MasTec Inc (MTZ) 2003 Q1 法說會逐字稿

Good day, everyone. Welcome to the MasTec, Incorporated first quarter 2003 earnings conference call. Today's call is being recorded. The following statement is made pursuant to the safe harbor forward-looking statements provided by the private securities litigation reform act of 1995. During today's call, we may make certain statements that are forward-looking such as MasTec's future results and plans and anticipated trends in the industries and economy's in which MasTec operates. These are based on MasTec's current expectations and are subject to a number of risks, uncertainties and assumptions, including that revenue may differ than that from projected. We may be impacted by slowdown in our client's businesses or deterioration in our client's financial condition.

Reserves and allowances may be inadequate or the carrying of our assets may be impaired pending the outcome of litigation may be adverse to us and we may be experiencing real costs associated with realigning our businesses or be unsuccessful in those efforts. Should one or more of those risks materialize or the underlining assumptions prove incorrect, results may be differ than implied in the forward-looking statements made by the company in this conference call. These and other risks, uncertainties are detailed in documents filed by the company with the Securities and Exchange Commission. MasTec does not undertake any obligation to revise the forward-looking statements to reflect future events or circumstances. I'd now like to turn the call over to Mr. Marc Lewis, MasTec's vice president of investor relations. Please go ahead

Thank you. Good morning. I would like to welcome you to MasTec first quarter 2003 conference call. We have Austin Shanfelter, President and Chief Executive Officer and Don Weinstein, the company's Vice President and Chief Financial Officer. The format of the call will be opening remarks from Austin and will be followed by a detailed summary of the quarter from Don. We have new SEC regulations. Financial discussions will be limited to GAAP based financial items. These discussions will be followed by a question and answer period. We expect the call to last approximately 45 minutes. Austin?

Thank you, Mark. Good morning. Welcome to our first quarter call. Yesterday, we reported the revenues and earnings for the first quarter of 2003 fell within the range of our prior guidance. Today we were reaffirming our prior full year guidance for revenues of $750 million to $850 million with earnings of 18 to 28 cents per share. Before we discuss the financial details of the first quarter, I would like to spend a few moments reviewing the general activity in all of our service offerings.

As we discussed in the fourth quarter call, we made a conscious decision to eliminate service offerings that were in 2002. Our business is now focused on providing infrastructure services for telecommunications, broadband, intelligent traffic systems and energy utilities. We have the broad range of customers with significant geographic diversity. In telecom, we see pressures on customer's capital expenditures. However, since most of our -- much of our revenues are mission critical maintenance work that literally keep our customers' network up and running, the customer spending in these areas continue to be less impacted than the other discretionary expenditures. We did notice lower than expected cap ex in '03 when compared to '02 for [Inaudible] and our U.S. customers. This appears to be budget and weather related. Even in this environment the revenues reductions have been mitigated to some degree with extended and expanded business relationships for some of our major customers. MasTec has also been active in the attractive federal markets which is estimated at $50 billion a year.

MasTec is a subcontractor to a federal prime contractor such as General Dynamics, a subcontractor for GSA connections, master contracts, and has obtained GSA schedule contracts that will allow the company to sell directly to the federal government. MasTec has obtained $12 million of federal contracts in the last 12 months, and we expect that number to grow. In broadband, the previously announced upgrade for ComCast system is well under way and should accelerate for us throughout the year. Additionally, we will be starting our new projects from other cable operators, such as Cox Communication and Adelphia. We anticipate continued opportunities from our customers during the year. We have also started working on the regional fiber installation and deployment project for the development authority of the north country in northern New York state with the initial construction budget is $11 million.

Finally, our installation in the home service continues to expand with several customers that should provide growth and revenues and earnings in the coming quarters. In the coming quarters, we will deploy the expanded service offering to several existing customers in a variety of geographic areas. Our intelligent traffic systems group also is expecting growth this year. For example, in the first quarter of 2003, we obtained contracts for $57 million and several states including Florida, Alabama, Georgia, South Carolina, North Carolina, Maryland, Texas, Illinois, and Virginia. While EPA compliance drives IPS spending, MasTec should be the beneficiary of additional demand created as a result of increased homeland security for airports, sea ports, border security projects, along with nationwide Amber alert system expansion. MasTec should see enhanced performance in this area. We continue to expand our geographic coverage and capabilities.

In the energy group, we continue to focus on increased MSA opportunities with existing customers and expanding our coverage area. We've expanded our substation backlog in the recent months and have been awarded additional dime substation contracts ranging from $350,000 to over $3 million each. We continue successfully negotiating and renegotiating existing -- and exiting on marginal contracts and adding new business. Recent customer such as Gulf Power has expanded that footprint. We have reduced our headcount by almost 400 people in the first quarter. Additionally, we also target areas for increased efficiency and cost savings in our purchasing, fleet, safety, and insurance operations. I am now going to turn the call over to Don Weinstein and will give you the financial summary of the quarter just ended.

Thank you. Good morning, everyone. We had very tough weather in the first quarter 2003 which affected our productivity and revenue. Winter storms affected our operations as far south as Corpus Christi, Texas and shut down some projects entirely for as much as two weeks. As a result, we saw significant pressure on margins during the first quarter of 2003. Even so, I would like to point out how our operating results were still in the range of our earlier guidance. The overall financial improvement spurred by management actions taken in the fourth quarter continues to position the company for improved profitability and cash flow. We had some carry-over cost and additional headcount reductions in the first quarter from the restructuring efforts, the associated costs are mostly behind us. Looking at the numbers, our revenue was $180.6 million for the three months ended March 31, 2003, compared to $203.8 million for the same period in 2002, representing a decrease of $23.2 million or 11.4%. The decrease was due to delays related to severe weather as we have discussed, voluntarily exiting from certain service offering activities and client relationships, and a reduction in capital expenditures by certain clients.

Our costs of revenue were $152.8million or 84.6% revenue for the month ended March 31, 2003, compared to $164.6 million or 80.8% of revenue for the same period in 2002. In the three-months ended March 31, 2003, margins were negatively impacted by severe weather which resulted in the underutilization of personnel and equipment. Depreciation expense was $8.4million or 4.6% of revenue for the three months ended March 31, 2003, compared to $9.9 million or 4.8% of revenue for the same period in 2002. Depreciation expense declined in the three months ended March 31, 2003 as a result of reduced capital expenditures by MasTec and the disposal of excess equipment. General and administrative expenses were $17.9 million or 9.9% of revenue for the three months ended March 31, 2003, compared to $22.1 million or 10.8% of revenue for the same period in 2002. The decrease is due in part to the implementation of our restructuring plan that commenced in 2002 and is on going.

The decrease occurred as a result of the termination of employees, the consolidation of facilities and office closures. You should expect that we will always adopt additional measures to streamline our cost structure such that it is consistent with our revenue stream at the time. Interest expense, net of interest income was $4.5 million or 2.5% of revenue for the three months ended March 31, 2003 compared to $4.7 million or 2.3% of revenue for the same period in 2002. Although we continue to incur interest expense from our long-term debt, unused line fees and periodic credit line borrowings to meet working capital needs and support various letters of credit, we reduced interest expense by $.4 million during the three months ended March 31, 2003. For the three months ended March 31, 2003, our effective tax rate was 39.5% compared to 41.8% in 2002. Net cash provided by operating activities was $5.2 million for the three months ended March 31, 2003. The net cash provided by operating activities in 2003, in part, resulted from collection of receivables, changing of working capital and the receipt of $22.7 million in income tax refund results from losses incurred in 2002, net of an interest payment on our senior subordinated debenture of the $7.8 million and other cash payments associated with restructures efforts taken last year. During the three months ended March 31, 2003 we invested $1.2 million in our fleet to replace or upgrade our equipment and $0.9 in technology enhancement.

As of March 31, 2003 we had no outstanding draws under our $125 million revolving credit facility and are in compliance with the financial covenants. Looking at self collections DSO improved from 82 to 80 days in the quarter. For the quarter, some of our largest North American customers were, in alphabetical order, Bellsouth, ComCast, Direct TV, Florida Power and Light, Progress Energy, the Sandwich Islands Communication Company, Sprint, Verizon and various DOTS. MasTec customer base continues to be diversified by region and client with no one customer making up 10% of sales during the quarter. This is further evidence of customer diversity if that for the quarter the top ten customers comprise less than 50% of total revenue.

Finally, regarding revenue, MasTec has been a top -- strong top-line performer which we attribute to the strength and predictability of our master service agreement or MSA model. In the first quarter of our top ten customers forward telecom MSA customer, three were energy MSA customers and two were broadband MSAS. During the last quarter, revenues by industry service offering whereas follows. Telecom amounted to 34.5% of revenue or $62.3 million, energy was 20.8 -- 20.8% or $37.5 million. Cable was 21.6% or $38.9 million. ITF and our government work was 19.3% or $34.9 million And the international operations were 3.8% or just under $7 million. Now, turning back to Austin.

Looking forward to 2003, our investors should continue to expect measurable improvements of the financial performance of the company in the last three quarters of the year. Things are improving. Our shareholders should have already received their proxy materials for the upcoming media shareholders to be held in our Miami office on May 30 at 9:30 a.m. We invite today's audience to attend and look forward to talking with our investors individually during that meeting. I would like to say a word to the team members in 2003. 2003 has already started off with in a positive manner and we want to say thanks to the employees that have continued to work so hard for the benefit of this company and the shareholders. In order to assure we have enough time to the Q&A session, I would like to turn the call back over to the conference operator so we can devote the remaining time to listeners questions.

Thank you very much. Today’s Q+A will be conducted electronically. If you would like to ask a question, do so by pressing the star key followed by the digit one on your telephone. If you are using a speaker phone, make sure your mute function is turned off to allow your signal to reach the equipment. We will proceed in the order you signal us and take as many questions as time permits. Press star one on the touchtone telephone to ask a question. If you find that your question has been answered, you may remove yourself from the queue by pressing the pound key. We will pause for a moment to give everyone an opportunity to signal for questions. We'll take our first question from Joe Gladue(ph) with Chapman Company

Yeah, hi. Congratulations on a good quarter. Just like to ask a question about the telecom area. I guess we've seen most of the carriers have reported and it looks like their capital expenditures in the quarter amounted to somewhere 15, 18% of what they're estimating their full year will be. Do you think -- I'm wondering what you're seeing on your end. Do you think there will be undercutting their estimates for the year? Do you think there's an acceleration coming for the final three quarters of the year?

Right now we don't have any indication that they are cutting back continuing for the rest of the year. I think the weather impacted some of the spend as well. If you look at our sector and others that are in it, you know, we all have a lower than normal expenditure in the first quarter from the cap ex side, but I think it was weather related. They couldn't get the work done and get out there and perform. As well, I think they pulled some costs back as well. So at this particular point we believe that their budgets will be spent this year. We have not seen any announcements other than, you know, some from AT&T about how they're going to control their expenses. At this particular point we see a consistency in the fact they'll spend the money they have, which is -- I think is around -- they spent $5.5b in the first quarter and last year they spent $7.5b. We see them making that up through the year

Two quick numbers questions. What was the headcount at the end of the quarter?

the headcount ended up at about 6500

Okay. You did close some facilities in the quarter. Can you consolidate some facilities -- can you give us an idea how many that was and if there's more to come

We continue to close down facilities and exit leases. We probably have been able to close down around three to four new facilities in the first quarter. We expect more of that in the second quarter, exiting probably some 15 to 20 by the end of the year

Okay. Thank you.

Thank you. Next we'll go to Romeo Reyes(ph) with Jefferies & Company

Yes. Good morning. With respect to second quarter guidance, would you mind, you know, giving us your best guess of what your second quarter EBITDA is likely to be. Are you sticking to the 10% EBITDA margin that you've talked about in the last couple of conference calls for both the second quarter and for the full year. You know, would you anticipate generating 75 to $85 million of EBITDA. That's the first question. Second question, were there any reductions in payables or accrued liabilities in the first quarter that would have used any cash? Obviously, you benefited from that income tax refund. The last question is, with respect to cap ex, I jotted down that you spent about $2.1 million. I didn't hear you -- whether it was $2.1 million. You talked about two lines, $1.2 for something and $1.9 for something else. Can you go over what the cap ex was for the first quarter? I missed it. Lastly, what you anticipate your full year '03 cap ex to be. Thanks

Good morning, Romeo.

Good morning.

I love one question with four parts. First, regarding your questioning on EBITDA, the SEC and recent law changes under Sarbanes-Oxley limits our ability to talk in terminology that is outside of the GAAP literature as EBITDA is. Let me help you --

Don, to the extent that you can reconcile that to a GAAP number, you know, virtually 99% of the companies that I cover are giving out EBITDA numbers. All they're doing is putting in a schedule that consolidates or reconciles the EBITDA number to either cash flow from operations or EBIT numbers. To the extent it is possible, a lot of companies are doing it. Just FYI

I understand that. My second part of my comment was going to be, let me help you get there. If you start with the EPS guidance of 3 to 5 cents, from that the adjustments you would make would be tax. You see the tax rate is approximately 40%. So you can make the adjustment for taxes. You should expect interest expense to be about the same in the second quarter. You should expect depreciation to be about the same or a little bit higher as we continue to grow the business. So based on those adjustments, looking at a calculation of earnings before interest, taxes, depreciation and amortization, you should be able to compute an EBITDA number. I will take it under advisement about future releases having some form of reconciliation inside the document itself

That helps the bond holders. It helps them out a lot. I've been asking you for the last couple of quarters. I hate to ask it again and again. I get ten calls from bond holders asking me the same questions. So I'm not asking you just to be a pain. I'm asking you because a lot of people are clamoring for that information

Romeo, that's why I try to help you every quarter and an interim basis as appropriate of the looking at the reductions in payables, yes, there were reduction in payables. There were cash payments of about $6 million associated with accruals for the restructuring effort. We've been aggressive in accelerating our claims closure within our casualty program and legal basis in terms of settlement itself. The sentiment basis for legal claims alone because, as with other claims, when you come to an understanding of what the fully developed cost would be, you want to get those closed as soon as possible. That used about $3 million. I mention we had a bond interest payment. That, obviously, affected the accruals. That was about $8 million. So you had about $17 million of cash utilization in the first quarter, which is, other than the interest expense, unique to the first quarter. In terms of the capital expenditures, the $2.1 million was made of up two pieces. $1.2 for equipment and .9 for IT spending

So that number was 2.1, right?

Correct

Perfect. What do you expect it to be for a full year '03?

As we talked about in the past on previously calls, you know, MasTec is still committed to achieving the 10% EBITDA margin. I think as you watch our company through this year, you will see clear improvement in gross profit, SG&A and, ultimately, developing the 10% plus EBITDA margin

Okay. But on the cap ex, what do you expect? Do you expect that 2.1 million per quarter to be the number for the full year or, basically, is it going to be higher than that?

We got it around $15 million for the year

15 million. Great. Thanks.

Next from ISI capital, we'll hear from Chris Charles(ph).

Hi. Romeo asked all my questions. Thanks

Next we'll move to Alex Rygiel with Friedman,Billings and Ramsey.

Thanks you very much. I have a couple questions. First, can you tell us what your backlog was at the end of the quarter?

A little over a billion two. About $30,000 more than it was the end of '02.

Any change in mix with your backlog or change in margins within your backlog on a sequential basis?

Not on the margin basis. The mix was a little bit more weighted toward broadband work and a little -- toward broadband and ITS and a little less related to telecom.

Great. Can you somehow attempt to quantify the negative impact of weather on both revenues and earnings per share?

On the revenue side, I think you probably saw an impact of between, you know, anywhere from 10 to $15 million on the revenue side. We saw locations in the northeast that lost up to two weeks. I think it is very important to understand that in our models we have to have people that go to work in the morning that show up, get paid for that show-up time. So, you know, the productivity side really impacts the margins at the bottom line. So having those incremental revenues attached but yet having full productivity of our staff, it could have impacted our margins significantly in the first quarter. As Don mentioned, we had weather even in March down as far low as Virginia, the Carolinas, which is just abnormal. The mid-west where a lot of our U.S. clients are located, they still had deep ice in frost lines 3 and 4 foot deep as of March going into April. It was a severe winter. Productivity can't happen. One of the things you don't do in this business is either start a project when it's those kind of conditions because of the expense to restore it is not cost effective for the company either.

With regards to your margins, you know, I'm looking at your year-over-year decline in headcount. Headcount is down something like 13% year-over-year. Revenues are down 11%. That would imply that your revenue base is more productive today than before, but, yet, your gross margins are also down. Can you help me to reconcile those two? Is it pricing that difficult out there in the marketplace, or am I just missing something on the gross side?

I'm sorry, Alex. Just for clarity. Are you talking March 31 of '02 versus March 31 of '03 or sequentially?

Year-over-year so 1 Q to 1 1 Q.

What you had in Q1 of '02 was remaining revenue from some of the businesses, the sea lock and long haul which existed in Q1. That work tended to be higher margin work than the work that replaced it. As Austin said, in Q1 of '03, the margin pressure from the workforce given the poor working conditions was artificially reduced. If you normalize out for those two events, what you will see is on a gross margin basis, while Q1, obviously, is impacted by lower overall revenue, and that does have an impact on our margin, I think if you look at those three pieces you can reconcile the gross margins from Q1 of '02 versus Q1 of '03

Would that bring you to the conclusion that gross margins were relatively flat year-over-year?

No. I think it would bring you to the conclusion that on a revenue -- if revenue was the same quarter-over-quarter with the changes that have been made to the business, you would see an improvement in margin

That's great. Second question, or third question. Direct TV historically has been one of the top five or top ten customers. I didn't notice their name on your list this quarter. Can you talk about Direct TV?

Don did mention them in his top ten customers. Let's go over those again so you have them

You're right. I'm sorry about that.

The business relationship with Direct TV remains strong and is in a growth mode for us as a company

Great. With regards to closing down some of these offices, were there any revenues generated in the first quarter that you will not have generated in -- on a go-forward basis, IE, was there an office closure, a discontinued operation that you won't have going forward?

If there were a handful of millions of dollars of revenue. That's one handful related to work that we've been -- you know, these are on the ramping down of jobs or revenue related to lines of business that we had been in prior to the sale of that business in the first quarter. There's a handful of millions associated with revenue that will not occur.

Alex, we talked about getting in the long haul business in the sense of the directional drilling business. We had to complete a couple of those large jobs in the first quarter. That's what Don is referring to

Great. Could you give us more guidance for G&A over the next couple quarters?

You know, what we tried to do, Alex, is focus everybody on EBITDA. From a G&A perspective, when we look our peer group to make things look apples to apples, there are classification differences in our PNL(ph) relative to our peers. We may show higher G&A margin and had he they may show lower G&A and offset would be in gross margin. Generally, we've targeted the EBITDA margin for the business at 10%

Thank you.

As a reminder, if you would like to ask a question or have a follow-up question, it is star one. If you would like to remove yourself from the question queue, please press the pound key. Next, we'll go to Barry Posternak with Penseco Capital.

Good morning. I think you mentioned earlier that Adelphia you were expecting some new projects later in the year. Is that something that's come into backlog? If not, what's the basis?

Adelphia continues to do regular maintenance and we continue to do some of the home installation model work in areas like Buffalo and Ohio, and will continue to do some more work for them on a court ordered process where it's approved. Whether that be in auditing or installation work going forward. Also, the -- they're doing some multiple blowing unit work which we're involved with which is installation to the condominium or multiple dwelling unit.

Is business with Adelphia expected to pick up?

We believe you're going to see business with Adelphia pick up more in the second half of this year as they get their process and the leadership is controlled the day to day goals and objectives of what they're going to do. They are definitely under some pressure to meet franchising commitments in cities that haven't been met for, really, a couple years now. Prior, they were behind schedule now because of the events where you have cities like Los Angeles that need to be upgraded and caught up to specifications. You're going to see that money be spent at some point in the not too distant future

Okay. Could you give us an update on the business with ComCast? Were there any new cities that were -- that you guys won contracts on during the quarter or just a general status update?

It is the same we announced in the first quarter. We are building the crews up and continuing the capacity with the jobs we mentioned in the first quarter. We'll be starting some new jobs in the second quarter. That will be jobs like the Miami to Key West. We'll be starting in the second quarter. San Francisco continues to ramp up. Chicago will ramp up and other areas we mentioned before such as South Bend, Indiana and Jacksonville continue to be on going projects

Are there any significant cities that haven't been awarded yet?

There's other projects that have not been awarded on the schedule. It will be coming out as months go on. I think it is important we continue to say that as we perform, which we believe we can extremely well for our customer from ComCast, that the opportunity will open themselves to us and that we feel were well positioned to take advantage of those opportunities

Okay. But have the major cities been awarded? How much opportunity is left?

For most part the major cities have been awarded. That will be on going for the next two years

Okay. Thanks.

We'll hear from Bill Heffrin(ph) from Regiment Capital

Can you give us the tangible net worth number at North America for purposes of determining the room you have under the covenant?

We, today, have about $9 million available under the covenant.

Okay. What's revolver availability right now?

Excuse me?

Is that what you were saying, the revolver availability or --

It is under the tangible net worth of covenant

What's revolver availability?

At quarter end we had gross availability of $43 million -- I'm sorry. Grossly liquidity of $43 million which is cash and availability under the line.

How much of that was cash?

About 15 of cash.

All right. Thanks.

Next, we have Steven Bauman

with Harvest Investment Management

Good morning, guys. Just a quick clarification question. You mentioned the 10% EBITDA margin goal. Is that still a full-year goal? Obviously, you're going to run under underneath that for the first half?

It is still a full-year goal, yes

It implies second half, I guess, significantly above 10%?

Let's be clear. We are ramping up to 10%. So if you're implying that when you look at the 12 months ended December '31’03 will it be 10%? No. We will ramp up and continue to ramp up to 10% plus EBITDA margin.

That was my question. Thank you for the clarification.

Thank you.

We'll take our next question from Russell Wilder with HL Capital Group

Good morning, gentlemen. One question on, you said the headcount was reduced by 400 in the quarter. Was that a certain geographical regions or specific office? I know you mentioned you closed three or four. Were these tied to any particular service group, like, you know, traffic or broadband or telephone or energy

I believe what you're going to see is telcom probably took the furthest reduction in personnel, plus the back office support as we consolidated the back offices. The company itself is going to continue to look at every job and job location as well as our corporate cost structures to continue to drive down costs and drive it out of the business. I think what you'll probably see coming forward in the second or third quarters is, of course, somewhat of an increase in that headcount number because of the fact that the telecom business, because of the weather related issues are behind us, that business will grow a little bit. ITS will grow some, and energy and broadband will grow as well. But they'll be a very limited number of people that will impact [Inaudible] for the company

Good. One last question. What was availability on your credit line at the end of your quarter?

At the end of the quarter, it was, again, looking at grossly liquidity of cash and line of credit availability, about $43m, roughly.

Thank you, Don. I have no further questions.

Next, we move to Alex Rygiel for a follow-up question

Thank you. You mentioned that ComCast would be a 10% customer by year end. Was ComCast a 10% in the most recent quarter? At what quarter would you anticipate ComCast becoming a 10% customer?

Alex, ComCast -- actually, we had no 10% customers in the first quarter. We expect ComCast to become a 10% customer in the second half of the year.

Thank you.

If you have -- we have a question from Frank Bisk with [Inaudible] Advisors.

Yes. Good morning. It seems you're going to be generating a decent amount of free cash this year. Is that going to be used to pay down some of the debt, or is this something else you're looking to do?

I think, Frank, the first thing we want to do is build up that cash. We want to make sure we continue to build it up to show folks we have the ability to do multiple items. So, therefore, I think what you're going to watch us do over the next couple quarters is build that cash up a little bit, and then make some decisions on where we're going to go in the future. There's no immediate decisions being made to buy down debt or to do acquisition strategy. We will make those decisions as the fruitions come true

Okay. Thank you.

With that, I'd like to thank everyone for joining us on the call. We will continue to communicate in the second quarter. We are well on our way. We have 15 in the second quarter. Looking forward to talking to you in the future. Thank you for joining us. Looking forward to speaking with you in the future.

That does conclude today's conference call. We thank you for your participation. Have a very nice day.