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Edited Transcript of MTZ earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 MasTec Inc Earnings Call

CORAL GABLES Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of MasTec Inc earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* George L. Pita

MasTec, Inc. - Executive VP & CFO

* J. Marc Lewis

MasTec, Inc. - VP of IR

* José Ramon Mas

MasTec, Inc. - CEO & Director

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Conference Call Participants

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* Adam Robert Thalhimer

Thompson, Davis & Company, Inc., Research Division - Director of Research

* Alexander John Rygiel

B. Riley FBR, Inc., Research Division - Analyst

* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Andrew John Wittmann

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Chad Dillard

Deutsche Bank AG, Research Division - Research Associate

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Noelle Christine Dilts

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Steven Fisher

UBS Investment Bank, Research Division - Executive Director and Senior Analyst

* Tahira Afzal

KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst

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Presentation

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Operator [1]

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Welcome to MasTec's Second Quarter 2019 Earnings Conference Call, initially broadcast on August 2, 2019. 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. Marc?

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J. Marc Lewis, MasTec, Inc. - VP of IR [2]

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Thanks, Savannah. Good morning, everyone. Welcome to MasTec's Second Quarter 2019 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 does not undertake 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 actually differ significantly from results expressed or implied in these communications.

In today's remarks by management, we'll 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 press release, our 10-Q or posted in the PowerPoint presentation located in Investors and News sections of our website located at mastec.com.

With us today, we have José Mas, our CEO; and George Pita, our Executive Vice President and CFO. The format of the call will be opening remarks and announcements by José, followed by a financial review from George. These discussions will be followed by a question-and-answer period, and we expect the call to last for about 60 minutes.

We had another great quarter and have a lot of important things to talk about today, so I'll turn the call over to José. José?

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José Ramon Mas, MasTec, Inc. - CEO & Director [3]

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Thanks, Marc. Good morning and welcome to MasTec's 2019 Second Quarter Call. Today, I'll be reviewing our second quarter results as well as providing my outlook for the markets we serve.

First, some second quarter highlights. Revenue for the quarter was $1.939 billion, a 20% increase versus last year's second quarter. Adjusted EBITDA was $241 million, a 26% increase versus last year's second quarter. Adjusted earnings per share was $1.60, a 54% increase versus last year's second quarter. Cash flow from operations was roughly $400 million, and backlog at quarter end was $7.8 billion. In summary, we had another excellent quarter.

For me, the most exciting thing about this quarter is that it could have been even better and more importantly, what this quarter says about our future. While our Oil and Gas segment had another very strong quarter, our Power Generation and Transmission segments performed above expectations. We are very excited about our prospects in both of those segments and expect them to continue to grow in both revenues and earnings. We believe those 2 segments have considerable growth opportunities and will be a much larger portion of MasTec's revenue over time.

We're also very excited about opportunities in the Communications segment. In 2015, we spoke a lot about our expected growth in the pipeline market and the significant investments we were making to prepare ourselves to be a market leader in that segment for years to come. What we are doing today in Communications is reminiscent of that exact opportunity. Today, we are investing in people, equipment and relationships to take advantage of what we believe will be a significant increase in work activity related to the deployment of 5G.

While we would obviously love to see growth in revenues and earnings faster, our wireline and wireless business continues to consistently grow at double-digit rates, and we expect that rate to continue to accelerate in 2020. We also believe the investments we are making today will allow us to increase our margin profile as the opportunity plays out. Our investments today in Communications are negatively impacting margins, and we believe this is a sound investment that will pay off in 2020 and beyond. We are very excited about the future earnings capability of our company.

Now I'd like to cover some industry specifics. Our Communication revenue for the quarter was $653 million versus $619 million last year. The increase in revenues was driven by strong double-digit growth in our wireline and wireless business, offset by a 27% decline in our installation and fulfillment business. We expect continued growth in both our wireline and wireless markets in the second half with continued weakness in our fulfillment and installation business.

The last few months have been very active as it relates to the marketplace and 5G. Wireline backhaul service continues to expand, and we are seeing both incumbent and new carriers increase their long-term build plans.

As it relates to wireless, the recent T-Mobile/Sprint announcements, coupled with the aggressive move by DISH Network to create a fourth large wireless company, bodes well for MasTec and our industry. There will be a significant investment by both players as their strategy and network architecture evolves and changes.

We believe we are in the very early stages of what will be a significant investment related to 5G from both the wireline carriers supporting backhaul services and the wireless carriers creating a more robust and denser network. We believe it's important to note that our service offering to both our wireline and wireless customers continues to expand and diversify. We are engaging with our customers earlier and engaging in more value-added services. Today, our services include design review, engineering, site acquisition, lease negotiations, permitting, material procurement, warehousing, kitting, structural reinforcement, fiber build-out, power coordination and provisioning, tower construction, antenna installation, tower wiring and splicing, integration, commissioning and active construction, we offer full maintenance of the network.

We've worked hard diversifying our customer base in this segment and are happy to report that Verizon has now been a top 5 customer for 4 consecutive quarters. We believe we are well positioned in this market as the leading wireless infrastructure provider with significant opportunities for long-term growth. While we expect continued growth during the balance of 2019, our true opportunity is to position ourselves for 2020 and beyond where we believe the opportunity will be substantially greater.

Moving to our Power Generation and Industrial segment. Revenue was $250 million for the second quarter versus $146 million in the prior year, an increase of 71%. I'd like to congratulate our management team in this segment. In 2017, this segment generated $299 million of revenue for the full year. This past quarter, they almost matched full year 2017 revenues. We expect growth to continue in the second half of 2019 and be up about 30% from the first half of '19.

While backlog was down slightly sequentially, we have several projects we anticipate being awarded in the coming months. And we expect to end 2019 with record levels of backlog in the segment, setting us up for another strong growth in 2020. This quarter, we saw strong award growth in the solar markets, and we were awarded our first 48- and 54-inch water main lines.

I'd like to highlight our diversification within this segment. Our 2019 revenue estimates are comprised of wind farm construction, turbine repowering projects and maintenance, utility-scale solar construction, compressor station work, civil construction, vertical specialty construction, gas-fired peaker plants and biomass facilities.

Revenue in our Electrical Transmission business was $100 million versus $85 million in last year's second quarter. Backlog was up 20% sequentially and does not include projects awarded but not yet signed. Our backlog includes EPC projects which will not generate significant revenue in 2019 as we perform a lot of the front-end work, but revenue should substantially increase in 2020 as these projects go into the construction phase. Our expectation is that 2019 will be a better year than 2018, but we should see significant financial improvements in both revenues and margins in 2020 based on our current backlog and expected awards. We are encouraged by what we believe is a growing and improving market. We are seeing a greater number of opportunities and feel we are well positioned to excel in this market.

Our Oil & Gas pipeline segment had revenues of $937 million for the second quarter compared to revenues of $769 million in last year's second quarter. Backlog was up 14% year-over-year and flattish sequentially. We also have several projects, some very large, that have been verbally awarded and are not in backlog. We are in the final stages of documentation and expect those projects to be added to backlog in the coming quarters.

Demand for our Oil & Gas segment services include pipeline construction, integrity work, large-diameter horizontal drilling, distribution, booster stations, meter stations and compressor station. Demand continues to grow. As we look ahead into 2020, we have now significantly committed our capacity to our customers with a number of projects going into 2021. We are actively working with our customers on their future needs, and we continue to have very strong visibility for multiple years out.

To recap, we've had a great first half of 2019. Our backlog is strong, and more importantly, our outlook is excellent as we are enjoying growth opportunities across all of our segments. In fact, our customers seem more bullish and are actively engaging in conversations about long-term planning and resource management. While we expect 2019 to be another record year of financial performance, we are most encouraged about the opportunities we see to continue to grow our business for many years.

I'd like to take this opportunity to thank the men and women of MasTec for their commitment to safety, their hard work and their sacrifice. Our people are our most important asset, and it's because of their performance that I'm so excited and bullish about our future.

I'll now turn the call over to Bob -- to George for our financial review. George?

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George L. Pita, MasTec, Inc. - Executive VP & CFO [4]

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Thanks, José. Good morning, everyone. Today, I'll cover second quarter financial results, including cash flow, liquidity and capital structure as well as our increased guidance expectation for 2019. As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. Reconciliation and details of non-GAAP measures can be found on our press release, on our website or in our SEC filings.

Here are a few highlights regarding our second quarter 2019 performance. In summary, we had better-than-expected second quarter 2019 results across all measures, and this strong momentum is affording us the opportunity to raise our 2019 guidance expectation to new record levels.

On the balance sheet side, we had record second quarter cash flow from operations and $287 million in net debt reduction from ordinary course cash collections. We ended the second quarter with our days sales outstanding net of BIEC, or DSOs, at 77 days, a normal level within the targeted range for our business. And we continue to expect record cash flow from operations for the annual 2019 period.

On the income statement side, second quarter revenue, adjusted EBITDA and adjusted diluted earnings per share all significantly exceeded our expectation. Second quarter 2019 revenue of $1.94 billion increased 20% from last year's level with growth in all segments. Second quarter revenue exceeded our expectation by approximately $140 million. Second quarter 2019 adjusted EBITDA was approximately $241 million or 12.4% of revenue, representing the largest second quarter adjusted EBITDA level in MasTec history. This performance level exceeded second quarter 2018 levels by approximately $50 million or 26%. Adjusted EBITDA also exceeded our expectation by approximately $41 million, and adjusted EBITDA margin rate of 12.4% of revenue exceeded our expectation by 130 basis points.

Second quarter 2019 adjusted diluted earnings per share were $1.60, a 54% increase compared to $1.04 per diluted share last year. Second quarter adjusted diluted earnings per share exceeded our expectation by $0.49.

In summary, our strong second quarter 2019 performance and business strengths allow us to increase our annual 2019 guidance expectation to new record levels with a $100 million increase in annual 2019 revenue to $7.7 billion, a $41 million increase in adjusted EBITDA to $836 million and a $0.49 per diluted share increase in adjusted earnings to $5.04 per diluted share.

Now I will cover a summary of second quarter segment performance. Second quarter 2019 Oil and Gas segment revenue increased approximately 22% compared to the same period last year to approximately $937 million. Second quarter 2019 Oil and Gas segment adjusted EBITDA margin rate was 19.1%, a 320 basis point improvement over the 15.9% reported in the second quarter of 2018. This performance was better than anticipated due to project productivity on numerous small pipeline projects.

It's important to note that this marks the fourth consecutive quarter of Oil and Gas segment adjusted EBITDA margin rate performance approximating 15% or better. And on a trailing 12-month basis, our Oil and Gas segment adjusted EBITDA margin rate performance is approximately 16.5% of revenue. Given the continued strength of this market, we now expect our annual 2019 Oil and Gas segment adjusted EBITDA margin rate will approximate our trailing 12-month performance in the high 16% to low 17% range.

Second quarter 2019 Communications segment revenue increased approximately 5.5% compared to the same period last year to approximately $653 million. Second quarter 2019 adjusted EBITDA margin rate was 8% of revenue, a sequential improvement of 60 basis points compared to the first quarter of 2019. As José already highlighted, second quarter Communications segment revenue trends are characterized by strong double-digit growth in wireless and wireline fiber services, partially offset by higher-than-expected decreases in install-to-the-home services. Our second quarter 2019 Communications segment adjusted EBITDA margin rate performance continues to reflect previously communicated ramp-up costs related to fiber project start-up costs and crew capacity initiatives.

We expect that second half 2019 Communications segment performance levels will improve, with revenue expected to grow over first half 2019 levels in the low double-digit range and second half 2019 adjusted EBITDA margin rate levels in the low 9% range.

In summary, we continue to invest in Communications segment capacity growth in 2019 in order to maximize our future potential. And we expect 2020 to show strong annual revenue, adjusted EBITDA dollar and adjusted EBITDA margin rate improvement when compared to 2019's levels.

Second quarter 2019 Electrical Transmission segment revenue increased 18.9% compared to the same period last year to approximately $100 million. Adjusted EBITDA margin rate was 8.6% of revenue, slightly above our annual 2019 expectation for this segment in the low to mid-single-digit range. Importantly, this segment's second quarter backlog grew by approximately 20%. And we continue to experience active transmission project bidding activity that we expect will set this segment up for a sizable growth opportunity in 2020.

Second quarter 2019 Power Generation and Industrial segment revenue increased approximately 71% to $250 million. Second quarter 2019 adjusted EBITDA margin rate was 3.5% of revenue, which includes some weather inefficiencies and closeout costs on a few projects that were substantially completed during the quarter. We expect second half 2019 year-over-year revenue growth to range in the 40% to 50% range, with second half 2019 adjusted EBITDA margin rate improving over the first half of 2019's levels to the mid-single-digit range.

Second quarter 2019 corporate adjusted EBITDA was a cost of $15 million compared to $18 million in costs during the second quarter of 2018. Second quarter 2019 corporate results include 2 notable pipe transactions with approximately $29 million in earn-out expense, partially offset by approximately $25 million in recovery of legal costs and other income from a second quarter arbitration award related to a Canadian acquisition several years ago.

As disclosed in our 10-Q filing, while we are in active pursuit to collect additional amounts due under this award, the success of those efforts is unknown, and therefore, we have not reflected additional collections in either our current results or 2019 guidance expectation. As these collection efforts are currently underway, our commentary regarding this matter will be limited.

Now I will discuss a summary of our top 10 largest customers for the second quarter 2019 period as a percentage of revenue. AT&T revenue derived from wireless and wireline fiber services was approximately 14%, and install-to-the-home services were approximately 4%. On a combined basis, these 3 separate service offerings totaled approximately 18% of our total revenue. It's important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within that organization, giving us diversification within that corporate universe.

EQT Corporation was 12% and Energy Transfer affiliates was 8%, and this consisted of multiple projects. Phillips 66 affiliates was 6%. Verizon Communications was 5%, reflecting both wireline and wireless services. Kinder Morgan was 4%. And the Southern Company, Duke Energy, Iberdrola Group and EPIC Pipeline were each at 3% of revenue.

At second quarter end 2019, our 18-month backlog was approximately $7.8 billion, a slight increase compared to the same period last year. Notable backlog activity during the second quarter includes a 20% sequential increase in Electrical Transmission segment backlog; a slight decrease in Communications segment backlog, reflecting a decrease in install-to-the-home services; and approximately $900 million in new quarterly Oil and Gas segment bookings, which does not reflect large pipeline project award activity after quarter end that José referred to in his remarks.

Remember, as we've indicated for years, quarterly backlog amounts tend to be lumpy as large contracts burn off each quarter and new large contract awards only come into backlog at a single point in time. That said, our backlog performance and trends support our optimism regarding the strength of our end markets with multiple -- sizable and multiple multiyear growth opportunities.

Now I will cover our cash flow, liquidity and capital structure. As we have previously noted, our long-term capital structure is solid with low rates and no near-term maturities. We ended our second quarter with net debt, defined as total debt less cash, at approximately $1.3 billion, a $287 million reduction compared to the first quarter of 2019; and a book leverage ratio, defined as net debt divided by trailing 12-month adjusted EBITDA, of 1.6x. We also had ample liquidity of over $700 million.

In summary, our capital structure allows us significant flexibility to invest in efforts to maximize shareholder value.

We reported record second quarter 2019 cash flow from operations of approximately $400 million, which reflected normal ordinary course cash collection activity, as indicated during our last conference call. During the second quarter, our DSOs normalized back within our targeted range and ended at 77 days. We continue to expect that our future DSOs will fall within our target range of mid- to high 70s to low 80s. We also continue to expect that annual 2019 cash flow from operations will reach a new record level in excess of the $530 million reported in 2018, with 2019 free cash flow, defined as cash flow from operations less net CapEx, in excess of adjusted net income.

Assuming no further acquisitions or share repurchase activity during the second half of 2019, we expect to end the year with approximately $1.2 billion of net debt, ample liquidity and approximately $850 million and a book leverage ratio of approximately 1.4x.

Regarding our cash flow profile, allow me to take a step back and review our performance over the trailing 18-month period covering all of 2018 and the first half of 2019. During this period, we supported the working capital requirements associated with significant revenue growth and still generated $881 million in cumulative cash flow from operations. During this period, our DSOs started at 81 days and ended at 77 days, well within our target range and representative of ordinary course levels. Also during this 18-month period, we invested over 600 -- $460 million in strategic M&A and share repurchase activity and yet still managed to reduce our book leverage from 2x to 1.6x today. We believe these longer-term historical measurements highlight the strength of our ordinary course cash flow generation ability.

Given our strong cash flow profile and expectations, I would like to reiterate our views on capital usage priorities, namely, we continually evaluate the expected investment return associated with acquisitions and other strategic initiatives to grow our operations as well as share repurchase opportunities. And as a reminder, we currently have approximately $129 million in remaining share repurchase authorizations.

Regarding our spending on equipment. During the second quarter of 2019, we purchased approximately $12 million in net cash CapEx, defined as cash CapEx net of equipment disposals, and we incurred an additional $70 million in equipment under finance leases. We expect that for the full year 2019 period, we will acquire approximately $80 million in net cash CapEx and also expect to incur approximately $180 million in equipment under finance leases.

Moving to our current 2019 guidance. We are increasing our full year 2019 revenue expectation by $100 million to $7.7 billion. We are increasing our full year 2019 adjusted EBITDA by $41 million to $836 million and raising adjusted diluted earnings per share by $0.49 to $5.04. All of these metrics represent new record levels for MasTec.

We currently estimate third quarter 2019 revenue at $2.15 billion with adjusted EBITDA of $246 million or 11.4% of revenue and adjusted diluted earnings at $1.62 per diluted share.

Relative to some additional details for modeling purposes of our guidance, we expect second half 2019 diluted share count to approximate 75.9 million shares, with full year 2019 weighted average diluted share count approximating 75.8 million shares. We expect second half interest expense will approximate $42 million and that annual 2019 interest expense will approximate $81 million, with this estimate reflecting first half 2019 activity, including a $5 million interest cost reimbursement received during the second quarter of 2019 from a previously described arbitration award.

We anticipate full year 2019 depreciation and amortization expense will approximate 3.1% of annual revenue. And lastly, we anticipate that our full year 2019 adjusted income tax rate will approximate 25.7%.

In summary, we had a great first half of 2019 and are pleased to be in position to raise our 2019 full year guidance expectation. As importantly, we strongly believe in the future growth opportunities our markets afford us as multiyear infrastructure initiatives expand and accelerate in 2019 and beyond.

That concludes our prepared remarks. We'll now turn the call back to the operator for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Jamie Cook with Crédit Suisse.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [2]

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Congratulations on a nice quarter. I guess my first question, José, on the Oil and Gas business, the margins obviously have been much better than people expected. You talked about some awards you won post the quarter close. So how do we think about backlog as you sort of exit 2019 in Oil and Gas? And what's the margin trajectory given what we've seen so far and just the tightness in the market?

And then my second question, I guess, I would say is on the Communications side. Obviously, long-term fundamentals look very positive there. The margins have been a little lower this year because of investments. So how do we think about that investment unwind in 2020? Or will that continue to be -- weigh down the margins a bit?

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José Ramon Mas, MasTec, Inc. - CEO & Director [3]

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Sure. So on the Oil and Gas side, I think we've been outperforming for a series of quarters. And George alluded to the fact that we're kind of upping our full year margin guidance. If you look at the first half margins this year, we're at about 18.4%. If you take the implied guidance, we're talking about having a full year of -- in the 16%, 17% range. So as we think about second half, what really drives that is the percentage of work that we're doing in cost-plus versus the other type of work that we're doing. We expect margin profiles to hold steady. We think the only thing that will really move that is what percentage of cost-plus work we're doing at any given time, which is slightly less margin. So if you think about second half, the upside for us is can we -- how much does cost-plus bring. We've taken conservative views on that in the second half. So if we have upside in the second half, the year is probably going to be an outperformance of Oil and Gas margins. But more importantly, the question, I think, when you think about 2020 and 2021, we think we're going to be able to deliver on the same type of margin profile. The business is good...

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [4]

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That's 2019?

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José Ramon Mas, MasTec, Inc. - CEO & Director [5]

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That's 2019. Yes.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [6]

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Okay. And what's the revenue trajectory when we think of 2020 just given how strong the growth has been?

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José Ramon Mas, MasTec, Inc. - CEO & Director [7]

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Look, we're not ready to guide for 2020 yet. I don't think you're going to see a significant reduction in revenues next year. But I think it's kind of early right now. We talked about being somewhat fully committed for 2020. A lot happens between now and then. So things change, things get better, some projects get delayed. So it's too early for us to guide for 2020. But generally speaking, it's shaping up to be another great year with a similar margin profile as what we're experiencing in 2019.

For your Communications question, I mean, obviously, if you go back the last few years, we've been trending anywhere from 10% to 12% from a Communication margin profile. We know that we have a couple hundred basis points of margin improvement that we think we're going to realize in the near term as early as 2020. So our expectation is margins are going to improve in 2020. We think we're making all the investments today to make that happen. We believe that during this cycle, we have a chance of hitting peak margins from a historical level, not in 2020 but over -- throughout the cycle. And we think we're well positioned. And again, we would all love to see it come sooner, but I think when you look at what's happening from a macro perspective, it's coming. And we have to be patient. We have to make the right investments, and then I think we'll benefit from it.

I said this in the prepared remarks, and I really believe it, I feel -- we talked a lot about in 2015 as to what we thought what was going to happen in the pipeline market. We've executed there. I think the results speak for themselves. And I think it's very reminiscent of what's happening today in Communications. I think we're putting ourself in a position to be a market leader and to excel in this market for a very long time.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [8]

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Great. George, nice job on free cash flow.

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Operator [9]

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And our next question will come from Tahira Afzal with KeyBanc.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [10]

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José, congratulations on a phenomenal quarter. José, I mean, given you've got -- you're appropriately assuming maybe flattish scenario for pipeline next year, do you think you can still, on aggregate, grow EBITDA next year nicely from all the other segments? I assume again based on all the bottoms-up and commentary you've provided but would love to get a sense of that.

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José Ramon Mas, MasTec, Inc. - CEO & Director [11]

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Look, I think if you do the math, we think we can grow EBITDA even if Oil and Gas shrinks. Communications is going to be better in 2020. Transmission is going to be better in 2020. Power Gen is going to be better in 2020. We feel very strongly that our pipeline business is going to do very well in 2020. But regardless of your own individual outlook on what might happen in Oil and Gas, EBITDA for MasTec should be really strong in 2020 compared to 2019.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [12]

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Perfect then. José, in your prepared commentary, you talked about "significant opportunity" from DISH as you look forward. As you said, the last time you said that was about the pipeline in 2012 as you took that business from $1 billion in annual revenue to $3.5 billion. When you are saying significant, how sizable could it be? Can you frame that versus your -- let's say, your AT&T business right now?

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José Ramon Mas, MasTec, Inc. - CEO & Director [13]

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Well, look, it's very exciting. It's a new entrant into the market that's going to be a significant competitor in the wireless market. We think they're super well positioned. They obviously have an enormous amount of spectrum. I think they've shown over the course of the last few months their commitment to being a significant player in that space. We've had a relationship with them for a long time. We have a current relationship with them on the wireless business. So I think we're very well positioned. And I think it's going to play out, time will tell. But yes, it could be a very significant opportunity for MasTec, and we'll see. We've got to earn it. We've got to perform, but the opportunity is there.

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Operator [14]

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And our next question will come from Steven Fisher with UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [15]

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So you guys talked about some of the big bookings prospects in Oil and Gas and some of the verbal selections. I guess what are the biggest gating factors on when those will actually get booked? And how much permitting risk is there versus any sort of capital budgeting discipline risk? And so what's your confidence in the timing? And how should we think about the risk and margin trade-off of what's coming?

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José Ramon Mas, MasTec, Inc. - CEO & Director [16]

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Well, again, I think we've taken a conservative view even as we look at backlog. Backlog is extremely strong. The reported backlog is extremely strong from a historical context. When you layer into the fact that we've got a lot of awards that aren't even in that number, that number is substantially greater than what's reported. We have to obviously finalize documents, and some of those projects still need some things to get going. But I think it just speaks to the long-term outlook of that business and how strongly and how good we feel about it. All projects are in different phases. I think one of the changes in our business over the last couple of years is backlog is now made up of many more projects than what was historically, right? Historically, we'd have 1 or 2 big projects that was the main driver of our backlog. Today, that's not the case. There's a lot of projects that make up our backlog, which we think probably derisks it a little bit and diversifies our customer base a little bit.

Something else that we're relatively proud of, if you look at our top customers from a percentage of revenue as -- company-wide, diversification is a lot better in MasTec. Our top customers is a smaller percentage than it's historically been. So I think we're doing a really good job within this segment and across the company to further diversify our scope of services, to diversify our customer base and to diversify the number of projects that we're working on.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [17]

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Great. That's helpful. And then just on Communications, as you think about this ramp-up over the next year, what aspect of the telecom spending do you expect to drive your biggest incremental revenue next year versus this year? Would it be on more of the small cell side, towers, fiber? Which of those pieces do you think you'll see the most incremental revenues on?

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José Ramon Mas, MasTec, Inc. - CEO & Director [18]

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I think they all have potential for growth. Obviously, the fiber builds have a lot of -- there's been a lot of awards relative to fiber. I think the revenues associated with that will significantly pick up in '20 versus where they've been this year. So that's an obvious driver of growth. When I think about that question and I probably put it in a longer-term sense, I think the wireless opportunities, whether it's small cell or towers or a combination of everything, is going to be a significant driver of our business for a very long time.

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Operator [19]

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Our next question will come from Noelle Dilts from Stifel.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [20]

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Again, congratulations on a nice quarter. So when I look at your guidance for the year, obviously, really strong second quarter, very strong third quarter guidance and fourth quarter is just a bit below where consensus was. Could you just help us understand if maybe there's -- that's reflective of somewhat of a shift and maybe the work on MVP or how you're thinking about the timing of the ramp-up on Communications? I'm just trying to understand some of the puts and takes as it relates to timing.

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José Ramon Mas, MasTec, Inc. - CEO & Director [21]

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Sure. We didn't offer fourth quarter guidance. I know there were some projections out there. It -- I think there are some conservatism built into the fourth quarter relative to both Communications and Oil and Gas. Obviously, we've got the MVP project that we're not sure if that will finish in 2019 or 2020. I think there's a chance that it goes in 2019. And those are kind of the variables that we've got to work with as we work on projections. We've obviously had a very strong first half of the year. From our minds, we haven't really changed second half projections relative to where we originally kind of laid out. So as we perform and we get more visibility into the coming 6 months, then I think it's obviously an opportunity for us to be. And I think the numbers that we put out are relatively conservative numbers that we think we're going to hit. And there's probably upside relative to those numbers based on both of those initiatives that I spoke about.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [22]

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And then just on the pipeline side, just to clarify a bit. I mean it still sounds like you're seeing a lot of opportunity on the large projects side. I mean we've been looking at obviously a significant number of larger projects that are out there for 2020 and 2021. I just want to understand if there's -- are you feeling more or less constructive about the market and if you -- you kind of referenced, even if there were declines, you still feel like you'd be able to grow EBITDA. I guess is there an element of your business where you're a little bit worried about the timing? Or is it really just timing more than anything else that kind of what drive if you were to see a decline?

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José Ramon Mas, MasTec, Inc. - CEO & Director [23]

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To be clear, I'm more constructive. I'm not less constructive. I'm not trying to signal anything in the comments. I know that one of the shareholder concerns of MasTec for a long period of time has been sustainability of our Oil and Gas business. I disagree with that assessment. I think we've got a very sustainable business that's going to be strong for a long time. I'm just making the point that even if the contrarian position, even if you take the contrarian position, which shows our Oil and Gas business going down, the rest of the segments at MasTec could more than make up for it. And I'm just making that point, not that I expect that to happen, but I think it's important for us to give shareholders as much information as we can relative to the prospects of all of our businesses. So we still feel very strong and very good about our Oil and Gas prospects for multiple years out, but we feel just as strong and better about our other businesses.

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Noelle Christine Dilts, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [24]

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And the second part of that question was really in terms of what you're seeing with Kingsley and Canada. Do you think that those businesses will -- elements of your Oil and Gas business will show growth as you get into 2020?

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José Ramon Mas, MasTec, Inc. - CEO & Director [25]

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Yes. I mean obviously the reason we made the Kingsley acquisition was because we felt really good about where it could potentially go. It's -- we haven't owned it for that long, so I think it's only going to get better. There are tremendous opportunities for them to grow their business and be a big player in that market.

As it relates to Canada, from a revenue perspective, we're actually having a pretty good year. We expect revenues to be up north of 60% this year in '19 versus '18. When you think about our pipeline business, we still have drag for Canada is still a drag on our business. We lost about 8% on that business last year. From an EBITDA perspective, we're still going to lose a couple points of EBITDA in that business. This year, a lot of it has to do with just utilization and size of the business. So it significantly improved in 2019 versus '18, but it's an area of the business that could continue to improve.

So even within our pipeline numbers, as you see them today, there are opportunities for improvement, there are opportunities for areas to get better. We fully expect Canada to be a catalyst for margins in Oil and Gas pipeline next year. Will it really move the needle or not? Time will tell. But we feel good about the prospects and what's happening in the market there today, much better than we did in the last year anyway.

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Operator [26]

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Our next question will come from Alex Rygiel from B. Riley FBR.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [27]

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José and George, very nice quarter. A couple random questions here. You talked about very strong margins in the small pipeline business. Can you update us on what your mix is in Oil and Gas between sort of smaller projects and larger projects and how you see that trending over the next year or 2?

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José Ramon Mas, MasTec, Inc. - CEO & Director [28]

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Yes. I would expect it to kind of maintain at the levels that it's at. We're probably somewhere in that, guessing because I don't have the number in front of me, 60-40 split, smaller projects to larger projects. And I would probably expect it to be somewhere in that mix range.

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George L. Pita, MasTec, Inc. - Executive VP & CFO [29]

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We'll have a little bit more cost-plus work in the second half of the year, right? So you're talking about for the full year. I think our mix -- we'll have more cost-plus larger project work in the second half. For the year, I think the overall mix this year will probably be representative of expectation going forward for next year.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [30]

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That's helpful. And the Electric Transmission margins were really good in the second quarter. Is that a function of just the volume coming through the system? And therefore, should we kind of reset our expectation level a little bit higher for where margins could be in Electrical Transmission over the next year or 2?

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George L. Pita, MasTec, Inc. - Executive VP & CFO [31]

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I think when we're looking at -- we're certainly looking at improvement on the Transmission side as we move into 2020. I think this year, our expectation, generally speaking, I mentioned in the remarks, is in the same -- in the low to mid-single digit. So I wouldn't necessarily change our expectations for '19. But certainly, as we look out into 2020, we expect to have a lot more utilization. We expect to have growth and with that should come margin expansion.

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José Ramon Mas, MasTec, Inc. - CEO & Director [32]

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And to be clear, while we did well in the second quarter relative to, I think, what expectations were, those aren't the kind of margins that we're looking for in that business. We expect that business to be at double digits. We think that we can be at double digits in the near future. So while it was improving and it was better and I think it shows that we can perform in that business for the volume, that's not our desired margin range, right? And we know and we think that we know we can do better.

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Operator [33]

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And our next question comes from Andy Kaplowitz with Citi.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [34]

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Nice quarter. José, last time that we see this kind of ramp-up like we're seeing in Power Generation, the risk of project execution goes up. And margin there was a little below your initial expectations for the year. I know you talked about weather, but can you talk about your confidence level that Power Gen margin will improve to that mid-single-digit range that you're guiding to in the second half of the year as your revenue ramp-up continues?

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José Ramon Mas, MasTec, Inc. - CEO & Director [35]

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Look, I highlighted it in the prepared comments because I think what that group has done is remarkable. 2017 revenues in that entire segment were $299 million for the year. This quarter, it was $250 million. Next quarter is probably going to exceed their full year 2017 revenue. So the fact that they've been able to grow the business that rapidly over a 2-year period -- they grew 71% year-over-year. There's a lot of inefficiencies that happen when you're growing at those levels. To be able to grow at those levels and to stay profitable and to continue to drive margins, we think is a feat of its own. I think we've been very cognizant of risk profile as we've grown that business. And I think that like we've done in the pipeline business, we've mitigated the risk profile of that business. We're taking very little risk. I think the risk of a project performing poorly for us or turning bad for us is very limited. And we've done that by design, so I think that will prove out as coming quarters and coming years prove.

A lot of opportunities in that market. We've built a really good reputation, a really good name for ourselves across a number of those end markets. And we're just really excited about what's happening. We think the opportunity and the potential there continues to be significant, so we expect that business to continue to grow in 2020. And the margins will come with it. There's no way that we can double that business or triple that business over the last couple of years and not have some margin impact with all of the investments that we're making to get bigger and investments in people and hiring and to be able to deliver for our customers. So irrespective of some fluctuations from quarter-to-quarter, I feel really good about the long-term margin profile of that business being in that mid- to high single digits.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [36]

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That's helpful, José. And then you made the comment in the prepared remarks that you'd like to see your wireline and wireless business grow faster despite growing double digits. Has the growth of wireline and wireless not what you thought it would be in '19? Or is it really the sole ramp-up of Communications solely because of the bigger decline in install-to-the-home? And then how should we think about the install-to-the-home decline? Because it ended up being a bigger headwind on revenue and margin through 2020. Or by the time you get to '20, it really should be too small to be a big headwind?

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José Ramon Mas, MasTec, Inc. - CEO & Director [37]

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So the second part of the question, I think by the time we get to '20, it will be small enough that it really won't impact our numbers in a meaningful way. The first part of the question, I think when we think about Communications, we always said we expected ramp to be second half of '19 event. We've -- I think we've been extremely consistent on that for a long period of time. Has it pushed out a little bit? Maybe more into 2020. The answer is yes, right? I think we do have some customers that are still trying to figure out exactly how they're going to deploy certain things. We've got obviously the -- some of the Verizon permitting issues have been very -- they've been prevalent and spoken about by many people, so we're seeing some of that as well.

So I think we're months maybe behind where we originally thought, which in the overall scheme of things isn't significant. But yes, we're probably a little bit lighter in the second half of '19 than we originally thought. But it doesn't change our long-term outlook of what we expect to happen in both wireline and the wireless markets.

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Operator [38]

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And our next question will come from Andy Wittmann with Baird.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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I was going to ask a little bit more on Electric Transmission. I think the commentary sounded quite positive there. And you guys have been talking about some of these -- I think you called them larger awards that have been awarded but not yet signed. I was just hoping for a little bit of a refresher in the number of awards and potentially the size of the awards that those included. And what needs to happen for those to come through? I know you -- when you first announced them a few quarters ago, you said it's going to take some time. A little bit of time has passed, and so I was just kind of hoping for an update as to how those were evolving and when those could wind up in backlog and then ultimately going into the ground.

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José Ramon Mas, MasTec, Inc. - CEO & Director [40]

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Yes. So if you look at backlog in Transmission on a year-over-year basis, at first flash, it looks like it was a reduction. So last year, it was $632 million, this year is $489 million. It's in -- I think part of that story is we had a significant amount of Puerto Rico work because we have won that large Puerto Rico contract. So there was about $250 million in that backlog associated with Puerto Rico. So when you back that out in the second half of 2018 and you compare it to 2019, we actually had really nice year-over-year backlog growth, sequential growth. And if you back out Puerto Rico, really strong year-over-year growth. Some of those contracts have come into fruition, which is what's driving backlog. Others, we're still waiting to finalize contracts.

We feel we've got a chance to significantly increase backlog in the coming quarters in that segment. Again, some of those jobs will start in 2020. Some of those jobs will have very little work in 2020 and be more 2021 projects. Bottom line is that market right now is doing really well. It's very healthy. A lot of projects are out there. We feel really good that we're going to win our share and that our business is going to grow in conjunction with that.

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Operator [41]

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And our next question will come from Chad Dillard with Deutsche Bank.

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Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [42]

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So I just want to ask a bigger-picture question here. So as the 5G rollout gains momentum, what is the mix of work shift? How is the mix of work shift from laying fiber on the ground to more aerial installation associated with the tower to small cells? What does that transition mean from a market share or a win rate perspective for MasTec? And what does it mean from a margin perspective?

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José Ramon Mas, MasTec, Inc. - CEO & Director [43]

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So it's -- they're all going to happen concurrently. It's not like carriers are waiting for all the fiber to get laid before they can start the rest of their work, right? There's a significant amount of fiber in the ground already today in this country that people are trying to tap into to build, whether it's the tower work on the existing infrastructure to build -- or to build small cells.

So the networks of tomorrow are going to incorporate a little bit of all of that, right? You're going to have to have macros. The macro network is not going anywhere. The macro network is going to get touched. The small cell network is really what's going to densify the network. And then you've got an enormous amount of fiber needs because now you have this new small cell network that has hundreds of thousands, if not millions, of touchpoints across the country that have to be connected.

So that's where the opportunity lies, right? And I think we've always been well positioned on the fiber side. We've won our fair share of that. The reality is when you think about pure wireless, which is where I say the tower work and the small cell work would fall, we've been a market leader for a long time. We think we're one of the very few only wireless contractors in America today that has the capabilities of touching power poles, of doing things associated with that. The reality is that everybody is going to build a small cell network and a little bit of a different capacity. Some are going to use electrical distribution networks. Some are going to use streetlight poles. Some are going to use their own poles that they create. So the opportunities are there. They're vast. They're very different. They're complex, which is part of the reason that this -- the deployment has taken a little bit longer than some have expected. But those are good things for MasTec because the complexity and the challenges add to the need for customers to use large vendors with a proven skillset, which I think we have. So again, very excited about what's coming and very excited about the way we play in the -- in that overall scheme and the benefits we bring to our customers.

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Chad Dillard, Deutsche Bank AG, Research Division - Research Associate [44]

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That's helpful. And you mentioned that you are fully committed on Oil and Gas large pipeline in 2020. I was just curious to get a sense for just the character of that work. How does the fixed price versus reimbursable mix differ versus 2019? How does the geographic mix differ versus 2019? And if you can share with us kind of how you're thinking about that in 2021? And also can you quantify the Oil and Gas closeout in the quarter?

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José Ramon Mas, MasTec, Inc. - CEO & Director [45]

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Yes. So on the fixed price, we do very little work on pure fixed price. Most of the work that we do is unit price-driven or it's -- obviously, in some of our larger projects today, it's been cost reimbursable. We don't expect the mix of contract types to change as we look in 2020 or 2021. Our contracts, again, there is a big difference between unit price and pure fixed price. In fixed price, you're taking a lot of risk rating that happens, and unit price should kind of pricing for whatever changes happen on the job. And then in reference to your question on closeouts, there was no abnormal closeouts or anything of that nature that drove our second quarter. I think it was consistent with the margin profile that we've been producing over a number of quarters, and we expect that to continue.

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Operator [46]

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And our next question will come from Adam Thalhimer with Thompson, Davis.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [47]

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José, how many crews have you added now in the Communications side? And are you almost done with that?

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José Ramon Mas, MasTec, Inc. - CEO & Director [48]

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I hope we're never done because it means the market is just getting stronger and bigger. We've -- we're on pace to add what we talked about in the past, so we're still adding a few hundred people a quarter. And I think that, that trend is going to continue, at least through the balance of this year. So we didn't expect that to stop. We actually expect that to go all the way through 2019. At this point, some of those early adds that we made at the end of '18 are now becoming a little bit more proficient, and we're seeing that in the data and in the statistics. So we're feeling really good about the progress that we're making there. But that's something that we expect to continue throughout all of '19.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [49]

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Okay. That's helpful. And then lastly, core AT&T wireless/wireline, what's the outlook there for the back half?

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José Ramon Mas, MasTec, Inc. - CEO & Director [50]

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Yes. So for us, our big business with AT&T has been core wireless, more so than core wireline. AT&T has slowed down some of their wireline spend for the second half of '19. It doesn't impact us greatly because we didn't -- quite frankly, we just -- it wasn't a huge market for us. It affects us a little bit, but it wasn't a huge market. Core wireless should be significantly up versus where it was in 2018.

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Adam Robert Thalhimer, Thompson, Davis & Company, Inc., Research Division - Director of Research [51]

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But wireless was a little disappointing in the first half?

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José Ramon Mas, MasTec, Inc. - CEO & Director [52]

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No. No, I mean it was up strong double digits first quarter and second quarter. So our wireless business is having a very good year from a revenue perspective. We're making a lot of investments that are affecting margins but not revenue.

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Operator [53]

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And our final question will come from Brent Thielman with D. A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [54]

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Congrats. José, transmission market does sound like it's really heating up here. I guess I'm curious, kind of when do you feel like you start to hit capacity constraints in terms of the business you can take on there?

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José Ramon Mas, MasTec, Inc. - CEO & Director [55]

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If you look a number years back, that was a much bigger market for us than it is today. A lot of that key personnel remains with our company, so we feel really good about our ability to execute. We've been talking about our growth appetite and our growth prospects in that business for a while now. I think we're starting to see that come through backlog, which really supports, I think, our outlook. So we feel really good about what we're going after and our ability to execute on what we go after.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [56]

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Okay. And I guess so much growth happening organically at MasTec. I'm just curious how much of your time you're devoting to look at M&A prospects these days. And also I guess just given the public success the company has had in the last several years, I'm curious whether that's steering more sellers toward you than maybe what you've seen in the past.

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José Ramon Mas, MasTec, Inc. - CEO & Director [57]

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It's an interesting question. We've definitely seen a much more active M&A funnel than, I think, we've seen in the last couple of years. We're actually seeing some more sizable and some very interesting prospects. So we are still spending time on that. It's always been part of our strategy. We haven't been super active in the last couple of years because we have been focused on meeting the organic growth opportunities at MasTec, and I think those continue.

One of the things that I'm really excited about in the quarter was we finally got our cash flow dynamics back to normal, which give us an enormous amount of flexibility to be more aggressive going forward to make decisions that increase shareholder value, and those decisions can be anything like M&A or buybacks. So talking about the cash and the cash is coming is very different than actually having the cash and normalizing our cash flow situation. So now that that's been normalized, it allows us to focus on that and hopefully make the right decisions related to that, so pretty excited to be in that position.

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Operator [58]

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And with no further questions, I'd like to turn the conference back to José Mas for any additional or closing remarks.

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José Ramon Mas, MasTec, Inc. - CEO & Director [59]

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Sure. So I'd like to thank everybody for their interest in MasTec and their participation in today's call. This concludes our second quarter 2019 earnings call.

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Operator [60]

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And this concludes today's conference. Thank you for your participation, and you may now disconnect.