MasTec Inc (MTZ) 2002 Q2 法說會逐字稿

Welcome to the MasTec, Incorporated, second quarter earnings release conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the conference over to Marc Lewis, Vice President of Investor Relations. Mr. Lewis, please go ahead.

Good morning. First of all, I'd like to welcome to you MasTec's 2002 second quarter conference call. My name is Marc Lewis and I'm the VP of Investor relations here at MasTec. With us today we have Austin Shanfelter, MasTec's President and Chief Executive Officer, and Donald Weinstein, the company's Executive Vice President and Chief Financial Officer.

The format of the call will be opening remarks by Austin, followed by a more detailed financial summary of the quarter from Don. These discussions will be followed by a question and answer period, and we expect the call to last approximately 30 to 45 minutes. Before we continue, our Assistant Secretary, Steve Davis, would like to make the following qualifying statements.

Thank you, Marc. The following statement is made pursuant to the safe harbor forward-looking statements described in the private securities litigation reform act of 1995.

During the course of today's conference call, we may make certain statements that are forward-looking, such as statements regarding MasTec's future results and plans, and anticipated trends in the industries and economies in which MasTec operates. These forward-looking statements are based on MasTec's current expectations, and are subject to a number of risks, uncertainties, and assumptions, including that our revenue may differ from that projected, that we may be further impacted by slowdowns in our clients' businesses or deterioration in our clients' financial condition, that our reserves and allowances may be inadequate, or the carrying value of our assets may be impaired, that of the outcome of pending litigation may be adverse to us, and that we are -- we may experience increased costs associated with realigning our business, or maybe unsuccessful in those efforts. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statements made by the company in this conference call. These risks, uncertainties and assumptions are detailed in documents filed by the company with the Securities and Exchange Commission. MasTec does not undertake any obligation to revise these forward-looking statements or reflect future events or circumstances.

I'd now like to turn the call over to Austin for a general summary of our environment and business.

Thank you, Steven and good morning.

As you all know, we are currently in one of the most difficult periods in history for our industry and for our sectors served by many of our customers. We all know that the telecom, energy, and cable industries have been operating at low spending levels for quite some time. Their capital budgets are scaled back, and many have undergone massive layoffs. In the last 12 months, some 500,000 good people have lost their job in the telecom sector alone. Additionally, since 2000, the year 2000, more than 60 telecommunication companies have filed for bankruptcy. Confidence in corporate America is at a low point.

All of this has generated uncertainty and difficult environment overall for MasTec and its investors. We saw some very stable historic upward trends in the first two months of the second quarter, and based our earnings and guidance on these trends. However, when our June numbers were analyzed, we noticed a sharp drop-off in revenues across three of our service lines, with the most troubling trends in telecommunications and broadband. This drop was unexpected and did not conform to our prior experiences. In previous years, including last year, June has always trended up significantly, from April and May, between 8 and 10 percent. This year, the trend went the other direction.

Our top four telecom, and three of our broadband customers, dropped off between 10 and 20 percent in June. We believe that the drop was an aberration, and have already seen evidence that the decreased revenues in June was an exception to the norm. We based our analysis on our current contract award activity.

In the past 45 days, we have been award $45 million in new telecommunications contracts. One of the most significant developments in MasTec, was that we were chosen as one of four nationwide providers of emergency outside plant services for MCI Worldcom. This work is post-petition and court-approved work. MasTec has also been awarded $12.5 million in outside energy business for new contracts on the east coast. We have secured $14.5 million in new projects in ITS/DOT work area, in such areas as Houston, Texas, Greensboro, North Carolina, Austin, Texas, and Florida. Broadband 2 has been awarded over $10 million in the past three weeks alone. These projects will begin in the third and fourth quarter of 2000. Additionally, for the one-time in over -- first time in over twelve months, opportunity flow has picked up in each of our sectors we serve.

We presently have over $300 million of project bids to be submitted in the next 45 days alone. As we said recently, we will pick up revenues by our market share approach as our customers migrate to more capable and financially stable contractors.

Why we will spend sometime today analyzing the financial performance of the second quarter in detail, the Main topic of our quarterly conference call can -- call will address some of the other raw -- things that raw numbers cannot demonstrate. I'm talking about positioning the company for success. We define success as increase in profitability and market share, and today I would like to touch on four main things: financial stability, market adaptability, profitability, and corporate accountability.

We all recognize that this is a tough environment, but we are one of the survivors. We are not just going to survive. We are going to improve and grow.

I have said this before, but I cannot overemphasize it enough, in this environment, MasTec has a strong clean balance sheet. In 2001, the company took pro-active steps to adequately reserve receivables and instituted tough new credit policies. As a result, we have turned away significant sales in 2002, but we believe the quality of our receivables is unmatched in the industry. We also have an excellent liquidity, evidenced by our new $125 million credit facility, which has no outstanding balances at June 30th.

We believe that the numerous competitors have either lowered their amounts or have no remaining bonding capacity for the balance of the year. This presents a serious problem for these companies, and as a result, they are forced from the market. All during the first half of 2002, MasTec has been aggressively increasing our bonding capacity to gain the additional competitive edge. Finally, as our competitors have continued to go out of business, either through bankruptcy or lack of financial capacity, the strong companies like MasTec will pick that up market share.

Adaptability: We have been attractively -- actively positioned ourselves for the market share gain, during 2002, particularly the second quarter, when events began to change rapidly. We have seen weakened competition in all of our service lines, and this has set us up for a real opportunity for MasTec to increase market share. Why we have not talked much publicly about these for competitive reasons, it will make a real impact on our future business and profitability.

In the period from 1994 to 1999, the company had an acquisition strategy that diversified MasTec into a national footprint with nationwide brand services lines. Now our acquisition activity has turned to people, intellectual capital, and we are hiring the cream of the crop talent to enable to us to -- to be able to be positioned for the future. MasTec has been using this downturn in the market period as an opportunity to invest in the future by enhancing our services and our personnel. so we will have the best team to service our customers. We will also continue to obtain best talent available to ensure that productive future. Talent is currently available, at a fair price, and MasTec is a company that can, and will, attract this talent.

One example of our recent hiring of Eric Tveter as COO. Eric has a broad range of experience and contacts in the industry, and is a welcome addition to our team.

Our business is about our customers and our capabilities. In this environment, I have to stress that our customers are looking for stable, reliable, flexible solution providers. We believe that MasTec's technical expertise, financial stability, and instant expansion capability will set us apart from our competitors. We continue to develop long-term relationships with our customers and suppliers to leverage these relationships at every opportunity.

Our customers continue to see other companies pulling back and not be in a position to support them in the future. MasTec, on the other hand, is well situated to meet their needs in these difficult market conditions. By remaining in the state of readiness, we are capable of handling opportunities from our customers in efficient and profitable manner. As a result, we are in an excellent position to gain market share by customer, by geographic location, and by length of project.

Profitability: In the second quarter, we had lower revenue than expected and sacrificed, in current earnings, by slowing downsizing, in order to enable a quick response to a future known customer service demands. But make no mistakes, we will continue to manage for the long term and never sacrifice long-term goals and strategic positioning for the short term. No one hates to fall short of goals more than the MasTec management team. However, when we see opportunities to strategically reposition for increased market share, like we have seen in the last three months, we will be pro-active and focused on capturing these for the benefit of MasTec and its investors.

From an efficiency standpoint, we are in the process of completing our subsidiary consolidation. Our Oracle conversion project is approximately 1/4 completed, which should dramatically increase our back office efficiencies and lower costs. We continue to focus on efficiencies to reduce our cost structure, when appropriate, in order to improve long-term profits and return on investment. Don will speak to you more about this a little later in the call.

Corporate accountability: Corporate accountability and governance have been buzz words in the media and investment circles recently. However MasTec has been on the cutting edge of corporate accountability, and has committed -- and has a committed and focused management team. We have a knowledgeable and extremely effective Board of Directors, with the majority being independent. We have new auditors, Ernst & Young, that transitioned without any accounting issues from prior firms. And we have established a third party internal audit function staffed by KPMG auditors.

Today we will file the SEC-mandated CEO and CFO certification required by the top public companies like MasTec. You can be confident that the facts and financials presented to you are the real deal.

I'm now going to turn the call over to Don Weinstein and he can give you detailed summary of what has happened in the second quarter.

Thank you, Austin. And good morning to everyone.

As Austin mentioned, we are indeed in a very tough market. There's been pressure on revenue, due capital expenditure constraints by our customers, which clearly comes as no surprise to anyone on this call. While most of our revenue does come from master service agreements, and similar contracts that are ongoing and maintenance related, these industry Cap Ex declines and deferrals still can affect us, even though the effects are less than -- are less on us than for some in our industry. However, this environment does set up unprecedented opportunities for to us continue to execute and gain market share.

I know that Austin has already mentioned profitable market share gain potential, today. It really positions MasTec for future growth in revenues, margin, and net income. And we never talk about revenues without talking about margin and net income. You are going to hear more about market share successes from us in the future.

Turning to the financials: our revenue was $213 million for the three months ended June 30, 2002. The drop in revenue over the second quarter of 2001 was due primarily to a continued capital expenditure reduction, or spending weakness by our clients, and Brazilian currency translation, combined with our own internal decision to be very selective in our customer base by reviewing the credit quality of new and existing customers. As we discussed before, this pro-active action has caused to us pass on a substantial amount of work, but we believe that we maintain a high quality of accounts receivable.

Our cost of revenue were $183 million, or 85.9% of revenue for the three months ended June 30, 2002, representing a gross margin of 14.1% compared with a gross margin of 17.4% on $272.8 million of cost of revenue for the same period in 2001. 2002 margins were principally impacted by under utilization of personnel and equipment. Demobilization was slowed, somewhat, during the quarter as we prepared to take on additional work, and it's known additional work, that is being redirected to financially stronger companies like MasTec.

Austin mentioned some of that earlier activity. And I'm sure that we are going to talk about this more when we get into the Q & A session in a moment.

General and administrative expenses were $19.3 million, or 9% of revenue, for the three month ended June 30, 2002, compared to $36.2 million, or 11% of revenue, for the same period in 2001. However, it should be noted that, in general administrative expense of 2001, is included a reserve for bad debt of $16 million, to provide for receivables from clients who filed for bankruptcy. The increase in general administrative expense before bad debt, really adjusted from about 9.8% to 6.1%, as a percentage of revenue, was primarily related to the overall decline in revenues experienced in 2002 relative to 2001.

Depreciation was $8.3 million, or 3.9% of revenue, for the 3 month ended June 30, 2002, versus $13.6 million, or 4.1% of revenue, for the same period in 2001. We reduced depreciation expense in the three month ended June 30, 2002, by reducing capital expenditures, which is a significant story for MasTec, in terms of our effective management of Cap Ex in 2002, and also the disposition of excess equipment.

Amortization of intangibles decreased to $128,000 for the three month ended June 30, 2002, compared to $2.8 million for the same period in 2001. The reason is that goodwill, as we all know, is no longer amortized in accordance with SFAS 142.

Interest expense, net of interest income, was $4.3 million for the three months ended June 30, 2002, compared to $2.4 million for the same period in 2001. Although we did pay down all of our outstanding balances on our credit facility in 2002, we have experienced an increase in net interest expense of $2 million in 2002, principally resulting from periodic borrowings to meet working capital needs, as required.

Other income of $5 million reflects the gain on disposal of certain non-core assets which were held for sale.

In 2001, other losses, aggregated $6 million, related primarily to an impairment charge on our equity investment in a client.

For the three months ended June 30, 2002, our effective tax rate was approximately 40.9%, compared to 37.3% in 2001. And net income was $1.8 million, or 4 cents per share, for the three month ended June 30, 2002, compared with a loss of $2.2 million, or a 5-cent loss per share for the same period in 2001.

Now, focusing on the balance of 2002, we need to update our earlier guidance. Considering the environment, we feel it's prudent to adjust our revenue projections, but just down slightly, to reflect the recent capital expenditure reductions projected for many of our customers. We expect third quarter revenue to be between $220 million and $240 million, and earnings per share, from operations, to range from about 8 cents to 13 cents.

Looking at the remainder of 2002, our forecast for the year for revenue is between $850 million and $900 million. Now, due to our slower contraction of capacity, and the related drag this places on earnings, we will adjust our EPS estimate for the year to between 24 and 33 cents per share, exclusive of the SFAS 142 accounting charge adjustment that we had made in the first quarter.

As you know, because we have constantly communicated this, we are always looking for ways to more efficiently run our business. We continue to make progress in Oracle, as Austin pointed out, where we are converting to a standardized information flow between all of our operating units and offices. We continue to trim costs, where appropriate, and have downsized much of our operation.

However, it, as Austin mentioned before, we are not going to trim to the point where we can't take advantage of, frankly, these unprecedented opportunities to pick up market share. Growth for MasTec is not going to come only from future capital expenditure increases by our customers, but from MasTec continuing to gain on profitable market share. And we are convinced that the future, in our sector, is going to belong to those companies that combine technical excellence and flexibility with financial strength.

Now, in order to ensure that we have enough time for Q & A session, I'd now like to turn the call back over to the conference operator, so we can devote time on the call to listener in questions. Operator?

Thank you.

Today's question-and-answer session will be conducted electronically. If you'd like to ask a question, you may do so by pressing the star key, followed by the digit 1, on your touch-tone telephone. Once again, that is star 1 for a question. We'll pause just a moment to assembly the roster.

And we'll first go to Chris Newton with Morgan Stanley.

Thanks. Good morning, Austin and Don.

Just a basic question. I was a little bit confused here by the comments, where -- you guys decided to slow down your cost-cutting efforts, in spite of the fact that the revenue growth was coming a bit below plan late in the quarter. And I think it would seem to be pretty clear that the key to this story here, in terms of rebuilding credibility with investors, and getting the story on track is to -- is to get the cost cutting in line, because everyone knows that the market demand is quite weak. Why -- why did you slow down the cost-cutting? And where are we in that cost-cutting process?

Chris, we can break this down into three pieces.

We have gotten a couple of our groups -- divisions into a very good position with the cost-cutting.

We have other divisions, that we are working on right now, that we should have the cost-cutting completed in the third and beginning of the fourth quarter.

But we also have one division, broadband, that we eliminated our cost-cutting efforts due to conversations with customer bases, that they were looking for precise people and capabilities to ramp up very quickly for the opportunities that were going to present themselves late in the third, possibly beginning of the fourth, quarter. It's really, basically, a position where we sat down with the customer, detailed out the process, detailed out the individuals, and made the decision not to cut those costs back. We could have made significant changes in the second quarter, but by losing those people, competitors, or other companies, may have picked up those key individuals that have long-term relationships with our customers, that would maybe influence the ability for MasTec to get that large share of the marketplace.

And Chris, as we have all talked about the in the past, MasTec is still 100% committed to making all of the cuts we have discussed earlier. So, when we've talked about the timing of those cuts, that relate to both back office -- and you can see some effect of back office cuts in our SG&A margin for this quarter, you saw the improvement in SG&A, as a percentage of revenue -- the timing of the cuts, or the timing of the principal cuts, has always been, sort of, third, fourth quarter. The reason that you're not going to see a material improvement in '02, related to those cuts, is that there will be costs associated with those cuts. And so what we have always talked about, and just to refresh everyone on the call's recollection, is we have stated that we would have those improvements in SG&A, and cost of sales, implemented such that, on a run rate basis going into '03, that those costs would be reflected in their entirety.

So we are on plan. We continue to allocate all of the resources appropriate.

What we are saying is, there was some lower hanging fruit, in our business, that we could have addressed quicker. But based on known customer service demands, and these are very specific conversations, where the customers have excellent relationships with some of our stronger managers, these tend to be more expensive managers, and as they look at the ability to be successful, and fairly quick rollouts of business, they want to know that we have the right people on board to facilitate those rollouts. So some of the lower-hanging fruit, that we could have addressed in this quarter and previously, MasTec has made the strategic decision to retain those people, pay the short-term price, for the longer-term upside in opportunity.

Okay.

I guess I'm still a little bit confused why you guys are focused so much on market share. It's my -- even some of the smaller competitors are exiting the business. My impression is, there still is excess capacity industry wide, and the pricing environment remains relatively poor. But I guess what you're saying is very much the opposite, that the pricing environment is firming up because so much capacity has been taken out of the market. Could you kind of clarify?

First of all, the pricing of the marketplace is not firming up. The opportunities are definitely presenting themselves. There are situations with MSAs, that we know that are out there right now, where because contractors went in early last year at very low prices, those jobs are coming back out into the market. Normally it would be three to five-year contracts. But because the contractors have failed on them, because they went so low in pricing, there is opportunities out there. Those were in customers like BellSouth, Verizon, SBC, and, of course, just recently, if you take a situation like the MCI news that we mentioned here today, MasTec is one of four nationwide contractors, the only publicly traded contractor in the country, that is one of four that will provide services for the post-petition work for MCI. The courts have set aside $70 million to accomplish that work, and we're working off of POs all over the country. So there is a pure market share gain, where MasTec was a small player with MCI, probably over 150 contractors serviced MCI, in the past, and now they have selected, with the courts, four contractors in the US to meet their needs. I can't be more clear about a market share gain opportunity.

All right. Okay.

A final question, if I could, just real quick. What was the non-core asset that was sold and generated the gain in the quarter, the real estate?

It was a couple of pieces. It was both, some assets held for sale, as we have downsized our equipment on hand. We have sold some of those. We also sold some real estate, and other investments that we had in stock in foreign entities.

Okay. Great. Thank you.

And our next question will come from Marc Hughes with SunTrust Robinson.

This is Toby Summer for Mark Hughes.

I have a question, if you could give us a breakdown of the revenue between datacom/energy in Brazil? And another question, if you could just give us a list of your top customers, and the percentage of revenue, and then maybe talk about the backlog, where it stands relative to last quarter, and a year ago, and -- and if there is a margin associated with that backlog. Thank you.

Let me do the first and third, and I'll kick over the top customer list to Austin.

In terms of a breakdown of revenue, looking at the six months ended, telecom was about 48%. Cable was about 19%. ITS was about 14%. Energy was 13. And our international operations generated about 6%of our revenue.

In terms of the backlog, our backlog has declined about $200 million to about a billion two. And that's where we stand today. In terms of profitability associated with that backlog, it's principally MSA and MSA-driven, so it has fairly consistent and strong margins.

As for the top customers, we'll break this down in, really, the four groups we serve. Our top telecom customers are BellSouth, Sprint, US West, and Verizon. Our top cable tv customers are DIRECTV and Comcast. Our top DOT customers, right now, are Florida DOT and Texas DOT. And our two top energy clients are TXU and Carolina Power & Light.

Thank you.

Our next question, then, will come from Jim [McKillery] with [Ekbert Tobin].

Thank you.

When you look at the billion dollars, that you were -- that you thought you might get earlier, for 2002, and compare it to the $900 million you are expecting now, what went away? What -- what customer or what industry is responsible for that delta?

First of all, Jim, I think it's very important that you follow, what we talked about, what happened to us in June. We had a downslide in June revenues that was unexpected. That affects, of course, our overall number for the year. That is picking back up, and we're trending traditionally going forward now, but, you know, that definitely impacted the year.

We also see the bid market was very soft in the first half of the year, starting to hit us now, but these are jobs that will start -- some of these jobs will start in the third, some will start at the beginning of the end of the fourth quarter. But much of the effect of that bid market will be into the 2003.

Plus, Jim, our original guidance what was $900 to a billion, so we are actually lowering our guidance at the bottom end of the range by about $50 million. It's not a material reduction, which really reflects the vibrancy of MSA model, in terms of being able, even in these fairly difficult times, to maintain a positive and growing revenue stream Because, as you can see, different perhaps than some of our peer groups, MasTec revenue has increased first quarter over fourth quarter, second quarter over first quarter, and we are projecting another increase third quarter over second quarter. So our revenue continues to grow.

I will tell you, the disappointment, as Austin mentioned, was in some of the bid business, and some pressure on some of our historical stronger customers.

And that bid business, that you're talking about, is stuff that you didn't get, or stuff that just -- that they didn't want, or the bids were -- were not let?

The bids are out there.

MasTec has to make a decision, as it reviews its client base, just like we have done at the beginning of the year. Is it work that we really want? Is it long term in nature? Is it a functional customer that we can serve, and add value to them in a long-term? Or is it just a low bid process?

So, even though we have this kind of volume, much of it just gets thrown away, from MasTec's view of it, because it's just low bid. We still are going to be very focused on the fact that, anything we take on is gonna add value to the company long term, and it's gonna be with companies that we had to add value to for a long-term.

Okay.

You have said, during the presentation, increased market share numerous times. And, often, I know, that you used the MCI example as a concrete evidence of that, but is there, other than your -- is there more concrete evidence that you can share with us? Is there something else we can look at to -- to, get a better feel for that market share?

Let me go over a couple of companies that we have significantly increased market share with, and we expect to continue to expand.

DIRECTV continues to be a growing customer for us. Florida Power and Light is a very large growing customer for us. Literally, the DOT business, the ITS business, has become strong for us, and Florida DOT was a very expansive growing client for us in the last little while. Cogeco Cable, out of Canada, one of the main MSOs up in Canada area, has been a large growing client for us in this first half of the year, and looks to continue in the second half of the year. PG&E, a large, growing customer for us, and Valley Telecom, a large, growing customer for us.

And these are long-term in nature customers. These are the ones that fit our model. And these are ones we are excited about.

Okay.

A number question. Can you give me the head count in North America at the end of this quarter, and at the end of last?

The head count for the year has come down about 600. The head count, from quarter to quarter, has been -- there have been pluses and minuses, but it nets out to approximately 7500.

At the end of this quarter?

And last quarter.

At the end of the June quarter?

Correct.

And that's North America, or the total company?

That's North America.

Okay.

And the last -- I think the last question, is, you -- April and May were kind of what you thought. June was lower than expected. So as you're looking at this quarter, let's assume that July and August are kind of what you thought. What gives you confidence that September won't be a negative surprise also? I mean, what has changed out there to make you think that -- you know, that the telcos or the cable guys don't look at their numbers, and say holy -- holy stuff, Batman, you know, we're going to cut back again, just like we did in June.

Jim, needless to say, after the June anomaly that took place, we, then, engaged in very detailed meetings with the customers. We talked to them about the fact that this is going to be a recurring theme. Is this something we should anticipate? Should we be pulling back crews now, or not pull back crews now, to pre-anticipate this issue?

As we discussed it with our clients, they felt it was a one-time event in June, and they believe that they got to spend the money that's been allocated to them, even though it's a reduced amount. As in our announcement, we talked about the fact, that, the first half of this year they only spent 40 percent of their reduced amount Cap Ex to support their networks, and we believe that the second half will be in line with what we have historically seen.

Okay.

Is there any cost to them if they -- for not being completely forthright? That is, you know, if they think that it might happen, but they're not convinced, why wouldn't they just say that to you anyway? You know what I mean?

As we've talked about, the specific and direct costs to them relate to potential regulatory fines or potential franchise issues. You know, you cannot not spend on your base facilities. And so, that's what we saw in June, and that was merely a deferral.

And Jim, I think it's also important to note that, you know, we've been talking about it, and so has some of our competitors been talking about it, that these numbers have been at all-time lows for over a year and a half to two years now. Telecom RBOCs are not putting the dollars into their infrastructure.

At some point, this worm turns. Now, whether that's in the next six months, next year, next two years, something's got to give here because you can't keep these low end spendings going forever. You've got to service the customer base that's paying a bill.

And, thus, you know, that's where MasTec comes in to support their networks. As they continue to cut back their staffs, and their internal employees base, it only leads them to an outsourcing solution. At the end of the day, these are large networks that need support and need maintenance done to them.

Here again, they have been at their low ends for a year and a half. You know, there's some point where the information we gather has got to be true.

I think they just got some directives, in the last part of the second quarter, to cut back as hard as they could, because of current market conditions. However, it's a short-term solution. It's not a long-term answer.

Okay, great. Thank you.

Our next question will come from Rom Katsgaard with Morgan Keegan.

Austin, got a couple of questions for you. The first one is, on the balance sheet, can you discuss, you know, accounts receivable, DSOs, where it stood at the end of the second quarter versus first quarter, and what we may expect in that balance sheet item going forward?

Our DSOs -- Don will go through the financials on that, Ram, real quick, but the DSOs went from 83 to 86.

When you look at, Ram, the way we look at DSOs, considering the fact that we have had a, sort of, year-over-year revenue decline, on a LTM basis, our DSOs at June were about 86 compared to prior year, they are about 91. So you do see an improvement. Obviously, we're not satisfied at 86. And we have previously made the commitment that we would get the number down into the 70s, and we continue to work to move the receivables in that direction.

Okay.

Secondly, is there any more risk in the receivables, or is it all completely scrubbed out?

We've mentioned that in our note. We've gone through the full process of having new auditors come in, hiring new internal auditors, and we have, you know, we've literally looked at every one of our clients from top to bottom, Ram. Our exposure clients are gone.

Okay.

For those -- just so we're all clear, for those clients where there is exposure, we have liens in place, or other security, to mitigate any potential exposure.

Okay. Secondly, maybe Don you can answer this. You know, you did some goodwill write-offs in the first quarter. Where do you stand right now on your goodwill, as you see -- as you see yourself lowering your targets? You know, I mean, is there any exposure to goodwill charges over the next couple of quarters, or as you come into the end of the year?

No, we continue to do discounted cash flow valuations internally to support the goodwill amount on our books. We've certainly updated that, based on internal forecasts, where we're going to be for the year. The strength of the cash flow of the business still completely support the amount of goodwill we have on our books.

Okay. So, in a nutshell, you don't really expect to take any charges, as it stands right now?

Correct.

Okay.

You know, you made a comment, in that press release, that you thought your large communications customers had spent only 40 percent of their lowered Cap Ex forecast. Is that what has given you some confidence that the spending will come through now, you know, as the economy picks up, or whatever, and that's why you expect the second half to start showing some sequential uptrend in revenues?

I think, Ram, for one thing, it's just a factor. It's one of the factors we're looking at.

Please understand that after June's anomaly took place, once again, we went right back into our customers and started talking to them about where they are going to be for their budgets. And we asked them if they were going to have another reduction, so we could manage to do that by reducing some cost structures in those locations.

They're managing, still cutting their costs -- their Cap Ex down, by consolidating a lot of their back office structures. For example one of our customers used to be in 12 regional offices. It is now going to be in one. So they are consolidating their back offices.

So in that process, we've gone through it, we've looked at it, and they give us comfort that they have their budgets, they're going to be spending those budgets, and that they have to be cautious in June.

Okay, and then, finally, as you look at your -- you talked about your revolving line, you're not really gone into it. Now, where do you stand in terms of your covenants, you know, in terms of accessing the facility or having the facility available?

As we put in the press release, because, certainly if you are going to come out with lowered guidance for the year, we did want to make sure that there was no misunderstanding. Even at the lowered guidance level, we are currently in compliance with our debt covenants and we will continue to be in compliance with our debt covenants. We don't believe that there is any risk at this time regarding either of our two financial covenants.

Okay. That's great.

And finally, Austin, I know it's a tougher environment. I have never seen it get this bad, you know, who knows where it goes. But you know, are you able to right now start taking a look at '03 or is it still too early to -- I know you come out with a range for '02, but, any visibility for when you might see a pickup, you know, a real pickup?

I think there's --

The bottom line is, is in the last 45 days, 50 days, we have received this $300 million of bid activity. We were not seeing that, Ram, in the fourth quarter last year or the first quarter this year at all. We also understand that, you know, there's going to be a major event that still's going to take place before this year, that -- the end of the year, that's going to really impact 2003, 2004, and 2005 guidance. And, of course, that's an MSO provider that we've all talked about, here, in the past.

So right now, we are not providing any guidance in 2003. But do I believe, because of where MasTec is positioned on its historic MSA, and where it's going to be positioned on some market share gains, that we are working on today, very aggressively, that's going to cover the base? And I think the growth is going to come from some of these new convergent markets from some MSOs.

You know, if I can ask one more, because you talked about what you think in the marketplace. You talked about lowering your head count. What is happening in Brazil? I think you gave us an estimate of Brazil being roughly 6 percent of revenues right now. Can you put into perspective -- you had a 35 percent decline in revenues, and I know, in the first quarter, you told us you had that decline because of emerging carriers not being this year versus last year. Can you put your revenue decline in perspective as to what percentage your customer base last year is not here this year?

Ram, first of all, I think what we need to put in perspective is, is that the one reason that the revenues seem lower this quarter is because of the devaluation of the Real. But also, we are still working for the same customers we were working for last year. I think just the same issue, down there, is happening, in the state, is happening, down there, where our customers just aren't letting out as much of volume. They are just doing exactly what they need to get done to accomplish their task.

Don's got some numbers here that he can share with you.

Yeah. I mean, if you just look at a year-over-year change in June of '02 versus June of '01, you know, our revenue from the CLECs is down about $140 million. And that is the largest principal adjustment. The next adjustment would be about $60 million less, year-over-year from, cable companies.

Okay. Thanks a lot.

Our next question will come from Eric Warren with Kaufman Bros.

Good morning.

Good morning, Eric.

Just a little clarity. Where is July in relation to May levels?

July is up from May levels.

Okay.

As well, how's AT&T coming? And do you think you'll be investing more -- will you have to invest more to ramp up to service MCI?

One of the wonderful things about this -- the only good news about this whole thing is, we're not going to invest much. We've a lot of assets that are sitting on the sidelines, and we can bring back into the MCI opportunity, bring back into the potential Comcast/AT&T scenario. And we're really positioned well to go quickly and gain that market share very fast.

On the second note is, is AT&T, we've had some recent wins in a couple of their marketplaces. We have started in Denver, Colorado. We're starting some projects in Dallas, Texas. We're starting some projects in San Francisco. We're increasing our capabilities in Atlanta, Georgia, for them right now. So, they are starting to let out the work, actually, and some of those are actual market share gains for us.

What was your cash balance at the end of the quarter? And could you go over your two major credit covenants, just for review?

Sure. The cash balance at the end of the quarter was $9 million.

The two covenants we have, we have a tangible net worth. Now, recall, our credit facility is North American only. So if you look at my consolidated financial statement, which includes the impact of international operations, you won't be able to compute the number.

Okay.

But we have a tangible net worth covenant of $180 million, and it's all culled out, by the way in our 10-K and 10-Q. Where we go in some detail. But we have a tangible net worth covenant, and we have a fixed charge covenant of two times.

Okay. Thank you.

Our next question will come from Joe Gladue with The Chapman Company.

I guess most of my questions have been answered, but to follow up on one of Ram's questions, did you give out the actual number for accounts receivable?

No, I -- I don't believe we did. I mean, in the press release, we show a total current assets, just leafing to that right now, and our total assets of $718 million, working capital of $206.

We are filing are our Q today, our account receivable at June 30 was $228 million.

And just a little bit, if you could talk a little bit about the MSA activity. Do you guys have any major MSAs up for renewal or rebid this quarter or next? And I -- and I guess what's the -- how's the competitive environment in regards to those?

We have been extremely aggressive in pre-negotiating the extension of our MSAs. We're literally out six months to a year, minimal, to try to set up for another three to five-year term on our MSAs. So we have no current MSAs, that we're serving, that are coming up for a bid.

Okay.

And you did -- also you mentioned that there was roughly a $300 million in bid activity you've gotten over the last 45 days. If you -- if you guys are successful with that bid activity, when could some of that stuff start showing up in revenues?

You see a few of them show up in the third quarter and you'll see some of them show up in the fourth. The ones we choose to take.

I mean, what I want to make sure the group understands, we will look at these clients that we have these opportunities with. And once again, if those $300 million of opportunity doesn't fit into what's going to meet the MasTec's client criteria, we are not going to go after it. We are not going to go after this just for capacity of revenues, either. We're going to go after solid bidding, solid opportunities, and create profits for the company going forward. So we want to get good revenues.

However, it's just interesting to note, that this kind of volume exists right now, because we did not see it in the fourth quarter. We did not see it in the first. And we just started to see it at the end of the second.

Okay. Thank you.

Next question will come from John Laforge with Phoenix Investments.

Hi, everyone.

The question I have was more on competition. You're saying you've got a lot of equipment hanging around, and I'm assuming everyone else has a lot of equipment hanging around. How important is it to a lot of your customers that their -- people in your situation are bonded and so on? Is that number one on the list?

Well, for some of our customers it's absolutely necessary. For our DOT work, for some of our telecom work, and for some of our energy work, there's not a choice. You're either you have bonding capacity or you don't. You either can get a pre-qualify or you can't.

Okay.

So as we see that happening in some of that customer base, you know, right now we see MasTec having an advantage -- to some of our competitors, especially the mom and pops that are out there.

When it comes right down to the fact that, you know, some of these people are lowballing jobs, I think we've all got to understand that it usually takes six months to a year from the cycle out of the business. Now, just recently, an underground communication construction magazine, they announced that 25%, in the last year, of the underground directional drilling contractors, have gone out of business. I mean, that's 25 percent of the marketplace was there just a year ago, has been removed. And, if you look back to our old notes of a year ago, there was some 700 machines returned to vendors after the end of 2000.

So I mean, this industry is really pulled backed, and there is not that many capable, ready, able to go contractors out there to service the need. There still is -- you know, still some capacity issues, that we have competition, but it is coming down in the right direction.

So, when you are in the middle of a bid, because this 25 percent has been lopped off, have you noticed that there are less people in the middle of a bid, or are you not privy to that information?

We're privy to the information. Two things have happened. When we would go to a bid in the first quarter, it would be -- it would not surprise us at all to have 45, 50, 60 companies at a substantial bid. Today when we go to those same bids, that number might be 15. The difference is, today, those 15, the real question is, who's survivable, who can really perform that work, and who's the customer really going to take seriously?

I mean, one of the things that has happened to the customer is, they are under a lot of pressure to take the low-cost provider. However, is the low cost provider their ultimate solution for long term? And what you are seeing is the failures starting to come through. You're seeing the small guys falling apart, because they were just making payroll, they weren't running a business.

And so, we've got to stay disciplined, and we're not going to chase that work right now, that we're going to be disciplined in the approach that, we'll watch what happens, and we'll let that customer understand, that if they need our help, we're here to help them get through a change when it comes available.

What does your experience say that will turn the customer on to the fact that they really made some mistakes in hiring the low bid, regardless? Does the market have to improve? Does their Cap Ex have to come back up so they don't have to be as lowball in who they're looking for? Any comment on that?

First of all, each customer has two obligations. And that is to get their work completed and to meet their customer needs. And secondly, do it at the best costs.

Okay.

And when you go past the line of the best costs, you drive the costs down so far that your contractor can't survive, then you have jeopardized your ability to supply a service to your customers.

Gotcha.

The bottom line is, there's a turning point here. And, you know, once again, we are talking with three to four customers, right now, existing customers, about gaining market share and MSA work, because of failure on behalf of a low-bid contractor last year.

What about -- do you know anything about the regulatory fines the Verizons may come across, if they don't start upgrading the network? Are they substantial? Are they something that they can just let go until the economy gets better?

You know, different companies are going to take different approaches. I would hate to quote on how a Verizon is going to handle a regulatory issue. They've to deal with them. They can't just brush them off. They've to keep the local politics in order for future.

You know, some of them have brushed them off. Some of them take them very seriously. But at the end of the day, you're going to lose customer share.

I think that the fact that you've got pressure from DIRECTV, you've got pressures from the MSOs, that are, you know, whether they engage, and how far they go into telephony, or don't go into telephony, going forward. They still have the capabilities of competing in that marketplace. And as customer satisfaction erodes on the RBOC side, or the local telecom side, maybe it's more compelling for the cable player to spend some more money to get the telephony out, because they can grab the customer base. It's a fine line.

At the end of the day, there's a customer that's paying you their hard-earned cash for a service. And you're either delivering that service, or you aren't. One of the other interesting factors is, and I think we have to all remember this, is thousands of companies, thousands of companies throughout the United states, are still hooked up to T-1 lines.

Yeah.

And $1,000-plus a month for that hookup. Well, that's not most efficient. That's not most cost-effective. And that's not the final solution that a business needs.

But it's the only thing that's out there. Well, the reason it's the only thing out there is because the MSO-- the MSOs and the telecoms haven't provided another business solution that can be easily rolled out to businesses all over the country. I mean, we are still in an arcane world, and what we're offering business today, for our service, and a high dollar expense.

You were remarking in, I believe in your press release, something about broadband picking up. Can you go into a little bit more detail?

Well,what we've seen is, is that AT&T has been talking about spending their money for quite some time.

Okay.

It wasn't happening, it wasn't happening.

What we're seeing now is some letting of contracts. We have been out there, working with our customer base, for pretty much six months, making sure that we are positioned for the opportunities when they started pulling the triggers. AT&T is starting to pull some of those triggers.

Okay.

Granted, it's not at the volume that is we expected it to be at, but it's started to happen.

And one of the things about market share, and market penetration, is if you get your foot in the door on their first projects, and you do a great job, which MasTec is capable of doing, and it has done in the past, then you have your foot in the door for the long-term future of that opportunity. We are out there. We are on the cutting edge of those opportunities. And where AT&T is starting up, chances are MasTec is nearby or in there.

Great, thank you.

Next go to Jim [ unintelligible ].

Yeah. I'm sorry. If we look at the September quarter, you said July was better than May. How is August looking relative to either July or your expectations?

We are just -- of course, we're only 15 days into August. So, you know, we're about a week behind in our information, and that's just normal for the field. But, we'll monitor very closely and make sure that we're out in front reporting to where that stands.

Do you need a big month of September in order to hit the 230, or so, in revenues?

No, the third quarter is, historically, more of a flat quarter, month to month, for us. What you see is a slow -- you know, we've talked about these many times, but the first quarter is a ramping up. Starting from real slow levels to build-up.

The second quarter usually builds -- starts getting up to a top-line number right in June. We didn't see that this year, with what just took place. But July coming back.

You'll literally see the third quarter being more of a flat quarter, month to month. And you'll see the fourth quarter being one that's very strong in the first couple of months, and potentially weakening in December.

But it really depends on on of these new rollouts that we are thinking we are going to hear about the in the fourth quarter, whether that really happens or not.

And we keep dancing around those announcements. I'm assuming we are talking about an AT&T/Comcast deal.

Now, to avoid you having talking about it specifically, can we just talk about it theoretically? Let's assume the deal closes at the end of this year. And let's assume they just choose you to do some work. What type of time frame would it be between the time the deal closes, to the time they choose you to do work, or somebody to do work, and then the time that the work actually begins and a company starts booking revenues?

First of all, I think it's important to understand that MasTec does engineering services, as well. One of the first steps to this large of a type project, that you're posing right now, is that engineering services need to be done. MasTec is very capable of offering those services, and it has definitely expressed to the customer, on many levels, that we're ready and able.

The second part of it is, is that it is our understanding that when this event does take place, in the event this event does take place, that the ramp-up speed will be extremely fast, and their rollout will be extremely timed to get the best effect for cash flows in the future. They can't -- because of franchise commitments that haven't been met for years, there's going to be a lot of pressure on this thing to be rolled out from multiple reasons.

And what are the -- what are the -- what are the hurdles that still need to be overcome for that? Is it just -- I think it's just federal government approval, now, isn't it?

My understanding is federal government approval.

Okay.

And finally, assuming, again, a positive event on that, what gives you confidence that the rest of your cable business just doesn't collapse, and make it, you know, make it a wash? Because -- you know, if you look at Cablevision and Cox and everybody else, they're all cutting their Cap Ex pretty dramatically.

Let's go to the extreme that the deal doesn't happen, okay? AT&T, as they sit today, still has enormous commitments that they've got to get done. They haven't been doing it for a couple, three years. There's franchises in question. You still have to upgrade your system to your franchise promises.

If you listened even to Adelphia, and what's been happening with Adelphia, their most important situation, that they take care of, and they talk about, and they have announced, is protecting the franchise. That is the inevitable ability for them to sell their systems, or maintain a long-term relationship with their clients going forward. The franchise is the key to their success.

Okay. Thank you.

And due to time constraints, we'll take our last question from Marc Hughes with SunTrust Robinson.

Thank you very much.

Quick question on the energy segment. It looked like, at least in terms of percentage of total revenue, it dropped this quarter. Curious if there's any -- were there any customer issues there, or slowdown in the overall market? Thanks.

The energy market has really been fairly stabilized. I just think that the telecom, as a percentage of income, just went up because of our, you know, stable MSA contracts that we have there. You know, so I -- the energy business has been very stable for us. As a matter of fact, it -- it continues to have some opportunities to grow and expand.

Okay. The six-month number's at 13%. I think the Q1 number was 20%. Which seems to suggest a decline. Is my -- are my numbers wrong or --

No. I think what you're seeing is, as Austin pointed out, you know, just relative to timing of our customer expenditures, you know, I think on a yearly basis, you'll see that, you know, energy will pick up a little bit, in terms of total percentage. And telecom will trickle down some.

Okay. Thank you.

We would like to thank you all for joining our call today, and look forward to discussing issues in the near future with you, where the company's going, what it's accomplishing, and keep you updated on future developments. We thank you very much for joining the call and have a good day.

This does conclude today's MasTec, Incorporated, second quarter earnings release conference call. Again, thank you for your participation.