MasTec Inc (MTZ) 2006 Q3 法說會逐字稿

Welcome to MasTec's November 10, 2006 third quarter earnings conference call. [OPERATOR INSTRUCTIONS]

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

Thank you, Stacy. Good morning. Welcome to MasTec's earnings call, which we'll discuss the results of operations for the third 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 where we operate. These forward-looking statements are the Company's expectations on today, the initial broadcast date of November 10, 2006, and the Company will make no effort to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions including, but not limited to changes in estimates, business results, risks through operations, significant changes in legal risk or litigation outcomes, and others are detailed in our filings with the Securities and Exchange Commission. Should one or more of these risks and 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 CEO, along with Bob Campbell, Executive Vice President and Chief Financial Officer. The format of the call will be opening remarks by Austin followed by a few detailed financial comments from Bob. Financial discussions will be limited to GAAP-based financial items and their derivatives. The discussions will be followed by a Q&A period and we expect the call to last approximately 45 minutes.

Austin?

Thank you, Marc, and welcome to MasTec's Q3 2006 conference call. Yesterday we announced our sixth quarter in a row of profitability from ongoing continuing operations. We have put the Company on solid footing and are posed to take advantage of the core business strength, diversity, and growth potential. I would like to highlight some of the developments and how we have positioned MasTec for continued success and growth. No doubt we went through some very difficult times, but those experiences have helped us put in place the people, equipment, platform and client base to capture the opportunity to deliver results for years to come. Our announced divestiture of the state DOT asset and projects was a necessary step that will benefit MasTec, both in the short and long term. It's obvious that the decision will increase cash flow, eliminate overhead, allow management to focus on the core business and eliminate negative exposures, which all allow us to enhance the forecasting and visibility of the Company going forward.

All indications are that our core customers are entering to a long-term spending cycle that should benefit each of our offerings. MasTec is well-positioned to grow and serve our end markets and the growing outsourcing trends. We have a strong devoted customer base that continues to rollout and upgrade to provide video, voice and data services, whether in the install to the home or the deployment of fiber. The RBOCs, cable companies and satellite firms are rolling out advanced equipment and programming that use MasTec services. As HDTV and other data needs continue to see large demand, the point of these new products will continue at a robust pace. Also, MasTec is in the process of bidding and negotiating a number of longer term service agreements with our current and new energy customers. Without a doubt, many of our energy customers are looking for firms that have the size, expertise and overall capabilities to meet their long-term plans. We continue to see increased CapEx cycles growing year to year and MasTec remains focused on those opportunities.

MasTec has been disciplined in its pricing proposals to ensure that we can provide the highest level of service while at the same time providing acceptable returns to our shareholders. Particularly as labor markets continue to tighten, we will only commit our resources to areas that further our goals and objectives. In the past three months, we have seen increased bid activities in telecom's, energy and broadband clients. Some of these successful examples would be clients such as: Three Rivers Communications in Montana; Tri County Telephone in Wyoming; CPS Energy in San Antonio, Texas; Arizona Public Services in Phoenix, Arizona; and also Cox Communication in both Hampton, Virginia, and San Diego, California.

Additionally, it's important to note that Verizon, BellSouth, Embark and Qwest have all had substantial each quarter growth this year and were also up year to year from the third quarter 2005. One important point about energy business is the bulk of our customers are in the southeast, where hurricanes and other storm damage work is normally prevalent in the third and fourth quarters of each year. Even though storm damage in 2005 caused utility customers to tighten their budgets in 2006 and we have no major storms this year, we still managed quarter-over-quarter and year-over-year growth with our utility customers.

Bob is going to go into more details but I'm excited about how we have positioned our core business. We experienced strong revenue growth of 14.9% quarter-over-quarter, and 12.8% year-over-year, despite walking away from some markets due to some aggressive pricing by others and lack of major storm revenues. At the end of the quarter, our DSOs were down 64 days, and our cash was up $67 million from a year ago. Revenues from nine out of the ten top customers for each period year-to-date and quarter-over-quarter have increased. In short, the core business opportunities before us are exciting. We are now prepared with the financial and [inaudible] capital to take advantage of these opportunities. As we move forward we refined our management structure to allow us to continue to capitalize on profitable growth and acquisition opportunities in our sector. The management team and team members of MasTec are excited and focused on a strong performance for 2007.

I'd like to turn over the call to Bob so he can discuss financial results of the quarter and discontinued ops in much better detail.

Thank you, Austin. Before I cover our third quarter financials in our usual detail, let me review the headlines. First, we have signed an agreement to sell our state DOT projects and assets, with a closing date of on or before January 31st. Second, our third quarter earnings from continuing operations increased 32% to $14.2 million compared to $10.8 million last year. With basically no hurricane revenue this year and with this year's higher legal costs, we had an excellent quarter operationally. That's six quarters in a row of solid or better earnings. Third, for the first nine months, continuing operations earnings almost tripled from $10 million to $30 million. Fourth, Q3 revenue was up 15%, despite having, basically, no storm revenue this year. Fifth, liquidity is currently at $111 million. Sixth, DSO's are at 64 days for continuing operations compared to 76 days last year. And finally, we are adjusting our 2006 continuing operations guidance to $0.65 to $0.70 per share per earnings, and $930 to $940 million in revenue, due to the lack of high margin storm revenue and continued high legal costs. We don't give quarterly guidance, but with only a quarter to go, our guidance means that Q4 will be $0.19 to $0.24 compared to $0.16 last year.

Now, let's go through the details. For Q3 '06 income from continuing operations was up 32% to $14.2 million, or $0.22 diluted earnings per share compared to $10.8 million or $0.22 per share last year. The P&L includes the new FASB 123(R) stock expense in 2006 that was $0.03 for Q3 versus none last year. Remember that our share count went up 15 million shares in January as a result of a secondary stock offering and a DSSI acquisition. Revenue was up 15% from $221 million to $254 million. Without hurricane revenue the growth was 20%, and it was broad-based. We had year-over-year growth with DirecTV, Qwest, Progress Energy, TXU and others. Our diversity of customers and end markets really helped us in Q3. It allowed us to have good revenue and earnings. in spite of having basically no storm revenue this year.

Gross profit was 15.4% for the quarter versus 16.8% last year, and that's before depreciation. The decrease was primarily made up of higher insurance costs, benefits and fuel costs, which peaked in Q3, and disappointing results from two energy contracts that we have now exited. Plus, the impact of not having higher margin storm work. Regarding insurance and benefits, we're basically self-insured, so we can be lumpy in our quarterly costs. G&A expense was 8.3% of revenue in Q3 '06 versus 7.7% in 2005. The increase was mainly due to increased legal expenses which were up $1.6 million and $2 million in new 123(R) stock expense compared with Q3 '05.

Let's talk more now about legal costs. Our total legal costs for the quarter were $3.5 million. We have a small amount of collections-related legal expenses in cost of sales, in addition to what is included in SG&A. We have spent well over $8 million this year on outside legal fees and, unfortunately, we're on a run rate to hit about $12 million for the year. We're very mindful that it amounts to $0.18 a share.

We are disappointed not only in the spend rate, but in the slow pace of getting some of our collections litigation to conclusion. With a fair amount of our litigation finally getting to trial in Q4 and Q1 '07, we expect that our legal costs will subside next year. You should know that our goal for 2007 is to cut outside legal costs in half to 50% of its current run rate and that's $0.09 a share. Finally, we have several big collections cases finally getting to trial in the next two quarters. And we continue to be optimistic regarding their outcome. If not, we never would have spent the legal fees. The information that we can share is in the litigation footnote in the Q.

Interest expense was reduced by $2.6 million due to the pay-down of $75 million of debt in Q1, plus our interest income. We had $70 million of cash at quarter end. A year ago, our Q3 balance sheet had only $3 million in cash, so that's a dramatic improvement. We have significantly improved our continuing operations, accounts receivable, days sales outstanding, or DSO, this year. We closed Q3 at 64 days compared to 76 days last year, and down from 66 days from Q2. Typically we get a negative spike in Q3 due to our normal seasonal ramp-up, so we were pleased to see Q3 improve versus Q2. Our DSOs reflect improved customer credit quality, customer diversification and positive changes in customer mix. Management's goal continues to be to get DSO's under 60 days.

Today's gross liquidity is $111 million, compared to $51 million a year ago. Typically our Q3 liquidity is weak due to our seasonal ramp-up, but we've had a good collections quarter. For your information, we define liquidity as bank cash plus availability on our credit facility. As I mentioned, our Q3 15% revenue growth was broad-based. For the quarter -- for the third quarter, our ten largest customers were DirecTV 36%, Verizon 9%, BellSouth 8%, Embark 5%, Florida Power and Light, Progress Energy, Qwest and TXU are all at 3%, South Florida Water Management District is 2% and Dominion Virginia Power is 1%.

Today's continuing operations backlog is at roughly the $1.1 billion level and that's an 18-month backlog number. Even though we believe that fiber deployment work will last for many years, our backlog includes only the specific work for which we have visibility today. While we continue to provide an estimate of backlog, I don't feel that it's a very useful analytical tool. We have migrated from a Company with large multi-year construction contracts, where backlog is very relevant, to being a Company more focused on service agreements with recurring revenue. Keep in mind that two-thirds of our revenue is from master service agreements, generally for maintenance work and generally pursuant to three to five contracts.

As I mentioned earlier we've signed an agreement to sell our DOT business, which we discontinued in demonstrate 2005. We will close on or before January 31st. The selling price consists of $6 million in cash, a $5 million note and a five-year earn-out of up to $9 million. We are selling all of the assets and most of the liabilities. We have taken a noncash impairment charge of $13.7 million to write down our book carrying value to the net purchase price in the contract. We ignore the earn-out, which is contingent consideration, in our calculation of the impairment. After a year of marketing the DOT business and using two different investment bankers to try to sell it, we are very pleased to announce the sale agreement. We look forward now to being able to focus in 2007 on our core businesses and taking advantage of the market opportunities that Austin mentioned. In addition, our financial statements are going to look dramatically better without the P&L and cash drag of DOT.

We will be dealing with our February '08 bonds shortly. Currently debt markets are favorable to MasTec, and you can expect to see information on a refinancing soon. However, our capital structure will remain conservative. As I mentioned, we're adjusting our guidance to $0.65 to $0.70 per share -- that's continuing ops -- with revenue of $930 to $940 million. We've had three good quarters and expect another good one for Q4.

Compared to the guidance we gave in January, we've had two misses. Basically, no storm revenue versus having $45 million last year, and spending an estimated $12 million on outside legal, with slower recoveries than we expected. Operationally, we've had a terrific year, especially when you note that 2006 has been burdened with the new 123(R) stock expense of about $0.10 per share this year. Without the 123(R) expense, on a pro forma basis this year we will double our 2005 EPS. Nevertheless, our guidance on a GAAP basis is more than a 75% increase in earnings and revenue growth of 10% to 11%. Our guidance reflects a $0.19 to $0.24 Q4 compared to $0.16 last year, and last year we had a significant amount of storm work in the fourth quarter. The upper end of our guidance reflects some legal recoveries offsetting the legal spend. In summary, we have now put six good quarters on the board, we will soon dispose of our last noncore business, our core businesses are heading in the right direction and our markets continue to be favorable.

At this point, let me turn the call back to Austin.

Thank you, Bob. In short, MasTec is very str -- is a very is to go competitor in today of market. We have firmly positioned the Company for the future. We will capitalize [and poise[ for CapEx growth from our customers, and we expect '07 and beyond to be a period of sustained growth for MasTec and its investors.

In order to ensure enough time for Q&A, I'd like now to turn the call back to the operator.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Steve Mather with Sanders Morris Harris.

Thanks, good morning.

Good morning, Steve.

Hi, a first one on housekeeping, the other income line is $3 million or so in this quarter. What should we expect going forward on that?

Bob, do you want to --

The other income line includes gains from the sale of vehicles and -- oh, and the other major item, in fact, the largest item is the increase in our equity investment in our joint venture, which is doing very well. That's the largest part of other income both in Q3 and that'll continue in Q4.

Okay. All right, that he sounds good, sound like maybe a $2 million run rate or so?

I think that's correct.

Okay, great. And then kind of more strategically on the DirecTV business, it seems to me that the installation side is becoming, you know, more relevant, more highlighted for that firm. Anything you could say about that -- that business in general?

We still continue to see a mix of new install and maintenance. And what we've seen over the last, really, three to four years is our model is each year picking up more of a percentage of maintenance work compared to new installs. So as their customer base grows and expands, we're doing moves and changes and upgrades as much as we're doing brand-new installs. So we still look -- at right now our numbers are around 65% move, adds and changes and maintenance work and 35% new install.

Do you think there might be any acquisition opportunities in that business?

Well, we're going to keep our eyes open, wide open for acquisition opportunities really in all the core business sectors that we have now. I think the issue that the fact that we've gotten the sale done with IPS and the government DOT business is now really allows us to focus on business that has really been performing bottom-line profits for us for the last couple years now. And now it's a position where, if we find good acquisitions, whether it be in the install-to-home space or communication space or energy space, MasTec is incredibly interested in looking at those businesses.

That's great. Last but not least, just on the EBITDA margins, I'm wondering can you point to any specific initiatives to boost that, basically?

A few points, Steve. We can't do anything about storms, but legal, as we pointed out is -- should subside next year. Some of the things that we had this quarter, insurance, we're pretty -- we feel good about our long-term trend, but it can be a little lumpy. Fuel is going down and Austin mentioned we remain disciplined in pricing and focused on margins to the point where we've walked from a few pieces of business that didn't meet our profit expectations.

And I also think, too, just putting focus purely on the continuing ops and not really working and chasing the business that we were trying to sell should help us really focus on possibly other areas, whether it be purchasing or whether it be other areas of the business that we can definitely leverage better performance.

That's great, thanks.

Thank you. We'll no next to Eric Kainer with ThinkEquity.

Thank you very much for taking my call. First question is I saw the nice uptick in Verizon work and I was wondering if that is still path creation or if we're starting to do some home installations there?

We have -- there's a little bit of both. What we told the markets, I mean, the last two quarters that we expected the second half of the year to be a little more robust than the first half was, and I think we saw that come to fruition here in the third quarter. We expect pretty much a good flow into the fourth. A lot of weather will be dependent on that a little bit, because we are in some of the northeast markets so that may have some impact. But we're seeing them both starting to spend and meet their targets on the outside plant, but we have seen an uptick in the MDU markets that we're serving for Verizon and the install to the building. Not as much at the home level, but as the MDU levels.

Okay. That makes sense. Second is back to the disc ops, and I know it's not a favorite topic, are there any hurdles that we should be looking for before we get to 1/31/07?

Let me go kind of go through a couple things. I think that in this process we knew that we needed to bring a solid deal to the table. The buyers are incredibly solid people with tremendous backgrounds;, background with KKR, backgrounds with Tishman, backgrounds with Coleman. And these are people that I think really can execute on a plan to get this not only closed, but they might be able to do a better job at the business than MasTec did. And we hope they will be able to. But we think we've dotted the I's and crossed the T's, and of course, everything's publicly filed, so you folks can look at it. We think we've got a solid deal here and otherwise we wouldn't have announced it to the markets.

Excellent. Last question is about kind of a long-term model. You had previously mentioned that you thought that the gross margin could go back to kind of historic levels, which I took as being kind of low 20s-type levels. Is that still your belief?

Those are absolutely our goals and objectives. I mean, the bottom line is that this business and industry is capable of getting those types of margins and we'll definitely be focused on those for the future for our team members and for our business plans to get back at those levels. The question always is the timing. Once again here, now that we're focused purely on this change of our core business in telecom and cable and energy and satellite home installation providing, I think that we really can now really work on the final tweaks and the big-time tweaks in our model to get all the leverage out of it that we can.

Excellent. Thank you and good luck.

Thank you.

We'll go next to Liam Burke with Ferris, Baker Watts.

Thank you. Austin, the utility area had tough comparison with the Florida Power and Light hurricane-related expenses in '05. You also had two unfavorable contracts in there and you still today 3.5% revenue growth. But flip back to second quarter of '06, you had 21% revenue growth year-over-year. As we get past the third quarter, can we look for those types of growth rates in the utility spend?

I think what you're going to be looking for is a full-year over -- a full-year growth of a number up around 10% or better in energy this year. And I think we're going to target that or better going forward. We like the marketplace. We like the opportunities that we're getting presented with. And what we're finding is that we can expand our geographic regions now to states that are contiguous with states we serve now. And we're going to look at those marketplaces a lot more over the next coming months. And we're going to be inquisitive in those space a little bit more than we have been in the past.

Okay. Do you have any unprofitable contracts in the mix now.

We truly believe we've deposit a handle -- I mean, I'm not going to sit here today and tell the markets that every single one of our jobs is profitable across the board. But you're talking a management team that's incredibly excited about being where we are today and that we have gotten ourselves positioned to literally be in a place where a very, very large 95% to better percent of our business today is absolutely providing profit for us.

Great. Thank you.

And for those areas that aren't, we are going to continue to attack them.

Okay.

Thank you. We'll go next to John Rogers with Davidson.

Morning, John.

Mr. Rogers, your line is open.

Can you hear me?

We can now.

Oh, sorry about that. Bob, could you run through the customer list again? I didn't get quite all those numbers. And then second question, in terms of the acquisitions, especially the DirecTV business earlier this year, can you give a sense how much of the growth there was organic versus from the addition of the acquired business?

Yes, I'll -- let me -- I'll read the customers again in a moment, but the -- we publicly said that the DSSI acquisition, their '05 revenue was in the neighborhood of $50 million. And we closed on it January 31st, so make that calculation. The top ten customers, again, for everyone's benefit, DirecTV 36%, Verizon 9%, Bellsouth 8%, Embark 5%, Florida Power and Light, Progress Energy, Qwest and TXU all at 3%, South Florida Water Management District at 2%, and Dominion Virginia Power at 1%.

Great, thank you.

You bet.

Thank you, John.

And we'll go next to Colby Synesael with Merriman.

Thank you for taking my question. I want to go back to the other revenue of about $3 million. It looks like that was a $0.05 benefit in the quarter. One, is that something that you guys were expecting in your guidance when you put out guidance of, I guess, $0.70 to $0.80? And then second, going forward -- you might have answered this, but is there going to be more of that going forward? My second question has to do with the earn-out on the DOT business, if you can give us some of those parameters as far as what that is contingent upon? Thank you.

Okay. First about other income, you know, in reality, in our Company, one, we do expect to have gains on the sale of equipment, primarily vehicles, routinely, so you'll tend to see that in other income every quarter. It may bounce around a little bit, but we expect to always have gains. And then secondly, the biggest component of other income is the earnings -- our share of the earnings from our joint venture, and -- which is doing very, very well. So those numbers are not only in our guidance but in the fourth quarter and you should see more of the same in '07. It's just another piece of the MasTec portfolio. We just don't happen to own all of it.

Right. But it seems like it was a little bit higher this quarter, I guess compared to least -- if you go back two years.

Right. I mean, this is a growing business with sort of accelerating revenue and earnings. I mean, it's the kind of business you want to own part of.

I think the answer, Colby, is yes, we planned for it and, yes, we thought it was going to be in our business and, yes, we executed that plan.

Great. And the DOT, the earn-out?

Briefly, the primary piece of the earn-out is that MasTec gets 35% of excess cash flow. This is all in the purchase agreement, but it's basically cash flow from operations minus net CapEx minus mandatory senior debt schedule payments. And in addition to that, should the business eventually get flipped after return of capital and a return on the capital, we get 100% of the proceeds toward the earn-out.

If I could get one quick question in there, shares out actually went down this quarter, I wonder if you could just explain why that was?

I don't believe they did, but --

It looks like diluted I had last quarter is 66.643, and this quarter they actually went down. I just -- I normally don't see that, I just wanted to know why.

Let's continue the call and I'll get back to everyone in just a moment.

Thank you. We'll no next to Allen Mitrani with Sylvan Lake Asset Management.

Hi. Thank you. Can you ta -- about the earn-out or about the sale of the discontinued ops, you talked about selling all of the assets and most of the liabilities. Can you detail or just give us a sense of the liabilities that you kept and what kind of, I guess, losses they may -- what kind of reserves you have for them, what kind of losses you expect for them?

Okay. We're keeping defensive litigation, we're keeping some things that are reserved for, like not routine warranty but any kind of negligent work on our part. We're keeping benefits liabilities, which are already expensed and insurance claims, which are also already expensed. So, you know, in a big picture sense, the operating liabilities are really going with the business.

Okay. And then at the end of last year you bought -- or beginning of this year, I guess, you bought DSSI, Ron's TV, I believe. It had revenue of $50 million last year. Can you tell us what it contributed so far this year?

We just answered -- we just put that answer up just a few minutes ago, I think you can do the math that that's what they've got to date for last year is $50 million. And the math is just simple that we've got 34% growth in the unit this year. They're probably responsible for around -- probably it's 10% to 12% organic growth and these are just estimate numbers, and the rest of it would be from the Ron's TV acquisition. You can guys can do the mast, the numbers are right there.

Okay. I'll find that, I apologize. Lastly, you talked about other income and as you said, joint venture, just remind us what the joint venture is? It's a 49% stake that you hold in the joint venture, is that correct?

That's correct.

That's not reported at all in minority interest? Minority interest is showing a loss this quarter?

No. We have a 51% venture --

You do, okay.

-- that's in our results and then we back out the minority interest. And we have the 49% joint venture that's in other income. The 51%, it's in our numbers and then we back out the minority interest. The 49% just goes on one line.

Okay. Excellent. Thank you.

Yes.

And we'll go next to Alex Rygiel with FBR.

Thank you very much. Austin, in about six months, after the DOT transaction closes and hopefully you get through a large portion of the legal challenges, what are you going to do with your time?

We're going grow th -- Alex, great question. But, you know what, this is a great business in the communications space. There's great opportunities in the energy space. And I know you've heard me speak a lot about the passion I think I have for the -- this Company has for increasing its install-to-home capabilities. I think we've just basically touched the surface on how expansive that market could be. As you see -- as we watch AT&T consolidate and we look at the needs they're going to have as they roll out new products, I just think there's going to be vast needs for more people in the energy industry to be outsourced. Vast need for people in the home installation market. And I think continued need for people that do the things we do every day for the RBOCs and especially with then more consolidation coming into play. I don't see them looking to expand their work forces, I see them more looking to constrain them and I think that's what MasTec's sweet spot is and it'll continue to be. And I think it'll give us plenty of opportunities and challenges as we go forward.

Great.

But I'd far rather be working on that than what we have for the last five years.

So we should be looking for a new employment contract coming across soon?

You know, right now, I think my answer to you on that one and anybody else that asks me is that I was more focused on what I needed to do with the business and that's where I stayed focused. And we'll worry about those things as the days ahead come.

Great. And Bob, just for clarification, back in 2005, can you run through the top ten customers and percent of sales? I'm not sure if I've got the most accurate information since the restatement.

One second. Here we go.

For Q3 '05?

Yes.

The top ten were DirecTV 31%, Verizon 9%, BellSouth 8%, Embark 6%, Progress Energy 3% -- a little out of order -- Florida Power and Light 5%, Qwest 2%, TXU 2%, South Florida Water Management District 1%, Dominion Virginia Power 1%, [Ivelia] 3% and SBC 1%.

Great. Thank you very much, gentlemen.

Thank you, Alex.

Thank you. We'll go next to Todd Mitchell with Kaufman Brothers.

Yes, just two brief quick questions sort of on macro [inaudible]. We've heard a lot of positive data about the utility sector and you've talked about a lot of activity for RFP's, but it seems like the number's a little bit weak. Could you sort of talk about what the dynamics are there? Second of all, in regards to the DirecTV business, could you qualitatively, at least, break out the difference between organic growth and acquisition growth? And also, would you be willing to address sort of what kind of activity you're seeing post-quarter qualitatively? DirecTV had a rather somewhat weak sales previous quarter. It seems to me that the activity is peaking -- or picking up. Can you confirm that?

First of all, let me talk about the DTV growth because that's the third time we've gotten asked a question, so let's try to be clear. Roughly about 50% of the growth that we've experienced this year comes from organic growth and about 50% comes from the acquisition that we had last year. The -- could you --

I understand that. I guess what we're looking at here, though, is not necessarily their net adds. We're looking for the upgrades from the rollout of HD, which appears to have been somewhat inhibited by their inability to get a HD DVR out on time.

What I'm not going to comment on is what they're doing with their numbers at this point. I feel real comfortable talking about the mix of work that we're seeing and that we're getting in our markets. Because our markets are very different in geographic areas of country. I mean, where we're serving in southeast and southwest and mid-Atlantic, we're seeing good growth year-over-year. That growth is split between new installs -- and it's still running about the same number, about 35% of our revenues are in new installs and about 65% is on maintenance upgrades and those type of pieces of work. So we're still seeing that same pattern of our installation work. Now, we saw an uptick a little bit here at the end of the third quarter. And we expect tour seasonal uptick in the fourth quarter, just because it seems like when the football plan rolls out and the sports program come out, we historically get some upticks. And when the holidays come through, people are buying the package a little bit more. But for us -- I can't speak to their overall platform but I can speak to what we're seeing.

Okay. And in regards to the utility business?

In regards to the utility business, would you clear your question up for me so I can make sure that I'm --

If you look at year-over-year comps, it looks like it's in the low single-digits in terms of the top line. But we've been talking about how the macro indicators there are very strong and you've been talking about how your RFP activity's been very strong there. When would you expect that to kick up?

I think the biggest issue you got to remember is there's some 45 mi -- $35, $45 million of revenue between the third and the fourth quarter of last year that came strictly from storm. If you back that out, there's just incredibly strong growth in our energy sector. We also talked about pulling out of a couple of projects that were not profitable to us. So when you start talking in numbers of $50 to $55 million of either projects or storm damage and then you look at our numbers, I think there's some substantial strong growth in the utility market for MasTec. So, I mean, we're talking numbers, I would think, in excess of almost 30% --

Okay.

-- of growth.

Thank you for clarifying that.

So that's the base business and that's what we're seeing.

Thank you.

We'll go next to John Harmon with Needham and Company.

Hi, good morning.

Hi, John, how are you doing?

Good. I was wondering if you could just talk about the direction of the Verizon business with regard to the fact that they're flattening out in the number of homes that they're going to pass per year but also with their recent webcast they had and their commitment to put another $18 billion into their fiber to the home business?

Every bit of news that comes out from Verizon, we go through this a lot where we don't comment on what we interpret their information to be, but every piece of news that I'm getting out of Veri -- about Verizon is they're committed to the space. That they're going to go ahead and continue to roll out their plan. That it's being taken at the take rates at the customer's home. That there's satisfaction in their product line. We're just not seeing a pull back of any sense of what they've targeted for growth. We fill a niche of that market. I think that our big growth of that is going to be how do we get more involved with the installation, either the multiple dwellings or at the home level itself, as it gets more robust going forward. But I think our construction revenues and the areas we serve for them today are solid, are predictable and I think we're going to have just continued -- approximately this year, maybe a little bit more in this year, revenues as we look forward.

And on a geographic basis, would you say that they're deploying -- their future deployments are more in areas where you have a stronger presence than where they originally started?

Here again, I'm willing to say that in our areas it's a solid process. To speak about their overall plan, I would have to hesitate to talk about what their overall plan are and how that is geographically. But I think in our areas we know exactly what they're trying to do. They work with us a very strong partner and we feel comfortable with the guidance and information we're receiving to make plans for our next year guidance, which we're going to let out in January.

Okay, thank you. And finally, I don't know if you've ever mentioned this number, but how much revenue could you potentially regain through the litigation you're currently engaged in?

We have never deny done that number and our disclosures are what our disclosures are are. We wouldn't be spending this money, as Bob stated in his comments, unless we felt recoveries are well above those numbers.

Okay. Thank you very much.

Thank you, John.

Thank you. And we'll go back to Allen Matrani with Sylvan Lake Asset Management.

Just two questions. First on BellSouth, any --, the delay, at least so far in getting the final approval from AT&T, are you seeing delay? Some of the equipment vendors are talking about, basically, some delayed ca -- no budget flush for the end of the calendar year but then a renewed spending for next year. Can you give us your sense of what you're hearing out of BellSouth --

I would not disagree with what the vendors are putting out in the marketplace. I think if the approval goes past the end of this year, it might have some impact that's a little different because it's difficult for them to budget and spend. But I think what's really important for everybody to understand on the call is that we're doing basic maintenance work. I mean, it's got to get done. Whether it gets sold or doesn't get sold, they've got to meet their daily needs of operating their system and their network. So we're not as subject to the baseline of our business as maybe the equipment vendors are about putting new equipment out there.

Okay. Okay. Good. And then Bob, you talked with refinancing at some point relative to these bonds that are coming due in about a year plus, but you said you want to stay conservative. Can I -- does that imply that you'll take out some of the debt with new debt but you'll issue some equity or equity-linked securities related to that?

No. Without being very, very precise, we're looking at a debt-to-debt refinancing.

Okay. A straight debt for debt, got you. Lastly, in just going through the Q, it seems as if you've adjusted the discount rate to the insurance reserves this year as interest rates have gone up from the fed. Is that what's dictating the reduction in the discount rate and, I guess, the increase in -- or the reduction in reserves this year because the feds fund rate has gone up to 5.2 where you are now versus where you started at 3.5%? It looks like it added a few pennies this year. I'm just wondering. next if the fed's cutting, are you cutting your discount rate and taking away earnings? Can you just talk about that a little bit?

We'll have to follow the discount rate. If the discount rate goes down we will adjust.

So it will move with where the fed's fund rate is?

Right. But I think it's worth noting that because we're basically self-insured, the overwhelming majority of that expense goes up and down with our safety performance with the actual insurance claims. And because we have $2 and $3 million deductibles, it does bounce around a little bit each quarter depending on what's happening to the claims. And that hit us a little bit this quarter.

So regardless of if the fed cuts rates next year, you may not decrease your insurance re -- you may not decrease the discount rate, depending on how your safety record is?

The discount rate will change with the market rates. That's just good accounting and we just have to follow that.

Okay. So what that implies is -- I'm saying is that you could theoretically be cutting into earnings next year by a few cents, but your guidance-- obviously that would mean that your operational guidance is just a little higher. I'm just trying to understand all that. Whether you --

The bigger more significant piece is in our control, which is simply not having accidents.

Got you.

That's what we completely control and that's the overwhelming majority of our insurance expense. So it's up to us to continue to improve on our safety record.

Okay. Thank you.

Thank you, Al.

We'll no next to Chris McDonald with Kennedy Capital.

Hi, good morning. Just a quick question, anywhere where you see if you're seeing scarcity in labor or a lot of labor cost pressure?

We've talked pretty openly over the last couple quarters that we continue to see some labor pressures in especially the energy industry. They just aren't making journeyman lineman every week out of votech schools. It's a seven-year process to train these individuals and it's a very tedious process to have safe qualified work force out there. That's one that we felt pressure probably at the beginning of the year. We continue to feel pressure. And we're going to continue to try to make sure that the assets we have are deployed in locations where we can get return on that investment, because these are very tough assets to find. We are finding some issues in some of the other sectors we're serving start to creep in, but I think we're going to be middle of '07 to -- depending on CapEx cycles, the middle '07, later '07 before we really feel any kind of a crunch coming on.

Okay. Given the fact that you're bidding on several long-term service agreements in that energy space, I would imagine any of the pressure you're feeling is most likely reflected in pricing on these deals. Is that right?

Well, it's not only pricing but it's also where we feel we can deploy our best assets and personnel. I think that what we're not doing is reaching out to areas where we're starting brand-new that we don't have qualified people that have shown performance in the past. And we want to make sure that we grow with our clients and grow with new clients that we're really doing so with the quality people that have shown performance for us in the past and that we can get predictable -- not only growth models but predictable results.

Okay. Thanks guys.

Before we go to the next question -- this is Bob -- we had a question on the number of shares in the diluted EPS calculation. This quarter is 66.2, last quarter was 66.4, really rounds to 66.5. The change -- it's all in the calculation of common stock equivalents so the calculation goes up and down, depending on whether your stock price is going up or down. In this case, between Q2 and Q3 the stock price has gone down slightly and our number of shares have gone dawn.

Thank you. We'll go next to Eric Kainer with ThinkEquity.

Thank you very much. Just a couple follow-ups. First is on the DirecTV business, every time they upgrade a customer, either to the MPEG4 box or to a DVR, is there a call to one of their [inaudible] like you or are some of those self-install?

Some of both. But if you went to a outlet retail store and you bought the equipment yourself and you decide to go home and install it yourself, you can do that. However, if you've called a 1-800 number or you've asked the retail store to provide you with an installer, then that would be more likely in our areas, a MasTec representative at your home doing that work for you.

Okay, great. And just one other question on kind of trying to get some visibility into the business. Of the backlog that you had at the end of 2Q, I assume most of, obviously, this quarter's revenues came out of that backlog. Can you give us some sense for how much of the revenues in this quarter did not come out of backlog? I would imagine it's a pretty small amount, especially given the [inaudible] of -- or the zero in storm restoration revenues.

Yes, Bob, go ahead.

Again, to talk about backlog I continue to believe it's not an overly valuable analytical tool, because the majority of our business is maintenance, MSA or MSA-like agreements. And I think backlog is a better -- it's a better tool for a construction company doing large multi-year big-dollar projects to know, are they going to replace their revenue. In our case, it's really just an 18-month estimate of both -- of major projects, but also the revenue from our MSAs, and it's all based on what we have visibility for. So with our large number of customers and mostly MSAs, yes, the number is up. It's $1.1 million this quarter versus $1 million last quarter. But again, I don't think you can overanalyze that number.

It's $1.1 billion.

Did I say a million? I'm sorry. $1.1 billion. I stand corrected.

We knew what you meant.

Good. [LAUGHTER]

And just a last question. Austin, you mentioned walking away from some projects due to pricing. Any color on those? I mean, any geographies or industries that those were in?

t never fails that in this industry -- it always has been there -- where some local or regional player will come in and just really try to buy a market and that happens. I think what's great about MasTec now is we have the discipline in place not to chase that and not to just chase after markets. So I'm not going to talk about specific market locations or customers. I don't think that's a good position for us to be in. But I think the message we want to get to investors is that with the Oracle system, with the management team we have in place and really kind of of the focus on the core we have, we can find out quicker and faster where we can push the pressure points or not to keep a market. And our pressure to push down, to chase projects now is far less than it was maybe in previous years.

Okay. It sounds like, then, that was from some of the smaller players in the space, not from some of your bigger national competitors?

I think what you have is you have some our national competitors are so divided up in small little companies that sometimes they do make decisions, maybe, that their upper office doesn't understand. In general, MasTec's one firm, it's one Company. We know what every one of our groups are doing every day and we're watching that out. But I think our competitors sometimes have a little slippage at their local levels, so we get competition from both sides.

Okay. Thank you very much.

And will go next to Alex Rygiel with FBR.

One follow-up question. Austin, who is South Water? That seems to be a new customer in your top ten list. Can you talk a little about who they are and what you're doing for them?

I'm not seeing them on my top ten customer list. so maybe we just misunderstood each other.

I guess it was your ninth largest customer that you mentioned?

Oh, South Florida Water Management District.

South Florida Water Management District. Yes. That's our -- that's some work that we're doing down here in Florida at -- that is with our JV, the 49 -- the 51% JV that we have. And that was -- we entered into that market probably about a year and a half ago. I think you'll remember, Alex ,where we started doing had some water and sewage work and mostly it's on the water side. And it's really deny a successful endeavor for MasTec.

Is that a long-term MSA or is that project related?

It's project-related.

Great, thank you.

Thank you. With that said, thank you very much for everybody joining our call today. Up with thing I want to leave everybody with, you know, the margin deterioration that we had in this quarter is something we're really going to focus on going forward. We do think it's very explainable with the issues with the storm damage and the legal costs that we've had. But we are very sensitive to getting that trend back in order, not only in the fourth quarter but definitely in '07 and beyond. And what we're very excited about where this Company is positioned right now. This is a big day to make this change that we made with the ITS business and really getting back to focusing the core. I've told our team and I explained to our people here that this is as big of a day as the offering in a lot of ways for this Company as it moves forward. We expect great things and looking forward to working with you folks in the near future. Thank you very much.

And once again, ladies and gentlemen, that will conclude today's call. We thank you for your participation and you may disconnect at this time.