legacy business and the businesses that we've acquired and integrated over the last 2 years was really one of the key drivers for that customer to put their faith in us and partner with us to build a what's a very strategic project for them going forward.

Okay. And Paul, just continuing on power delivery. You've talked about historically some of the deferred distribution spending in 2024 in light of all the anticipated grid needs, how long can the deferred spending last?

I don't think it can -- we don't think it can last very long. There's a base maintenance need that will continue to be supported. And the balance between the regulator and the utility will come through. I mean, that's unique to one geography. Like when you come out here on the West Coast, many of us flew in and saw hills on fire, right? A lot of the work we're doing in California is around undergrounding, it's around resiliency. I think residents here understand that, that can't be deferred, right? And the utilities and the regulators have made commitments to those investments, and we're proud to be part of that solution. Similarly, when you look at the East Coast, we haven't seen any slowdown in the Southeast with our utility customers there who have exposure to wind storm events. So those more pressing resiliency issues are definitely front and center and are continuing to be addressed. Where we've seen some short-term deferral is really around places that are more opportunistic around load growth. And we think the economic activity that, that power can drive will ultimately bring that to resolution fairly quickly.

So moving on to clean energy and infrastructure. What changes have you implemented in that segment? And now you've talked about a little bit more visibility, what sort of visibility you have? What's the backlog like?

Yes. So the last major acquisition we did was at the fourth quarter of '22 for a company called IEA, and they were a large provider, both renewable and civil construction. What we found is they had a lot of projects in their anticipated revenue for '23 that had timing challenges with interconnect, procurement, permitting, whatever it might be. Our legacy business has been much more focused on evaluating those risks collaboratively with the customer. And because of the way the integration was playing out, we hadn't been as aggressive in evaluating what the acquired company was doing. That's really where the focus has been over the last 12 months, around the integration in addition to the operational performance, but we feel really good about the visibility today. We've grown backlog strong for the last 2 quarters. We expect to grow backlog significantly through year-end. And our revenue for the Clean Energy segment is at its highest levels that we've ever had. So we've got great visibility with the customers, we've got the work that we need to -- and backlog that we need to execute on for the 2024 guidance. And we feel really good about the cadence of work that we're seeing coming to backlog for the following year. So it's really the discipline that we've pushed across the company, to work collaboratively with the customers and make sure we understand the risks that they're concerned about from a timing perspective and manage that appropriately within our expectations.

In this segment, how do you see your margin continuing to improve, actually, into the next year?

Yes. So the volatility we had in the back half of last year and early this year definitely has impacted margins, with the higher visibility that we have for the projects moving into '25, we expect much -- there'll be some seasonality because of winter weather. It's just normal course in the first quarter. But we don't expect to see anywhere near as big of a dip in volume, and therefore, the operating leverage impact that it had on margins in 2023 and 2024. So feel we have good visibility. We should exit the back half of this year in the mid-single digits, and that is an appropriate goal for the full year next year. Longer term, we think the segment is a high single-digit EBITDA margin business for us. And with the right mix of supply and demand constraints, there could be an opportunity to push that higher.

Okay. You previously talked about starting alliance agreements with customers on clean energy side. Can you talk about the progress there? Are they really impactful?

Yes. That's been a great collaborative development with a number of our clean energy clients. It's not the preferred procurement solution for everybody. But for a handful of customers, we've structured relationship where we're working with them very early on, and we have commitments around a certain percentage of their portfolio or a series of projects over a longer time frame. It's a great balance to the traditional single project procurement model. It takes the right level of commitment from the customer to bring us in early and for us to have confidence in their ability to develop those projects on the right cadence so that we can leverage our resources most effectively. But where we put them in place, they've been terrific, incredibly collaborative and a true partnership where we're helping them early on with things like constructability, finding ways to engineer cost out earlier on than you would typically be involved. And so it's a real value add for the client. And obviously, from a planning perspective, it gives us a lot of visibility around minimizing downtime for assets and resources.

What would be some of the examples of these partnerships you have done? What would be some of the examples and names of the...

We haven't disclosed that publicly. With respect to them, we'll keep it quiet, but...

Yes. So then let's move on to your Communications segment. How are you progressing into expanded wireless opportunity with AT&T?

Yes. So the additional markets that we were awarded at the end of last year moved over to us in the third quarter. So we're just into that transition now. It's going well. I think the transition was effective. And now we're just picking up the crews and subcontractors to execute in those geographies. In addition, they're working on their swap out of Nokia equipment over to Ericsson. That's progressing as well. And as we've said previously, that will ramp through the back half of this year, and then we expect to have a full year impact from those additional territories and equipment standardization program in 2025.

So when do you expect BEAD's funding to begin and how that may impact the demand in this segment?

Yes. So the general consensus is we'll start to see money flowing from what's been allocated to the states to our customers some time in 2025. I think the industry has been a little more cautious on the impact next year. We'll see some. We don't think it's going to be a huge driver of demand for next year, but this is a $45 billion federal program. So it's going to impact and supplement spend for our customers for a long time. Separately, though, there's been a number of trends in the industry that continue to give us good visibility on growth on the wireline side as well. A lot of our customers are talking about continued expansion of territory, other strategic initiatives around overbuild of fiber, third-party capital like AT&T announced earlier today that they're going to accelerate their deployment with GigaPower, which is a joint venture arrangement that they're operating under. So there's a lot of good tailwinds, a lot of good drivers of demand for our services. BEADs will be a really nice supplement to that as it works through the process of allocation to the telecommunications and broadband providers.

And what do you think this may do to your pricing or margins as you think about the next 18 months or so?

Yes. Well, both of them -- both increased volume on the wireless side and the increasing opportunity set on the fiber side, both really help with operating leverage, particularly on wireless. That's the one business where we self-perform less of the work. All of our -- everything else we're generally a self-perform firm. But in wireless, about 2/3 of the work is more program management with a series of subcontractors. So we have a heavier layer of fixed cost to manage those crews. As the volume goes down, you can have some absorption challenges. But in this type of environment, we'll see a lot of that gross profit fall straight to the bottom line, really accretive to margins. Same thing on wireline fiber, not quite as dramatic, but that incremental spend really helps from a utilization perspective. We think as capacity continues to constrain, there'll be more pricing opportunities. And we've said kind of that 12% to 13% is a reasonable EBITDA margin expectation over time. We won't hit that in 2025, but we think with the cadence of growth that we're seeing, that's definitely an opportunity for us in 2026.

Great. Then moving on to the pipeline. So you had announced you have raised your revenue guidance by $100 million. What's driving optimism? What are you seeing in that segment?

We're just -- we're seeing really positive demand for bidding activity, new permits and just dialogue with customers around not [indiscernible] a lot of business in late 2010s, good, small, medium-sized midstream projects to enhance takeaway capacity or move product to new markets for use. It's not going to be a huge driver of growth, but we think kind of staying flat at $2 billion for -- through 2025 and beyond is very achievable with the demands that we're seeing. And that's without the contribution that we got from the Mountain Valley pipeline in 2024. So it's just -- it's not incredible, but it's the best we've seen since the pandemic. And we do -- we operate very well in that segment. It's our highest margin business. We think we should easily be able to achieve high teens EBITDA margins consistently with that type of demand backdrop.

So Paul, obviously, the company has made tremendous progress over the last decade. I think when I first met you, EBITDA was sub-$100 million, now it's getting close to $1 billion. As you've continued to make this progress, what's your guidance publicly that you have stated for this year and how you see the outlook for next year?

Yes. So for this year, we're guiding to about $12.5 billion of revenue and $975 million of EBITDA, about $3 a share. We think '24 is about setting us up for a really opportunistic end market situation in really every segment with that flat level in oil and gas. So we're really excited about what's to come in '25 and beyond. We think high single-digit top line growth organically is achievable for the next few years. And we think we've got a really good opportunity to be double-digit EBITDA margins in every segment with the exception of maybe clean energy, where we think the intermediate term margin outlook is high-single digits. So we're really excited about all of the end market opportunities. Organic growth is going to be our priority from capital allocation, but we'll definitely continue to evaluate M&A, probably not what the size and scale that we did in '21 and '22. But back to more of the profile that we've done very successfully throughout the 2010s augment our capabilities, geographies, customer base and try to find things that we think have a really high top line growth opportunity to supplement that with the organic backdrop.

Yes. And you've been really passionate about deleveraging and getting to investment-grade rating. Now you've achieved all those targets, how do you think about capital allocation?

Yes. So we did increase leverage slightly coming off of the IEA acquisition. We've worked that down very well. Cash flow generation has been strong over the last 1.5 years. So we're really pleased with how diligently we've been managing working capital and converting earnings into cash flow. Organic growth is going to be the key. We'll look at M&A. From a share repurchase perspective, we really do that opportunistically. We think we've got more attractive uses of capital than just direct share repurchase. When we do that, we think it's because we have an opportunity to get the shares repurchased at a meaningful discount. So those will definitely be the key. I would also say, if we need to invest in working capital for a particular project, sometimes customers have temporary funding needs, we'd absolutely use working capital commitments for that as well to help kind of bridge a project if necessary. We've done that very successfully in the past. So -- but the organic growth is going to be the key. And Jose, our CEO, has always been very insightful into where we're seeing trends and being opportunistic with M&A to supplement that organic growth is going to be an important part of the story, too.

Okay. And one question I've always wondered. You still trade at a significant discount to one of your closest peers, although your business model is very similar, it's very similar performance. What do you think investors are missing? What is changing? What's new this year over the next year that should help continued flows to CAC?

Yes. I don't think investors are missing it. I think a lot of it's on us, and we have to be more consistent, right? So we had a very strategic transformation over the last 3 years and doing big acquisitions and integrating them effectively is challenging. And we took our lumps, and we had some volatility in earnings relative to guidance because of that. So from our perspective, the opportunity is there. From an end market perspective, we need to perform consistently and continue to monetize that opportunity and show investors that we can do that time after time and give them the predictability that we need. That's what I think was the biggest challenge in the short term. But now we've got good diversification. We've got the businesses integrated into MasTec, still obviously some work to do, but we've got good visibility into the opportunity set and the earnings profile. And our goal is to just perform at the levels that we put out publicly and rebuild that confidence. And I think we've started to do that this year, and we'll continue to make that our priority.

That's great. We have a few minutes left. I'll open up for audience. Any questions?

[indiscernible]

I haven't seen any data yet looking at that interconnection specifically, but it's something that we'll dive into. I mean, we would provide those services for both the customers and/or if they're interconnecting with an existing fiber grid with our existing telecommunications and broadband providers. So I think it's definitely something that's addressable, but in the total aggregate size, I'm not quite sure.

Given all the progress we made on the balance sheet and improved outlook, you had an interesting conversation [indiscernible]?

Yes. So we're talking about that. Fitch is stable. I think their indication is they wanted to see a couple of quarters kind of at this level. So I would think the outside date from discussions with them is probably when the year-end earnings come out. That would be when we would expect to be kind of low 2s and kind of met the commitments we've made from a balance sheet perspective with them.

Any other questions?

Well, thank you all for coming, and let me know if you have any other questions.