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

All right. Great. Thank you, everyone, for joining us here as we wind down day 2 of Baird's Global Industrial Conference. Justin Hauke, I'm the senior analyst covering specialty contractors and engineering construction, along with Andrew Whitman. We're very pleased to have once again MasTec joining us. It's been an interesting journey over the last year from when they were here with us last year and look forward to hearing more about that. But Jose Mas, the company's long-term CEO is here; and then Paul Dimarco, Chief Financial Officer; and we've got Marc Lewis in the back somewhere, I'm sure all of you know. But I'll turn it over to Jose to kind of just give a little 5-minute lay of the land, and then we'll do some Q&A and Session 3 at RW Baird. If you have any questions, we'll get those integrated in here and chat for a few minutes.

Sure. Thank you again for having us here. It's great to be here. It's funny what a difference a year makes. We were here last year at a very difficult period for us. We had come off of making a big acquisition at the end of '22 of a company called IEA, which was a publicly traded company. We kind of doubled down on the renewables business, and we had a challenging year in '23 kind of integrating them, understanding what we had bought and executing to that. We had a lot of underperformance relative to '23. And I'm happy to report that I think in 2024, we've kind of turned the tide, really took that business. And I think, especially in the third quarter, demonstrated not only our ability to grow it, but our ability to improve margins. We exit Q3 with a record backlog in that segment, and we think we're going to continue building on that through the balance of the year. So we're pretty excited about what that business is going to do for us in '25 and beyond. So a big difference from last year. Maybe to kind of frame the company in a little broader sense over the course of the last few years. Post-pandemic, we made a significant decision to really grow the energy side of our business, both from a distribution and transmission perspective as well as the renewable side. So we made a number of acquisitions starting in 2021. Our company today looks a lot different than it did 4 years ago. The energy side is the biggest piece of our business. But we're pretty excited about what's happening across all of our segments. So today, we've got a fairly large communications business that we've been in for a long time. Wireless was a big part of our growth story for many years and over the course of the last few years with all of the things that are happening on wireline construction and the pushout of wireline has been a big growth market for us. We were excited to announce on our quarterly call here a week or so ago, that we had been awarded a large project from Lumen to help them as they build out facilities for hyperscalers. That contract starts next year, and we're pretty excited about being involved with it. In addition to that, we see really strong demand on that side of the business. We think '25 and beyond are going to be great. And we think there's a lot more of those type of awards coming on behalf of our customers. Our customers are really focused on getting into that world and helping hyperscalers what their communication needs, and I think will ultimately be a big beneficiary of that. Our distribution transmission business in the second quarter, we announced a large transmission award, which is really going to catapult that business for us over the course of the next few years. I'm sure we'll talk about that in detail later. But we're really excited about not just what's happening on the transmission side, but even on the distribution side, we've seen improvements in that business as the year has progressed, and we think we're entering 2025 with a lot of momentum. Again, on our clean energy and infrastructure side, we had a great quarter, where all of the businesses, all of the verticals between that business, infrastructure, industrial and renewables had their best margin quarter of the year. Again, exiting '24 with great backlog and really good opportunities in '25. And even in our oil and gas business, we're really bullish about the project activity levels that we're seeing, especially further years out. We expect '26 and '27 to be great years. Might have a little bit of a headwind in '25 relative to MVP kind of coming off for us and having to replace it, but feel really good, especially post election, what that means for that business, and how we see the future. So pretty excited. We've kind of talked about double-digit growth across all of our segments next year on a top line basis with the exception of oil and gas and really with opportunities to improve margins in every one of our segments.

No, that's great. I mean -- and each one of those things you mentioned, I do want to go into because each one, I think, is really important. And I guess maybe if I was to keep it at a high level, Certainly, it seems like '24, relative to our expectations, I think you guys have really turned the corner faster than the world have expected. I'm just curious, maybe lessons learned or whatever else is kind of knew the DNA because 1 thing I think is a hallmark of the company and its success is the ability to very quickly pivot over time, for whatever reason, finding where growth is. But maybe just kind of review what had happened, and what's new today that is different from where we would have sat a year ago.

Yes. look, I think for us, we -- again, we made 2 acquisitions in '21. We made another one in '22. At the end of '22, we put out some projections of where we thought the business would head to. The truth is that none of those projections have changed, right? We still have exactly the same outlook today sitting here than we probably did at the end of '22. The problem is we had a really bad '23, right? So I think of it as we're kind of 1 year behind, although we had a good quarter, and we're proud of the results that we delivered in Q3. It's not like we were there high five, right? We didn't do anything special, right? We did what we were supposed to do. Quite frankly, there's room for improvement across all of our segments, even off of Q3 results. It's good that we showed the progression. We're proud that the kind of materialized. We're proud that we were able to show it to our outside investors. But the reality was that that's what we expected, and that's how we expect it to perform. So for me, it's -- we had a tough '23, lots of issues with the deal, right? I don't think we fully understood the project pipeline that we were buying. We talked extensively about this last year. But we got our hands around that we've made the changes that we needed to make in 2023. It's demonstrated itself in '24. And I kind of feel like we're back on track as to where we should have been a year before. For me, we're 1 year delayed, right? Nothing really changes in our long-term outlook. We laid out a goal of doing $15 billion of revenue at double-digit margins. I think that's still attainable for the company. If you look at consensus for next year, it's in the low 13s off of about double-digit growth from '24 to '25. If we do that again in '26, we're not far off of $15 billion. And the question is how quickly can we get to double-digit margins. So that's what we're working on. Again, those goals haven't changed for us. I don't think the long-term outlook has changed. I think if anything has gotten better, right? We've got these massive demand drivers that we probably didn't expect 2 years ago that I think over time will have a meaningful impact on the business. The overarching probably biggest opportunity for MasTec as we see it, is what's happening with the need for power in this country, right? We've got power consumption increasing. Some of the fastest-growing markets within our country are driven off of the ability to have power available to them so they can do things like data center and AI. We're in the middle of that. Our customers are in the middle of that. It creates tremendous opportunity. And in reality, we're in a world today where we need all sources of power. So whether it's renewables, whether it's gas, whether it's coal, whether it's nuclear, there has to be a realization that all of them are going to play a role in energizing our country's future and to be in the middle of that and then to have the associated effects of that, and how it impacts our other businesses is pretty exciting, and it is probably relatively different than when we were sitting here last year.

Well, yes, and let's go to that because your 2 biggest businesses now are the clean energy business and power delivery in terms of these themes, but we would have said that, a year ago, it was really exciting, but I think the stuff that is new is the reality of the data center investment, which was something we -- really you were talking about, at least as a discrete opportunity. And I think that's really changed over the last couple of quarters. So what is it that you do on the data center side, on the internal electric side, your relationship with some of the hyperscalers that are out there and the bidding opportunity that you have in front of you.

Yes, sure. At this time last year, we were actually working in that world. We didn't know what -- we didn't understand the market yet. We didn't really understand what the potential in the market was going to be. What -- where we were most impacted and to date, it's still where the primary revenue source from that business is today is on our civil side of our business. We're actually doing mask rating on behalf of hyperscalers. What does that mean? Somebody buys a big swath of land, and we're actually preparing the land for construction. That's how we got into it. That's how we started to understand the opportunities that existed. It's how we built our relationships. And as that business has evolved, what we've realized is it not only impacts us, but it impacts our customers to a great degree. So the biggest issues that hyperscalers have today is they have to figure out what sites can they get their hands on that have power availability because regardless of the piece of land you have, if you can't access power to it, then it's somewhat irrelevant to the hyperscalers. So we've been able to help both sides, right, hyperscalers or in some cases, developers and utilities, think about how they go to market there and how we can help participate with them in doing that. As that -- those relationships have evolved, we began to offer more services to those customers. So today, most of these data centers are building their own substations, they're building their own conduit structure for things like electrical and things like water and sewer and telecom. So we've been able to build within the existing infrastructure of MasTec, the businesses that we provide we actually do a lot of trades that are associated with the construction of any one of these sites. So we went out earlier this year. We talked about it publicly, and we kind of created a data center team. It's a non-P&L team within MasTec. Their job is to kind of sell MasTec services throughout the ecosystem of data centers to understand what it means, understand what the products and services that we have to offer, and how do we best sell in. I think we've done that probably sitting here at this time last year. We had the ability to bid for 1 hyperscaler. Today, we're an approved vendor for 4 different hyperscalers. We do a lot of work for the general contractors that they choose on different sites. So we've been able to develop those relationships. But if you think about it, right, we're trying to take our existing services and sell them in. So we continue to do the civil work. Mask ratings an important piece of the puzzle for us and one that we think is going to continue for a long time. But then how do we help them on their electrical needs. One thing is working for our customers, building power generation opportunities for them to service the data center, which would be outside of the world of a hyperscaler or a general contractor that would be working for a power developer. But then within the walls, things like substations and the infrastructure associated with getting utilities from a demarked point to a building, those are really valuable things that we can help with that are high dollar. We talked about $1.5 billion in opportunities that we've been able to identify that we're chasing relative to that. And then you get into what are the other things that we can ultimately do on behalf of these build-outs? There are a lot of things that today we probably peripherally do that if we really focused on, we have opportunity to increase our business. We're not necessarily there yet, but that would probably be the next phase of how we would be thinking about our growth with the data center.

Yes. I mean I think it's interesting there's so many of these because the power demand needs, the stat that I saw is AI, is like 3% or 4% of electricity demand for data centers broadly today, it could be like 10% to 15%. And so many of these are going to be like co-located with power directly on site as opposed to being the grid, which plays into a lot of what you're talking about across the balance of your business, whether it's telecom or anything else to support that.

Yes. Look, it's a big business for our customers, right? So whether you're every renewable developer every utility, every telecom company is trying to find a way to play, right? So whether it's providing direct power access to a data center, whether it's as part of their existing portfolio and whatever build out they need to do to be able to feed that if you're a telecom company, how do you provide your existing plant to help them versus how do you build a new plant. So all of those conversations are happening, and we get to be the provider of the services ultimately when there's a deal struck between our customers.

Yes. The other thing that I would say is new today versus a year ago would be -- and I know you guys have always -- you've had large electric transmission projects in the past, but you guys have announced a really large one, not just for your company, but broadly, and really, the visibility that comes from that. I don't know if you're in a position, I don't think you are able to talk about what that is. But you've sized it in the past $300 million, $500 million of revenue per year for the next several years. Maybe just talk about what capabilities you have now that allowed you to win that and just your comfort level on the risk profile taking on that work?

Yes. When you talk about the success that we've had over the course of the last 3 years, right. The acquisitions that we made in '21 were specifically done to put us in a position to be able to compete in the industry at a large scale, right? So we've always been in the electric business. We were somewhat of a fringe player in the early 2000s, made a number of acquisitions to really catapult our standing there, whether it was distribution or transmission. And I think that mission is accomplished. And irrespective of whether it showed up in the financials over time, from a work perspective, from a customer perspective, from the perception of MasTec in the industry, I thought we had done a great job. What we hadn't done yet was demonstrated the job and the work that we were doing on the customer side into our financials, which I think partly done in Q3, but the reality, I think there's a lot more to come there. So we feel great about where we stand in the competitive landscape. We think that we are one of only a few large-scale contractors that can execute large-scale transmission in this country. The award we won was from a very sophisticated customer, who I think gives a lot of credibility to awarding a project like that to MasTec. I think that's probably been one of the biggest positive surprises for us is the amount of activity that we've seen post award from others who feel like that customer entrusting us with that size of a project really validated our services and the investments that we've made over the last few years. Again, it's our job to further demonstrate that by winning more projects and by being more successful, but it's -- again, from where we were last year sitting here in that market to where we are today relative to our competitive landscape, I think it's totally different. I think it's great for the company. It's great for our shareholder base, and I think it's just going to improve.

Okay. I guess shifting gears to the communications business. This is your legacy business. Obviously, it's been one of your most successful ones. I think certainly it was maybe a surprise to us from seeing a year ago, the amount of opportunity you've been able to harvest there. So just talk about the competitive wins that you've done. You talked about this Lumen contract. Maybe you could size that a little bit for us as well. But -- and then I guess the other thing, too, is that there still is this stimulus aspect that you guys have talked about that mean really, frankly, it's like adding 2 more carriers to the network in terms of the spend. So just can you talk about where...

Yes. Look, I think, again, coming out of last year, one of the big successes that we had was we were able to significantly expand our market share especially on the wireless side of the business. So if you think about wireless spend in the U.S. this year in '24, it's kind of flattish. So if you take Verizon, T-Mobile, AT&T, it's not like the spend one way up. Yet our business has increased nicely because we did a good job of picking up market share at the end of '23 and working with our customer to really position us differently going forward. The benefit of that, the true benefit of that, we actually won't even see until next year because a lot of that transition happened. While the contracts were awarded at the end of '23, the actual transitions of work didn't happen until the latter part of this year. So we're beginning to see that impact, and we'll continue to see that impact in '25. And then it's the market, right? The wireline market, what we're seeing with fiber expansion across the country, both, as you think about communities, we're offering broadband to people's homes, and there's multiple carriers trying to build out subdivisions. Two, what you're seeing today, which is every carrier trying to maximize their network and grow their network based on what's coming from the AI side and the industrial marketplace. So we're in the middle of that. So on the wireless side, I'd argue that, I still think there's a big spend to come. I don't think 5G has ever really taken off the way that it's intended to. Small cell investments haven't happened the way that they were intended to. I think that's all about carrier's ability to monetize those assets, I think that's coming, although we're not seeing a ton of activity related to that. I still think that's to come. And then on the wireline side, we've seen tremendous demand, right, in business that we've been in for a long time. It's grown substantially for us in the last 3 to 4 years. And I think, again, outside of the federal funding we've seen to date with things like [ RDOF ] , and what we're seeing today with AI, you still have a beads program that hasn't even had any impact on the market today, which dwarf some of the other federal funding programs in size. We could argue whether it's going to happen, how much comes, how much [ Starlink ] get some beads that they didn't get before. But I think that...

It's like $40 billion...

It's a lot of money. I think we have a lot of different customers that are planning to get a piece of it. So I think it could be very incremental to '26 and beyond. We don't expect huge impact of beads in '25. We still think a lot of those dollars haven't been awarded, so they're not really going to make it into the system until some point in the mid-'25, and then at that point, by the time you start engineering, you get prework done, you're not seeing significant activity until '26, but we do think it will have an impact in '26.

So before I bring Paul in, I guess, so these are all positives. I guess, what is the downside? I mean you kind of outlined what you're expecting for '25 growth, that's where consensus is. So what's the risk that, that doesn't happen next year? And then conversely, where would the upside potentially be if there was?

So when you look at our backlog, because I think that drives it, right? We're in a great spot irrespective of the businesses, whether it's communications, whether it's power delivery, whether it's clean energy. I mean today, we're sitting at backlog levels that truly support our 2025 performance. So we're not in a position today like we were at this time last year, right, where we still had to win a lot of work to be able to execute on our '24 plan. We beat our '24 plan. We actually did better than we expected. But I think we're going into '25 in a very different way in which we're relatively secure across all of our segments. I think we have a lot more upside to '25 than we did '24 coming in. So we're feeling really good about our business, right? The one market that we do expect to did next year is in our oil and gas business. We -- again, we're coming off of the Mountain Valley Pipeline, which has generated a lot of revenue for us. That will be gone in '26 or in '25. We think there's a number of things that will begin to replace it, but whether we can match the levels of '24 or not, we've kind of backed off that. We've said publicly we think that's $1.7 billion business versus a $2.1 billion business for us this year. That's kind of built into people's modeling. We feel good because we've actually -- we've got some early look into some projects for '26 and '27. There's a chance that some of that accelerates in '25. It makes '25 better than what we've been saying, we'll see. But look, we feel great. I think that going into a year with the level of activity that we have and we have under contract, we're in a good spot.

Yes. And I guess you hinted, I mean, oil and gas variable could be -- the political situation obviously has changed, so that there could be something that emerges out of that. But also, I guess the positive would be that, that is -- was your most capital-intensive business or one of them. So it being smaller, maybe it goes to the next question for Paul. But I think another change here has been your balance sheet and the cash that you've been able to generate. So maybe just talk about the working capital you've taken out some of the capital reductions you've made, Paul, and what that's done for the balance sheet?

Yes. So we came out of the '22 with heightened leverage the acquisitions that we had acquired. And we knew we had to delever, and we had some opportunities from a working capital perspective. Part of it's mix, the clean energy business generally has better working capital profile than some of our other businesses. But like in our communications business, that group really focused on accurate billing, timely billing and they've driven down their working capital requirements significantly over the past 1.5 years. We continue to perform very well in the oil and gas business and clean energy has continued to not only benefit from mix, but they've driven down DSO as well. So we finished Q3 at 68 days of DSO, which is the lowest we've had in a long time. And we think it's very sustainable at that level with probably a little bit of an opportunity to improve going forward. On the fixed asset side, we looked internally around how we were utilizing equipment, and we did some comparisons relative to peers, and we identified an opportunity around equipment utilization that was pretty apparent, right? And now we were costing that equipment through the P&L as well. So you can look over the past couple of years, our fixed asset investment has really under has been much lower than our depreciation. And that's not because we've had growth. We've had the need to replace equipment. But we've focused our internal evaluation on on fixed asset purchases more into a return basis. So we're looking at the real P&L impact of that new equipment, and that's what we're basing our decision on. And what we're seeing is increased utilization and increased longevity of that equipment staying on our balance sheet. We think that will enhance returns on invested capital over time. I think we're starting to see the benefits of that today, and we're seeing more discipline throughout the business around utilized equipment and then replacing it when it gets to a point of impacting operations, right? There was a little bit too much focus on EBITDA in the past, and we're bringing more visibility to depreciation today. We think that's going to continue to drive, as I mentioned, better returns. And particularly as we get into some of these growth environments. There will be investment for sure, but it will be more disciplined and more commensurate with kind of the current working capital and fixed asset profile that we're seeing in 2024.

Yes. And then I guess, maybe back to you, Jose, but just the balance sheet has opened up I think that's a new situation you really haven't had in the last couple of years. So just the capital allocation priorities. You've been an acquisitive company. Are there still markets that you're not in that you want to be in, or are the future going to be more tuck-ins that supplement what you're already in?

I think that the most important thing for us today is to take advantage of the organic growth opportunities that we have in front of us. I mean, we -- as a business, I've been here for a long time. I can't remember the last time that across all of our segments. We've got the organic opportunities that we have in each and every one. So I think our mission, our job, our most important job is to take advantage of those opportunities to mine them, to maximize, to maximize the margin potential with those. With that said, I do think there's the opportunity for tuck-ins. I think there's areas of the country across each of those segments where we can strengthen our portfolio. We've been very effective at doing tonnes over the history of MasTec, doing them well, doing very specific type deals. So I do think you'll see more of that activity in MasTec. I don't think that you should expect at least in the short term for us to do any really large deals. Part of the reason is we've just come off of a lot of integration efforts. So we need to focus the team on organic growth opportunities. With that said, right, if there was something that we did, it'd probably be in a different vertical. One of the challenges for us on integration is a lot of the companies that we bought over the course of the last few years were companies in businesses that we were already in. So there really was a lot of work to integrating 2 different organizations, bringing them together, getting the most out of them. So that's different than buying an add-on piece of the business that you're not in. With all that said, though, I think we're really focused on tuck-ins. We're really focused on organic opportunities. And I think that's where you should expect any activity if it comes from MasTec.

Yes. Well, kind of last maybe thematic one here. And it's hard to answer it, but I've gotten the question from a couple of people, and I've asked plenty of other companies the same question, but on the election, the corollary for the upside of oil and gas would be, we've seen the solar stocks all pull back, and there's concern, and it's been bandied about all year about IRA, repeal or at least sections of it. And given the backlog scrub that you guys went through with IEA, I just would be curious your take on that and the potential for I think to pause, elongate, what your customers are saying?

So first, it does have a meaningful impact on especially our gas pipeline business, right? I think that there's been a realization prior to the election that gas is going to play a bigger role in future powering needs because we needed to. But the rhetoric was still there, that was anti-gas right? So the rhetoric was still out there that we're trying to decarbonize. We know we need it, but we don't really want it. That was kind of the sentiment that existed. And I think that changed. I think that's visibly changed. The industry was obviously a big supporter of Trump. I think Trump is going to come out in a big way to support that industry and support it being a a bigger player relative to power needs in the next few years, I heard. I haven't seen it, but I heard Siemens made an announcement this morning about some of their gas turbines, and what the demand has been here in the very short term and how far they're pushing out. So those are very positive signs for our gas pipeline business. But the theme hasn't changed, right? We have -- I think you said whatever the growth rates are, whether it's 3%, 4%, 5% a year for higher consumption. If you really believe those numbers, the amount of electricity that we need to generate over the next 5 to 10 years, it's somewhat mind blowing, right? We haven't been in that position in this country in a long, long time. So the reality is we need it all, right? The fastest way you can get power to market today is renewables. It's wind, it's solar, right? And it's solar with storage. So there will be a lot of renewables built. There's no doubt in my mind. I think that irrespective of what the rhetoric is, I think the tax legislation is relatively safe as it comes to utility scale solar and wind. I think there's fringes of the IRA that are exposed and are at risk. But I think the things that we do are relatively well protected. I think the industry did a great job of really focusing on a potential change in the administration. If you look at all the investments around where solar plants went, where a lot of the racking manufacturing has gone. It's gone into Republican states. There's been an enormous outreach to both Republican Congress and Republican senators. John Thune, today was named speaker, has been a proponent of the clean energy business. So I feel good about where that business is at relative to the markets that we're in. Obviously, we need to get track of it. Anything can change, but we're believers that we need all sources of power. I think the President is going to get behind that because he wants to see economic growth and a way to do that is to help this industry with its power needs, and there's another way of doing that having a policy of everything is good.

I mean, not to put words in your mouth, but it's almost like the maturity of the industry relative to the past when like a wind tax credit was so critical to this project going forward, that, plus the fact that you're in an environment where electricity demand is growing as opposed to being a flat or declining environment, those are 2 dynamics that are different that make maybe the policy side.

No question. Yes, no question. And again, on their merits, they're good sources of energy at relatively a good cost profile, which also changes, which you probably wouldn't have been able to say that 5 years ago, right? Wind and solar are economically feasible in this environment to power -- to create power, right? And that's a big difference as well. Obviously, the tax credits are important, but they stand on their own.

Great. We've got about a minute left. I'm trying to think if there's anything -- we've got a breakout session that's going to be held right outside here too. I think I may just leave it there because I think otherwise, we'll go into a tangent on something else. But I think that's a good overview of what you guys have done. And thank you, everyone, for attending. And again, breakout session just right out here downstairs.