MasTec Inc (MTZ) 2006 Q4 法說會逐字稿

Welcome to today's MasTec 2006 fourth quarter earnings conference call, initially broadcast on March 9th, 2007. Let me remind participants that today's call is being recorded.

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

Thank you, Cynthia. Good morning, welcome to MasTec's earnings conference call in which we will discuss our results for the fourth quarter and year ended December 31, 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 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 the day of initial broadcast, March 9th, 2007, and we will not update these on subsequent events. Various uncertainties and assumptions are detailed in our filings with the Securities and Exchange Commission, may be modified. Should one or more of these risks or uncertainties materialize, or should any of our underlying assumptions proven correct, 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, Jose Mas, our incoming President and CEO, and Bob Campbell, Executive Vice President and Chief Financial Officer. The format of the call will be opening remarks by Austin, a few financial comments from Bob, and a look forward by Jose. Financial discussions will be limited to GAAP-based financial items and their derivatives and these discussion wills be followed by a Q&A period. We expect to the call to last about 45 minutes. Austin?

Thank you, Marc, and welcome to MasTec's fourth quarter call. 2006 was a year spent repositioning MasTec for the opportunities ahead. I'm excited to first give some of the 2006 highlights and to later have Jose Mas on the call to speak about 2007 and beyond.

2006 represented a year that revenues was up double digits with gains in all of our end markets. It was a year that income from continuing ops was more than doubled and cash flow generation was substantially up. And our liquidities showed marked improvement. Our DSOs were best in class, even closer to our goal of 60 days. And we closed the sale of our state D.O.T. asset, which has been a drag on both financial resources and management focus.

During 2006, we also completed 3 significant capital structure events. We negotiated a less expensive, more flexible $150 million bank credit facility. We closed a $156 million equity offering, and we recently refinanced our long-term debt with a new, 10-year $150 million senior note issue with more favorable terms. These transactions represent a wonderful accomplishment and truly establish MasTec against one of the best balance sheets in our space. But more importantly, position MasTec to be able to have the capital necessary to invest in opportunities in the future and allows management to focus on those opportunities. As I stated, each of MasTec's end markets are showing signs of growth or significant growth opportunities. 2007 and beyond should present a number of expansion opportunities with a strong balance sheet, a great team, and a diverse client base. This will all bode well for MasTec.

As most of you know, this will be my last conference call as CEO. I'm personally excited where MasTec is going under Jose's leadership. I know he's an individual with the capability, integrity, and passion to lead MasTec into a promising future. He knows this industry, our customers, and employees extremely well. I look forward to continuing my service to MasTec as a board member with Jose's leadership. I would now like to turn the call over to to Bob. Bob?

Thank you, Austin. To start, I'm going to echo a few things that Austin said because they're important. In the year just completed, we passed a number of very significant milestones. We made some dramatic changes in our operations, shed money-losing assets, upgraded a number of financial and operations personnel, and beefed up our capital structure. All of this positions us better than ever before to be the leader in our space.

Today, before I go through a detailed review, let me reemphasize a few data points for the year. First, income from continuing operations more than doubled from 2005 to 2006. Second, revenue increased almost $100 million or 12%. Third, our liquidity at year end was $124 million, up dramatically from the $59 million at year end 2005. Fourth, we have completed the recapitalization of the company. We completed a very successful equity offering in 2006, And recently refinanced our long-term debt on favorable terms. Fifth, we recently closed the sale of our discontinued state DOT projects and assets. And finally, our 2007 earnings guidance remains at $0.80 $0.90 a share. That's for continuing operations.

With my overview out of the way, let me take you through more detailed information. For the full year of 2006, income from continuing operations was $39 million, compared to $19 million last year, an increase of 109%. Without the $7 million impact of the new, non-cash FAS123R, stock compensation expense, continuing ops earnings were up 140%. Fully diluted earnings per share from continuing operations were $0.60 in 2006 versus $0.37 in '05, an increase of 62%. The smaller percentage increase in EPS was primarily due to the company's equity offering in January of '06, in which we issued over 14 million of new shares.

Revenue for the year was up 12%, growing from $848 million to $946 million. The increase was across the board with communications, energy, and government customers. The revenue growth was despite the absence of storm revenue in 2006, making '05 a difficult comp year. 2005 storm revenue was roughly $45 million, versus only $1 million in 2006. With storm revenue excluded, our revenue growth was about 18%.

Our liquidity also saw great improvement over 2005. At year-end 2005, liquidity was $59 million. As a result of improved operations, improved collections, and our equity offering, liquidity was $124 million at December 31st, 2006. We defined liquidity as bank cash plus availability on the revolver. $18 million of the bank cash is restricted.

Our year-end accounts receivable days sales outstanding or DSO was 64 days. The same as we reported at the end of Q3, but much better than the 71 days at year-end '05. Two years ago, we said that our goal was to get DSOs down to 60 days. Since then, we've gone from being in the 80s down to 64 days. We continue to have a 60-day, to have 60-day DSOs, that's a target and we expect to hit it. As I mentioned, we have completely recapitalized the company. In January of 2006, we completed a successful equity offering of 14.4 million shares of common stock at $11.50, netting $156 million of cash. Additionally, reflecting our improved credit profile in January of '07, we've replaced our maturing $121 million of 7.75% of bonds with $150 million in 7.625% 10-year senior notes.

Also, on February 14th, we closed the sale of our discontinued state D.O.T. projects and assets. That made February 14th a terrific Valentine's Day for all of us at MasTec. Terms of the sale included $1 million in cash and an earn out of up to $12 million based on 25% of EBITDA for 6 years. With the 6 years beginning in 2008. The D.O.T. projects and assets have been a huge drain on earnings, cash flow, and management time. And we're very excited about the opportunity to focus only on continuing operations.

Now, let me make a few more detailed comments about our 2006 P&L and about the fourth quarter. I mentioned that fully diluted EPS was up 62% and revenue was up 12%. And that was against tough '05 comps due to good storm revenue, and good storm margins in 2005. For the year 2006, our 10 largest customers were DirecTV at 37%, AT&T 9%, Verizon 8%, Embark 5%, Progress Energy 4%, Florida Power and Light and TXU were both 3%, Qwest was 2%, and Dominion Virginia Power and the South Florida Border Management District were both at 1%.

Today, 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 years, our backlog only includes the specific work for which we have visibility. 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 focussed on service agreements with recurring revenues. Keep in mind that more than two-thirds of our revenue is for master service agreements. Generally for maintenance work, and generally pursuant to 3 to 5-year contracts. Finally, on backlog, I believe that our numbers are more conservative than those for others in our sector.

Our gross margin before depreciation was 14% for the full year of 2006 compared to 13.7% a year ago. We realize that our improvement in gross margin was modest and we believe that we have opportunities for further margin expansion. Full year margins were negatively impacted by several factors. We had several energy contracts with poor performance during 2006, we have exited or are exiting these contracts and have pretty much worked through the issues of redeploying some excess equipment. We had several poor performing cable TV contracts. We have exited or are exiting those contracts, have also strengthened our operating management, and we're in the process of reducing the overhead structure that serves this market.

Also, and this is in the fourth quarter, MasTec incurred significant expense by hiring and training approximately 800 new technicians to meet the accelerating demand of our install-to-the-home operations. The training of such a large number of new recruits obviously had a negative impact on margins in our largest customer market. We had an increase in no margin material sales of customer equipment, primarily in the installed in the home market. And finally, the comparison to '05 is hurt by the absence of good margin storm revenue in 2006.

One final note about gross margins. Our business model is somewhat different than that of our peers. The majority of our vehicles and construction equipment are leased and not owned. All of our light duty vans for our install-to-the-home business are leased, and leased on relatively short-term leases. These leases are almost all operating leases and the lease expense is in the cost of revenue on the P&L. Lowering our gross margin, instead of the cost being below the gross margin line as depreciation expense. This tends to unfavorably distort our gross margins as compared to some of our competitors who own almost all of their vehicles and equipment. Our depreciation expense is only 1.6% of revenue while depreciation for some of our competitors is in the 4 to 6% range and that's a significant difference. As an aside, we're making progress, lowering the cost of our vehicles and equipment with the dramatically improved balance sheet and credit profile and with our growth prospects, we're able to both buy better and lease better, which is starting to have a favorable P&L impact for us.

G&A expense rose from 7.5% of revenue in 2005 to 7.9% in 2006. The increase is due entirely to the two factors that we have talked about all year. Outside legal costs are up $6 million, and the new FASB-123-R stock compensation expense increased by $7 million compared to 2005. Without the stock compensation expense, which is non-cash, G&A actually decreased in 2006 from 7.4% of revenue in '05, down to 7.1% in '06.

We've discussed the high outside legal costs on every conference call during 2006. We have said that most of the costs are for what we call legacy litigation. The litigation is mostly offensive in nature, meaning that we're suing others to collect money for work that we did. The money owed to us relates to the businesses that we have exited, but we did the work, haven't been paid, and we intend to collect. And we've also said that we expect to collect more than we're spending. We believe that 2006 was the high water mark for outside legal spending. The spending will be reduced somewhat in 2007, and even more so after this year. Interest expense in 2006 was $10 million, was $10 million down from $19 million from the prior year. The decrease was mostly due to the partial pay down of our senior subordinated notes with some of the proceeds from our equity offering. Other income was $8 million for 2006 compared to $4 million in 2005. Most of the increase was due to the increase in operating earnings from one of our joint ventures.

Switching to Q4 for a minute. Income from continuing ops was $9 million, or $0.14 diluted earnings per share compared with Q4 2005 income from continuing operations of $8.1 million or $0.16 per share. Once again, the impact of the additional shares from the 2006 stock offering needs to be considered in year-over-year EPS comparisons. Revenue for Q4 was up 8%. Our lowest increase of the year, but we were up against some really tough comps with approximately $35 million of storm revenue in '05 versus none in 2006. Q4 was also a tough earnings comp for us because of the large amount of storm revenue at good margins that we enjoyed in 2005.

Some other factors that affected Q4 were as follows: Q4 was impacted by the profit challenges of the energy and cable TV contracts that I've mentioned in my full-year remarks. Q4 was also impacted by the cost of hiring and training 800 install-to-the-home technicians that I also mentioned earlier. Q4 was hurt by outside legal costs of almost $5 million, compared to $2 million a year ago. That's a $3 million increase. And finally, on a comparative basis, we had $2 million of FASB-123-R stock expense in Q4 '06 versus only $100,000 in '05. And on the positive side of the ledger, interest expense was down almost $3 million quarter-over-quarter.

Our 2007 earnings guidance remains unchanged. We see continuing operations earnings of $0.80 to $0.90 per share on revenue of $1.04 million to a billion -- sorry -- that's $1.04 billion to $1.06 billion. The continuing ops guidance for '07 represents a 33 to 50% increase over the '06 earnings that we just reported. In addition to the profit impact from the revenue growth, we expect margin expansion and lower legal costs. And we expect to see the benefit of being able to focus on our continuing operations basics. The non-cash FASB-123R expense for 2007 is estimated at $7.5 million and that's for stock options and restricted stock grants.

As you may know, our practice is to give annual earnings and revenue guidance, which is a practice we intend to continue. However, let me remind you that seasonally Q1 is always our weakest quarter. And it is not a bellwether for the success of the full year. In addition, you should know that the P&L benefit from the actions that we're taking with our energy and cable TV contracts will not be fully realized in Q1. And one final comment about Q1, relative to interest expense, we will have a writeoff of about $500,000 of deferred financing costs on the bonds we've matured. And we did have a period where we carry both the old and the new bonds. So that we see interest expense being roughly at $3 million versus $2 million in the fourth quarter.

Enough said, now let me turn the call over to Jose Mas.

Thank you, Bob. On behalf of over the 9,000 men and women of MasTec, its Board of Directors, our family, and our shareholders, I would like to thank Austin Shanfelter for his hard work, his enthusiasm, and most importantly, his dedication and loyalty to MasTec. Austin took the reins of this company during both a difficult period of our industry and for the company. And he made a difference. Over the course of the last 5 years, we has changed the direction of this company and put us on a path towards success. He leaves the CEO role having returned the company to a position of financial strength and with a renewed positive outlook for the future. For all of this, thank you, Austin.

As I look ahead in MasTec's future, I am very encouraged by the company's positioning in our current end markets as well as where these markets are headed. With the sale of the D.O.T. business behind us and a strengthened balance sheet, our future will be all about our ability to execute. 2006 was a good year for MasTec, but not a great year. We have considerable room to improve margins and that will be our number one focus at MasTec. Over the course of the last few years, many positive developments at MasTec have been overshadowed by a few poor operating units. That is unacceptable. We just completed a nationwide internal road show with our employees and the most important commitment that I made was that all managers will be held accountable for their business units and poor performers will be dealt with and dealt with quickly.

Let me spend a few minutes talking about our end markets and customers, and where we see future opportunities for MasTec. In the communications business, we continue to see increased level of spending by our customers and increased bidding activity. Our fourth quarter business with Verizon was up almost 50% year-over-year. We are currently working on the FiOS program for Verizon in 11 states and are encouraged about our prospects for 2007. Regarding AT&T, we continue to expect increased levels of spending and believe this will be a solid future growth opportunity for MasTec. We are also excited and optimistic about the activity we have seen in the rural telephony market and believe that this will be an area for growth for us in 2007.

Our install-to-the-home business saw growth of over 30% in 2006 compared to 2005. As Bob mentioned earlier, we had to hire approximately 800 employees in the fourth quarter to meet the accelerating demand of our customer. DirecTV recently announced that it intends to offer over 100 national high def channels by year-end and we believe this will have a significant impact on both new installations and upgrades. We expect 2000 to be another year of growth and accelerating demands.

In spite of some poor-performing contracts, our electrical utility business also had a solid year. Year-over-year comparisons are difficult because of the significant impact of storm activity in 2005, but in spite of that, we were able to show year-over-year growth. We believe the electric utility business offers MasTec great opportunities for growth and we will aggressively pursue that growth. To help us capture this opportunity, I am happy to announce the hiring of Johnny Priest to run our electrical utility business. With over 39 years of electrical utility experience, he most recently served as President and COO of Shaw Energy Delivery Services. Prior to that, Mr. Priest spent over 30 years at Duke Energy where he rose through the ranks to the level of President of the Energy Delivery Services Group prior to that unit's sale to Shaw. Mr. Priest has a strong background in the substation and transmission business, both areas we expect to grow as the nation's electrical grid is expanded and modernized.

Overall, MasTec is well-positioned to take advantage of the opportunities in the markets we serve. We will be focussed on profitable growth and execution of margin expansion. As one of the largest shareholders in MasTec, rest assured that nothing is more important to me than increasing shareholder value. 2007 is an important year for MasTec. And a year in which we will execute. In order to ensure that we have enough time for the Q&A session, I will now turn the call back over to the conference operator so that we can devote the remaining time on the call to our listeners' questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to Eric Kainer with ThinkEquity.

Thank you very much for taking my call. And again, congratulations, Austin as you move into the next phase here.

Thank you.

I wonder if you could tell us a little bit about the acquisition of the LLC and kind of how that changes the balance sheet and indeed whether that's factored into the -- into the guidance that you've given us for 2007.

We've mentioned before that LLC predominantly does sales for our customers, predominantly DIRECTV. We're a large, basically national, sales arm for them. We own 49% of that entity, we acquired the remaining 51%. Doesn't really change guidance going forward, and from a balance sheet perspective, you'll see the results obviously in our Q1 balance sheet.

Okay. So that comes, then, I think it says in the K that effectively $5.8 million would have come off of the '06 other income line, and perspectively twice as much would have ultimately hit the bottom line if that was fully integrated in 2006. Is that correct?

That's correct.

Okay. Next question is about the Verizon FiOS project. Are you -- are you doing work still past construction for them? Are you now also expanding the responsibilities to actually connecting their subscribers?

We're doing the same type of work that we did in 2006, which is predominantly past construction. We're also doing a lot of MDU construction and installation work in the MDU units. Verizon has been talking about doing installation work, although they have not made any awards at this point in 2007.

Okay. Great. And one last question, and that's about the cable TV business, obviously we haven't seen a cable TV customer show up in your top 10 list for quite a while. Wondering if you're seeing enough activity in cable TV to project that that might happen sometime this year?

I think it's an industry thatwe're looking closely at, if you look at obviously MasTec historically, cable TV was a larger part of what we did and some of our larger customers obviously came from that industry. We've been more active in that space, we're seeing a lot more activity from a bid perspective in that space. And I think we're going to aggressively pursue it, whether or not any of those customers hit our top 10. We're currently not modeling that or expecting that, but the opportunity does exist that we're successful on some of these and somebody does breakthrough.

Okay. Excellent. Well, congratulations and good luck.

Thank you, Eric.

And we'll go next to Alex Rygiel with Friedman, Billings, Ramsey.

Thank you very much. First, Austin, congratulations, best wishes, it's been fun over the last couple of years, appreciate all your help.

Thank you.

Jose, Bob, few questions for the two of you first. I did notice that BellSouth was down sequentially and year-over-year. If you could comment on that. Secondly, with regards to this acquisition, can you comment on the annual adjustment to sales that we should be thinking about making to our model? And if you do a back of the envelope, if I were to add $6 million to your income like you just referenced, looks like another $0.10 in EPS. So comment on that incremental earnings of this acquisition as it relates to your guidance and maybe why you didn't adjust your guidance.

A couple things. First on AT&T, we're very optimistic about what's going to happen to AT&T going forward in the future. Obviously had a very long relationship with BellSouth. We did see our revenues dip somewhat quarter-over-quarter. However, I do think that there's a lot of prospects that are currently here and will be coming. So I actually expect our AT&T business to do well in 2007. From the acquisition perspective, 2006 was an excellent year for them.

I think it's somewhat more of a seasonal business than what we're typically in today. And we obviously recorded a significant portion of that income or 49%. We think there might be some up side to the 49% that we both believe. At this point we don't think that's considerable.

And as it relates to Florida Power and Light. I understand that it seemed like they cut back a little bit on their capital spending late last year, because maybe they ran through their budget. But I think a lot of the expectations was that at some point in '07 either early or mid, they would start to harden some of those, some of that infrastructure down at south Florida. Can you comment on where we stand as it relates to that?

No, I think there's no question that Florida Power and Light went through a significant portion of their budget, especially late in 2005 and somewhat early in '06 as they were closing out their books from the hurricanes. It did affect the end of '06, it did affect their spending, second half of the year, especially in the first quarter. I think that we'll see some pickup from that earlier in the year. We were awarded in the first quarter of '07 or here recently, a storm hardening contract from an overhead perspective from Florida Power and Light. We are beginning to see some hardening activity, which I think bodes well, not only for '07, but beyond. But we haven't seen anything near the levels that we were expecting. I think part of that we didn't have a hurricane in '06 and some pressure was taken off. But we do think at some point Florida Power and Light and all of the other Florida utilities are going to be facing more hardening programs going forward. And we think that's a good opportunity for MasTec.

One last question with regards to senior management additions. Congratulations on the one announcement that you made today. Have there been any other changes at the senior level?

We'll be announcing some more on the first quarter call.

Thank you.

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

Great, thank you for taking my call. Just judging by some of the comments you guys have made today in terms of reducing some of your overhead in the energy and cable departments and then talking about how you're adding 800 people for install to the home. Can you talk about what you envisioned for the MasTec business maybe a year from now in terms of how much of your business is actually going to be coming from recurring revenues, how much coming from install, and where do you really see the company going in terms of its strategy?

I think today the majority of our revenues are recurring in nature. I think that will continue to be something that we look for at MasTec. There's no question that we've had a great run on our install-to-the-home business and we actually think there's a lot more to go there. So we actually expect that business to grow, but in all honesty, from a diversification perspective, we actually expect some of our other businesses to grow at a faster clip. I think we spent a lot of time today talking about our electrical utility business. It's one that we really want to aggressively try to grow over the course of the next year or two. Hopefully as you look at MasTec a few years out, we're in a lot of the same businesses we are today with hopefully some more diversification into some of the smaller sectors that we're in today.

In terms of the expansion opportunity, which I think you also touched on on the call. Is that going to be primarily in the install-to-the-home business and adding to that, or are there other areas of expansion that you guys are looking at right now? I think the expansions are across the board in the industries that we serve. I think there obviously are opportunities in all of the different businesses that we serve and we're going to go after all of them, including the install-to-the-home business.

One thing mentioned in Jose's comments. He talked about the power industry was probably one of our largest areas for growth opportunities. And I think if you refer to some of those comments, let you have a little bit more understanding where we're going.

Great. And just finally for Bob. Can you tell us when you guys expect to start paying taxes on the income statement? Thank you.

It would not be this year. We've got the -- in fact to comment specifically on that, you'll see in the K, we've got 170, almost $180 million NOL at 12/31. And that does not reflect recognizing or realizing for tax purposes the big impairment on the sale of ITS. So that number will be well over $200 million or would be today. So that's from a cash standpoint. And then you can sort out in your model when we hit over 200 million of taxable income. In addition to that, we have this deferred tax asset of a little under $50 million. And tax effective, that should give us certainly through this year and into the following year before we'd be accruing book taxes.

Okay. Thanks a lot, guys.

You bet.

Thank you.

And we'll go next to Liam Burke with Ferris Baker Watts.

Thank you. Jose, you mentioned your balance sheet being in good shape. You've got a high cash balance now. Without the drag on the bad -- the businesses or the D.O.T. business in '06, you should be generating nice cash flow in '07. Will your priorities for cash be entirely acquisitions?

No, I think we're looking at two areas of growth. Obviously, one is acquisitions, the other being organic growth, which is probably more important to us as a company. And I think with some of the opportunities that we've weighed out here today, there's no question that if we can land some of these, we're going to have higher needs of CapEx going forward, which will also be an area where we plan to use some of our excess cash. Our preference still is to grow organically and to win new business and fund that growth, but at the same time, as we've said earlier, we're going to look at a lot of different growth opportunities and it's good to be in the position that we're in.

And on the utility front. Florida Power and Light and TXU are two that showed up. How are the prospects for other utility companies out there?

Well, we also Progress Energy on our list, we had Dominion Power, a nice cross section of power companies in our top 10. I think we're working hard, I think the additions that we're making on that team are going to lead to new business with new customers. And hopefully in the next few quarters, you'll see some new names on the list.

Great. Thank you.

Our next question comes from John Rogers at DA Davidson.

Hi, good morning and best wishes to you, Austin.

Thank you, John.

I was just wondering, could you give us a sense of how much fiber to the home business you did in 2006?

John, I don't have that number handy. Obviously we're bidding projects every day and we're seeing more fiber to the home projects every day, be it from the R box or from our US companies or even municipalities, we've seen a lot more activity from them. There's no question that the activity of fiber of the home is dramatically increasing and I think in our minds there's no question that that's going to continue to increase even at a faster clip as we go forward. We think it's going to be the technology of choice for our customers. So it's an active marketplace, it's one that we're going to be very involved in, and one that there's absolutely more opportunities today than there were a year ago. And I think there will be more opportunity a year from now than there are today.

John, just for the side note, too, if you looked at Verizon for us this year. First quarter, second quarter, it was a little bit down compared to the year before. Really in the last two quarters it's been up. Really the momentum is going the right direction.

But -- of that Verizon business, is it half of it fiber installs? Or more than that?

You're looking at larger percent being on the actual inground installation work than you are in the MDU construction at this point.

Okay. I'm just trying to get a sense of --

It's all -- the majority of it, if not the grand majority of it is all FiOS related. So it's all fiber, they're fiber project related.

You worked with AT&T up until this point. There's no real revenue yet from their fiber works. Is that correct?

There's some that falls through. What they're basically doing on a day-in and day-out basis. But it's nowhere near the -- it's nothing like what Verizon's program is. We don't think that AT&T's really started investing heavily in their program. So no, our revenues with them are more from a maintenance perspective.

Okay. And then, second question is just with the 800 people that you mentioned training for in-home work, what's your plan for this year in terms of training and investment in that?

Well, obviously, it will depend on our customers and their demand. What we're expecting is we're going to have to add a lot more people in 2007. And earlier the remarks on what we think DirecTV's doing from a perspective on what they're going to be rolling out. We actually think there's going to be a much higher demand this year than it was in '06. We've been pretty lucky. We've actually had a pretty good success at bringing people in and getting people hired. Obviously the biggest challenge and risk for us is getting them up to speed and to a productivity level where obviously the company's making a good return. And that does take time. So we're working hard to streamline and basically make our hiring more predictable. And really spread it over quarters rather than have to run and hire hundreds of employees in one quarter. And I think we'll get better at that in '07. But the reality is that the demand of our customers are ultimately going to push what we need to do and the demands for our customers have been great.

Okay. But roughly the same sorts of numbers? Or is it a substantially more this year? Than the 800?

the 800 was really for the fourth quarter.

Right.

Our year numbers were much higher than that. We -- to be honest, we, right now we think '07 is going to be at or above '06 levels.

I was just trying to understand if that was a surge in that quarter, or whether it was a run rate going forward.

There was definitely a surge in the fourth quarter, but we think that surge is going to continue going forward.

Okay. Great. Thank you.

And we'll go next to Simon Leopold at Morgan Keegan.

Thank you, I wanted to see if I could get a couple clarifications before question. One is in the quarter, the other income was, I guess R3 million, a little bit higher than we had been anticipating. Want to get a better understanding of where that was coming from and the sustainability of that particular line item. Also, if you could walk through, you walked through the, I believe the top 10 customers on the annual basis. If you could talk about that regarding 4Q '06 versus 4Q '05. And then the last thing I was hoping you could discuss is the customer concentration. Maybe the pros and cons and trending particularly with DIRECTV being such a big piece of the business. Obviously good trends there, but high concentration. Thank you.

Bob will take you through the top 10 customers for Q4. Just to address the other income line, I think we talked about it earlier predominantly made up of two main things. One is sale of equipment and gains on sale of equipment. And second, the joint venture that we had invested in and our participation in that. As you look into '07, we obviously acquired the remaining piece of that joint venture so the accounting for that will somewhat change. We actually expect Q1 to be very similar from another income perspective and then we see that trailing down through the rest of the year, although we'll continue to have some. Since we lease a lot of our vehicles, we actually have had some success at selling some of our leases off and actually making a profit. We'll continue to see some of that through '06, but again, that number should be somewhat stable for Q1 and begin to reduce. Bob?

Okay. Previously I'd given the top 10 customer breakout for the full year, now I'm going to do it for the fourth quarter. DirecTV 41%, Verizon 9%, BellSouth 7, Embark 4, Progress Energy 3, Qwest 3, Florida Power and Light 2, South Florida Water and Management District 2, TXU 2, and Time Warner 2%.

And how about last year? How does it compare? Do you have that?

I do happen to have that. For the fourth quarter of '05, it was DIRECTV, 35%; Verizon, 7%; BellSouth, 13%; Embark, 6; Progress Energy 4; Qwest, 2; Florida Power and Light, 5; South Florida Water and Management District 1; TXU, 3; and then Time Warner and Dominion Virginia Power roughly at 1. Does that help?

Yes, thanks. And now, if talk about the concentration issues?

Sure. Obviously DirecTV is -- we've got a lot of concentration with that one customer. We actually feel really good about where that business is going. The business has obviously had a huge run-up over the course of the last 4 or 5 years. I think we were excited about where that business is heading. I think they're going to have a great 2007 and obviously enjoy that. But there's no question that we understand that we've got to do a better job at diversifying our overall customer mix and as 2007 goes forward, we expect some of our other businesses to pick up at a better clip and overall from our 3 main lines. You're going to see more, a better, more diverse customer offering.

Now with that mix shift away from DirecTV also help out with the gross and operating margins, as well?

I think, and just to be clear, I don't think our DirecTV business will decline, I think that will continue to increase. So our challenge is going to be, how do we increase the rest of our business at a higher clip to lower the dependency on that one customer? from a margin perspective, I actually think we performed well in that business. A lot of issues that we've talked about here today have affected margins. I think we've got a lot of work to do around margins and a lot of opportunities to do around margins. I don't necessarily think that business mix changes our margins. I think better execution of all of our business is what's going to change our margins.

Thank you very much.

Thank you.

And we'll go next to Steve Mather at Sanders, Morris, Harris.

Thank you, good morning, gentlemen.

Morning, Steve, how are you?

Pretty good. Let's see, if I model you as a high single digit revenue grower for '07 and '08, and it looks like the trick is to grow earnings and cash flow much faster. And of course by guidance, and by all accounts you're going to do that and accomplish much faster than 10%. But I'm just wondering can you, can you get into the points of leverage, how you'll do that? and I'm kind of specifically interested in your DTV margins. And also how you might avoid future, let's say unprofitable contracts in energy and cable.

We're not going to get into splitting our margins out by different customers or different segments. I think if you look at what we were able to accomplish in '06 over '05, our continuing ops increased over 100%. So I think, I think we have been able to deliver on what we've said. I think in all honesty, we wish we would have done even better. So I think there's a lot of opportunities in '06. Bob mentioned some of the things that'll help get us there. But truthfully, it's really about a mind set of having everybody in this company understand that we're going to do profitable work, we're going to work for customers where we can make what we think is a fair return. And if we're not, we're going to get out. And I think that's a mindset difference. I think -- I alluded to it in my comments, I think too many good things have happened at MasTec come to be overshadowed by a few poor. And I think if we take that discipline and we enforce that discipline around the company, that in and of itself will have a dramatic impact on our margins.

Okay. That sounds good. Just one other thing. The master service projects, of course, going straight up '06 versus '05, and then, of course, install versus construction kind of flat. Just real broad brush , do you expect the install to construction to tick upward or remain flat again in '07?

Your install to construction, you're specifically referring to?

I'll say non to-the-home. Fiber installs, et cetera.

I mean, there's no question that that's ticking up. There's no question that both from the work we're currently doing and the prospects we're looking at going forward, there's a great opportunity to continue that uptick. I think we've seen some of it and I think we'll continue to see it.

Okay. It sounds good, thanks.

Thanks, Steve.

Next, John Harmon with Needham & Company.

Hi, good morning.

Morning, John. How are you?

Bob, you were talking about depreciation levels of MasTec versus your peers. The relative -- sorry, how it affects your profit and loss statement depending on whether you lease or own. You certainly talked about moving more towards owning. How far along are you doing that? And when you're done, would you expect your depreciation rates to look like those of your peers?

Let me break that into 2 parts. I wanted to highlight that because previously and historically so much of the assets were leased that as a result, we have very little depreciation and $50 million of lease or rental expense. And that is so different than all of our other public competitors. And when you get to the net income line, they've covered their cost and we've covered ours. But if you look solely at gross profit, we're running $50 million of lease and rental costs through operating leases. And our competitors have that same kind of a cost and depreciation on owned assets. And that's what I was trying to point out, that our depreciation is, say 1.6% and you'll find a lot of our competitors are in the 4 to 6 to even over 6% range. That was really just how to look at MasTec, how to look at our historicals versus our public sector peers.

If I could rephrase my question then.

And the second question is about the future.

Don't you want to look more like your competitors over time?

And there's a history behind the amount of leasing that we've done. Before we recapitalized the company, before we sold the equity, before earnings turned. Frankly, the primary vehicle for our adding assets was through leasing out of necessity. So that's what we did. We had a lot of less orders, the rates may not have been great, but we got the vehicles and equipment we needed to service our customers. Today, however, all the options are ours. And we're looking to make -- the normal lease versus buy decisions. And there will be more ownership. There will be more.

In fact, if you look two years ago, we only had $6 million of CapEx, and it was $22 million, I believe in '06. And our 10-K guidance is 20 to 40. And not going to predict, but it'd be reasonable to think it might be in the middle of that range unless we have some great expansion that maybe we haven't planned on. But one thing that's different between MasTec and our public sector peers is we have this very large install to the home business. And rather than the heavier stuff, we got a lot, actually 3500 of light duty vans. And they're all on operating leases, they're on short-term operating leases, and honestly, we've -- we've gotten some great economics on the latest round of these leases.

John, just to add statement, our intent is not to look more like our competitors, our intent is ultimately to do what we think is best for MasTec. And what we're going to do, as we go forward because a lot of comps are made, we want to point out the differences. And we want to try to get everybody to understand. As you look at MasTec from a gross margin level, as you look at MasTec from an EBITDA level, these are things that change how you look at us versus our competitors. So we want to point out those differences. We're not necessarily going to change how we do just to look more like our competitors.

No, of course. It's very helpful that you pointed that out. My next question is, regarding AT&T, you touched on it a bit, but historically you've sold to the BellSouth side of AT&T, how do you feel about getting into the SBC side of AT&T going forward?

I think that's a great opportunity for us. I think it's one where we have had some activity over the course of the last few years. I think with a lot of the relationships in the history that we have with BellSouth, it's helped to open doors at the new AT&T. So we fully expect to take advantage of that and try to take advantage of opportunities that will present themselves. We think that's going to be a very positive development for us going forward.

Okay. Thank you very much.

Thank you, John.

Next to [Andrew Thomas at Tracer].

I was just looking at your numbers, looks like you bought the interest in the JV at three times trailing earnings. I just want to determine if I'm doing my calculation right. And second, when you gave your original guidance for EPS for '07, did you anticipate that you were going to buy in the rest of the JV and the resulting $0.10 accretion to EPS?

A couple of things, we don't necessarily -- we're not going to really comment on the multiple paid on that business. I think from a going forward perspective, 50% of those earnings that were from '06 were captured. So a significant portion of their income was obviously captured in our books. Again, we think there were some activity that caused a spike in that business in '06, thus we didn't feel it was prudent to change guidance for '07.

Okay. Great. Thank you.

It appears we have no further questions at this time. I'd like to turn the conference back over to Austin Shanfelter for any additional or closing remarks.

Thank you and on behalf of myself and Jose Mas and the Board of Directors, we want to thank all of you that supported and encouraged us this past year. And really a special thanks to those men and women that each day represent MasTec in such a professional way. It's their hard work and dedication to our customer base that makes a positive difference every day for this company. We thank you very much, have a great day.

That does conclude today's conference, ladies and gentlemen. Again, thank you for your participation today. And you may now disconnect.