MasTec, Inc. (NYSE:MTZ) Q3 2023 Earnings Call Transcript
MasTec, Inc. (NYSE:MTZ) Q3 2023 Earnings Call Transcript November 2, 2023
MasTec, Inc. misses on earnings expectations. Reported EPS is $0.95 EPS, expectations were $1.64.
Operator: Welcome to MasTec's Third Quarter 2023 Earnings Conference Call initially broadcast on November 1, 2023. Let me remind the participants that today's call is being recorded. At this time, I'd like to turn the conference over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc?
Marc Lewis: Thanks, Elaine, and good morning, everyone. Welcome to MasTec's third quarter 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 eventual knowledge. Various risks, uncertainties and assumptions are detailed in our press releases and filings with the SEC.
Should one or more of our – 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 today's call. In today's remarks by management, we will be discussing adjusted financial metrics reconciled in yesterday's press release and supporting schedules. In addition, we may use certain non-GAAP financial measures in this 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. Please note that we have two documents associated with today's webcast on the Investors and Events and Presentations page of our website at mastec.com.
There is a companion document with information and analytics on the quarter just ended and a guided summary to assist in developing your financial models going forward. Both PDF files are available for immediate download. With us today, we have Jose Mas, our CEO; and Paul DiMarco, our EVP and Chief Financial Officer. The format of the call will be opening remarks announced by Jose, followed by a financial review from Paul. 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 I'll now turn it over to Jose so we can get going. Jose?
Jose Mas: Thanks, Marc. Good morning, and welcome to MasTec's 2023 third quarter call. Today, I'll be reviewing our third quarter results as well as providing my outlook for the markets we serve. As you all know, we moved up our earnings release in this call by two days from our normal cadence. As we went through our quarter close process, given the preliminary results we were seeing for the third quarter relative to our prior guidance and the forward information we are receiving from some of our segments, we determined that it was important to get our earnings release out to the market as soon as our procedures had reached the point that we had sufficient clarity on the data. We appreciate everyone adapting your schedules so that you could join us on this call today.
Thank you. Now some third quarter highlights. Revenue for the quarter was $3.257 billion, a 30% year-over-year increase, organic growth of roughly 10% and a 13% sequential increase, but well below our previous guidance. Adjusted EBITDA was $271 million, a 10% increase over last year, but again, well below our previous estimate. Adjusted earnings per share was $0.95. Cash flow from operations generated during the quarter was $294 million, with a $213 million reduction of net debt during the quarter. We expect further cash flow strength during the fourth quarter and the first quarter of 2024, which Paul will cover later. And finally, backlog at quarter end was $12.5 billion. In summary, we continue to face challenges this year. We now expect full year revenue to be about $1 billion or 7% below our previous estimates.
This revenue shortfall is primarily related to the continued challenges in our Clean Energy business, where full year revenues will be up about $900 million versus our initial expectations. The bulk of that shortfall occurred at IEA, which we acquired late last year. As a reminder, IEA generated approximately $2.4 billion in revenue in 2022. While we knew the wind market would be challenged this year, we expected the solar market to allow them to achieve revenue growth in 2023. We now expect revenues for IEA in 2023 to be approximately $1.7 billion. While there is no question we are disappointed in our ability to understand forecasting risk based on project timing, there have been a number of market factors that have an outsized negative impact on IEA.
IEA to a greater degree than MasTec's legacy renewable business had a customer base that was more dependent on using tax equity to help finance projects. While the Inflation Reduction Act has created significant tax incentives that are expected to have a materially positive impact on the solar industry and our business, the delay on clear defining the specifics of the law, for example, domestic content has created a significant delay to certain customers' ability to access tax equity. While this delay has impacted our ability to achieve our projected revenue, I'd like to make clear that these projects haven't been canceled, but rather delayed. And while there has been some negative commentary on the solar market in general lately, we continue to experience significant demand for our renewable services.
While we have started a number of new projects in the second half of 2023, our fourth quarter guidance does not assume new project starts after October. So our fourth quarter guidance is made up of projects we are currently working on. We also believe this to be prudent. It’s taken us time to get to know the IEA customer base, and we believe we are bringing the right scrutiny to both our legacy, and IEA projects as we fill our 2024 pipeline and believe we will be much more consistent in our ability to forecast this segment’s revenue. We are disappointed with the forecasting assumptions we made in 2023 and our understanding of projects risks and our revenue assumptions. We have made significant changes on how we go-to-market and how we assess projects and risks.
While we’re incredibly disappointed about our performance this year, we are still very bullish on our future. The level of interaction we are having with our customers around projects and timing today is as good as we’ve ever had in our business. We have a level of verbal and expected awards that gives us an opportunity to significantly grow our Clean Energy business. While we need to be prudent on timing and understand the risks associated around financing, interest rates and interconnect agreements, our long-term outlook for this market is unchanged. We expect considerable backlog growth, both by year-end and into 2024. And while again, I’m very disappointed with our 2023 results, I truly believe that the combination of IEA and our legacy Clean Energy business will end up being a great acquisition for MasTec and our shareholders.
We will appropriately manage expectations and risks going into 2024 and make conservative revenue assumptions until the market stabilizes. With that said, we expect strong double-digit growth revenue in 2024 in our Clean Energy segment. In our Oil and Gas segment, revenues were below our previous estimate as our ramp on the MVP project took longer than expected. Despite this, our full year revenue target of $2 billion is unchanged with more activity expected in the fourth quarter than we originally expected. We now expect the MVP project to extend through the first half of the year. We expect 2024 revenue new levels in our Oil and Gas segment to be slightly lower than 2023, but with slightly better margins as we expect there will be less cost-plus work versus this year.
In our Communications segment, revenue fell short of expectations primarily related to a slowdown in wireless spend. For the full year, we expect revenue from our three primary wireless customers, AT&T, Verizon and T-Mobile to be down about 14% year-over-year. We expect this to be offset by strong growth from our wireline customers. As we look ahead to 2024, post quarter end, we won a significant maintenance contract for our largest communications customer for services we weren’t previously providing. This program should be fully ramped by the second quarter of next year, and we expect over $100 million a year in annual revenues. This award, combined with a number of large wireline program awards under which we are currently performing engineering services that we expect will convert into construction in the first half of next year gives us confidence in our ability to grow our communications revenue in the high single digits for 2024 despite some continued CapEx weakness as some of our customers manage through higher cost of capital.
In our Power Delivery segment, revenue fell short of expectations as we had a significant year-over-year decline in storm revenue, which also impacted year-over-year margins, along with a number of utilities moderating their spending plans as they deal with the changing interest rate environment. Margins were up sequentially, and we expect similar performance in both revenues and margins in the fourth quarter. Over the course of the last few months, we have seen a number of utilities begin vendor consolidation efforts. We have had a very good quarter, increasing our market share, having been awarded increased scope for 2024. Post quarter award activity has been strong, and while we have seen some short-term fluctuations in capital spend, we believe the long-term fundamentals of the business has only improved.
We expect some continued capital discipline on behalf of the utilities offset by growth associated with transmission and substation work, leading to expectations of single-digit revenue growth in 2024 with modest margin expansion. Before turning the call over to Paul, I would like to reflect on where we are today. Post-pandemic, we took steps to fundamentally transform MasTec. In the three to four years since, we’ve more than doubled the revenue of the business despite seeing a significant drop in our Oil and Gas pipeline revenues. We believe that our transformation, which has seen us significantly increase our presence in Power Delivery and Clean Energy positions this company better than at any point in our history. But this transition has been much more difficult than we expected.
The two Power Delivery acquisitions we made in 2021 are performing well and have strategically positioned us with significant expansion opportunities for future growth. However, they came with their sets of challenges and setbacks and took a lot of effort and time as we integrated them in 2022. Much more difficult has been the combination of IEA as our full year performance and revenue deterioration have been difficult to manage and put stress on the organization. While again, not pleased with our performance, I think, we have created an optimal structure as we look to effectively grow and manage this business. Our market strategy has been well received by our customers and the relationships we’ve created, solidified and grown over the last year gives us great confidence regarding our future in Clean Energy and the market-leading position we believe we can capture.
Exiting 2023, we are keenly focused on growing and effectively managing our business for growth, strong margins and cash flow. For the first time in a few years, we have no new acquisitions to integrate, which will allow us to fully focus on the areas that we need to improve. For those of you new to MasTec, this is my 16th year as CEO. Our revenue for my first year as CEO was around $900 million and EBITDA was less than $50 million. Those of you that know me, know how competitive I am and how I always want to succeed and perform. This has been a challenging year, but understand, I'm as motivated and determined as ever to make sure MasTec reaches its full potential. My family is the largest single shareholder in MasTec and our interests are aligned with all shareholders.
I bear a great sense of responsibility and knowing that our shareholders have made an investment with their hard-earned dollars in MasTec. I do not take that for granted. I can also say, and I know actions speak a lot louder than words, that I believe we are better positioned today than at any point in our history. The long-term opportunities in our segments are better than I think people realize. Despite the short-term challenges, our long-term outlook is intact. Our communications, power delivery and Clean Energy segments give us not only strong revenue growth opportunities but each segment has the ability for margin improvement. Our long-term margin goals are unchanged and have been more impacted not by pricing, but by volume and our ability to absorb costs on higher revenue levels.
We look forward to delivering on these expectations and regaining the confidence of the investment community. I'd like to take this opportunity to thank the men and women of MasTec. Men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great-quality project at the best value. I also know how competitive our people are and the desire they have to perform at a very high level. I know they're up for the task. I will now turn the call over to Paul for our financial review. Paul?
Paul DiMarco: Thank you, Jose, and good morning, everyone. First off, I wanted to echo Jose's comments, and thank you for the flexibility and accommodating the change to our earnings call schedule. We hope the earlier visibility into our results and outlook will provide some value. We are committed to providing clear and accurate visibility into our performance and strategy, and we'll continue to work towards that goal. Turning to our third quarter results. MasTec generated consolidated revenue of $3.26 billion, up 30% year-over-year and 13% sequentially, but below guidance by approximately 13%. We had lower-than-anticipated activity versus our expectations in each segment, which I will cover in more detail later. Adjusted EBITDA at $271 million missed our guidance by $90 million, driven by decreased operating leverage associated with lower volume, unabsorbed costs due to ongoing project delays and execution challenges on certain legacy projects.
Lower-than-expected adjusted EBITDA also drove performance and adjusted earnings per share of $0.95. Overall, it was a very disappointing quarter, where we faced a number of challenging developments. We took a hard look at the business and our prospects for the balance of the year, and we believe our outlook appropriately captures the closeout risks in projects that have challenged us this year and the anticipated lower activity with certain customers. Despite these challenges, we are pleased with the $294 million of cash flow generated by operations during the quarter and the corresponding $230 million of net debt reduction. Turning to some segment details. Third quarter Clean Energy revenue was $1.1 billion, and adjusted EBITDA was $58 million or 5.2% of revenue.
While we did achieve 12% year-over-year organic revenue growth in the quarter, revenue and adjusted EBITDA were both well below expectations, driven by delays in execution of certain contracts and performance challenges on certain legacy projects. While margins held flat with the second quarter, margins were almost 100 basis points below expectations due to lower fixed cost absorption. We also incurred additional costs on the legacy industrial project that reduced margins by almost 100 basis points. This project has been challenging to close out for the past few quarters but we expect to be off-site in Q4 and believe that we have appropriately accounted for potential risks in our guidance. Our Oil and Gas segment generated revenue of $672 million in Q3, a year-over-year increase of 79%, but approximately 20% below our expectations, as we saw a slower ramp than anticipated on the Mountain Valley Pipeline.
As a reminder, we had to mobilize almost 3,700 crew members to the site. We encountered some delays due to the ongoing legal challenges the project faced even after receiving approval under the debt ceiling relief bill passed over the summer. Adjusted EBITDA was $97 million, in line from our rate expectation at 14.5%, but lower than guidance, commensurate with the revenue shortfall. We are now fully ramped in the project and expect construction to be completed in the first half of 2024. Our Communications segment also had less activity than expected with revenue of $824 million, $76 million below forecast. We saw continued pullback from our wireless customers in excess of previous expectations, and we also experienced moderated fiber spending late in the quarter, which we expect to continue through year-end.
Adjusted EBITDA was $78 million for Q3 or 9.5% of revenue. Lower volume in the quarter impacted absorption of our indirect expenses, lowering margins by approximately 200 basis points versus guidance. Lastly, our Power Delivery segment had Q3 revenue of $665 million, $85 million below guidance and adjusted EBITDA of $57 million or 8.6% of revenue. While margins were up 40 basis points from Q2, we fell short of our guidance due to lower utilization of our crews and equipment. Several of our utility customers have indicated their spending will slowdown for the balance of the year as they manage annual capital budgets and this higher cost of capital. We began to see pullback late in the third quarter, but we expect this to be a short-term trend that will be alleviated as we move into 2024 and annual budgets are replenished.
Emergency restoration services also trended below our expectations and very little activity is expected in the fourth quarter. Backlog as of the third quarter was $12.5 billion, reflecting a 7% decline versus the second quarter. The decline was driven by lower near-term activity expected in our communication and power delivery MSA work, the significant Q3 revenue burn in Oil and Gas and timing of contract executions in our Clean Energy segment. For some additional color, we signed over $500 million of contracts in Clean Energy alone since September 30, that are not included in Q3 backlog. Additionally, after these contract signings, we continue to work on projects under a limited notice to proceed that of approximately $2 billion of contract value.
Per our policy, these contracts will be included in backlog once fully executed. We have also signed or received verbal awards totaling over $300 million for both the Communication and Power Delivery segments. These awards are related to work for new customers, geographic expansion or new services with existing clients. Q3 cash flow generated by operations was $294 million, reducing our net debt by $213 million to about $3 billion. The cash flow was driven by improved working capital metrics with DSO and DPO, both improving and now in line with historical levels. DSO improved to 85 days, down from 90 days at Q2 and we expect further improvement in subsequent quarters. For the third quarter, net debt leverage improved slightly to 3.4 times and liquidity also improved to approximately $1.2 billion.
Factoring in the developments during Q3, we now expect 2023 revenue to approximate $12 billion with adjusted EBITDA of $850 million or 7.1% of revenue. This reflects a significant reduction from our prior guidance, driven by the near-term developments we are experiencing across the business. While we are disappointed in the 2023 expected results, we feel confident that the outlook is appropriately conservative in light of the current market. From a segment perspective, our Oil and Gas segment full year revenue expectations remain unchanged for 2023 at $2 billion with adjusted EBITDA margins in the mid-teens. For the fourth quarter, we expect revenue of approximately $740 million and adjusted EBITDA margins in the low double digits. Full year Clean Energy segment revenue is now expected to be approximately $4 billion with adjusted EBITDA margins in the low to mid-single digits.
We have a very strong pipeline of projects and are pleased with the post Q3 project signings but expect specific product start dates to produce some quarter-to-quarter variability. Margins are expected to trend lower than our previous expectations due to the continued costs we are carrying in preparation for significant volume growth. Fourth quarter expectations are $1.15 billion of revenue with adjusted EBITDA margins similar to the third quarter. For full year 2023, we expect our Communications segment to generate $3.25 billion of revenue with adjusted EBITDA margins in the high-single digits. We anticipate some further margin pressure versus prior guidance due to reduced operating leverage from the lower revenue expectations. Fourth quarter revenue was forecasted at $750 million with adjusted EBITDA margins down slightly from the third quarter.
Looking to 2024, we’re having good dialogue with customers on ways to drive further efficiency in their capital spend, something we are well-positioned to provide through our industry-leading scale. Finally, full year 2023 Power Delivery segment revenue is now expected to be $2.7 billion with high-single digit EBITDA margins. Margins are expected to be lower than previous forecast due to reduced operating leverage and the expectation of very little emergency restoration work. Fourth quarter expectations are roughly similar to Q3 performance for both revenue and adjusted EBITDA. We’ve also revised our full year 2023 adjusted earnings per share guidance to $1.75, driven by lower anticipated earnings, partially offset by a lower expected effective tax rate.
In light of the revised guidance, we now expect to generate cash flow from operations of approximately $500 million for the second half of 2023 and $400 million for the full year. This equates to approximately $200 million of cash flow from operations in Q4. Net debt leverage is expected to remain in the low 3 times at year-end, higher than our sustained target of 2.5 times but we are committed to return to this level next year, and we believe our 2024 outlook will readily support our leverage objectives. Recall that Q1 is generally our slowest quarter, so our lower working capital requirements should support continued cash flow generation. Finally, while we are still early in our 2024 planning process, we felt it was important to provide investors with some preliminary achievable guidance off the disappointing results for 2023.
To recap the initial 2024 outlook provided in yesterday’s release and expanded on by Jose, we currently expect mid to high single-digit revenue growth for the company. We expect this growth to be driven by double-digit growth in Clean Energy, mid-single-digit growth in Power Delivery, high single-digit growth in Communications, and a mid-single-digit revenue decline in Oil and Gas. We expect each segment to improve margins in 2024, resulting in total company adjusted EBITDA margins of 7.5% to 8%. And I’ll now turn the call over to the operator for Q&A.
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