MasTec Inc (MTZ) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the MasTec Inc. fourth quarter earnings release conference call. Today's call is being recorded. 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 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, postponements or cancellations in our clients' businesses or deterioration in our clients' financial condition'; that our targeted service markets may not expand as we anticipate; that our reserves and allowances may be inadequate, or the carrying value of our assets may be impaired; that the outcome of pending litigation may be adverse to us, and that we may experience increased costs associated with realigning our business or may be 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 these communications. These and other 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 to reflect future events or circumstances. I would now like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations.

Good morning. I would like to welcome you to MasTec's 2003 earnings call. With us today we have Austin Shanfelter, MasTec's President and Chief Executive Officer; Michael Nearing, our Executive VP and General Counsel; and David Sasnett, our Corporate Controller and future Executive Vice President and CFO. The format of the call will be opening remarks by Austin, followed by a few by a few comments from David. Under Sarbanes-Oxley and new SEC regulations, financial discussions will be generally limited to GAAP-based financial items and their derivatives. These discussions will be followed by a Q&A period. We expect the call will last approximately an hour.

Thank you, Mark, and good morning. Welcome to our fourth quarter call. Our call was obviously later than we would have liked, but as you can see from our press release, there has been important issues, changes, and events that have caused the delays. We will be discussing these today, including an overview of the 2003 results, an update and outlook of our business going forward, and finally, the upcoming appointment of our new Chief Financial Officer, David Sasnett.

For the year ending December 31, 2003, revenues were $874 million, within our previous announced guidance of 858 to 878. However, we booked a loss of $39.7 million because of some unexpected adjustments identified in our year-end review and audit. Some of the larger items that caused these unexpected losses are as follows. We are in the process of winding down our operations in Brazil, which have been dragging down the earnings in recent quarters. As we have disclosed previously, MasTec has been pursuing strategic options relating to the operations in Brazil. We will definitely exit this business by the closing of operations during our second quarter. In conjunction with this decision, we've recorded a revision of $9 million to write down various Brazilian assets.

We increased our domestic allowance for doubtful accounts by $5 million in the fourth quarter of 2003. Based on extensive credit review, the total reserve now stands at $25 million. We revised our estimation methods for our self-insurance reserves and wrote off certain insurance receivables during the fourth quarter of 2003. We increased our self-insurance reserves from $22.8 million at the end of September 30, 2003 to approximately $29 (ph) million at December 31, 2003. The additional provisions were recorded in part because of the insolvency of a prior insurance carrier, Reliance.

In 2003, we had $10 million of losses from energy substation and gas pipeline related projects, initiated and substantially completed during this year. These losses arose from the cost in excess of expectation (ph) and occurrence from various reasons, including the errors in specification of design, work performed outside the original contract scope, and customer-caused delays and other bid (ph) and management issues. While these areas still offer revenue growth potential for the Company, we will manage them more diligently in the future.

We also provided for a $5 million for losses associated with cost overruns on two of our network service projects. We have substantially exited all projects that have produced losses in the past, and have engaged investment bankers for a possible sale of this unit. We took a $6 million charge for the write-off of deferred state sales tax assets in the fourth quarter of 2003. These non-cash assets were written off in light of the operational losses over the last three years; however, there may be potential future tax benefit in those states, as profitability operations are re-established.

We have discovered an overstatement of work in progress and inventory amounts in our Canadian operation. As a result, a charge of $2.1 million was taken to write off these overstatement amounts. Management personnel for the division were terminated in the first quarter of 2004. The Canadian unit represents approximately four percent of MasTec's revenue for this year, and the Board of Directors has initiated a review and an audit of the financial reporting processes of the Canadian unit. We also incurred additional legal costs, accounting and expenses related to our 2003 audit and the pending settlement of our derivative and Syntel (ph) cases. Finally, we had other less significant items that also affected the results in 2003, and these items will be more fully described in our upcoming 10-K filing.

I would like to make several points concerning the delay in reporting, our results and expected losses for the year. As CEO, the buck really does stop here. Contrary to our earlier belief and guidance, we had a number of problems that were not apparent to us until after the year's end. Some of these were the results of having temporary loss of information we needed to run our business as we converted legacy systems to our new Oracle platform. Other problems arose because we had policy and procedures that were inadequate or not being followed.

Having said that, as we have seen historically, the Brazilian assets were managed resource intensive and had volatile operating results. The closure of these operations permit us full-time focus on North American operation and decreases volatility of future consolidated results. We believed our North American business outlook remains strong. We continue to have strong diverse customer base, evidenced by our revenue growth in 2002.

As the result of the 2003 losses, we are in the process of obtaining an amendment to our $125 million credit facility, which we believe will be completed prior to the filing of our 10-K. The actions we have taken will allow us to get back to the basics of focus on profitable operations. We are fortunate that we see real growth potential in the industries that we serve. However, as a Company, we will refocus our internal business and generate adequate profitability and eliminate the exposure to businesses that do not (ph). While we continue to remain optimistic that we will get portions of next-generation work, such as fiber to the pharmas (ph), as well as participating in increased CAPEX spending and other broadband upgrades, large government infrastructure projects, and the general telecom market, our focus of our efforts will be bottom-line performance. We are putting process in place to make a profitable Company.

As we mentioned earlier in today's release, we announced the upcoming appointment of David Sasnett as our new Chief Financial Officer. Don Weinstein will be remaining with us through the completion of the filing of the 2003 10-K, and thereafter, Dave will assume all the responsibilities as CFO. David brings 13 years of Big Four auditing experiences with Deloitte and Touch to MasTec, along with six years as a public company CFO. David joined our team as Controller in February, and it became quickly evident to me and later then to the audit committee and the Board that David possessed the skill sets, experience, and leadership quality necessary to move the Company's financial management team to the next level.

Additionally in March, audit committee member Sherrill Hudson was appointed the audit committee chairmanship. Sherrill was with Deloitte and Touch for 37 years, and the last 19 years as managing partner for the firm's South Florida operations. MasTec's management and Board of Directors are committed to a rigorous financial reporting and controls. We believe that our commitment is evident by the additions of Sherrill and David to our team. Now I would like to call over to David, where he can discuss some of the financial details of the quarter.

Thank you, Austin. I am very pleased to have the opportunity to speak with our investors for the first time, and hope to have the opportunity to meet most of you in the near future.

Our delays in reporting our results and filing our 10-K are as unpleasant for us as they are for our investors. However, we identified numerous significant issues that required substantial review and analysis. We felt it imperative to apply the appropriate diligence to these issues. These issues took time to identify and to resolve properly and professionally. We continue to evaluate some of these issues even now, so that our accounting for and disclosure of these issues in our 10-K is in accordance with professional standards.

Our audit committee, Austin, and I are committed to improving the quality and timeliness of our financial reporting. We are in the process of hiring additional financial and accounting personnel, and revising our internal controls and procedures. While it may take some time for these resources and changes to have a noticeable impact, we are confident that within a few months we will have the capabilities in place to avoid a repeat of the current situation.

With respect to current financial information, we will provide more details when we file our 10-K; however, I do have a few statistics that I can share with you now. For the year just ended, some of our largest North American customers were -- in alphabetical order -- Adelphia Cable, BellSouth, Comcast, DirecTV, Dominion, Florida Power and Light, OnCart, TXU, (indiscernible) West (ph) Energy, Qwest, US West and Sprint. Our customer base continues to be diversified both by region and by client. For the year, our top 20 customers comprised about 64 percent of total revenue. Our largest customer was about 13.4 percent of revenue.

For the period just ended, North American DSOs were 83. During the last year, revenues by industry were -- cable MSO, 265.5 million, or 30.4 percent of total revenue; telecom was 248 million, or 28.4 percent of total revenue; energy, 22.9 percent of revenue at $200.2 million; ITS government, $138 million, or 15.8 percent of revenue; and international revenues were 2.5 percent of the total, or $22.2 million.

In recent weeks, we have obviously been more focused on 2003 results than on 2004 guidance. Until we file our 10-K, we are unable to provide any revenue or earnings guidance for 2004. Obviously, the previous guidance we have given you is now no longer applicable. We expect to have a follow-up conference call when we file the 10-K, and will provide revised guidance for the remainder of 2004 at that time. With that, I would like to turn things back over to Austin.

Here are a few key points I want to leave you with prior to the Q&A. The industries that we serve are showing improvement. For example, fiber to the premise is now being deployed, and we believe that the potential scope of this endeavor will be very large for the industry and MasTec will be a player in this deployment. Our broadband annual revenues were up 75 percent over 2002, primarily through upgrades and installation work that we obtained. While the Comcast rebuild will be tapering off in the second half of 2004, we believe our install to the home, repair and maintenance and new build business will continue to grow for other broadband customers.

Our energy revenues were up 23 percent over 2003. While we had contract and management issues on some of the new businesses, the MSA distribution work continued to improve. Our annual revenues for government ITS (ph) projects were up 11 percent in 2003, as federal and state government continued to spend money on infrastructure and homeland security. While our telecom revenues decreased year-over-year, we believe that we saw bottoming out in telecom in 2003, and expect spending to increase (ph) slightly in the future. Our MSA model continued to deliver revenues with stability and profitability to the Company.

Our liquidity position remains adequate, and as a result of the informed and engaged Board and audit committee, we have changed and expanded our financial leadership. I would like to offer one word of thanks to our team members for their hard work in '03, but I wanted to once again welcome David aboard as a partner with me in moving MasTec forward. I want our investors to know that we will work tirelessly to deliver increased value to you as well. In order to ensure that we have enough time for the Q&A, I would like now to turn the call back over to the conference operator so we can devote the remaining time of the conference call to listeners' questions.

Thank you. (OPERATOR INSTRUCTIONS) Romeo Reyes with Jefferies & Company.

Good morning and welcome aboard. A couple of quick questions for you. Can you give us a sense of what cash on hand is as of today, and maybe as of the end of 2003? That was the first question. The second, can you give us a sense of what cash flow from operations was for 2003? And specifically maybe if you can break out for the fourth quarter. Third question is relating to capital expenditures. What were the CAPEX for the full year and also for the quarter? And lastly, of these charges that you have outlined, how much do you expect to be cash charges, cash that has to go out the door in 2004?

Let me go through a couple things. Free cash flow for the year end was approximately $10 million, and the free cash flow for the fourth quarter was $4.2 million. Presently, we have $4.9 million of cash in the bank and liquidity of 35.6 million of total liquidity. The CAPEX spending for the year is -- one second -- about $11 million. Does that cover your questions, Romeo?

Yes. Just on the free cash flow, that would be cash flow from operations less CAPEX, right?

That's correct.

So 10 million for the year and 4.2 million for the fourth quarter?

That's correct.

Now, the total liquidity you said is 35 million. That presumes that there is $30 million of availability under your revolver?

That's correct.

Now, the amendment that you are seeking is not because you're not in compliance with the covenants; it's because you need a little bit more room?

That would be correct as well.

In terms of the cash portion of the charges that you have outlined, I don't know if they added up to a little over $40 million. How much of that is cash that needs to go out the door in 2004? In other words, is it stuff that you have accrued as of year-end 2003 that you have to write a check for in 2004?

Less than $5 million of that is going cash out in 2004.

Okay, great. Thank you very much.

Rick Grubbs at Kaufman Brothers.

Austin, going back to the credit facility, I'm just wondering if you can elaborate on the two covenants, I guess -- the tangible net worth and fixed charge. And given the charges that you have outlined on a preliminary basis here, which ones are causing the most tightness, if not both? And also, if you can just talk further about in the restatements that you mentioned, if that extends back to 2002 or if it's just 2003, or just sort of put some time frame around any restatements of the financials. Thanks.

I'd like to clarify something earlier. We are amending the credit facility, because I think technically we would not have been in compliance with December and March covenants. But we are amending the covenants relative to both the tangible net worth and the fixed charge covenants. As far as restatements of prior periods are concerned, we are still the process of looking at that, rather than give you a definitive answer right now -- I don't think we can. We are saying, though, in our press release that we think restatement of prior periods is likely or a real possibility.

However, we believe that we have captured the amounts quite accurately in our release.

And you had mentioned your conversion over to the Oracle platform. Is that consolidating the number of different accounting systems and is that intended to prevent some of the issues you described today?

Let me kind of go through this. I think it is important to understand that MasTec was an amalgamation of 45 companies or better, all originally on their own software programs and different platforms. About 2.5 years ago, we engaged in switching over to a single-platform operation, that as probably 90 percent of the companies in the world experienced in our process, you find that it has cost you more to get it done and it takes you a lot more time to get it accomplished.

We had nuances in our business that were very difficult to overcome when we did our programming and did our buildup of services and our platforms for Oracle. But what we have found is now we have finally completed, but definitely had a lapse in the fourth quarter while we were changing over our last two businesses to Oracle in the fourth quarter, and that showed some delay in information flow to the Company. But going forward, we believe and we are very confident that because we are completed with this process and that we have one set of reporting procedures, that it will not only help us with measuring our business on a regular basis, but also help us be incredibly compliant when it comes to the 404 issues that are in front of us towards the end of this year.

Okay, and two last comments if I can. Austin, you had mentioned, again, the fiber to the home, the next-generation broadband build. I was wondering if you could give us some more color on the business as you see it unfolding in 2004. I know you probably don't want to get into too much detail there, but just some idea about where you think -- where that's going to hit. I know Verizon has let out some contracts -- maybe your thoughts on BellSouth (indiscernible) whatever -- (multiple speakers)

I think it's pretty important to (indiscernible) that Verizon has let out some contracts and they are also bidding on some in some areas of the country, California and Texas. And we're, needless to say, in touch with those folks on a regular basis about some of those opportunities. We definitely believe that there will be some movement in the other RBOCs as well, but we are absolutely seeing fiber to the home being deployed both on a municipality level and on the ILEC level, where you have the RUS type of jobs that are out there in the country. We have companies like United Telephone in Kansas, Crenshaw (ph) Telephone, Copper River and Grand River, some of these local telcos that are funded by the RUS. And many of these folks are spending broadband money, which allows them to put in fiber-to-the-home type of products to the customers. So the RUS this year has $2.1 billion of ability to spend and loan to these type of companies, and we believe that that will release a little bit more this year as we go forward.

Great. Thanks very much.

Vic Grover at Needham & Co.

Thanks for hosting the call. I guess trying to back into the fourth quarter using the full-year numbers is somewhat difficult, but can you give us any kind of granularity on the numbers? Because it looks like your telecom was up sequentially pretty sharply, even in the slow period. But really more looking on the margin, you said in your press release you expect to update guidance in your 10-K. Is there anything you can tell us on this call?

If I recall, your last guidance did not include fiber to premise, which you were just discussing in terms of opportunities. What would possibly make your guidance change dramatically to the downside if your revenues were in line for the fourth quarter, and it looks like your mix and pipeline is still strong? Anything you can tell us in terms of what you would expect in terms of direction for guidance? I guess the last question, if you can't really go too much into that, can you talk about your backlog at the end of the year?

We are going to be very disciplined in our approach today to make sure that we wait the week to get the 10-K filed and have this fully disclosed. And we will have a call right after the release of the 10-K that we will be able to dive into very detailed details on exactly our guidance for next year, the whats, wheres and whys. We have done a deep dive from every single angle that we can be incredibly predictable and reliable in our guidance to the street from this point forward. That's the initiative of the Company and the Board of Directors, and we're going to stay on that course. So we will be updating you within a week to that guidance. As far as -- your last question was what, Vic?

Anything you could tell us about backlog. Is your backlog still firm --?

The backlog still exists at about 1.1 billion for (indiscernible) looking forward.

Thanks a lot, guys.

(OPERATOR INSTRUCTIONS) Bill Heffron (ph) with Regiment (ph) Capital.

I just wanted to make sure I'm clear on something. Austin, you had mentioned that liquidity was about 35 million; but then I guess David mentioned that you are not in compliance right now. So do you have access to the revolver now or not?

Yes, we do. We are not in default of the facility right now -- they have not declared us in default. They are working with us in a very positive manner to get this completed, and it should be completed in the next couple of days. And we will announce that the minute that it is completed.

Okay. Thank you.

John LaForge at First Albany.

Most of my questions were centered around revenue also. So I guess when are we expecting you to update the 10-K next week?

We are on record that we will be filing the 10-K the week of April 19th. We will be having a follow-up conference call to discuss all the numbers therein the day after filing.

You are not going to give any more specific guidance -- just the week of?

We should know in the next couple of days, and the minute we lock down a day that we will get it done, we will release that about that exact day.

Okay, thank you.

A follow-up from Romeo Reyes at Jefferies & Co.

Another follow-up -- on Brazil, now that you're going to exit that business, can you give us a sense of how much of a drag that was in 2003 and in the fourth quarter, how much that your free cash flow would have changed if you had just looked at North America -- how much of a drag was Brazil on free cash flow for the quarter and also for the year?

Just a second, Romeo. They're just looking up that number.

The amount of the loss we will report this year for Brazil will be somewhere in the neighborhood of $14 million.

And would that be free cash flow, EBITDA less CAPEX.

No, it wouldn't.

Okay. What would the free cash flow loss be?

I think somewhere just over $1 million. A lot of the write-downs we took in Brazil were of assets that were already on the books.

Okay. Now, do you expect to get any proceeds from the sale of Brazil at this point, or do you think that it's going to be -- you're going to have to just shut it down?

Romeo, I think we have just taken a position is that we are just going to shut it down. The asset down there is one that has been unpredictable for us for the last -- literally, the last year. And we have just made a conclusion that we are not going to try to go through a full process of continuing to run it to try to operate it to position it for sale. It would be better off for us just to turn it off and move forward and concentrate on North American business.

Just two further quick questions. What percentage of your work, of your revenue -- I guess either LTM (ph) or for the quarter -- you would consider to be recurring MSA type of work in nature? And then secondly, can you give us a sense of the renewal rate on MSAs? In the last -- either the quarter or in the last couple of quarters, what percentage of your MSA contracts that came up for renewal were renewed?

I would still tell you that our MSA or our MSA-like contracts are still at 75 to 80 percent of the Company's activity daily. And we have been successful in renewing each one of our MSAs that came up due last year, at the end of the last year and the beginning of this year, and we don't expect that trend to do anything but stay the same. We have added on some MSA type of work in energy this last quarter, last year, and we continue to shore up our existing relationships with our major customers.

Just one last question. Working capital, during the first half of the year, obviously your cash is only 4.8 million. Do you have any -- in the first quarter, you probably generate cash from working capital, but I guess in the summertime, you probably need cash for working capital. Can you give us a sense of how much cash you would need for working capital, and obviously that 4.8 million is probably not enough. How much would you need to dip into the working capital credit facility revolver to have enough liquidity?

First of all, I think it's real important that we did not dip into the credit facility as of the end of last year, and we haven't dipped into the credit facility yet this year. So that -- we have been able to manage through the cash that we have had very well. Secondly, usually in the first quarter is when we do do some burn, as we build up into the second quarter, because that is usually our seasonal ramp-up -- March, April, May become ramp-up. And we believe we can manage our cash very well and manage our ability to grow the business very well with the current liquidity that we do have in place.

Great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Mike Gerinski (ph) at Minnick (ph) Asset Management. Mr. Gerinski, your line is open. Please go ahead. It appears either his line is muted or he's not there. (OPERATOR INSTRUCTIONS)

No further questions?

We have one more question. Frank DeSantis with Copper Beech Capital.

I wondered if you could -- you mentioned that you're going to be exiting Brazil. Could you give any insight as to what that drag has been on earnings in the past, just to see what sort of lift there might be there? And then the same question as it applies to some of these projects that you cited that you took the charges for. Is that now going to be a situation where something that was in the loss swings into a profit? Any insight that you can give there without violating your not talking about the future until the 10-K is filed.

And then secondly, at one time I think you had filed for an equity offering. Is that now completely off the table? What is the status there? Finally, any insight that you can give with regard to amending the credit facility. My experience with banks is that they usually take something in return for that, so any sort of insight that you can give as to what the cost of that might be on an ongoing basis?

With respect to the impact of Brazil, we mentioned earlier that the net loss reported from Brazil in this year is -- excuse me, in the 2003 results would be about $14 million.

Sorry, I missed that.

Relative to the losses on the contracts, obviously we are in the position that many of the cost overruns were beyond our control, and therefore we are entitled to additional billings from our customers. And we are negotiating with our customers and we are in the process of filing claims under the contracts; however, we have not, under generally accepted accounting principle, due to the nature of these claims, they have not (ph) been recognized as revenue. So to the extent that we are successful -- and we can offer no assurances that we will be -- but to the extent that we are successful in negotiating with our customers, some of these amounts will come into revenue in 2004. But once again, I want to make it clear that we can offer no assurances about the collection of these amounts.

I believe relative to the credit facility, our banks have been very reasonable in dealing with us. I think we have a very supportive bank group. Obviously, when you amend your facility, you pay a fee for that, but we think the fee that they are charging us is very much in line, at least what we would expect for an amendment of this nature.

And on the equity offering, MasTec has continued to work with its partners and the banks on the process, and we will continue to do so, and work with our Board of Directors and make decisions as things progress. It is absolutely not off the table, and it is something that we will work together with all parties to make a final decision and inform the public as to our final decision -- probably very soon.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions. I will turn the conference back over to you.

I will just close it with we may have not been able to answer all of the questions that you had today in the time that we have allowed for the call, but there is a large amount of data for us to deliver and for you to digest in such a short period of time. However, we will be working to answer any of the following (ph) questions, and please communicate with us through Marc Lewis, our Investor Relations individual, and make sure that he can directly contact you at a set time for appropriate Q&A and follow-up, if there's any. And we look forward to talking to you folks as we release the 10-K and can go deeper into guidance and other issues that are apparently important to our investors. We thank you very much for joining the call today and look forward to talking to you in the future.

That does conclude today's conference. Again, thank you for your participation.