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

Good day. Thank you for standing by, and welcome to MasTec's Superior Group Acquisition Conference Call. I want to remind all participants that today's call is being recorded. I'd now like to turn the call over to Marc Lewis for some opening comments.

Thank you, Olivia, and good morning, everyone, and thank you for joining us to discuss MasTec acquisition of The Superior Group. Joining me today are Jose Mas, Chief Executive Officer with an overview, and Paul Dimarco, Chief Financial Officer, with a financial analysis. We prepared slides to supplement our remarks today, which are posted on MasTec's website under the Investors tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides accompanying this call. During this call, we will make certain forward-looking statements regarding our plans and expectations about the future as of the date of this call. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current and periodic reports and SEC filings include a detailed discussion of risks and uncertainties that may cause such differences. In today's remarks, we'll be discussing adjusted financial metrics, and we may also use certain non-GAAP financial measures. Please refer to Page 2 of the accompanying slide presentation for a discussion of these financial metrics and measures. We're really excited to share more details of this transaction today, and I'll now turn the call over to Jose for remarks. Jose?

Thanks, Marc. Good morning, everyone, and thank you for joining us. Yesterday evening, we announced that MasTec entered into a definitive agreement to acquire The Superior Group, one of the premier electrical infrastructure contractors serving data center and other mission-critical end markets across the United States. We are extremely excited about this transaction because it meaningfully expands MasTec's position in what we believe is one of the largest and most attractive infrastructure opportunities. Just as importantly, this transaction reflects the disciplined acquisition strategy we followed for many years, partnering with exceptional management teams, acquiring market-leading businesses and investing in sectors where we see strong long-term demand supported by durable industry trends. We believe Superior is uniquely positioned within this market, making it an outstanding strategic fit for MasTec. Superior has built one of the industry's premier Electrical Infrastructure businesses with approximately 3,000 highly skilled employees, outstanding customer relationships and a proven ability to execute some of the nation's most complex electrical projects. Over the last several years, the company has become one of the leading providers of electrical infrastructure services to hyperscalers, data center developers and other mission-critical customers. We are particularly excited to welcome Bryan Stewart, his leadership team and the 3,000 Superior team members to the MasTec family. Throughout this process, we developed tremendous respect for what Bryan and his organization have built. Led by the Stewart family since the mid-1980s, Superior has successfully scaled the business while maintaining a strong culture, exceptional customer relationships and a disciplined performance-focused operating model. Equally important, we found tremendous alignment between our organizations in terms of values, culture and operating philosophy. Bryan and his management team will remain in place following the transaction and continue leading the business. We believe maintaining the existing leadership, culture and customer focus is essential to preserving what has made Superior so successful and to maximize the long-term value of the combined organization. From a strategic perspective, we believe this transaction strengthens MasTec's position within one of the most compelling infrastructure opportunities we see today. Over the last several years, we've talked extensively about the increasing convergence of power infrastructure, communications infrastructure and data center development. The continued growth of AI, cloud computing and digital infrastructure is driving unprecedented investment across each of these markets, and we believe those trends remain in the early stages. Meeting that demand will require enormous investment, not only inside the data centers, but across the entire electrical and power infrastructure ecosystem that supports them. We believe this represents a generational infrastructure investment opportunities for the companies with the capabilities, skilled workforce and track record to help build it. Today, MasTec delivers the critical infrastructure that brings power, communications and energy to data center campuses. Superior extends our capabilities inside the campus through electrical construction, integrated systems, prefabrication, commissioning support and ongoing maintenance services. Together, we can support customers across a much larger portion of the infrastructure value chain with a more complete, integrated service offering. We also believe the transaction strengthens our relationship with many of the most important customers in the industry. Increasingly, customers are looking for larger more integrated infrastructure partners that can self-perform work, mobilize labor at scale and successfully deliver complex projects with speed, quality and certainty. The combination of MasTec and Superior enhances our ability to meet those demands while providing Superior and its customers with the benefits of MasTec's financial strength, broader geographic reach, and diversified infrastructure platform. Importantly, we also see meaningful opportunities to expand relationships with existing customers by offering a broader range of services across both organizations. Another highly attractive aspect of the transaction is Superior's labor platform. Access to skilled labor continues to be one of the most important competitive advantages in our industry, and Superior has demonstrated an exceptional ability to recruit, develop and deploy highly-skilled electrical resources across some of the fastest-growing construction markets in the country. As we discussed at our Investor Day in May, we believe labor will continue to be one of the most important differentiators affecting execution, constructability and long-term performance. In an environment where skilled labor is increasingly becoming the limiting factor for project execution, we believe Superiors' workforce represents one of the industry's most valuable strategic assets. Overall, we believe this acquisition enhances our capabilities, deepens our customer relationships, expands our highly-skilled workforce and broadens our addressable market. More importantly, it positions MasTec to lead through what we believe will be a generational infrastructure investment cycle driven by AI, electrification and the continued growth of digital infrastructure. We're excited about what this combination can accomplish and believe it meaningfully strengthens MasTec's competitive position while creating long-term value for our customers, our employees and our shareholders. With that, I'll turn the call over to Paul to discuss the financial aspects of the transaction. Paul?

Thank you, Jose, and good morning, everyone. I wanted to echo Jose's sentiment in welcoming the Superior team to the MasTec family. We look forward to supporting our continued growth and execution as we unlock value for our employees, clients and investors. We believe this transaction is highly compelling from both a financial and capital allocation perspective. Superior has established a strong track record of growth, profitability and cash generation, while serving some of the fastest-growing infrastructure end markets in North America. The purchase price is approximately $1.65 billion, consisting of $1.175 billion in cash and $475 million in MasTec common stock, along with the performance-based earn-out tied to financial results over a 3-year period following closing. We expect to fund the cash portion through a combination of cash on hand, borrowings under our existing credit facility and delayed draw term loan facilities arranged in connection with the transaction. MasTec will issue approximately 1.2 million shares for the equity consideration. We expect the transaction to close later this month after regulatory clearance. The upfront consideration represents a multiple of 6.9x Superiors' expected 2026 EBITDA, an attractive valuation consistent with MasTecs' disciplined valuation strategy and affords significant value creation for our shareholders. We expect the transaction to be immediately accretive to revenue, adjusted EBITDA, earnings per share and cash flow from operations. For 2026, we expect Superior to contribute approximately 5-months of earnings to MasTec's consolidated results. During this period, we expect Superior to generate $800 million to $900 million of revenue, $100 million to $150 million of adjusted EBITDA and $0.50 to $0.65 of adjusted EPS. Superior will form a new operating group for MasTec and Superiors' financial results are expected to be reflected in the Power Delivery segment. More importantly, we believe we'll be acquiring a scaled platform with attractive growth prospects, strong margins, significant cash flow generation and an outstanding management team. Based on current expectations for the full year 2026, Superior is projected to generate approximately $1.6 billion to $1.7 billion of revenue and approximately $225 million to $250 million of adjusted EBITDA. Looking ahead to '27, we currently expect Superior to generate revenue of approximately $2.2 billion to $2.5 billion and adjusted EBITDA of approximately $250 million to $275 million. Please note these expectations are preliminary, reflect a conservative approach and do not assume any revenue synergies, cross-selling opportunities or operational benefit from combining the businesses. We believe there will be meaningful opportunities overtime, but the transaction is compelling on the strength of Superiors' existing platform alone. From a balance sheet perspective, we believe the transaction structure with a mid-single-digit upfront multiple, almost 30% equity consideration and a significant performance-based earn-out opportunity illustrates our commitment to maintaining financial discipline and capital allocation. We currently expect this transaction to generate a low double-digit ROIC in the first year and support our stated target of 16% in 2028. One of the key attributes we find particularly attractive about Superior is its strong cash flow generation and low CapEx requirements. Combined with MasTec's existing earnings and cash flow outlook, we believe the transaction supports a rapid de-leveraging path while simultaneously strengthening our long-term outlook. At closing, we expect pro forma net leverage to be modestly above 2x. However, given the earnings contribution and cash flow generation profile of the combined business, we expect net leverage to decline to below 2x by year-end 2026. We also expect to maintain strong liquidity and remain committed to preserving our investment-grade credit profile. Overall, we believe the transaction represents a disciplined deployment of capital into a business benefiting from powerful secular growth drivers, led by an exceptional management team and positioned within one of the most attractive infrastructure markets we have seen. This concludes our prepared remarks. I'll now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question coming from the line of Jamie Cook with Truist Securities.

Congratulations. Just my first question, just, Jose, just sort of background behind the deal. Was this a process, how long you've known the Store Group -- so just the -- sorry, Superior Group. It's just that. And then my second question, just on the 2027 guide, revenues, I think you assume revenues are up like 40% to 50%, $2.2 billion to $2.5 billion with backlog of $1.4 billion. Just confidence level there that seems aggressive. And why your implied margins in 2026, I think, are 14% to 15%. They take a nice step down in 2027, just reason behind that or how to think about margins longer term?

Thank you, Jamie. So a couple of things. I'd say that -- we got to know The Superior Group during 2026. I think that we spent a lot of time with them at a personal level, really getting to know them as individuals, which I think was really important. I think this transaction was all about fit. It wasn't -- I think that they did a great job through their sales process of looking at different options, but quite frankly, really trying to find what culturally fit them best, which I think is why MasTec was able to close on this transaction, and we appreciate the time that we spent with them and I think a lot of the front-end work that went into the transaction. We're super excited about the business. We think the opportunity is unbelievable. You're right, we've got 40% to 50% revenue growth expected for 2027. As Paul stated, it's a relatively conservative estimate. We've built in no revenue synergies into that number, and relative to the backlog, we feel really good about that number. Again, we think, if anything, it's a conservative number, for multiple reasons, and we didn't get into a lot of it. We'll talk a lot more about it in the future. But I think historically, a lot of their business has been primarily driven by three states. They've got current contracts that are going to expand them into an additional two states in '27 with the potential probably of another four to six states, not far behind, so that geographic expansion is going to help us with revenue growth, obviously, but it's also going to impact margins a little bit as we set up offices and expand into new geographies. That's obviously what we think makes the deal really attractive for MasTec. They're coming off a year from '25 to '26 of exceptional growth. They nearly doubled business in '26 versus '25, and we're hoping to find ways to continue to do that. So again, thank you for your questions, Jamie.

Our next question coming from the line of Justin Hauke with Baird.

Great. I appreciate the call here this morning. I guess the purchase price multiple, I think it's surprised a lot of people at just 7x 2026, given the growth profile. I was hoping maybe you could discuss a little bit more of the structure of the earn-out, how you plan to account for that, the milestones behind that? I just want to understand a little bit how that plays into the total contribution here.

Yes, Justin, I'd say a couple of things. One, we expect the earn-out to probably add another turn to upfront multiple. It's based on a 3-year performance level, so they have to hit a certain performance target over the 3-years to get it. And to be honest, we hope we pay as much as we can in that. It is uncapped, but our expectation would be it would add about a turn, to the upfront multiple. I think that one of the things that can't be lost, and we would have been really pleased to pay this transaction in all cash. I think that this is one of the largest stock percentages that we've done in a deal, historically speaking. We normally do not give stock in the deals that we do. And I think that was a big driver for Brian. I think Brian sees the value of MasTec stock. He sees the upside in it. And I think that was definitely part of how he evaluated the total purchase price. I think he sees -- and I don't want to speak for Brian, but I think he sees great value in that as do we. And I think that's part of his thinking and how he came to his decision.

Yes. Great. Yes, I appreciate that. I guess second one before I turn it over was just -- and I apologize if this was somewhere in it, but it looks like this is mostly a union shop. I just -- is this double breasted or all union or just a bit of context behind that?

Yes. Today, it's all union. Again, we think that the market is obviously extremely strong. This is -- I mean when we think about the deal in simple terms, right, this is a bet on labor scarcity, right? We think, this is a market that's extremely tight. It's a market that we think the union provides incredible benefit to as you -- especially as you're growing into different markets. They've got an amazing leadership team. And when you can use that leadership team and access labor in different markets through their existing relationships, I think it's only going to help us grow and expand geographically. So we're excited. Obviously, we've got thousands and thousands of union members across the country, this adds to it. And again, something that we think it's a competitive advantage in this business today.

Our next question in the queue coming from the line of Andy Kaplowitz with Citigroup.

Congrats on the deal. Jose, can you give us a little more color in terms of what Superior can do for the rest of MasTec in terms of expanding your TAM for buildings and data centers? I think at your Investor Day, you talked about $725 billion of general buildings and data centers as a TAM. So does that mean you think you can get a much bigger market share? Does it expand the TAM? And then is there anyone that you would compare Superior to in the public domain?

Yes. So Andy, I'd say a couple of things, right? One is we provided in the deck that we put out today, an addressable market by 2030 from where it is today, we think it's substantial. Obviously, it's what drives us to the decision of doing the transaction. We are -- I think this is -- I've been in this a long time. I've been doing this a long time. I've never seen a market like this. I've never seen the opportunities that we see in front of us. So for us to be able to expand our presence within this market is something I think we talked a lot about at our Investor Day, and it's something we're very excited about. To put it mildly, right, we view ourselves as we did all the work outside the building and Superior really does a bunch of work inside the building. So it kind of completes our approach of being able to offer our customers really a full turnkey service. And when we think about the general contracting community, which is a significant customer base today of Superior, we just think we can offer them a lot more. We think we can do it in a way where we can hopefully bring costs down for ultimate customers. And I think that's the competitive advantage that we're trying to build. So we're excited about it. To be honest, when you look at what we're building in MasTec, I don't think there is a comp. I don't think there's anybody that has the self-perform capabilities end-to-end that MasTec has today, and I think that's meaningful. I think it's strategic, and I think it really differentiates us, which is why, one of the reasons why we're so excited about this transaction.

Helpful. And then Jose, you mentioned labor is a differentiator for Superior in the industry. So maybe talk about the growth of the workforce at Superior. 3,000 people now, any color what the workforce looked like a couple of years ago? And what it could look like in a couple of years from now? Is it capacity constrained for Superior?

I think it's their strength, right? I think one of the things that we were incredibly impressed by was their rate of growth. I think they've been really intelligent as to how they approach growth. At the start of the cycle, they really -- they did a number of joint ventures that allowed them to expand quicker than they would have been able to do it alone. Since then, they've gone on, they've dramatically grown their workforce. I think their workforce is up almost 400% over the last few years. So I think when you look at their ability to scale, add labor, train labor, it's been remarkable, right? And it's one of the things that really -- that we really like about them. I think there's things that we can help them with, especially as we think about geographic expansion, which is probably what we're most excited about. Again, they've predominantly been -- they've been in a lot of states, but I'd say three states have really driven their revenues over the course of the last couple of years. And I think when we look at '27 and '28 I think the potential of doubling or tripling the amount of states that they're operating in is very high. They actually -- we know they will be operating in five states next year, so under signed contracts. So that's going to almost double their geographic footprint, and I think we've got the opportunity to do a lot better than that. Again, we come with our own set of customers, right? We've got a really good customer base in this business that we've been building over the last couple of years. The customers that we have are in different states than the ones where Superior has been strong. So I think when we combine both of those with MasTec's really service offerings and the things that we can help Superior with as they grow, right, a lot of the outside defense work, I think, can really bring them into -- can help them expand their geographic footprint quicker, and give customers a reason to use the combined MasTec entities. So we're -- again, we're just super excited. We think the cross-selling opportunities are the best part of this deal, quite frankly. We haven't really assigned any value to it, but I think if there's one thing that excites both companies, is what we're going to bring to each other. And hopefully, that will reflect itself in the numbers in the coming years.

Our next question in the queue coming from the line Alex Rygiel with Texas Capital.

Jose congratulations, a very exciting transaction. Could you speak a little bit to Superiors' backlog and some of the due diligence you did on that backlog?

Yes, Alex. So thank you. We spent a lot of time on that. Obviously, we had the experience of IAA in 2022, where we struggled a little bit through '23. So it's something that I think we did very differently in this transaction. I think when we look at our guidance for 2027, where we have enormous conviction over those numbers. Again, we think, if anything, they might end up being conservative. We spent a lot of time -- and we feel like that's fully identified. So we had the chance of actually going project by project and understanding what that meant. And quite frankly, beyond '27, there's an enormous amount of visibility as well. So we're not really concerned by it. We don't think work and revenues are going to be the issue here. We think there's going to be plenty to do, and it's going to be about our ability to execute and bring value to our customers to hopefully grow the business.

Our next question coming from the line of Sangita Jain with KeyBanc Capital Markets.

Great. Jose, if you can talk a little bit about Superiors' own growth history. Has that been all organic? Or do they also have a history of M&A because their growth rate has been phenomenal over the last several years.

Yes, it's been 100% organic, which, again, is one of the things that we just found incredibly impressive. Their ability to grow into this market. They're -- they've been around a long time. Quite frankly, they've got a lot of history, but at the same time, they've had unbelievable growth over the course of the last 5-years. And our ability to execute to that and the management teams' ability to do that, I think, has been quite remarkable. I think kudos to them. I think they've done a fantastic job. And I think it's going to add a lot to MasTec. And I think the combined entity will be stronger based on the experiences that they've had with some of the experiences that we've had. And I think our -- what's in front of us for the combined entity is how do we keep doing it and how do we take advantage of the full market opportunity that exists for the combined entity.

Great. And then if I can ask you how you're thinking about -- is this like your first entry into the MEP space? And do you think that you need to build a national footprint through more M&A over time? Or do you think you can grow this company itself into kind of a national company for you?

Well, I think that's a great question, and I think it's one we don't have a full answer to today. There's no question that this is an unbelievable platform. And if we decided, took at other things and really to add around it, I think that's going to be available to us. We've had a lot of discussions about that internally with them. But the reality is that we've also got an incredible organic opportunity in front of us. I think that, as you know, we've been really focused on the organic side of our business. We're going to continue to do that. So we're excited about that, but there's no question that, this is an incredible platform investment with a substantial opportunity to build around it if we desire.

Our next question in the queue coming from line of Liam Burke with B. Riley Securities.

Jose, you mentioned it earlier in your comments that you're going to need to understandably invest OpEx to fund the growth of Superior. Is there any additional capital investment that is needed to be required? Or can this all be funded just through short-term expenses?

Yes. Look, this is a great cash flow generating business. So we do not believe that we will require any investments above and beyond what they're able to generate internally. I think the commentary was around the overall market spend. The dollars that have to be invested in the industry to accomplish what it is that they want to accomplish. It was more of an external comment than really an internal comment. But the cash flow dynamics around these businesses are fantastic, which is one of the reasons we like it so much. Obviously, the expense comes in and really our geographic expansion but we find that to be relatively limited and have tremendous upside and a quick payback.