MasTec, Inc.
Q4 2012 Earnings Call Transcript

Published: 1 Mar 2013

[Operator:]

Welcome to MasTec's Fourth Quarter and Fiscal Year-End 2012 Earnings Conference Call, initially broadcast on March 1, 2013. Let me remind participants that today's call is being recorded. At this time, I'd like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc?

[J. Marc Lewis:]

Thank you, Ginny. Good morning, everyone. Welcome to MasTec's Fourth Quarter Earnings Conference Call. The following statement is made pursuant to the Safe Harbor for forward-looking statements as described in the Private Securities Litigation Reform Act of 1995. In these communications, we may make certain statements that are forward-looking, such as statements regarding MasTec’s future results, plans and anticipated trends in the industries where we operate. These forward-looking statements are the company’s expectations on the day of the initial broadcast of this conference call, and the company will make no effort to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in our press releases and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. In today's remarks by management, we will primarily be discussing adjusted financial metrics as discussed and reconciled in yesterday's press release and supporting schedules. In addition, we may use certain non-GAAP financial measures in this conference call. A reconciliation of any non-GAAP financial measures not reconciled in these comments to the most comparable GAAP financial measure, can be found in our earnings release, our 10-K or in the Investors and News sections of our website located at mastec.com. With us today, we have Jose Mas, our Chief Executive Officer; and Bob Campbell, our Executive Vice President and Chief Financial Officer. Before I hand over the call, we'll hear opening remarks and analysis by Jose, followed by a financial review from Bob. These discussions will be followed by a Q&A period and we expect the call to last for about 60 minutes. We have a lot of great things to talk about today, and I'd like to turn the call over to Jose. Jose?

[Jose Ramon Mas:]

Thank you, Marc. Good morning, and welcome to MasTec's 2012 year-end call. Today, I will be reviewing our fourth quarter and full year results, as well as providing my outlook for 2013 and the markets we serve. Before getting into details, I'd like to take a step back and make some observations. A few years ago, we publicly set out to diversify our business and put ourselves in a position to have greater growth opportunities with improved margins. Over the course of the last 5 years, we have grown revenue from just under $1 billion to $3.7 billion with some pretty remarkable organic growth. And during that same time frame, EBITDA has grown sixfold. We accomplished these objectives despite a difficult market environment. While these are impressive financial results, our greatest accomplishment is how we positioned ourselves across a number of growth industries that offer us expanding opportunities for both continued growth and better margins during an improving market environment which, today, we are clearly in. Now some full year highlights. 2012 revenue was up 32% to $3.7 billion. Organic revenue growth for the full year was 25%. 2012 continuing operations adjusted EBITDA was up 35% to $332 million. Full year cash flows from operations was $172 million and 2012 full year continuing operation adjusted EPS was up 55% to $1.50. For the fourth quarter, revenue was up 27% to $932 million, organic revenue growth for the quarter was 26%, fourth quarter continuing operations adjusted EBITDA was up 100% to $99 million and quarterly cash flow from operations was $57 million, and fourth quarter continuing operations adjusted EPS was up 283% to $0.46. In summary, we had another excellent quarter and an excellent 2012. More importantly, 2013 is shaping up to be another record year for MasTec. While we are bullish about all the markets we serve, we expect the primary growth engines of the company to be our pipeline, wireless and transmission markets. We'll cover those more specifically later. Also, it's important to note that included in our 10-K is a business breakdown by segments. From this point forward, we will be providing financial data by the following segments

[C. Robert Campbell:]

Thank you, Jose, and good morning. Today, I'm going to cover 2012 financial results and 2013 guidance, and I'll also cover cash flow, liquidity and our capital structure. Consistent with previous calls, when I cover our financial results and our guidance, I will be discussing non-GAAP continuing operations adjusted EBITDA and earnings. A full reconciliation from GAAP results to continuing operations adjusted results is included in our 10-K and in the press release tables. The adjustment to 2012 results was to add back the $9.6 million pre-tax charge for our legacy Sintel Spanish litigation, which dates back to 2001. In addition, my remarks will only cover continuing operations without, one, any losses associated with our small water -- municipal water and sewer business, which is for sale; and two, without the profit from DirectStar, our DIRECTV marketing company, which we sold in Q2. Both of these businesses are now accounted for as discontinued operations in all periods. The adjustments to 2011 results were to back out the $29 million pre-tax EC Source remeasurement gain and to add back the $6.4 million pre-tax charge for our Teamster multi-employer pension plan withdrawal liability. In addition, the 2011 adjusted numbers are for continuing operations only, without the water and sewer business and without DirectStar. Also in my remarks today, I will be sharing reportable segment data for the first time. This is a significant new disclosure by reportable segments -- there is a significant new disclosure by reportable segment in our 10-K that we expect will be very helpful. Let me give you a brief overview of our 4 primary segments. Our largest segment is communications, and it includes our telecom wireline business, our wireless business and our install-to-the-home business. Our oil and gas segment includes petroleum and natural gas pipeline and related facilities. Electrical transmission does transmission work and also substation work. Power generation and industrial offers a very wide variety of services. Power generation and industrial does natural gas turbine power plants, built a coal-powered generation plant in 2011, does our wind and solar power generation, also does oil and gas facilities work. This is the organization that is going to do pumping station work for the southern portion of the Keystone pipeline. And power generation and industrial, also does various other types of industrial construction, including building processing plants. In the past, we have often referred to this group as our renewables group. But frankly, the group has always been more diversified than just doing wind and solar. Before I get into my detailed remarks, let me give you a quick overview. For the third year in a row, we had record full year revenue, net income and EBITDA. Fourth quarter revenue was up 27% from last year with 26% organic growth and full year revenue was up 32% with 25% organic growth. Continuing operations adjusted EBITDA in the fourth quarter roughly doubled to $99 million, and full year continuing operations adjusted EBITDA was $332 million, an increase of 35% over 2011. The full year organic non-acquisition adjusted EBITDA growth was 25%. Continuing operations adjusted EBITDA margin was 10.6% in the fourth quarter, which was encouraging relative to 2013 and better than our 9.5% in Q3, and dramatically better than 6.8% in Q4 last year. Continuing operations adjusted EPS in the fourth quarter was $0.46 compared to $0.12 last year. Full year continuing operations adjusted EPS was $1.50 compared to $0.97 last year, that's a 55% increase. Fourth quarter cash flow from operations was $57 million and the full year was $172 million. We had both strong earnings and cash flow in 2012. Full year 2013 guidance is revenue of $3.9 billion to $4.0 billion and continuing operations EBITDA of $410 million to $420 million. That's revenue growth of 5% to 7%, EBITDA growth of 24% to 27%, and the continuing operations EBITDA margin of 10.5% compares to 8.9% last year. I'll provide a 2013 EBITDA margin bridge a little later. And finally, our capital structure and liquidity are just in great shape today, and we currently foresee no issues in supporting our targeted levels of growth. Now let me get into the details of our results. Q4 2012 revenue was $932 million, up 27% from last year with broad-based growth, and our organic or non-acquisition growth was 26%. Our oil and gas business was up $84 million or 52%. Our power generation and industrial business had dramatic growth, mostly in wind, of $70 million, roughly double last year. Communications grew $37 million or 9%, led by growth in wireless, which had 24% growth. And finally, electrical transmission grew $8 million or 11%. Jose mentioned a number of recent large contract awards, which should accelerate transmission growth in 2013 and beyond. Q4 continuing adjusted EBITDA was $99 million, which was roughly double the $50 million that we earned in 2011. Q4 continuing operations adjusted EBITDA margin improved sequentially from 9.5% in Q3 to 10.6% in Q4, and the 10.6% in Q4 this year was dramatically higher than the 6.8% last year. Q4 continuing operations adjusted diluted earnings per share was $0.46 compared with the $0.12 we earned a year ago. For the fourth quarter of 2012, the 10 largest customers were

[Operator:]

[Operator Instructions] And we will hear first from Andy Kaplowitz with Barclays.

[Andy Kaplowitz:]

Jose, we love the extra information but, of course, that allows us to ask questions on it. So let me ask you a question about oil and gas margins. You generated a little more than 10% margin in 2012, you talked about the Marcellus issues. But you generated close to 20% back in 2010, so could we see a pretty quick snap back here to those kinds of margins or do we need sort of the long haul to get better utilization and better margins within that space?

[Jose Ramon Mas:]

Andy, I think the long-haul margins are a little bit better than the margins that you can obtain in the shales in the midstream. So I think that what grow the 2010 margins was the predominant nature of long-haul work. So I think it's a balance. I think that we can, obviously, do a lot better than what we printed in 2012, a lot of it has to do with the losses in Marcellus. But even if you normalize for that, it's probably somewhere in between the normalized '12 margins and the margins that we obtained in '10. But if things go your way, the market tightens a little bit, getting back to 2010 levels is not out of the question.

[Andy Kaplowitz:]

Okay. That's great. And then for my other question, let me just ask you about your revenue guidance. I know that you tend to be conservative. You've got a big drop-off from renewables that we all know about. If I exclude the acquisitions that you made at the end of last year, you're probably looking at, what, something like 2% to 3% growth. So let me just ask you this, what end markets are you being more conservative in when you look at the revenue forecast for '13 and why?

[Jose Ramon Mas:]

Well, a, there's no question that when we look at power generation and industrial, it's the one where we have the least amount of visibility. So for guidance purposes, we've taken a $300 million reduction there. There's no question that, that can improve a lot if the wind market accelerates. So what we have assumed there is -- last year, there was a lot of uncertainty around the business because of the tax credit so, obviously, the tax credits got extended, which will have a very, very positive impact on that business. The question is how fast does it come back? And we've probably taken a very conservative approach and view as to when it comes back, so that could turn if the market accelerated. Quite frankly, in transmission, we've pretty much got our year in backlog. So to the extent that we win any type of work, whether it's small or large, that should have a positive impact on transmission. Our pipeline business with the addition of the acquisition, we've got it growing, maybe 15%, 20% organically. Again, with where we expect long haul to be, that could dramatically improve. Our wireless business can get better. So the truth is, we're not trying to sandbag the year by any stretch of the imagination. We think that if we deliver $4 billion with the kind of margins that we're talking about, we'd end up having a great 2013. But if some things go our way, we could obviously do a lot better.

[Operator:]

And we will hear next from Tahira Afzal with KeyBanc Capital Markets.

[Tahira Afzal:]

I guess, my first question is really in regards to the D&A increase and investments you are making. And I know, Jose, you've provided a bit more color around why you've been communicating confident on these markets. Could you talk a bit about whether you have received commitments that make you so positive? Was it just the macro? And then, were you filling up in terms of utilization with regards to the end of the year? Are these investments more so to really help you furnish the work you have recently booked or is it really in anticipation of the work that you think you could get? And I guess where I'm getting to with all that is, are you going to have to make more investments that are notable by the end of the year or is this going to take you through for the next couple of years?

[Jose Ramon Mas:]

So Tahira, you've got one question in with a lot of sub-questions. To answer the question. Look, I think that we are extremely bullish on the 2 businesses where we spend a lot of capital. So in transmission and pipelines, it's not about 2013. If it was about 2013, we wouldn't have made those commitments. It's where we're seeing this industry really start to gear up for what's going to happen in '14, '15 and '16. Again, like I said earlier in transmission, for all intents and purposes, the back -- we've got our revenue numbers in the backlog that we have and yet, it's a very active market. We're actually tracking, following, expect to bid projects over the next couple of years that correspond to more than 2,800 miles of transmission build, that's an enormous amount. We're obviously trying to gear up to get our fair share of that. So we're very, very bullish there. When we look at pipeline, the fact that Enbridge shows up as our third biggest customer in the fourth quarter is a very good sign for us. Enbridge has an enormous amount of work for the next few years. We've tended to be successful with the them, so we're very bullish as to what's going to happen in our pipeline business. Over the course of the last few years, we've rented a lot of equipment in that business to really manage through the peaks and valleys, as we haven't had great visibility for the long term, we tend to be more conservative. The fact is that we have better visibility today in that business than we've ever had. We're extremely bullish, we're spending money and we're going to gear ourselves up, not for the growth in '13, but for the growth we think we can achieve '14 and beyond. With that said, we think that to the levels that we've geared up, we're going to be able to show a lot of growth. I hope, Tahira, to be in a position where I'm back in Q4 talking about the need to buy more equipment, because it just means that our business is going to grow that much more. But the reality for us to spend significantly above the levels that we're talking about, we're going to have to see corresponding significant growth, which would be a good thing.

[Tahira Afzal:]

Got it. Okay. And a quick follow-up to that. Jose, I mean, in the past you've made acquisitions and hence, in a sense, bought capacity through acquisitions, and both have been accretive. The investments you're essentially making on the capital lease and CapEx side are near-term dilutive in a sense. Is that because the acquisition targets out there are also approaching capacity at this point and the multiples are going high? Is that -- did you sort of look at those options when you made these decisions?

[Jose Ramon Mas:]

The answer is yes, and I think it's important, when you think about that, to say they're not mutually exclusive. So the fact that we're doing this doesn't mean that we may make further acquisitions in the future to bolster our capacity. With that said, when our strategy around acquisitions, and I think we've been talking about this for a long time and I think it's a part of our success, is we work really hard at trying to organically grow the businesses that we buy. And this is an example of us investing our money because we've succeeded on our goal of growing those businesses organically. So the investments that we're making in those businesses are because we've done the right things in the business to put them in the -- to give them the opportunities and put them in the position to be successful, and now we're backing it up. So it's a great story.

[Operator:]

And we will move on next to Alex Rygiel with FBR.

[Alexander J. Rygiel:]

As it relates to a larger, large diameter pipeline projects, are we going to see them come into backlog or could they take the form of some different type of contract, or vehicle, such as maybe an MSA, and maybe not necessarily come into backlog as quick as maybe you're awarded them?

[Jose Ramon Mas:]

Both scenarios. So you'll see it come into backlog and there will be MSA-type long-haul opportunities as well, or MSA-like -- not really MSA, but in the form that you mentioned, which is your going to sign up with a customer and you're going to stay busy with them for a long time. It may not necessarily impact your backlog number, but we will have other projects that do improve the backlog numbers.

[Alexander J. Rygiel:]

And just to follow-up on that question. Do you think we're going to see any movement in that pipeline backlog figure in the first half of 2013 or is it more second half 2013? And also, as it relates to electrical transmission, do you think we can see some move in electrical transmission backlog in the first half of 2013 or should we be expecting the second half?

[Jose Ramon Mas:]

So as it relates to pipeline, you'll see it in both the first half and the second half. As it relates to transmission, I think you'll see it more in the second half.

[Operator:]

And moving on, we have a question from William Bremer with Maxim Group.

[William D. Bremer:]

So a great color on the call, a lot of good information. You know, Bob, you mentioned the gathering -- that pipeline now consists of gathering lines, midstream, long haul, in addition to the pumping station work you're doing for the southern portion of Keystone XL. Jose, Bob, what is your take on pipeline integrity and inspection services? Is this sort of an area there where CapEx could gravitate to going forward?

[Jose Ramon Mas:]

So there's no question. I think that federal regulation probably needs to bolster up a little bit to see it happen everywhere, but we're seeing it in pockets. So there's parts of the country that are a lot more active than others. It's a growing opportunity, one that we're involved in today, and we think will grow over time. From a revenue perspective, it doesn't move the needle like some of the other things that we're talking about, but it's definitely part of what we're doing. When Bob mentioned the segment breakout, he talked about how, in our communication segments, we do a little bit of gas distribution work and we actually do some gas integrity work in that business as well. So we've got a nice presence in the market, we think it's a growing opportunity. But quite frankly, when we talk about gathering, midstream, long-haul and facilities, that's where the real revenues are going to be generated, at least, for the foreseeable future.

[William D. Bremer:]

And it seems as though that the North America including Canada markets are very, very solid for you this year and possibly next. Can you give us a longer-term view on possible, say, international opportunities for you?

[Jose Ramon Mas:]

Well, we've got a lot of opportunities at home, which is where we're focused. There's no question that when we think about a number of our different businesses, Canada just offers us a ton of opportunity because of what's happening there. We tend to have a very favorable view of Mexico as well, especially as we look out longer term. So between our different businesses, we're going to be North America focused. But I think you'll see a growing presence in Canada and over time, a growing presence in Mexico.

[Operator:]

And we will hear next from Noelle Dilts with Stifel.

[Noelle C. Dilts:]

So when I look at the step-up in depreciation, $30 million step-up in depreciation, it just seems a little bit large relative to the step-up in CapEx. Is there -- can you just help me understand that? Is there something else beyond just the straight CapEx that we have to be thinking about here?

[Jose Ramon Mas:]

Yes. You have to think about capital leases. And if you look at our 10-K and you look at the change in capital leases, it went up, I think it was in the mid-40s in the fourth quarter. I think that will be probably the biggest jump. We'll probably have a little bit of a jump in '13, but that also led to the increase in depreciation. And we're all focused on 2013 as it relates to depreciation. But the reality is, in the fourth quarter of 2012, we also had a big step-up in depreciation. So we ended up beating EBITDA guidance by $7 million but yet, EPS was mostly in line and that had a lot to do with that depreciation number starting to hit us in Q4. We put the orders in for a lot of this equipment early in the quarter and again, we're ramping. So it has a lot to do with where we expect the markets to be, but it started affecting us in Q4. And if you kind of roll that in through '13 with a little bit of increase, that's where we get to the numbers that we're talking about for depreciation for '13.

[Noelle C. Dilts:]

Okay. And then your commentary on the Canadian market was pretty positive. Can you talk about how these capacity additions are weighted relative to Canada versus the U.S.?

[Jose Ramon Mas:]

As it relates to the depreciation increase that we've talked about and the capital leases that we've entered, it's almost all predominantly in the U.S.

[Operator:]

And moving on, we have a question from Veny Aleksandrov with FIG Partners.

[Veny Aleksandrov:]

Again, my question is on the pipeline business. You added some products, it's apparently the first business probably that's going to reach $1 billion. Do you have any appetite in terms of adding new areas domestically? I mean, are there -- probably, it has to be done through acquisitions. Is it something you're thinking about?

[Jose Ramon Mas:]

Well, I think we've got a great geographic footprint today. We serve all of the major shales. Obviously, in some, we have a lot more market share than others. I think, when you think about Bakken, I think it's a developing shale. I think it's far behind the other shales relative to pipeline infrastructure. And I think it's going to be a big growth shale in the future and I think we're well positioned there, it just hasn't really started. There are a number of other shale discoveries that people are starting to move into today, which we're participating in. So I don't think there's a major shale in North America that we're not involved in today.

[Veny Aleksandrov:]

Okay. And my follow-up question, the Sandy-related work. Are you seeing any indications, any contracts getting -- I know it's too early, I know it's probably down the road, but what's happening there?

[Jose Ramon Mas:]

So as it relates to Sandy, the business for us that was most impacted by it was our DIRECTV business. We've got a good chunk of territory that was affected. It was very disruptive for us early on in the process. Obviously, without power, there's not a lot of DIRECTV work you can do. So we had a little bit of disruption, it was offset by some of the repairs that we did there. So we kind of believe that, that was kind of a neutral event for us in the fourth quarter. As we look forward, we don't have a huge presence in that area across all of our different businesses. We do think, over time, there's going to be some nice opportunities related to the extension of gas -- of natural gas plants and stuff, but not a huge market for us. We'll keep an eye on it, there'll probably be some opportunities, but to be quite honest, it's not where we're most focused from a business development perspective.

[Operator:]

And our next question comes from Adam Thalhimer with BB&T Capital Markets.

[Adam R. Thalhimer:]

I wanted to ask a couple of questions about power gen. Jose, do the margins move up in 2013 even though the revenue is down? I mean, are the margins on gas plants better than they are on renewable plants?

[Jose Ramon Mas:]

So the answer is yes. The challenge with 2013 is the challenge of scale because, obviously, the business is reducing pretty significantly in size. If the wind market wasn't coming back, it's a different conversation than if the wind market was coming back. So we will probably hold on to some people and assets in that business because of the dramatic increase that we're going to expect in that business in late '13 or '14. So I think it'll be a challenge for us over the next couple of quarters from a margin perspective, just because we've got a lot of overhead relative to the revenue volumes that we'll be at. But we think that will turn as the year progresses, especially into '14. So we will see improving margins in that business in 2014. There's no question about it. Our margins in '14 will be better than our margins in '12, even with the growing amount of wind in '14 because I think, by that time, we would have diversified the business a little bit better. But we're kind of caught in a crossroad, where our power business isn't big enough yet and our wind business is somewhat slowing down for a short period of time, and that's going to create a little bit of margin pressure. But over time, we expect that to improve.

[Adam R. Thalhimer:]

Okay. That's really helpful. And then I wanted to ask about the outlook in oil and gas. I mean, if you assume that your oil and gas business is, let's say, a $1.1 billion, $1.2 billion business today with the acquisitions you made in Q4, I mean, where could that be in a full-blown mainline pipeline recovery?

[Jose Ramon Mas:]

A lot bigger. Obviously, for all intents and purposes, we hit a $1 billion when you include some of the gas work that's under our communications business, because it's gas work even though it doesn't fall in the same segment. With the acquisition that we made and the growth that we expect to have and the potential, our next target has got to be $2 billion.

[Operator:]

And we will hear next from Tristan Richardson with D.A. Davidson.

[Tristan Richardson:]

On the debt offering, I'm curious Bob, just generally, I know you said that any costs associated with the exchange would be -- it's not included in the guidance, but I'm sort of just curious on the timing and just the potential costs you're thinking about there, and I know that tenders expired in March. I'm just curious of your thoughts?

[Jose Ramon Mas:]

So Tristan, unfortunately, Federal Securities Law prevent us from discussing that matter at all in this call.

[Tristan Richardson:]

Okay. On then on the wind side, I know you said you're expecting a big ramp in 2014. Did you say that it could exceed levels that you guys saw in 2012?

[Jose Ramon Mas:]

We said it could approach levels but quite frankly, with the amount of activity that we've seen here recently, it could exceed levels as well.

[Tristan Richardson:]

Okay. And is it mostly just because 2013 is more just the early planning phases, because we didn't find out until so late that the extension had been -- the PTC had been renewed?

[Jose Ramon Mas:]

Well, there's a lot of doubt and question whether it was going to be renewed at all. So I think there was a lot of people out there who never thought it would get renewed, and then in it ended up getting renewed in fiscal cliff, which I don't think anybody expected either. I thought -- those that expected it to get renewed, expected it to be early in the session. So the fact that it got done in fiscal cliff, I think, caught almost everybody by surprise. And it had everybody now scrambling to figure out what they're going to do, which is why we feel -- we're seeing a ton of activity and we're very bullish, but we're not sure if it hits late '13 or early '14.

[Operator:]

And we will go to follow-up question from Noelle Dilts with Stifel.

[Noelle C. Dilts:]

I was wondering if you could provide us with an update on some of your large transmission projects? Just where they stand and particularly on Susquehanna to Roseland, when you kind of expect to really ramp up on that? Just an update on the big project work would be great.

[Jose Ramon Mas:]

Sure. So we're probably not going to get into the habit of specifically talking about a particular project on the call. With that said, if we ever had a problem on a project, we would probably talk about it because it would impact our financial results. I can say that all of our jobs are going well and are on schedule. We are already active on that project specifically and working, but really nothing to report in terms of anything outside of what we're expecting.

[Operator:]

And that concludes today's question-and-answer session. I would now like to turn the call back over to Jose Mas for any additional or closing remarks.

[Jose Ramon Mas:]

Well, again, thank you for joining us and participating today. We look forward to our first quarter 2013 call and being able to update you on any further developments. So thank you.

[Operator:]

And again, that concludes this call. We would like to thank everyone for their participation today.