MasTec, Inc. (NYSE:MTZ) Q4 2023 Earnings Call Transcript
MasTec, Inc. (NYSE:MTZ) Q4 2023 Earnings Call Transcript March 1, 2024
MasTec, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to MasTec's Fourth Quarter 2023 Earnings Conference Call. Initially, broadcast on Friday, March 1st, 2024. Let me remind participants that today's call is being recorded. At this time, I'd like to turn the call over to our host Marc Lewis, MasTec's Vice President of Investor Relations. Marc?
Marc Lewis: Thanks, Maddie, and good morning, everyone. Welcome to MasTec's Fourth 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 expectation on the day of initial broadcast of the 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 differ significantly from results expressed or implied in these communications today. 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 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. Please note that today we have two documents, associated with the webcast on the Events and Presentations page of our website at www.mastec.com.
There is a companion document with information analytics about the quarter and year just ended and a guidance summary for 2024 to assist you in developing your financial models going forward. Both PDF files are available for download. With us today we have Jose Mas, Our Chief Executive Officer, and Paul DiMarco, EVP and Chief Financial Officer. The format of the call will be opening remarks analysis by Jose, followed by a financial review from Paul. These discussions will be followed by Q&A period. We expect the call to last about 60 minutes. We had a nice quarter and a lot of important things to talk about today. So I am going ahead and turn it over to Jose. Jose?
Jose Mas: Thanks, Marc. Good morning, and welcome to MasTec's 2023 fourth quarter and year-end call. Today, I'll be reviewing our fourth quarter and full year results as well as providing my outlook for 2024 and the markets we serve. First, some fourth quarter highlights. Revenue was $3.3 billion by 9% year-over-year increase. Fourth quarter adjusted EBITDA was $231 million and fourth quarter adjusted EPS was $0.66. For the full year, 2023 revenue was $12 billion, a 23% year-over-year increase. 2023 adjusted EBITDA was $860 million, a 10% year-over-year increase. 2023 full year adjusted earnings per share was $1.97, and full year cash flow from operations was $687 million and net debt was reduced by $535 million since the first quarter.
In summary, our fourth quarter performance was slightly better than our guidance with strong performance in our pipeline business and strong cash collections across the entire business. While we enjoyed year-over-year growth in both revenue and EBITDA, our performance was significantly below our original expectations. As we discussed in detail on our last call, we had a number of challenges related to the acquisition of IEA coupled with moderated spending by customers in the second half of the year. While we expect some continued pressure in the early part of 2024, I'd like to walk through a number of positive developments that I believe will have a significant impact on our ability to grow both revenue and earnings and get back to our long-term targeted revenue goals.
During the fourth quarter, in our Communications segment, we significantly expanded our relationship with our biggest wireless customer AT&T. In addition to the maintenance contract we announced on our third quarter call, AT&T expanded both our scope and geographic territory on our core wireless work. This expansion, coupled with their recent announcement of a complete swap out of Nokia equipment to Ericsson equipment over a five-year period is expected to significantly increase our wireless business over the next few years. While we won't see the impact of this new award until the second half of 2024, this award alone should increase our 2025 segment revenues by double-digits. This coupled with the continued demand for our wireline services, where we saw double-digit growth in 2023 and the expected impact of BEAD's funding gives us great visibility for future years.
We've invested heavily in our Communications segment and we believe starting in the second half of 2024 and beyond, the benefit of these investments will be materialized with solid revenue growth and more importantly, improve margins. Our Oil and Gas pipeline segment overperformed as revenue and EBITDA both came in higher than estimates. On our third quarter call, we guided pipeline revenues down with the same EBITDA dollars for 2024, resulting in higher-margin expectations. This is due to the expected completion of the MVP project during the secondquarter of 2024. While we're holding that guidance. We are very encouraged about the strength in this market. While backlog is down, demand is actually up considerably. We expect this segment to return to a more book-and-burn cadence as it relies less on larger projects.
We're also really encouraged about 2025 and beyond. Based on verbal awards and obviously based on project timings, we expect this business to grow in 2025. We had previously talked about a longer-term expectation of annual revenues in the range of $1.5 billion to $2 billion. We now expect long-term annual revenue to consistently be at or above the higher end of the range. Our Power Delivery business performed slightly above our expectations in the fourth quarter and secured long-term extensions and expansions during the quarter, with current key customers. Post-quarter end, a negative rate-case ruling in Illinois has impacted our customers in the state. Having a large presence in the area, we've moderated 2024 revenue expectations to be roughly flat to 2023.
We're hopeful that this will be conservative, but feel it's prudent as we think about 2024 segment revenues. Exelon who owns one of the utilities in the state has significantly cut capital expenditures for distribution spend in Illinois, but has also announced increases in transmission spending in the state and increased CapEx outside of Illinois. We believe we are well-positioned to participate in that growth, but again, have taken a conservative view until we have better clarity. While we've experienced some fluctuation in capital spending by different utilities in different geographic areas in the second half of 2023, some of which we continue to expect in early '24, there is no question about the need and commitment for a significant capital spending on our nation's electrical infrastructure.
Expectations for load growth is increasing across the country and a number of utilities this quarter announced increases to their expected capital spending. It's important to remember that in 2021, just two short years ago, MasTec's Power Delivery business generated a $1 billion of revenue for the year. We closed out 2023, generating over $2.7 billion or nearly a three-fold increase in revenue in just two years. With the integration efforts of the acquisitions and Power Delivery behind us, we believe we are better positioned than ever, while the majority of our business is recurring MSA-driven, our project business has the greatest opportunity for growth, we are currently bidding on a number of very large projects, any one of which individually could grow this segment by double-digits annually.
After spending the last few years, building out our platform geographically, we are really excited about this segment's future revenue. Finally, in our Clean Energy and Infrastructure segment, margins were in line with our expectations for the fourth quarter. We spent a lot of time on our last call talking about the issues and challenges we faced in 2023. I'd like to spend time today on 2024 and beyond and what we're seeing in the market. Today, we've guided segment revenues of $4.4 billion for 2024. This compares to about $4 billion in 2023. To add some color, our renewable revenue was budgeted by performing a bottoms-up project review. For example, we've built an estimate of every project we've won or believe we will win and estimated a cadence of quarterly revenue.
We took into account potential challenges and risks projects may face and took a conservative view. All this to say that our process for 2024 is significantly different and more conservative than last year. While short-term challenges still exist, we strongly believe in the long-term fundamentals of this segment. The undeniable shift towards renewables and the cost competitiveness they offer create significant opportunities for the market. We continue to believe that we have significant opportunities to grow revenue and 2024 does not reflect the growth potential we expect to achieve. For example between what we've been awarded and expect to be awarded over the next two quarters, not only does it solidify 2024 revenue, but actually carries over a similar amount of revenue into 2025.
With continued strong demand, our growth potential in 2025 and beyond should help us achieve our original annual revenue goals for this segment. In summary, while we know we've had our challenges, we are incredibly bullish about our ability to grow our business and build scale to deliver to our customers, safe and cost-competitive solutions to help them meet their infrastructure needs. I strongly believe that the investments we've made in the last few years to build scale along our vertical offerings and position ourselves as a leader in the businesses we operate in will translate to not only strong levels of revenue growth, but the ability to meaningfully improve margins. I want to make sure I emphasize that part. I truly believe that the most successful companies in our space are those that have the scale to meet our customers' demand.
Our customers' projects have significantly increased in size and scope and there is no question that our customers want to simplify and work with less partners. I believe that over the last few years, our biggest accomplishment has been to position ourselves as one of only a few partners that is viewed throughout our industry as a partner whose size and scale affords it the capabilities to take on any project. While I'm proud of that accomplishment, I also understand the need for this advantageous positioning to be reflected in our financial results. I'm optimistic that our results will show continued improvement throughout 2024. As we expect revenue to be more predictable and consistent, we are working and focusing on improving margins. While incremental revenue has a very positive impact on margins, as we reach our desired scale across our segments, it allows us to focus on maximizing efficiency.
Again, I'm looking forward to the opportunities that 2024 and beyond bring and providing our stakeholders with better consistency in our performance. I'd like to take this opportunity to thank the men and women of MasTec. The 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'll now turn the call over to Paul for our financial review. Paul?
Paul DiMarco: Thanks, Jose, and good morning, everyone. Before I turn to the financial review, I wanted to provide color on some key developments for 2023, and financial initiatives going forward. Despite the disappointing financial performance and visibility, we provided last year, we made significant progress on key areas of our integration in Power Delivery and Clean Energy. In power delivery, we are deploying our regional operating model, consolidating leadership over various companies in common geographies to drive efficiency and enhanced customer support. In Clean Energy, we are organizing this segment in the market sectors, namely renewables, infrastructure, and industrial. With the various components of our legacy business and IEA integrated to effectively deliver the full breadth of our operating capabilities to our customers.
We are now focused on fully deploying consistent tools and processes across each segment to put all our teams in a position to excel. We are confident these strategic changes will enable us to capitalize on the robust long-term demand afforded by our end markets. From a financial perspective, we are keenly focused on capital allocation to ensure we are generating appropriate returns on the capital we deploy. As we look at investments for organic growth, we have enhanced our evaluation of capital expenditure allocations to drive higher utilization of owned equipment and operating profit. Coupled with our ongoing working capital initiatives, we expect to drive higher returns on invested capital and improve our strategic flexibility. Now, I will turn to our 2023 financial review.
Fourth quarter revenue was $3.3 billion, in line with our guidance and adjusted EBITDA was $231 million or 7.1%, exceeding guidance by approximately $10 million. Adjusted earnings per share was $0.66, exceeding guidance by $0.22, driven primarily by the adjusted EBITDA beat. Accordingly, annual 2023 results followed suit. Revenue of $12 billion was in line with our guidance. While adjusted EBITDA of $860 million and adjusted earnings per share of $1.97, both exceeded our annual guidance expectations. We generated almost $500 million of cash flow from operations in the fourth quarter, bringing the total for 2023 to $687 million. This exceeded guidance by almost $300 million, driven by a significant improvement in DSO, which had 74 days was down 11 days sequentially from the third quarter.
Our liquidity remains very strong at $1.6 billion. Cash flow generation has been a key area of focus for MasTec and we are very pleased with the efforts displayed across the company to achieve these results. Our strong cash-flow performance resulted in net debt at year-end of $2.5 billion, a $350 million reduction year-over-year and puts net leverage at 2.9 times. 18-month backlog at year-end, totaled $12.4 billion, with sequential growth in each segment excluding oil and gas pipeline due to the significant work performed on MVP in Q4. I'll cover more details on the individual segments shortly. Turning now to the segment performance and expectations. Fourth quarter communications revenue was $760 million, with an adjusted EBITDA margin of 7.6%, both in line with guidance.
Annual 2023 Communications segment revenue was $3.26 billion, flat year-over-year, with adjusted EBITDA margins declining 140 basis points to 8.9%. As we discussed last quarter, the reduction in second half volume had a negative impact on operating leverage and margins. Our outlook for this segment continues to improve, particularly on the wireless front where AT&T has revised its long-term build plan and is consolidating its vendor base to drive efficiency. We expect to begin realizing the benefits of these consolidations in the second half of 2024 and be fully ramped in 2025. Based on preliminary estimates, these developments should drive 10% plus revenue growth in this segment. You can see these benefits begin to come through in the segment backlog, which grew by approximately $325 million versus Q3.
We anticipate that Communications segment annual 2024 revenue will approximate $3.5 billion with adjusted EBITDA margin improving 50 to 60 basis points year-over-year. Q1 revenue is expected to be $700 million, with adjusted EBITDA margins in the mid-single-digit range. Q1 guidance reflects historical trends of a modest decline in volumes sequentially from the fourth quarter as well as potential short-term disruption from the realignment in our wireless business. We expect year-over-year growth in this segment for each subsequent quarter of 2024. Fourth quarter Clean Energy and Infrastructure segment revenue was $1.1 billion, slightly below our guidance, with adjusted EBITDA margin of 4.8%. Full year segment revenue was approximately $4 billion with adjusted EBITDA margin of 4.3%.
Backlog for the segment was up slightly from Q3 to $3.1 billion. Of note, the year-end backlog includes a reduction in our industrial sector of $200 million due to the previously discussed indefinite pause of construction on the Rochester Hub project. For 2024, we expect Clean Energy segment revenue to approximate $4.4 billion representing low-double-digit growth. Adjusted EBITDA margins are expected to be in the mid-single-digits with at least 100 basis-point improvement versus 2023. Q1 revenue is expected to be $775 million, showing a slight contraction versus 2023 due to timing of project burn. We currently expect adjusted EBITDA margins to remain in the low-single digits with modest margin expansion versus last year. Fourth quarter pipeline segment revenue was $800 million, with adjusted EBITDA margins of 11.9%.
We had good production on a number of fronts, leading to higher adjusted EBITDA margins than anticipated. Annual segment revenue was just shy of $2.1 billion with adjusted EBITDA margins of 13.7%. We anticipate 2024 pipeline segment revenue will decline to $1.9 billion. We expect adjusted EBITDA to be flat year-over-year at $285 million with the anticipated margin expansion due to a lower contribution of cost plus work. First quarter revenue will be approximately $600 million, with adjusted EBITDA margin in the low-double-digits. Q1 will likely be the highest revenue quarter for this segment in 2024. Fourth quarter Power Delivery segment revenue was $658 million and adjusted EBITDA margin was 8%, both in line with our expectations. Annual 2023 Power Delivery segment revenue was approximately $2.7 billion with annual adjusted EBITDA margin of 7.9%.
2024 began with some challenges in parts of our Power Delivery segment as certain customers in Illinois received unfavorable rate case decisions. We are optimistic this will be resolved in the coming months, but feel it is prudent to factor in a prolonged appeal process in our outlook. Accordingly, 2024 annual revenue is expected to approximate $2.8 billion with annual adjusted EBITDA margins similar to 2023. First quarter revenue is forecasted at $550 million seeing the biggest quarterly impact from this deferred spending and lower levels of transmission activity versus '23 as we transition from certain completed projects to new work expected to start in Q2. The reduced operating leverage will weigh on earnings in Q1 with adjusted EBITDA margins in the mid-single-digits.
Annual 2024 Corporate segment costs are expected to approximate 125 basis points of consolidated revenue and investments reported in our other segment are expected to generate approximately $30 million of adjusted EBITDA. Turning to our consolidated guidance announced yesterday, we are projecting 2024 annual revenue of approximately $12.5 billion with adjusted EBITDA approximating $955 million. Adjusted earnings per share is expected to approximate $2.69, this represents double-digit adjusted EBITDA growth and approximately 30% adjusted EPS growth versus 2023. We expect Q1 revenue of $2.625 billion, adjusted EBITDA of $130 million or 5%, and an adjusted diluted loss of $0.48 per share. This expectation includes the combination of a normal seasonally slow first quarter and the Q1 impact we noted earlier in our Communications and Power Delivery segments.
In terms of the cadence for 2024, we expect majority of our revenue growth to come in the second and third quarters with Q4 roughly flat last year without any contribution from MVP. Our guidance indicates a 50 basis-point improvement in full-year adjusted EBITDA margins and we expect the majority of this expansion to also come during Q2 and Q3. We expect to generate approximately $550 million of cash flow from operations in 2024, assuming DSOs are in the high 70s over the course of the year. Coupled with the anticipated growth and adjusted EBITDA, we expect to reduce leverage to the low 2s by the end of 2024. We remain committed to maintaining our investment-grade rating and have proactively communicated our outlook to the various rating agencies.
In closing, I've enjoyed the first year of engagement with our analysts and our investor community. I look forward to continuing to build relationships with you and improve our communication and your confidence in our performance and outlook. That concludes our prepared remarks, I'll now turn the call over to the operator for Q&A.
See also 15 Countries with the Highest Prostate Cancer Rates in the World and 15 Countries with the Most Attack Helicopters in the World.
To continue reading the Q&A session, please click here.
