MasTec Inc (MTZ) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to MasTec's May 9, 2006 first-quarter earnings conference call.

Let me remind participants that today's call is being recorded.

At this time, I would like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc?

Good morning. Welcome to MasTec's earnings conference call for the first quarter of 2006.

The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. In these communications, we may make certain statements that are forward-looking, such as statements regarding MasTec's future results, plans and anticipated trends in the industries in which we operate. These forward-looking statements are the Company's expectations on the date of the initial broadcast of this conference call, and the Company will make no effort to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in our filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications.

With us today we have Austin Shanfelter, MasTec's President and Chief Executive Officer, Bob Campbell, EVP and Chief Financial Officer, and [Albert DeCardnes], EVP and General Counsel.

The format of the call will be opening remarks by Austin, followed by a few financial comments from Bob. Financial discussions will be limited to GAAP-based financial items and their derivatives. These discussions will be followed by Q&A period and we expect the call to last approximately 45 minutes.

Austin?

Thank you, Marc, and welcome to MasTec's first-quarter conference call.

Yesterday, we announced positive performance to start 2006. These results highlight the continued improvement we're making at MasTec. Not only is MasTec improving, but our end markets are improving as well. Demand for our services has not been this high since 2000. We believe we are both -- there are both short and substantial long-term opportunities.

The performance from our core businesses have continued to advance over the last four quarters. Bob will be talking to you about the details, but I would like to highlight a few items. Revenue was up, both organically and through acquisitions. G&A as a percentage of revenue is trending down; cash and liquidity are substantially up, and DSOs continue to improve to best-in-class.

We continue to have favorable client diversity and with the only nationwide single brand. Our customers know that they can count on us to perform as they need us to as this CapEx cycle broadens. This trend makes our services critical to our customers' goals and objectives.

Some examples of these strands from MasTec are quarter over growth with BellSouth. This was a combination of additional spending on existing MSAs and new work related to central office projects. We've extended agreements and improved pricing with Sprint in Florida and Nevada; Verizon Fibre-to-the-Home work has already begun in Virginia, New York, Pennsylvania, Massachusetts, California, Florida and Texas. World Telco fibre deployment activity is robust. We have added additional work for AT&T in Wisconsin and in Texas. We've also added a new Qwest MSA in Minnesota. We've seen an increase in RFP activity related to MDU and home installations from some of the RBOCs.

Our satellite business continues to expand and trend favorably. We have a strong geographic footprint and continue to drive for a more efficient delivery of services for our customer.

The CapEx spend in voice, video and data space continues to expand, as our customers continue to upgrade their networks in the quest to provide additional and bundled services. Our installed home platform as a whole continues to grow as a part of our voice, video and data initiatives. New products, proactive marketing, and customer migration to high-definition television are driving additional demand. As a result, we're seeing increased flow of RFP activity from Telcos to meet those future needs.

MasTec will continue to look for ways to expand and leverage its capabilities dealing with home installation. Presently we service over 200,000 homes per month.

Energy and utility demand is very high and trending higher. Both upgrade and maintenance spendings are on the rise. Outsourcing continues to grow as our customers seek cost-efficient alternatives to their in-house workforce. Additionally, the internal workforce of our customers continues to age. Recent estimates by FMI of the average age of a utility employee, electric alignment, at about 50 years old. But it also estimates that a 9% annual growth rate in service work will be needed. Outsourcing is a must for these customers.

Florida appears to be a good source of organic energy growth in the year ahead. In addition to normal maintenance service growth, the grid, being hurricane-hardened with lines, burial and significant numbers of [home]-replacement projects, we see expansion as well. We also see expansion with recent wins at Austin Energy, AEP in Texas, Nevada Power, and Arizona Public Services.

MasTec experienced growth in its energy transmission projects during the quarter, and we expect to see further increases during the year. We'd be highly selective as we expand our capability in the transmission space.

In a related area, we're seeing increasing bidding activity in the broadband-over-power line space. Some of our key energy customers have either committed to or are seriously reviewing BPL development projects. MasTec is uniquely qualified to assist our energy customers all the way from engineering to home installations.

In short, the increasing CapEx and continued customer trends towards outsourcing is helping MasTec in all of our service areas. Strong demand for our services is translating to a better pricing environment for us. We now have a very strong balance sheet; we also have a highly skilled and motivated workforce. These markets are support and are expanding. Going forward, it's about us managing our core businesses day to day. 2006 should be a great year for MasTec, our customers and our investors.

I'd now like to turn the call over to Bob so he can discuss financial details for the year and the fourth quarter. Go-ahead, Bob.

Thank you, Austin. I echo Austin's comments; what a difference a year makes!

I have a fair amount of detail about our financials, but before I cover them, let meet review the headlines. First, Q1 revenue was up 13% in high single digits growth without the Ron's TV acquisition.

Second, we were profitable in our continuing operations for Q1 '06. We made $0.06 a share compared to all loss of $0.11 last year. Q1 is our seasonally weakest quarter by far, and the last Q1 when we were in the black was for the first quarter of 2002.

Third, we continue to make progress at the gross profit line, 12.2% this year versus 8.7% last year, pretty good for our winter quarter. Fourth, G&A as a percent of revenue was reduced to 7.5% versus 7.7% last year, and it would have been even better except for the new FASB 123R stock-compensation expense.

Fifth, regarding our financial condition, I will say it again -- what a difference a year makes! In early May last year, before our 2005 bank amendment, our liquidity was only $10 million. We were paying LIBOR plus 275 basis points on bank debt, and we had the worst balance sheet among the public companies in our sector. Today, our liquidity is about $105 million. We are borrowing at LIBOR plus 125, and we have one of the best balance sheet in our space.

Sixth, our DSOs have improved dramatically. They are down to 64 days for continuing operations, and I believe that they are now best-in-class.

Finally, we amended our bank deal yesterday, getting better pricing, better flexibility and better availability. I will cover the details in a moment.

So much for the headlines, now let me take you through the details. For Q1 '06, income from continuing operations was $3.6 million or $0.06 diluted earnings per share, compared to a loss from continuing operations last year of $5.4 million or $0.11 per share. Included in the Q1 '06 earnings is 1.2 million or $0.02 a share for the new FASB 123R stock-compensation expense. That compares to no expense last year. Last year, the comparable expense was in our footnote disclosure and not in the P&L.

Revenue was up 13% from 194 million up to 219 million. The $25 million increase was due to increases in Install-to-the-Home, Telecom, a pickup in Energy Services, and our Ron's TV acquisition. Without the acquisition, revenue growth was at a high single digit growth rate. Storm restoration was not a factor at all in the quarter's increase in revenue. These increases were partly offset by a slow start for fibre deployment in 2006, but that appears to be only a matter of timing, as we are now back to accelerating revenues as we move beyond Q1.

Gross profit was 12.2% for the quarter, versus 8.7% last year; that's before depreciation. The improvement reflects productivity improvements, the better pricing environment we've been talking about, and we're starting to see improvement in fleet and equipment costs from rationalizing the fleet; and we're also starting to get better equipment deals due to our improved balance sheet.

Even though our favorable safety trend is continuing, we had several adverse insurance reserve changes in 2002 and 2003 claims that offset another good safety or insurance cost quarter. Gross profit improvement remains the number one priority at MasTec.

SG&A expense decreased from 7.7% of revenue in Q1 '05 down to 7.5% in '06. Without the $1.2 million of the new FASBR 123R stock-compensation expense, our SG&A was reduced down to 7%. As a point of reference, SG&A was 11.8% in Q1 2004 and 11.2% in Q1 '03, so we've got a good trendline.

Just for your information, the FASB 123R stock-compensation expense is shown on the face of our P&L in the 10-Q.

Moving to interest expense, it was reduced by $1.3 million in the quarter, primarily as a result of the paydown of 75 million of subordinated debt in early March of '06. The 2006 impact of the $75 million bond paydown will be approximately $5 million in interest savings.

Additionally, yesterday, we amended our bank credit facility, based on our much-improved balance sheet and improved financial performance, and we are now paying LIBOR plus 125 versus paying LIBOR plus 275 last year. While we had no outstanding draws on the facility at quarter end, the improved terms will affect the cost of letters of credit issued in support of our various insurance and surety programs. The bank amendment also includes better availability as well as greater flexibility in terms of acquisition -- acquisitions, capital expenditures, and in other areas. We greatly appreciate the continued support of our banking partners, Bank of America, GE, LaSalle, and PNC. GE joined the credit a year ago, but the other banks have been working with us since 2001.

Our Accounts Receivable Days Sales Outstanding, or DSO, improved dramatically in Q1. We closed the quarter at 64 days, compared to 71 days at year-end and also 71 days for Q1 a year ago. This is for continuing operations DSO. But we improved similarly on a total company basis. Our DSOs reflect improvements in the credit quality of the customer base, the diversification of the customer base, and positive changes in customer mix. By my analysis, we have the best DSO in our space. Management's goal is to get the DSOs under 60 days.

Our legal costs were extraordinarily high in Q1. Although they will be lower in Q2, legal costs will still remain abnormally high. As we mentioned on our year-end call, we are now at the stage where we have to spend legal dollars today in order to get recoveries in the second half of 2006 and into 2007. The recoveries are expected to be materially higher than the dollars we're currently spending chasing old receivables. We spent $3.4 million in Q1 this year -- this is on legal costs -- versus $1.8 million last year. That's for continuing and for discounts. As I mentioned, we will spend less in Q2, but the spending will certainly be higher than the $1.6 million we spent in Q2 last year.

For the first quarter, our ten largest customers were DirecTV, 38%; BellSouth, 13%; Verizon, 8%; Sprint, 6%; Florida Power and Light, Progress Energy and TXU were all 4% each; Dominion, Virginia Power, Arizona Public Service and Qwest were at 1%.

Today, continuing operations backlog is at roughly the $1.1 million level. That's an 18-month backlog number. Even though we believe the fibre deployment will last for years, our backlog only includes the specific work for which we have visibility.

Our gross liquidity is currently at $105 million; that compares to $47 million after the bank amendment last May and only $10 million last May before the bank amendment. We define liquidity as bank cash plus availability on the credit facility. Liquidity is up dramatically due to the $156 million we've received from the recent equity offering, the new bank deal, and of course improved earnings.

Regarding capital expenditures, we said in our 10-K we expect to spend 20 to $40 million in CapEx for 2006. With our improved balance sheet and improved financial results, we now have a clear option to buy fleet and equipment, and in recent years, almost everything was leased. Certain asset types, mainly off-road equipment, trailers and used assets, will likely be purchased now. With a mix of purchase CapEx and some leasing, we now believe that our 2006 CapEx spending will be at the low end of the 20 million to $40 million range we mentioned in the 10-K.

Now, let me make a few comments about our discontinued operations. The overwhelming majority of our discounts are the state highway transportation or DOT projects and assets. As we said at year-end, we expect to sell the projects and assets in 2006, we expect to net cash from the transaction, and we do not expect that we will have a significant cash drain on a full-year basis while we are trying to sell these projects and assets.

The Q1 results were adequately explained in the 10-Q, so I will not take your time going through the details. We do expect much better results from our discounts over the remaining quarters until we have a sale. The improved results are simply a function of completing less-than-good old jobs and starting to work on newer jobs bid far better or higher.

Regarding a sale, all I want to report is that we are marketing the projects and assets, we are having active discussions with multiple parties, and the market for highway transportation assets we believe is strong. We will, of course, disclose something more specific at the appropriate time.

We're currently discussing optimal capital structure and target leverage internally and with our bankers. At this time, all that I would like to say on this matter is that our capital structure will remain conservative, we will deal with our February '08 bonds in a timely manner, and you will be hearing more from us over time about capital structure, plans and parameters.

Our 2006 earnings guidance remains unchanged. We remain on track for continuing operations earnings of $0.70 to $0.80 per share, on revenue of 950 to $975 million. That's a 12 to 15% revenue increase and the $0.70 to $0.80 per share compares with $0.37 per share in 2005.

Austin talked about the improving business fundamentals, but I think I can sum up the quarter from a financial point of view as follows. First, our trendlines are all going in the right direction. Revenue, margins, costs, DSOs and cash -- they have all improved over last year. Second, our financial condition is now more than solid; it's one of the best in our space. The improved balance sheet and liquidity is helping us win new business. It allows us to make an acquisition, and it's also helping us to make more money. We have lower interest costs, and our cost of leased assets is starting to go down. Third, we have far fewer legacy issues to deal with now, so we can focus on margin and cash flow improvements. It was great to get our class-action suit settled and behind us. We still have to deal with some litigation to collect old money, and we need to sell our DOT business, but we're now able to really focus on improving our core businesses.

At this point, I'd like to turn the call back to Austin.

Thank you, Bob.

Before turning the call over to questions and answers, I wanted to thank the MasTec team members for their hard work and their dedication to our customer base. It's each of their efforts that affect our performance and they've done a great job in the last quarter.

At this point, we would like to turn it over to Q&A.

Thank you, sir. Today's question-and-answer session is held electronically. (OPERATOR INSTRUCTIONS). Alex Rygiel, Friedman, Billings, Ramsey.

Good morning, gentlemen, and a nice quarter. A couple of quick questions first -- backlog was 1.1 million or 1.1 billion at and the quarter. Is that correct?

That's correct. I believe I might have said something else, but I meant to say 1.1 billion.

So it was up about 15% sequentially. What was the year-over-year change?

I know it was 1 billion, I believe, at the end of the year, or a little under 1 billion.

Okay. With regards to Ron's TV, what was the revenue contribution in the quarter?

So we don't break that out at this point separately. So, it's just growth.

Alex, while we don't break it out, we did say when we bought it, last year's annualized revenue was roughly $50 million.

Okay, and now that you've owned it for a couple of months -- (multiple speakers)

And we've owned it for two months, right.

Has that asset been accretive to earnings yet, neutral or modestly dilutive? Are there any integration activities ongoing or occurring? Is that asset living up to your initial expectations?

Let's answer your last question first. It's absolutely living up to our expectations. It has been accretive in the first two months, as we had hoped it to be, and we are synergistically putting them together with the platforms we have at MasTec and fully branding as a MasTec product.

Excellent. You referenced o a slow start in fibre deployment. Can you expand upon that a little bit?

I think, Alex, it didn't start as robust as last year did -- some permitting issues, some states just not getting off the ground as quickly as they did before last year. But I think, for the full year, we expect to have the levels that we'd budgeted for (indiscernible).

Is that across a number of customers, or is that specific to one customer?

It's specific basically to one customer.

With regards to your electric utility business, what type of growth do you anticipate in 2006?

Well, what's very interesting quarter-over-quarter, Alex, we had a 21% growth rate Q1-over-Q1 this quarter, and we're going to continue to see growth. Demand is high in that market, in that space. As MasTec can continue to add qualified personnel, we will continue to grow that business. You know, so we're not predicting what we're going to be doing for the year, but I see overall growth continuing.

That's great. Thank you very much.

Eric [Kainer], ThinkEquity Partners.

Thank you for taking my call. Congratulations, gentlemen. This is an outstanding result.

I have three questions. The first question is about DirecTV, obviously 38% of revenues in the quarter. I know you are not terribly comfortable talking about how much one company could grow, but obviously one of the concerns on the street is about how much growth really there is in that part of your business. Can you give us some comfort around that?

I will say a couple of things. First of all, we are extremely comfortable with where we are as a percentage of revenues with DirecTV. It's a great client; it's a wonderful product that we are presenting ourselves to meet their services. But moreover, the platform is an incredibly strong platform that I believe that, in the future, will be just a strong a platform as our general construction services we see for energy companies, our RBOC companies, cable companies today. What we're seeing is absolutely -- and we've mentioned in our comments when we started off this call -- is that we are absolutely seeing more RFP activity in the RBOCs and the installation to the home and to the MDU markets. As they roll out and deploy for next generation systems, at some point, these systems have to be installed to the end user. MasTec is in an incredibly unique position that we have years of service and we are perfecting the model on a daily basis to roll out those services. So we are excited about the growth opportunity that exists in our current customer, but also that the platform brings us in RBOCs, possibly security companies, and other different types of end-users.

Just to follow up on that, Austin, -- I think you bring up an excellent point and that's about the connections, especially for the FTTP project. It's my understanding that a lot of the connections being made to the customers that have already been connected to the FTTP network have been done by Verizon directly. It's hard for me to imagine that they are going to hire a huge, unionized work force in order to do connections to the rest of those homes. How do you see that kind of laying out over the next really couple of years? I mean, how much of that business do you think might be outsourced? Do you think you'll get effectively the same kind of share that maybe you get for the construction right now?

Let me first comment that I would never comment on how our customers are going to do their work. I mean, I think that's for them to come out publicly and talk about. But in a general trending perspective, as more and more customers are reached with additional product lines, the workload and the backlog becomes such that either you do have to hire a lot internally, or you do have to go to some type of outsourcing. I think, if we follow the trends in the industry over the last really ten years, trends have not been to build up internal work forces; they've been more to outsource those services.

I think the fact that MasTec has the capability and capacity and now an incredible track record of providing those type of services, I think it puts us in a unique position to step up and meet those needs, as we are asked and as we are our looked at to provide those services. I just think it's all about numbers, and it's all about the quality and the capacity of work that needs to be done. At the end of the day, none of our customers really reap the benefit of their CapEx unless they actually install the product to the home, and at that point, they're going to make decisions that are probably quicker, faster and looking for quality of service at a different rate than they may be today.

Excellent. One last question -- you mentioned very interestingly BPL when talking about the growth that you had seen in the electric utilities. Could you just give us some kind of a flavor for how much of the increase in revenues from electric utilities might be accruing to the [BPL type] project?

Well, there's 0 in our numbers at this particular point, so the growth that we saw quarter-over-quarter in energy was strictly in the distribution and some transmission increases that we've seen. I think we're going to see the BPL type of revenues start creeping into our numbers some time in the third or fourth quarter of this year, but I think that it's actually something that's going to be a large roll out for energy companies and companies that are in that space. It has been around for probably five to six years as a concept. The actual distribution systems are starting to be built and starting to be engineered now on a regular basis.

In my comments, I said that some of our customers have actually decided to use some of the technology and others are considering it, so I think that decisions are being made and schedules to roll out product will be coming probably in the second quarter.

Excellent. Thank you very much, and good luck going forward.

(OPERATOR INSTRUCTIONS). Liam Burke, Ferris Baker Watts.

Austin, good morning. Bob, how are you? On the acquisition front, is there any pipeline to speak of? If there is, what areas would you think you needed to add to?

Yes, I think that there's absolutely some opportunities that are out there, and I think some of them there have been publicly announced, which I'm not going to comment on today. But I think that MasTec's appetite is definitely there, probably in the Install-to-the-Home space to some extent. We will look at the communications space, and we will absolutely look at the energy space. I think the unique difference of MasTec today compared to where it was years ago in acquisitions is that as we move forward to them, that we're definitely going to take the attitude, as we did with the Ron's TV, that we need to (indiscernible) part of MasTec in a very quick and swift process.

We have a very strong, single platform with Oracle now. We paid the price dearly for many years to get it rolled out, but we are extremely proud and happy about the fact that we can roll people in right now and make them part of this company very quickly. The bottom line is we are extremely proud and satisfied with our brand-name that is out there, and we want to continue to sell that to our customers and show them the depth of capability of the whole company.

But I think the focus is going to be we will continue to look at install-to-home; we will continue to look at the communications space, and we will absolutely look at the energy space for possible acquisition targets.

Great, thank you. The other side or the other question I had was on the cable is conspicuously absent from your top ten group. I presume that everything is pretty much the same there in that space.

Yes, it continues to trend the same for us. I think that we see some increased work coming out, but the Adelphia sale has still not been completed. They should start -- something should be starting to happen in the second or third quarters, but that continues to be a [protracted] process. You know, I think that we will get our fair shake of upgrades when that does take place, but the industry has not been as robust as the other industries we are serving. We just have a serious commitment to pay attention to the core business that we absolutely can perform bottom line, and that's what we have done.

[Colby Cenecille], [Merriman] Investments.

I just had a quick question actually. Is there any way for you guys to expand your relationship with AT&T? Can you just talk a little bit about that and why that's not as big of a customer as I guess Verizon, for example?

Well, historically the SVC/AT&T business MasTec wasn't really heavy in their regions in the country and for this company. What we're seeing is absolutely an opportunity now to expand our relationship, and we mentioned today that we won some MSAs in Wisconsin this last quarter. So I think you'll see MasTec, just like we did with Verizon, absolutely put our products in front of them and expand their service. I think it's really important for folks that when that question gets asked, that that same question was being asked of us two years ago when Fibre-to-the-Home came out for Verizon, where Verizon was probably one of our customers today that's in our top three (indiscernible) that wasn't in our top ten for four years running prior to that.

The bottom line is that MasTec has the capability and the capacity and the brand-name to go ahead and present to those clients as they expand, as they downsize their internal workforces, and as they consolidate. We believe that, as we have those opportunities to respond to RFPs and to sell what we do, we will definitely pick up marketshare with them as things progress.

John Harmon, Needham & Company.

Good morning, gentlemen. A couple of questions, please -- I was wondering if you had your segment breakdown -- communications, utilities, and government -- and the year-over-year numbers, if you've got them.

Bob?

They are in the Q. The communications I believe was up 13 -- 12; utilities was up 21 and the government segment was down 9, with the total revenue being up 13%.

1Okay, thank you. Did you give capital spending in Q1? I apologize if I missed it.

It was 2.9 million, and that was one reason I wanted to talk a little bit about the 20 to 40 million. Even though we are now saying it will be in the lower end of that range, we didn't want people to annualize 2.9 million. You know, there will be additional spending as we purchase more equipment than we have in the past, versus leasing it.

Right, thank you. Then finally, since you did this offering, what is a good number to use for share count for Q2?

6-to-1, (indiscernible) 6-to-4, right? 64 million.

Thank you very much.

We're standing by with no further questions at this time. I would like to turn the conference back to Mr. Shanfelter for any closing remarks.

We thank you very much for joining us today and appreciate your calling in. We look forward to communicating with you in the near future.

This does conclude today's conference. We do thank you for your participation. You may disconnect at this time.