MasTec, Inc.
Q2 2015 Earnings Call Transcript

Published: 18 Aug 2015

[Operator:]

Welcome to MasTec's Second Quarter 2015 Earnings Conference Call initially broadcast on August 18, 2015. Let me remind participants that today's call is being recorded. At this time, I would like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Please go ahead.

[J. Marc Lewis:]

Thanks, Eric. Good morning, everyone. And welcome to MasTec's second quarter 2015 earnings conference call. The following statement is made pursuant to the Safe Harbor for forward-looking statements 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 SEC. 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 be discussing continuing operations and adjusted financial metrics as discussed and reconciled in yesterday's press release and supporting schedules. In addition, we may make certain non-GAAP measures in this conference call. A reconciliation of any non-GAAP financial measure not reconciled in these comments to the most comparable GAAP financial measure can be found in our earnings release, our SEC filings, or in the Investors and News sections of our website located at mastec.com. Also note the comparisons to 2014 comparable numbers are made to the restated quarterly numbers as filed in our 2014 10-K filed on July 31. With us today, we have José Mas, our CEO; and George Pita, our CFO. The format of call will be opening remarks and analysis by José followed by a financial review from George. These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes. We have a lot of important things to talk about today, so let's go ahead. José?

[José Ramón Mas:]

Thank you, Marc. Good morning and welcome to MasTec's 2015 second quarter call. Today, I will be reviewing our second quarter results as well as providing my outlook for the markets we serve. Before getting started, I'd like to make some general comments around where the company stands today. There is no question that we have had our challenges since early in 2014. As a reminder, in 2014, our business was dramatically impacted by two major factors

[George L. Pita:]

Thank you, José, and good morning, everyone. Before I get started, I'd like to thank our MasTec staff members as well as our external auditors, BEO (12

[Operator:]

Thank you. And we'll take our first question from Matt Duncan with Stephens Investment.

[Matt Duncan:]

Hey, good morning, guys.

[José Ramón Mas:]

Good morning, Matt.

[Matt Duncan:]

So José, I want to start by talking about the issues in the Electrical segment. So if I'm hearing you guys correctly, it sounds like you're pretty confident that most of the issue there is really tied to the distraction from the accounting review. So can you talk a little bit more in detail about sort of how your people were distracted, what it did to your ability to win awards, and how quickly do you think you can get that segment sort of back on track?

[José Ramón Mas:]

Sure, Matt. There is no question in my mind that the entire segment was extremely involved in the investigation. Numerous people from all over the organization had to play a significant role during the investigation, which unquestionably took from their focus their time, their attention to the business, and I think it's reflected in the results of the business. I think that's behind us. There's no question that we've struggled on some jobs. We're hoping that as everybody refocuses on the business, things get better, life resumes to normal, jobs improve, and our win and our success rate going forward gets a lot better. We've got a lot of bids outstanding in that group right now. We feel really good about a couple of them. And it's hard to put into words the frustration that I know they felt, and they did a great job in getting through it. But no question, it was an enormous amount of time, effort and distraction for both them and the company as a whole.

[Matt Duncan:]

Okay. And then second question, I'll hop back in the queue. You sound extremely confident in the outlook for the business in 2016 on a number of fronts. The stock has obviously gotten pretty significantly beat up here and I understand there's obviously going to be some constraints on the balance sheet. But how are you guys thinking about the potential for repurchasing some stock here or are you guys personally stepping up and buying stock and sort of sending the message of how confident you are here in the business as we look out to next year?

[José Ramón Mas:]

We've always said we're going to be very opportunistic as it relates to buying back stock. Our position hasn't changed. We obviously bought back a considerable amount of stock earlier this year. It's definitely something that's on the table as is personal buying as well. So I think we're very bullish on the future. We're very bullish on what's going to happen. We're very disappointed as to where we stand this year. And I think, over the coming months, we'll demonstrate our confidence in the business going forward.

[Matt Duncan:]

Okay. Thanks.

[José Ramón Mas:]

Thank you.

[Operator:]

The next question is from Tahira Afzal with KeyBanc Capital Markets.

[Tahira Afzal:]

Good morning, José and team.

[José Ramón Mas:]

Good morning, Tahira. How are you?

[Tahira Afzal:]

I'm doing well. Thank you. I guess, first question is, since your last call, a couple of things have happened

[José Ramón Mas:]

Well, let's talk about margins for a second, right. I think that obviously, our margins this year are below our expectations. Again, we're disappointed with the results that we're going to deliver in 2015. Our business is really driven by utilization levels. And unfortunately, this year across a number of our businesses, utilization has been really low. Even our Oil & Gas business that we think is performing okay right now is very underutilized relative to what their opportunity and their potential is from a revenue output. I think that will take care of itself because I think the amount of demand in that industry for 2016-2017 and beyond is far beyond what we could have ever imagined a year ago. We're very excited. We think it's coming. We think it'll be demonstrated by backlog growth in the near future. And I don't think that's just a comment from us. I think that's a comment for the industry. I think that's going to be a fantastic industry for many years to come for lots of reasons. When we look at our Wireless business, obviously, we've invested heavily there. We think we've got the largest geographic presence. We think we're in a great position to take advantage of that market as it comes back. Bottom line is organic levels are down, north of 40% for the second quarter. We're having significant negative organic decline on a year-over-year basis. And we think that's going to turn. And the important part of that is even though we've had these massive organic declines, margins are still holding. They're better than they were last year. They're nowhere near where we want them to be or think they can be. But they're holding, and as that business comes back and revenue ticks up, we think it's going to have a significant impact on margins on a go-forward basis. And we think that's a very important part of our story in 2016. So again, Oil & Gas is going to drive the business just because of what we believe is going to be phenomenal revenue growth. I think our Wireless business is going to come back strong with the associated margins. Our Wireline business and everything associated with gigabit, whether it's electric distribution, fiber deployment, that business is going to be fantastic for time to come. I think on a year-over-year basis, our comps in Electrical Transmission are going to be obviously very low. And I think we'll get that business back on track. Power Gen is very doing well. So we're very excited about 2016 what it brings to us. The AT&T and DIRECTV merger is something that we think we've got a great opportunity to, at a minimum, maintain our business. We think there's some solid growth opportunities that hopefully we'll be able to talk about as time goes on. But we're excited. It's unfortunate the year that we're having, it's unfortunate the last 18 months that we've had as a business, but I think it's about to turn and turn in a very positive way.

[Tahira Afzal:]

Got it. Thank you. Then, I guess, follow up to that, if I look back 2013 was a year when you had Oil & Gas really hit on all cylinders. And it seems you were excited you could potentially beat that. At that point, you had operating margins of 7%. As I look into next year, is there any reason why you couldn't reach those other than just execution and weather?

[José Ramón Mas:]

We should absolutely reach that. And I think revenues will far exceed 2013 levels.

[Tahira Afzal:]

Thank you very much.

[José Ramón Mas:]

Thank you, Tahira.

[Operator:]

Our next question is from Dan Mannes with Avondale Partners.

[Daniel Mannes:]

(38

[José Ramón Mas:]

Good morning. Dan.

[Daniel Mannes:]

So I was wondering if you could help me a little bit. Obviously, you've spent a lot of time talking about the second quarter. But when you look at your secondhalf guidance, it looks like relative to the previous guidance, there's maybe in the range of $60 million of lower EBITDA. Now, obviously the Electric business will be a piece of that. But can you maybe walk us through what's changed in your secondhalf view relative to maybe the last time you gave guidance? Because I'm having a little bit of trouble bridging that.

[José Ramón Mas:]

Sure. So I think if you take that $60 million, and let's just use that as a number for now, about half of that is the Electric Transmission business. So the roughly $60 million goes to $30 million. We expect probably a couple of hundred million lighter in activity than what we initially thought with a lot of that being in Wireless, so there's an associated margin that goes with that that obviously takes off that as well. And then I think we've got some – I think those two are the big buckets, and then everything else is relatively small in comparison to the differences for the second half of the year. Those are the two big drivers.

[Daniel Mannes:]

Got it. And then the other thing I was going to ask, on the Electric side, given some of these challenges, and I know you said you don't have any projects going to loss, but certainly you've seen some margin fade. Any thoughts on – Idon't want to say retrenching, but looking maybe about bidding policy, things like that, are there changes you can make fundamentally to the business? Or do you think you were running it fine before, this is just bad luck?

[José Ramón Mas:]

Well, I think we've done a great job in that business over many years of really building that business on an organic basis. As you recall, we made one major acquisition there years back. We've dramatically grown that business organically for a significant period of time. I think we've had a little bit of a perfect storm hit us in terms of a couple of projects that either were pushed out into 2016, a couple of projects we didn't win, and then having a business that significant amount of its time and focus was involved in something that did nothing to benefit the business. From things as simple as rightsizing the business as the business was shrinking, we were very constrained on what we were able to do in the business because of the Audit Committee investigation. So I think that even managing the business on a day-to-day basis became very challenging with a lot of outside forces influencing that. I think that's gone, and I think it allows us to go back into that business, make the necessary changes, again, refocus on what we're doing and hopefully improve it very quickly.

[Daniel Mannes:]

Got it. Thank you.

[José Ramón Mas:]

Thanks, Dan.

[Operator:]

The next question is from John Rogers with D.A. Davidson.

[John Bergstrom Rogers:]

Hi. Good morning.

[José Ramón Mas:]

Good morning, John.

[John Bergstrom Rogers:]

Could you talk a little bit more about the pipeline projects that you're looking at, or that you've already booked in the third quarter? And specifically, George, you mentioned it looks like you're going to be making about an $84 million equity investment there. Is that foregone profits that you're donating in there? I mean, are these cash-positive contracts? I just want to understand that a little bit better and any risks associated with this work as an equity investment as opposed to traditional relationships.

[José Ramón Mas:]

We talked extensively about this on one of our last calls and the entire equity contribution relates to two projects that we were awarded in as a consortium member and an RFP process. Both of the projects are in the U.S., and they're basically pipelines to transport gas from the U.S. to Mexico for CFE. We think that the projects from a return on equity investment are extremely attractive. We've got some incredible partners in that consortium. We decided to invest equity in that deal on a standalone basis irrespective of the construction. The construction we're going to perform at typical margins, and really it's an added benefit of being able to invest in the project. The project will have billions of dollars of free cash flow over its life. It's an initial term of 25 years with an extension beyond that. The project will be 80%, 85% financed from the outside, the rest of it will be equity, which is the equity contribution we're making. We'll own a third of that consortium and, again, it's a fantastic project. It's a fantastic return on our equity and something that quite frankly if we get the opportunity to do in the future, we're going to look very closely at.

[John Bergstrom Rogers:]

Okay. Thanks for that, José. And then the second question I had was, given that you're through the audit review and some of the issues, have you changed your thoughts on either acquisitions or divestitures of any operations? I mean, did you think about your portfolio of businesses?

[José Ramón Mas:]

Look, we evaluate our portfolio of businesses all the time. I think that when we look across all of our different segments today, we're very satisfied with the segments we're in. We think each of those segments afford us the opportunity for significant growth over a long period of time. Quite frankly, irrespective of the issues we've had in our Transmission business, we're very bullish on that industry, on where the industry is headed, on the amount of capital that's flowing into that industry, the amount and size of projects on a go-forward basis. So our outlook on that business hasn't changed at all. We have looked at our internal processes. We have looked at how we're bidding large projects, at how we're tracking large projects. So I think we've made some necessary and appropriate changes to ensure that we're never in this position again on a go-forward basis. But our outlook on the industry and on being in the business has not changed.

[John Bergstrom Rogers:]

Okay. Thanks, José. Congratulations on getting through this.

[Operator:]

Our next question is from William Bremer with Maxim Group.

[William Bremer:]

Good morning, José. Good morning, George.

[José Ramón Mas:]

Good morning, Bill.

[William Bremer:]

Could we just go into a little bit of the current pricing of the bookings per segment, and how the pricing at this time is going into each segment?

[José Ramón Mas:]

Well, I think when you look at Oil & Gas, I think pricing in oil and gas market is actually quite strong. I think the market was slow in early 2014. I think it improved towards the back half of 2014 and I think it's actually stayed pretty solid. Obviously, you have pockets where things become more competitive. Some of the shorter-term work is more competitive because people are trying to stay busy in anticipation of what's expected to be a very active future. When you look at our Communications business, obviously, there's a lot going on there and we've got multiple segments on the Wireline business. I think you're going to see price escalation continue. The wireless market has obviously – it's having a difficult year relative to the overall industry. So again, from a short-term basis, I think you see margin pressure. On a longer-term basis, I don't think there's significant margin pressure. Our Power Gen business is improving and I think pricing there and pricing potential there is getting stronger. And in Transmission, again, you've got some short-term projects that I think have more of a margin drag than – or more margin dynamics than you do on long-term project. So again, as we look forward, I don't think margins and pricing's an issue in the industry. Quite frankly, in most of those industries, I see pricing getting a lot better in the short term.

[William Bremer:]

Okay. My follow-up is on the pipeline arena, the very large amounts of projects that are not in backlog right now. And more importantly, potentially performing some work in-country in Mexico. Can you just speak on those two, please?

[José Ramón Mas:]

Well, what we've said today is we signed the deal with the consortium to build the pipeline in the U.S., which is obviously a significant size, over 300 miles of 42-inch pipe. That's a very sizable job that will go into backlog in the third quarter. Also since quarter-end, we've been awarded over $1 billion of U.S. pipeline work, which I'm sure some of it will go in backlog in Q3, and some of it will go in backlog in Q4. But it'll obviously be a significant increase to our current backlog. There's a lot more out there. There's a lot. It's a very, very active market today. I think when all is said and done, we're going to be very, very full towards the end of the year as it relates to 2016. I think we're going to have significant 2017 bookings already in hands (47

[William Bremer:]

Great. Thank you.

[José Ramón Mas:]

Thank you, Bill.

[Operator:]

The next question is from Vishal Shah with Deutsche Bank.

[Chad Dillard:]

Hi. This is Chad Dillard on for Vishal.

[José Ramón Mas:]

Hey, good morning.

[Chad Dillard:]

Good morning. So, I just wanted to go back to the Electrical Transmission segment. So, if you back out the underperforming projects, can you talk about what the margins would look like? And then also I know you mentioned that one of those projects would be rolling off in September, but I just want to get a sense for the other ones just in terms of timing for project roll off?

[José Ramón Mas:]

Well, I think to (48

[Chad Dillard:]

Okay. And then so it seems like you see some pretty positive opportunity over the near term in Oil & Gas, but may take a little bit to get Electrical Transmission back towards growing backlog. So my question is like what sort of flexibility do you have to shift resources from one segment to another just to improve that utilization?

[José Ramón Mas:]

Well, I think when you look at Transmission and Oil & Gas they're obviously different. We've got – I don't know that they're fully transferrable from one end – from one segment to the other. At the end of the day, we're going to right size our Electrical Transmission business to the business they have. We've been working very hard at positioning ourselves to take advantage of the growth in the Oil & Gas market. We've been hiring people, we've been hiring key superintendents. We bought a lot of equipment over the last couple of years and we think we're very well poised and ready for what we think is going to be a significant growth in that market and our ability to execute on that.

[Chad Dillard:]

Okay. Thank you.

[Operator:]

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

[Adam Robert Thalhimer:]

Hey. Good morning, guys.

[José Ramón Mas:]

Good morning, Adam.

[Adam Robert Thalhimer:]

Hey, José, in the Oil & Gas business, I mean I guess there will be this year with oil and gas prices down and production starting to flatten out. Well given that backdrop, I mean why – what really drives strong pipeline spend in the next few years?

[José Ramón Mas:]

Well, it's specific projects, right? So I think you've got a dozen extremely large pipelines that are all, in my opinion, going to get built. There are very specific reasons why each of those projects are going to get built. We're not going to get obviously all of those. But I think as an industry, there's an enormous amount of work that, I think, many will benefit from. I think you're seeing a lot of those pipelines currently being awarded, being divvied out to multiple contractors, so I think the backlog building season for contractors in general is going to be very strong. Some work starts in late 2015. A lot of work starts in early 2016. I think we've been tracking those projects. I think the majority of those projects are going forward. Pipes been bought, right of way has been procured. Some final permits are waiting, and then you're going to see an enormous amount of activity. So, we feel very strong about what's happening and we think that goes well into 2017 and 2018 regardless of where oil prices are. Again, we're working on a significant number of projects that have nothing to do with oil that obviously are gas related with the price of where gas is added, say, it's a very cheap natural resources that I think they're figuring out ways at how to ultimately use that and benefit from that. And I think a lot of projects that you're seeing are based on that.

[Adam Robert Thalhimer:]

Okay. Good. And then the Fiber business, how does that works? Are you seeing chunks of work to bid on or is that more a situation where you need to go out and procure more MSAs?

[José Ramón Mas:]

Well, I think you have two natures to the business. You have a lot of incumbents that are working. You've got obviously new entrants. I think from an incumbent perspective, obviously having MSAs is beneficial because you get the opportunity to be there in that market working. There are a lot of MSAs currently going out specifically or contracts going out specifically for gigabit work, and we're participating in those and think we're going to get our fair share of that. So, it's a very exciting market, one that we think there's going to be tremendous growth for years to come. Obviously, we got our foot in that earlier this year. The work that we have quite frankly doesn't really ramp in any significant way until 2016 that we currently have in backlog, and with a lot of other opportunities that we're looking at, we feel good about our ability to continue to grow that at a nice clip.

[Adam Robert Thalhimer:]

Okay. Thanks, José.

[José Ramón Mas:]

Thanks, Adam.

[Operator:]

It appears there are no further questions at this time. Mr. Mas, I'd like to turn the conference back to you for any additional or closing remarks.

[José Ramón Mas:]

Sure. I'd like to thank everybody for participating on today's call and for their interest in MasTec. And I look forward to updating everybody on our third quarter call. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation.