MasTec Inc (MTZ) 2007 Q2 法說會逐字稿

Welcome to the MasTec 2007 second quarter earnings conference call, initially broadcast on August 2, 2007. Let me remind participants that today's call is being recorded. At this time, I would like to turn the call over to Mark Lewis, MasTec Vice President of Investor Relations. Please go ahead.

Good morning. Welcome to MasTec conference call for the quarter ending June 30, 2007. 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 make certain statements that are forward-looking such as statements regarding MasTec's future results, plans and anticipated trends in the industry where we operate. These forward-looking statements are the Company's expectations on the day of the initial broadcast of this conference call and the Company will make no effort to update these expectations based on subsequent events or knowledge. Various risks, uncertainties and assumptions are detailed in our filings with the Securities & Exchange Commission.

Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications. With us today we have Jose Mas, our President and Chief Executive Officer, and Bob Campbell, Executive Vice President and Chief Financial Officer. The format of the call will be opening remarks and announcements by Jose followed a by financial review from Bob. These discussions will be followed by a Q&A period. And we expect the the call to last approximately 45 minutes. Jose.

Thank you, Mark. Good morning and welcome to our second quarter call. We had a solid quarter, and I would like to share some highlights with you. Revenue for the quarter was 256 million, an increase of 11% year-over-year. Income from continuing operations was 16.1 million, an increase of 31%, and earnings per share was $0.24, an increase of 29%. I have been very vocal that the number one priority for MasTec over the last six months has been margin improvement. In the second quarter our pre-tax margin was 6.3%, our highest level in years and 100 basis points over second quarter last year. While we are pleased with our progress, we feel there continues to be significant opportunity for further improvement.

Over the the course of this year we have instituted very detailed monthly operational reviews of every project and manager. These reviews include financial performance, operational metrics, objectives, targets and goals. But more importantly, these reviews give us a very good indication as to how our field managers are managing their projects and personnel. Understand that it is these managers and crews that make MasTec successful and have the biggest impact on our performance. While the trends are positive, we expect the operational discipline we are creating will have an impact on how our managers are managing their business. We expect further improvements and feel these reviews have brought about an increased level of accountability that will have a significant, long-lasting impact on margins. We previously announced that we exited a number of contracts earlier this year. These contracts primarily servicing cable TV and energy customers did not meet our margin objectives. Exiting these contracts had and will continue to have a positive effect on margin. However, exiting these contracts has had a negative effect on year-over-year revenue comparisons. I would like to spend a few minutes highlighting some of the opportunities we see with the customers and markets we serve.

Our revenue would DirecTV for the the quarter was 109 million, an increase of 39% year-over-year and about flat with Q1. DirecTV accounted for 43% of our revenue in the second quarter versus 46% in the first quarter. We are encouraged by DirecTV successful launch of their new satellite on July 7, and believe they're on schedule to offer up to 100 channels of high definition by year end. Upon launching their 100 channels of high definition, DirecTV will have a significant competitive advantage on high-def programming which should have a positive effect on increasing both installations and upgrades. We are also please to do announce that during the second quarter we renegotiated and extended our contract with DirecTV until 2011, with further extensions available at that time.

Our communications business continued to see strong demand from Verizon. Our quarterly revenue with Verizon was up 48% year-over-year and up 19% quarter-over-quarter. Although we have enjoyed significant growth over the first six months, we expect the remainder of the year to be somewhat flat. Revenues with AT&T were 17 million making them our third largest customers. Revenues were flat quarter-over-quarter, and continue to be down year-over-year due primarily to the loss of a contract as discussed on our call last quarter. While we have yet to see a considerable amount of business related to AT&T's rollout of fiber, we are now beginning to see enhanced activity.

In light of that, we are making some management changes to take advantage of this opportunity. Oscar Perez who prior to joining MasTec was Vice President of Procurement for BellSouth will take on a position directly related to business development with AT&T. Taking over for Oscar is group President of our install of a home business is Zach Maguire who held a similar position with our largest competitor in the DirecTV business.

In our energy business, we are again pleased to announce new wins for our transmission business. During the second quarter we were awarded new contracts with Duke Energy, SAN Cooper and the City of Tallahassee. We continue to add management depth to our transmission business and expect this to be an area of growth for MasTec over the course of the next few years. There will be a significant increase in transmission spend and we are building a business to support and participate in that growth.

In our traditional distribution business we continue to pick up market share offset by lower spending in new subdivisions due to the slowdown in housing starts. We have added a significant amount of talent to this business and feel good about the direction we are headed and our position in the industry. We are building a solid foundation. Overall, we have made progress in 2007. I feel we have positioned the Company to take advantage of the opportunities in our marketplace and have created a culture of accountability, discipline, and success. In spite of posting our best quarter in years, I am not satisfied. We will continue to focus on margin improvement as our number one priority, and with our balance sheet strength we'll be looking at acquisition to diversify our customer base and jump start our growth initiatives.

For the year, we are reaffirming our revenue guidance of a 1.04 billion to a 1.06 billion but believe we will be toward the lower end of that range. We are narrowing our EPS guidance to $0.84 to $0.90 from our previous guidance of $0.80 to $0.90. I will now turn the call to our CFO, Bob Campbell. Bob.

Thank you, Jose. Today before I go through a detailed review let me give you the headlines. First, Q2 revenue increased 11% compared to last year. Second, income from continuing operations was up $3.8 million or 31%. Third, gross profit margin and bottom line profit margin both improved again this quarter. Fourth, our DSOs or accounts receivable day sales outstanding were at 59 days. That's our best in recent history, and finally we just completed an amendment to our senior credit facility. It improves pricing, availability, flexibility, and extends the facility to 2012. With my overview out of the way, let me take you through more detailed information. Revenue for the quarter was up 11%, increasing from $231 million to $256 million. Income from continuing operations for Q2 was $16.1 million compared to $12.3 million last year, an increase of 31%. Fully diluted earnings per share from continuing operations were $0.24 in Q2 '07 versus $0.19 in Q2 '06, an increase of $0.05 or 29%. On a year-to-date basis revenue was up 11%,, and income from continuing ops was up $6.7 million or 41%. Diluted EPS was up $0.08 or 34%.

Now let me make more detailed comments about our Q2 2007 P&L. Our revenue increase came primarily from DirecTV and Verizon with our other major customers showing ups and downs. As Jose mentioned, we have exited some contracts, mostly with cable television and energy customers, that were not meeting our margin expectations. Exiting these contracts is helping our margins, but it has had a detrimental impact on revenue comparisons. For Q2 2007 our ten largest customers were DirecTV, 43% of total revenue, Verizon 11% of total revenue, AT&T 7%, Embark 5%, TXU 3%, Progress Energy 3%, and at 2% each Florida Power and Light, South Florida Water Management District, Qwest, and XTO Energy. Our gross margin before depreciation was 16.8% for the the second quarter of 2007 compared to 14.7% a year ago. That's a 210 basis point improvement. We continue to have margin improvement and as Jose said, margin improvement is the number one priority as MasTec.

A summary of our gross margin improvement would be as follows. We had good gross margin improvement in many parts of the Company. Most of the improvement was in the area of labor and subcontract productivity. And to a lesser degree in the cost of vehicles and equipment except for fuel which was up $1.7 million. Although we made progress in Q2, certain cable television projects were a drag on margins for the quarter. We expect better operating margins from cable television projects as we look to the the rest of the year and beyond. As I mentioned, labor and subcontractor productivity was the largest area of margin improvement. Payroll and subexpense dropped from 54.8% of revenue last year down to 50.9% of revenue for Q2. We're encouraged by a 60-basis point reduction in Q2 in the cost of leasing our vehicles and equipment. We are making progress lowering the cost of our vehicles and equipment which is something we have covered on previous conference calls. With our dramatically improved balance sheet and credit profile, and with our growth prospects, today we're able to both buy better and lease better which is starting to have a favorable P&L impact.

As we discussed on the Q4 and Q1 calls, we have had some poor performing cable television projects. Although we made progress in Q2, we lost almost $2 million on cable TV projects in the quarter which had a significant impact on both earnings and margins. We have made a number of management changes in this area, have cut our costs, and have -- we have worked through some troubled projects, so at this point we expect better operating results over the remainder of the year and for next year. Cable television has been a good and profitable market for MasTec in the past. We expect it to be so again in the future. I have mentioned something on previous calls about our margins that is worth repeating. Our gross profit margin and our EBITDA margin percentages are not comparable to our peers because of our use of operating leases.

Our CapEx business model is just different from that of our peers. Of course we believe that it works very well for us. The majority of our vehicles and construction equipment are leased, and not owned, while most of our peers own almost all of their vehicles and equipment. Our leases are mostly operating leases, and the lease expense is in the cost of revenue line on the P&L lowering our gross margin instead of having those costs 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 most of their vehicles and equipment. Our depreciation expense is only 1.6% of revenue while depreciation for some of our competitors is in the 3 to 6% range. That's a significant difference. On the other hand, our equipment lease expense runs much higher for MasTec than for our peers. Our lease expense for vehicles and equipment is 2.4% of revenue which is higher than for our peers. Because of the differences in CapEx business models among those in our space, we believe that the best indicator of comparative operating profitability is adjusted EBITDAR. After backing out vehicle and equipment lease expense and after backing out the noncash FASB 123-R stock expense. EBITDAR or EBITDA margin is a better measure of comparative operating margin than EBITDA margin which comparing MasTec to our peers. Our Q2 EBITDAR was $30 million, and our EBITDAR margin was 11.7%. I have covered our improvement in gross profit margin and in EBITDAR margin to complete the margin story our pre-tax and our after tax margin was 6.3% in Q2 compared to 5.3% last year. That's our highest level in years, and 100 basis points over Q2 last year. We are encouraged by the progress but not satisfied with this level of profitability. As Jose said, we believe we can do better.

I mentioned that our pre-tax and our after-tax profit margin was 6.3%. It is worth noting that because we have about $200 million in net operating losses to carry forward for tax purposes, we are unlikely to pay any significant amount of cash taxes until 2009 at the earliest. Some of the NOL tax benefit has already been taken for book P&L purposes, so we should start accruing P&L tax expense sometime in 2008. I believe that MasTec is not necessarily getting full credit for our $200 million tax NOLs and street valuations, but it will favorably impact the next few year's cash flow. There is little risk of the NOLs expiring. Their average remaining life is over 15 years.

G&A expense was 7.9% of revenue in Q2 versus 7.4% last year. The increase was mostly for incentive compensation and bad debt expense. Bad debt expense was up $1.2 million year-over-year. Interest expense for Q2 was $2.1 million, down from $2.4 million for the prior year's quarter. The improvement is primarily due to higher interest income on much higher cash balances and to a lesser degree to a lower interest rate on the the new bonds we issued in Q1 compared to the higher rate on the old bonds.

My summary of the Q2 P&L is as follows. Continuing ops earnings were up $3.8 million or 31%. What helped was an 11% increase in revenue and a 210 basis points improvement in gross profit. We were hurt by losing almost $2 million in cable TV projects and $1.7 million in higher fuel costs. Pre-tax margin from continuing ops was 6.3%. That's our best in years, and 100 basis points better than last year. Q2 was the ninth consecutive quarter with solid or better results. I am talking about continuing operations of course because we have sold all of our discontinued ops. Despite our progress with margins, we believe we can do better.

Now let me take you through our balance sheet and our liquidity. Our quarter end accounts receivable day sales outstanding or DSO was 59 days, and an additional improvement from 61 days at the end of Q1, 59 days is the best in recent years if not in our 70-year history. It is worth noting that at the start of 2005 we establish our goal of hitting 60 day DSOs and we publicly disclosed that goal. At that time our DSOs were at 86 days, so we've come a long way. Every day of DSO improvement is worth 2.8 million in cash, so the DSO improvement really does help our liquidity. The credit quality of our customer base is certainly better today, selling our discontinued operations helped tremendously, and we work very hard to collected our money. Our billing and collections efforts are decentralized, so I would be remiss if I didn't thank the many MasTec operations and finance people who made our improvement possible. Our cash flow and liquidity continues to be strong. As a result of improved collections, improved earnings, our 2006 equity offering, the Q1 bond offering, and our recent bank amendment, our liquidity is $147 million today. We define liquidity as unrestricted bank cash plus availability on the revolver. Quarter end cash was $119 million compared to $63 million for Q2 last year. Our cash flow from operating activities was $27 million year-to-date compared to $10 million for the same period last year. Of course both our liquidity and our cash flow has been helped by the February sale of our discontinued DOT business.

We just completed an amendment to our senior credit facility. We have an improved pricing grid allowing us to borrow today at prime or LIBOR plus 112.5 basis points with the lowest rate available to us being prime or LIBOR plus 100 bips. That is if we hit certain leverage ratios. The amendment also improves availability and flexibility and we have extended the facility for two more years so that it is now matures in five years. The amendment includes what is called an accordion feature which could permit under certain circumstances the credit facility to expand from $150 million today to $200 million should we ever need to expand it. It is worth noting we currently have no cash draws on the credit facility.

Finally, our 2007 revenue guidance remains unchanged with revenue in the range of $1.04 billion to $1.06 billion although as Jose said we favored the lower end of the range. We have narrowed our EPS guidance to $0.84 to $0.90. That's for continuing operations. Our previous guidance which we initially provided in January was for $0.80 to $0.90.

Now let me make one supplemental comment regarding the earnings guidance that Jose and I mentioned. As you know from our disclosures and from our quarterly comments, we have a few issues in litigation. As we have commented before, we think of most of it as legacy litigation, arising from businesses we're no longer in, and with customers that we no longer work with, mostly very old cases, but the American Justice System does work slowly. Any outcome of any of these cases is of course not included in our earnings guidance and they may either positively or negatively affect any particular quarter. That concludes my financial review, so now let me turn the call back to Jose.

Thank you, Bob. In order to ensure we have enough time for the Q&A session I will now turn the call back to the conference operator so we can devote the remaining time on the call to listener questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Eric Kainer with Think Equity.

Thank you very much. Congratulations on a solid quarter, guys. A couple things. First, I believe we had previously heard about the rollout of a tool tied to the Oracle database and how that might be helping your productivity which obviously would result in better margins. Has that had an impact here? Is that part of the review process you went through?

Our review process, Eric, includes really understanding how our managers are managing their business at the field which we talked about earlier. Part of that is understanding how they evaluate their crews and their personnel, and I think what we've done is really tried to give them better tools and analytics to make better decisions a day-to-day basis, so, yes, I think it is working. I still think we have a long way to fully deploy that throughout the organization, so I think there are certain areas of the organization that have already seen the advantages and the benefit from that, and there is a significant amount of the Company that has not, but our goal is to continue to push that out through the organization, and we think we'll be complete with that by the end of 2007.

Thank you. Next question is about the energy business. I wonder if you can kind of talk a little bit more about that about especially the status of contract wins, sounds like you've got wins with three different organizations, I guess one of which is municipal, and talk about the opportunities maybe especially on the transmission side of the game there?

Sure. I think we're making excellent progress in our energy business. Obviously when you look at year-to- year comps, we're down. We said over and over that part of the margin improvement has been our ability to access certain contracts that weren't performing. There is a number of customers that make up the majority of that difference on a year-over-year basis, and if you look at us from a quarter-over-quarter basis, we're somewhat flat in the energy business as well, and I think there is some really positive trends, and there is no doubt that we're seeing a negative impact due to housing starts I think across the board, especially on our distribution business which is the majority of our energy business still today. We're seeing a downturn in-housing starts which is affecting new subdivision construction which is having a negative impact on revenues, but we're offsetting that by really picking up additional market share within that business, so when we look at some of our bigger customers, even some of them that are down, I feel really good about the fact that I feel today we have a larger percentage of their total work, so as work does pick up and as work starts to go again, I think ultimately we're going to end up having much better and larger relationships with that customer base. Specifically related to the transmission business, we see a lot of activity.

We're seeing a lot of activity for the second half of '07 but more importantly going into '08, the three project that is we announced on this call were significantly larger than the projects we announced on our last call, so our backlog is increasing, and we feel excellent about the team we assembled and the direction that we're headed there, so we expect this year our energy business to be somewhere around 20% of revenues which is where it has traditionally been, and we obviously expect that number to increase as the years go on.

Great. Last question is really about the DirecTV renegotiation and extension. Any reason that we should expect any different margin structure on that as we go forward?

There were improved economics in the deal, so we experienced some of that in the second quarter. I think there is more to come through the end of '07 and '08, but ultimately the real margin opportunity with DirecTV is continued expansion and rollout of high-def. We're very, very excited about that business. We're excited about the product that they're coming out with. We think that it is going to from a competitive nature it is going to be considerably better than anything else out there, and we think that's going to have a dramatic impact on our business. As the business grows and obviously with better economics, we expect that business to perform a lot better especially going into '08 and '09.

Thank you very much and good luck.

Thank you, Eric.

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

Good morning, Jose.

Good Morning, Liam.

On the TelCo-side of the business, are you seeing any pricing pressure there or is pricing held firm?

No. Pricing held firm. I think we've obviously seen a lot of expansion from Verizon on a year-over-year basis. I think most of that has really been market share expansion more so than actual additional spend by Verizon. I think that as we look at the second half of the year with Verizon we kind of expect a similar run rate as to what we saw in Q2 as we look into Q3 and Q4. We picked up a lot of market share. We're in a lot of new markets. We think that the there is going to be further opportunities as time goes on. We're excited about where they are. There hasn't been much pricing pressure in that business, and I think the rest of the business really we haven't seen the level of activity that we expected, and I think as that level of activity turns on which I think we're seeing signs of pricing will actually be very positive based on where it has been in the past.

Great. Thank you.

We'll go next to Steve Mather is SMH Capital.

Good morning. Thank you. A few questions to better understand the dynamics behind some of the numbers, Bob. You mentioned the P&L tax rate, possibly give us an estimate for what '08 or '09 might be?

It would be in the range of 40%.

Okay.

To be perfectly honest we haven't focused on that.

Okay. That's fine. And to what extent do you plan to maybe adopt more of a capital lease model?

We certainly have the balance sheet and credit profile to do today what we couldn't do two, three and four years ago. That is make good lease buy decisions or lease owned decisions on vehicles and equipment. And as we look at each acquisition, we're looking at either operating lease, capital lease or ownership and just going with the economics. We continue to do allotted of operating leases. We do have some capital leases, and we do buy some equipment if you look at the CapEx on the cash flow. So it is really just a question of relative economics, and we're not rushing towards capital leases, but we do have some.

Okay. And then just last regarding the DirecTV HD, I guess it is my understanding that when you put install that you add the equipment to revenue, but you add an equivalent cost of revenue. So push revenue up, but effectively not a bad thing, but it would pressure your margins down only because it is a one to one on that equipment. That the way you account for the HD equipment but not their standard Def equipment?

No, that's not accurate. We actually don't pass through revenue any of the actual HD boxes. The HD boxes are purely owned by DirecTV, but we do pass through our revenue the actual materials associated with an HD install such as the cable, the satellite dish, the multi-switch, of which some of those items are at a pure pass through, so there is not a huge difference between the HD components and the standard deaf components other than the actual satellite dish, and as DirecTV move to do one consolidated satellite dish that's kind of really taken away the impact from having the difference between the standard and the HD.

That's great. Thanks. Thanks very much.

Thank you, Steve.

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

Good morning. A couple questions, please. First of all, you talked about that you had walked away from some bad contracts in cable TV and energy. You said cable TV was 2 million. How much was the total amount of revenue? Those contracts you exited, and secondly how much of the 210 basis point gross margin improvement was derived from contract improvement?

Let's talk about our cable TV business first. Last quarter we announced that we lost in excess of $2.5 million. We expected it to get better. It lost just under $2 million for the second quarter, so we're somewhat disappointed in our execution in that business. I think as we really dove into it and peeled it back, we realized there were a lot more problems there than what we originally anticipated or thought and so I think we did an excellent job at cleaning that out through the second quarter. I think as we looked at the second half or towards the end of the second quarter and especially going into the third quarter, I think that business will have a very slight loss in Q3 so I think we made a dramatic turn around in improvement. I think the bleeding is somewhat behind us which I think was the most important thing, get our arms around the problem, identify the areas we need to do fix, fix them and try to build a business going forward. We do have revenue. The revenue is not significant, so the percentage of loss is very large as a percent of revenue and we're not going to disclose those revenues, but I think more importantly we've identified the areas of the business that we want to be in. We identified the customers we to want work with for the rest of the year, and we think we're going to have a business that we can be proud of going into Q4 and going into next year. On the overall improvement on margin, I think there is no question that getting out of bad contracts obviously has a positive effect. I think Bob mentioned the fact we think we did an excellent job from a productivity standpoint which we consider our labor and subcontractor costs coming down as a percentage of our total revenue. We think that's where the bulk of the improvement was although obviously some of that improvement does come from getting out of some of those bad contracts.

Okay. Thank you. Secondly, if you could talk about some of the mechanic of the HD upgrades for DirecTV, you talked about a minute ago the dual use antenna, but for example if a customer already has an HD box, can he access all of the channels, and do you do visits just to swap out a set top box?

So I guess there is a lot of different scenarios. DirecTV has about 16 million customers that they really had that join direct TV at all different periods in history, so there was actually a lot of different product out on the field from a customer perspective. We think that the HD product is going to obviously have an impact in two primary areas, the first being in new activations. We think when consumers go out and buy high-def TVs and have a choice to make at that point as to who the provider is going to be, we think with the competitive advantage of DirecTV is going to have, and the huge difference in product versus today where there really isn't much differentiation in the product, we think it is going to drive a lot of new activations and new customers coming into DirecTV which is going to require a whole new install. There is no question that DirecTV with the 16 million base customer is going to try to dramatically increase the percentage of those customer that is are currently on high-def and it really depends on that specific customer, but for the most part every existing customer will require a new satellite dish, require a new wiring, many will require new multi-switch and obviously all of them will require new set top boxes, so there is a lot of work to do both from an installation and an upgrade perspective and again we're proud to be a part of it, and we thinks going to have a significant impact towards the later half of this year going into '08.

That helps. Thank you.

Thank you, John.

We'll go next to Simon Leopold with Morgan Keegan.

Thank you. First a quick housekeeping. I don't think you mentioned the backlog if we could just get that number.

The backlog was about a 1.2 billion compared to a 1.1 billion in the the first quarter of this year.

Great. And to go back to an earlier question regarding the gross margin trending here, fantastic improvement. Trying to figure out the sustainability. I think it would help to get a sense of how much of the sequential improvement comes from the exiting of the quarterly performing contracts and how much of it is coming from other activity and really what I am looking for is help of understanding how we think about the next few quarters on that gross margin line. Are we looking for really stable levels linked more to volume? Anything that would help along those lines.

Sure. If you looked at last year, gross margin improvement from Q2 to Q3 was 70 basis points. If you look at our remaining guidance for the year on our operating profit or pre-tax profit, it is in the range of 6 to 6.8% depending on where we end up on those numbers, so it is roughly a little better than where we are today. I think as we look forward we expect gross margin to slightly improve quarter-over-quarter. We think the changes that we made aren't arbitrary and not going to be one-time pick ups that we got from something. It is actually we've improved the business. We think these margins are sustainable, and not only do we think they're sustainable, we think they should be improved, so I guess the best look we can give you is last year they went up 70 basis points quarter-over-quarter, and again we would expect them to continue to increase.

That's helpful. Other question I wanted to touch on, the other income dropped, and I think this has to do with accounting for the acquired entity, and I am assuming we we should think about this remaining stable in the coming quarters.

There is in question. I think two things. One, obviously how we accounted for the acquired entity but also what we were doing from a equipment sales perspective. We'll continue to have equipment sales over time but I don't think it is as significant as we had in the the past. I think the levels that you're seeing of other income today are the levels that you'll see going forward where you make a good point. A lot of our earnings in the past did come from that.

Great. One last item. The government business was up nicely sequentially. I recognize it is lumpy, maybe a little color around what happened this quarter and how we trend that particular line item.

We feel great about that business. We feel great about the direction we're headed. We're actually expecting that business to grow very nicely over the next few years. We've actually really increased our backlog there as well, and we think we won some good projects, really opened the door with a lot of new customers, so we think that's going to be part of the business in MasTec that's going to continue to grow.

Great. Thank you. That was helpful.

Thank you, Simon.

Thank you. We'll go next to David Foundry with Harland Advisors.

Yes, good morning, and congratulations on a nice quarter.

Thank you.

Talking about the energy business, can you give us some sense, I mean you gotten some contracts and it was kind of flattish, but this is a people-type business you're kind of limited by the the number of people you have. What kind of level of capacity are you running, and is there more capacity that you can use going forward in the next couple quarters?

I think there is no question. I think part of challenge is to continue to grow the personnel side of that business, to take advantage of some of those opportunities we feel very comfortable and confident we'll be able to do that. For example, one of the contracts we discuss on our last quarter was a whole change out project we were doing for Florida power and light. That project started shortly after our call actually didn't pick up as we expected. There was some hiccups along the way. It is a new project, a different project and I don't think in utilities have ever done before so I think on both sides there were some hiccups. Today we're in the process of actually doubling to go tripling our resources on that project as of today, so we expect that. We expect to begin to see the effects of that, the later half of Q3, especially going into Q4 and '08, so there is no question we have a lot of customers and a lot of opportunities that are going to require us to ramp up, and we're working hard to ramp up. I think part of the difficulty in really assessing our energy business has been the fact that a lot of the positives that are happening are being offset either by slowdown in regular spending by the energy customers or in the fact that we've exited some contracts and it is hard to back those out and really look at growth -- true growth on a period over period basis.

In that funicular do you have excess people that you're carrying because you haven't been able to put them to work or have you been able to put them to work in lower margin type opportunities?

We don't have excess people and we did, we could absolutely put them to work. What we do have and will have from time to time is as we got out of some and as we moved people around, we did have excess equipment we could have done one of two things with. One, we could have sold it basically taken it off our books or could have held on for projects we expect to start later this year, and we actually ended up keeping the equipment which I think ultimately hurt our margins in that business but ultimately will have a very positive impact as we begin to ramp up and move resources to other projects.

And then on the DirecTV business, you said you renegotiated your contract. In the past DirecTV has shrunk the vendor base they are using outsourcing base, and as part of renegotiations did you gain any additional share with DirecTV or are they continuing to shrink that vendor base?

We did not gain market share, and I think DirecTV has not shrunk that base any further in the last few years. If you look at our growth over the course of the last two or three years, it has truly been almost same store organic, so it has really been within our existing geographies and the expansion of our customer within those geographies. We expect the bulk of our growth will come from that in the future.

Okay. And then lastly can you give us in the past you quantified the costs of pursuing these legal issues, legacy and legal costs. Can you give us some sense of what those costs were in the quarter?

What we said last quarter is we really didn't expect legal costs to go down much further from where they were, especially in 2007. Our legal costs for Q2 were $2.5 million compared to $2.1 million in the first quarter compared to $4.8 million in the fourth quarter of 2006, so there is no question we saw an improvement early in '07. A lot of case that is we expected to happen in '07 are either being pushed back later into '07 or early into '08, so we're going to have an increased level of legal spend far and above what any of us would like or what any of us think is reasonable, but we probably won't see the real effect of shrinking legal costs until probably the second half of '08 and we should absolutely see it by '09.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) . We'll go next to Brent Thielman with

Good morning, guys. Congratulations on the quarter.

Good morning, Brent.

Just a quick question for me and maybe just an update on your sort of feelings about acquisitions and what particular area that might be, whether energy, satellite, et cetera, or are you more focused on the margin side and improving that at least in the near-term?

Well, no question margin is a critical component of any decision that we make. We've also said and talked a lot about our our first quarter call about our desire to reduce our dependency on DirecTV and reduce our percentage of business with them, so I think that unless there is an incredible opportunity that's not in an area that you're going to see us diving into, no question we feel really good about both our energy and our communications business and where those markets are headed, so I think that gives you a good sense of the markets we're looking at, and again multiples and margin and what it does to our combined entity is very, very important in that respect.

Okay. Great. Thanks.

Thank you.

We'll go next to Min Cho with Friedman Billings Ramsey.

Good morning. A couple questions for you. First of all, can you tell me if there was any weather impact this quarter?

Min, if you look at the South Central part of the country, especially the Texas region, Texas I think probably got as much rain as they have ever gotten in their history. I think they're at historical levels or were at historical levels by June for the full year. There is no question that the weather impacted us in Texas which is one of our biggest areas and one of our stronger regions, but again I think it says a lot about our company when we were able to post the kind of numbers we posted in spite of that, and we feel really good about how we're managing our crews and how we're moving people around and what we're doing on bad weather days, and I think the discipline and accountability in the company is really showing up in examples like that.

Okay. A couple times you mentioned that the energy business was impacted by the softness in new residential construction. Can you talk to that a little bit, maybe talk about what percentage of your distribution revenue is tied to new housing and then just more in general about the trends you're seeing on the distribution side?

Traditionally new subdivision sincerely a part of the distribution business. It is obviously not the majority or not the greatest part of the distribution business, but I think it is in pockets, so we look at certain customers and for example I will give you one example, Golf Power which is an important customer of ours in the northern part of the state of Florida which was an area that was growing from a real estate perspective and now slowed down. We actually saw a 20% decline on a year-over-year basis or actually on a quarter-over-quarter basis within the same geography doing the same type of work and a lot of that was related to housing starts. I think that's by far the extreme. I think we've got a lot of other customer that is are down a few percentage points here and a few percentage points there, and there is other customer that is are actually up, so so it really depends on the market and geography, although there is no question we're feeling the impact and our results would be a lot better would it not have been for that.

Is there a case for when the utilities are spending less on the new subdivisions that you see a shift towards more maintenance spending?

Well, I think it is hitting the utilities in a lot of utilities end up budgeting for their year and part of their budgeting cycle includes what they expect their revenue increase to be, and when their revenue increases don't happen and the new customer starts don't take effect, then obviously they have got their own budget constraints, so it is not like they had a pot of money, new housing starts didn't happen they can then disperse that pot of money into other areas. There is no question that reliability and investment into their existing plant is still a very critical component of what they're doing. I think from everything you read and even with some of the utilities have said, there has been an under investment in that market for a long time, so I feel really good about that part of the investment and actually the fact that that part of the investment is increasing and continues to increase, and again as we talked, we're really focused on the transmission side of the business, and we think that's completely irrespective to new housing starts because some so many of those projects are planned and in the process of really going forward, so as I look, I think it is hard to take one segment of the energy business and really try to dissect it. I think have you to look at the business as a whole, and as a whole it is a fantastic marketplace. It is a market that's going to continue to grow, and I think as a company we have to be able to be nimble and move fast and really change our resources and refocus our resources so the areas of those business that is are performing well.

Okay. And then one final question. I guess this is tied to your acquisition strategy. Since you are obviously doing a very good job for DirecTV with the in-home installations, are you look to go get into cable installations at all?

We've done cable installations in the past. I think little an improving market. I think it is a market where pricing pressure there is actually very positive. I think as the competitive nature of that business increased, those customers have begun to pay higher wages and really pay their contractors more to get the business done which I think is a very positive trend. I think it-- we kind of consider that as part of our cable TV business, so to take a step back, we've obviously had our challenges there. We're expecting our management team there to fix the problems and really build a better business in Q3 and going into Q4. Those will absolutely be some of the areas that that business looks at as it continues to grow, but until we get our problems fixed in that business and until we get a really good understanding of that market, I wouldn't expect any significant activity from MasTec.

Great and congratulations.

Thank you.

There are no further questions at this time. Mr. Mas, I would like to turn the conference back over to you for additional or closing remarks.

I would like to end by thanking the men and women of MasTec for the excellent quarter and hard work and dedication during the quarter, and I would like to thank all of you for participating today on the call and in the interest you show in MasTec, and I look forward to our next call in November. Thank you very much.

Thank you, everyone. That does conclude today's conference. You may now disconnect.