MasTec Inc (MTZ) 2008 Q1 法說會逐字稿

Welcome to MasTec first quarter 2008 earnings conference call initially broadcast on April 30, 2008. Let me remind participants that today's call is being recorded.

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

Thank you, Karen. Good morning. Welcome to MasTec's 2008 first quarter earnings conference call. The following statement is made pursuant to the Safe Harbor 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 expectation on the day of the initial broadcast of this conference call, and the company will make no effort to update the expectations based on subsequent events or knowledge.

Various risks, uncertainties and assumptions are detailed in our press releases and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should our underlying prove incorrect, actual results may differ significantly from results expressed or implied in this communication. In addition, we may use certain non-GAAP financial measures in this conference call. A reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measure can be found in our earnings press release or posted on the investor relation section of our website located at www.mastec.com. 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 announced by Jose followed by a financial review from Bob. These discussions will be followed by a Q&A session and we expect the call to last approximately 45 minutes. Jose.

Thank you, mark. Good morning and welcome to MasTec's 2008 first quarter earnings call. First, some first quarter highlights. Revenue for the first quarter 262 million, a 9% year-over-year increase. Income from continuing operations was 9.5 million or $0.14 per share prior to a 1.6 million or $0.02 legacy litigation charge versus $0.07 per share in 2007 excluding a $0.04 gain from the sale of real estate. Thus, on a pro forma basis, earnings for the first quarter of 2008 were $0.14 per share versus $0.07 per share in the first quarter of 2007, a 100% year-over-year increase. We are pleased with our first quarter results given the challenging economic environment. At every 2007 quarterly call we spoke of our commitment to greater management accountability and margin improvement. While we have made progress, management accountability and margin expansion will continue to be our primary focus in 2008. In addition, we will continue to diversify our business to take advantage of new and growing opportunities allowing us to further mitigate the risks of any specific sector downturn. In the first quarter we grew both our utility and government businesses by over 20%. That's more than double the overall growth rate of the company. Our goal is to continue to reposition the company to diversify our customer base, continue our geographic expansion and take advantage of high growth opportunities within our industries in both traditional and new markets for MasTec.

Now, let me spend a few minutes talking about our business and customers. Once again, our communications business delivered steady results in the first quarter. Although the traditional maintenance business continues to show softness, demand for fiber deployments remains strong. Verizon accounted for 23 million in revenue in the first quarter, an 11% sequential increase and a slight decrease from the first quarter last year. We are encouraged by both spending levels and, more importantly, by planned activity for the balance of 2008. We are also seeing an increase number of opportunities related to wireless infrastructure and believe this could be a good fit with both our skill set and diversification strategy. In our installable home business, DirectTV revenue was 123 million, or an 11% year-over-year increase. We are now entering our seasonally weakest quarter of the year with regards to this customer, and while we expect some softness in Q2, we are encouraged by the fact that DirectTV is performing well and their strong high-definition content continues to drive market share gains.

Our utility business revenue was up 26% compared to the first quarter of 2007. While we see softness in some areas of this business, particularly those related to new housing starts, we have a number of opportunities related to maintenance, transmission spending, alternative energy projects including wind and solar, and gas. We continue to expand our transmission capabilities and our recent acquisition in this space is performing very well. During the first quarter we were able to secure $45 million in wind farm contracts, all expected to be completed in 2008. Our scope of work on these wind farms includes the building of gathering lines that connect the turbines, the substation on the wind farm, and the construction of the transmission line connecting the wind farm to the electrical grid. We are also seeing increased activity in the natural gas base where we are currently working on building the gathering systems for the natural gas wells. We expect this to be an area of opportunity and expansion for MasTec.

During the quarter we also saw a 19% increase in our government business. This was driven predominantly by the growth of our water and sewer business. This work is performed primarily for government and municipalities and gives us another area of diversification in an industry segment which we believe will see little negative impact in a weakening economic environment. In conclusion, our business is growing, margins are improving, and liquidity is strong. We will aggressively pursue growth opportunities both organically and via acquisitions, and will continue our diversification strategy as we feel this is a competitive strength for MasTec. While we may see softness in Q2 compared to last year, backlog is growing, operational discipline has improved, and the company is gaining momentum. We expect an excellent 2008. I will now turn over the call to our CFO, Bob Campbell. Bob.

Thank you, Jose. Good morning. As Jose mentioned, we are off to a good start for 2008. We are cautiously optimistic for the year in spite of a soft economy. The first quarter is always a challenging one for us. This year's Q1 was easily our best first quarter in a number of years. My highlights for Q1 are as follows: Revenue was up 9% and earnings per share quadrupled from $0.03 up to $0.12. Beyond the revenue increase, Q1 was helped by a 80 basis point improvement in gross margin, a 50 base improvement in G&A expense, and the sale in February 2007 of our last discontinued operation, our DOT business. DSO's are down to a record low of 53 days compared to 61 days last year. Our financial condition remains strong. At the end of Q1 we had $123 million in cash revolver availability and securities held for sale. Finally, our guidance for 2008 is unchanged with revenue growth of 8 to 12% and EPS growth of 27 to 34%. That's for continuing operations only, and the 2007 base excludes the $39 million legacy litigation charge, otherwise the increase in earnings would be greater. We expect 2008 to be a good year for MasTec.

With my highlights out of the way, let me review our Q1 financial details. For Q1 2008, revenue was up 9% and net income was up 366%. Net income was $7.8 million or $0.12 per diluted share on revenue of $262 million. That compares with Q1 2007 net income of $1.7 million or $0.03 per diluted share on revenue of $241 million. Net income included losses from discontinued operations of $155,000 in 2008 and $5.3 million in 2007. Income from continuing operations was $7.9 million or $0.12 earnings per diluted share compared with income from continuing operations of $7.0 million or $0.11 per diluted share last year. This year's Q1 $0.12 included a $1.6 million charge or 2.3 cents a share for a legacy litigation item. Additionally, last year's Q1 $0.11 included a $0.04 non-recurring property sale gain. Therefore, on a pro forma basis without unusual items for continuing operations we made $0.14 this year compared to $0.07 last year. As I said, we had our best first quarter in many years. Our gross margin in Q1 2008 improved from 12.6% last year to 13.4% and that's without depreciation. That's an 80 basis point improvement in gross margin in spite of a 90 basis point or $2.5 million negative impact from fuel. The pick ups were in labor and subcontractor costs and the lease and rental costs of our equipment.

Regarding fuel costs, we are working on getting additional cost relief from our customers. G&A expense was down from 8.2% to 7.7% of revenue. Stock compensation expense was down and outside legal fees continue to drop as we wind down our legacy litigation. If you will remember, we took a $39 million charge in the third quarter of 2007 to provide for a change in strategy to accelerate the closure of what we called our legacy litigation. We are clearly making progress getting these older cases settled or adjudicated. We expect that most, if not all, of the significant cases will be behind us this year. We expect to continue our trend of lowering our outside legal costs. As you can see in yesterday's 10-Q, we continue to close out our older cases. I get questions about the cash impact of last year's $39 million legacy litigation charge, and you should know that we believe that about half of the charge, or $20 million, will be the negative cash outflow from legacy litigation and most of it will be in 2008.

We did have a $1.6 million P&L charge in Q1 related to a old D&O coverage case. When we developed the accruals for last year's $39 million legacy litigation charge we estimated, of course, the dollar amount and outcome of each case. When individual case outcomes vary from our estimates, we will be booking the pluses, pluses and the minuses, therefore, you may see some P&L hits and some pick ups within our quarterly financial results as we go through the year. Our guidance excludes both the positive and the negative impact of the legacy litigation. However, it should be noted that our Q1 EPS was within the guidance range even after the $1.6 million litigation charge.

Our financial condition and liquidity remains strong. At the end of the first quarter we had $123 million in cash, cash equivalence, securities available for sale and availability on our bank revolving line of credit. That's roughly the same level as Q1 2007. Cash and liquidity remain high despite the fact that we have used cash to make four acquisitions over the last 12 months. Liquidity was helped by reduction and accounts receivable day sales outstanding or DSOs to an all-time low of 53 days. Last year our DSOs were 61 days. Additionally, our balance sheet is in great shape. Almost all of our debt is $150 million 10 year senior notes that we sold last year. The interest rate on the notes is 7-5/8% and the bonds have a 2017 maturity.

We really don't have any significant debt maturities for nine more years. We often get questions about our large cash balance and significant amount of liquidity that we have and what are our plans for the cash and the liquidity. As you might imagine, we are often asked whether we intend to do a stock buy back given the current stock price and our large cash balance. While we will never say never regarding a stock buy back, I will say that at the current time we do not intend to do a stock buy back. We have a proactive acquisition program and we continue to look for opportunities to grow our company profitably. We are seeking opportunities to expand our service offerings and our geography and our customer base. We are very pleased with the four acquisitions that we made in the last year. We believe that the returns from these and from future acquisitions will be far greater and do far more for enterprise value than a stock buy back program.

For the first quarter of 2008, our ten largest customers were DirectTV 47%, Verizon 9%, AT&T 6%, EMBARQ, [Pican] Pipeline and Progress Energy were all 3% each, Encore and XTO Energy were both 2% each, and American Electric Power and Dominion Virginia Power both 1.5%. For your information, XTO Energy and [Pican] Pipeline are natural gas customers and we expect to a water and sewer customer in our top ten customers on a full-year basis. That's reflective of the increasing diversity in customers and service offerings that Jose was talking about. Today, backlog is at roughly the $1.4 billion level, up 100 million from last quarter. That's an 18-month backlog number. Even though we believe that fiber deployment work will last for years, our backlog includes only the specific work for which we have visibility.

Now let's move on to 2008 guidance. Today we are reaffirming our 2008 guidance first issued February 27. We expect 2008 revenue of $1,125,000,000 to $1,160,000,000, and we expect diluted continuing operations earnings per share to be between $0.85 and $0.90. That's an 8 to 12% increase in revenue and a 27 to 34% increase in EPS. The 27 to 34% increase in 2008 EPS is off of our 2007 base with the $39 million legacy litigation charge added back, so it's a good comparison of operating results. Our guidance does not include the impact of our legacy litigation, either positive or negative. Our guidance assumes a continuation of today's soft economy and it is not dependent on a second half recovery in the economy. On the other hand, our guidance does not contemplate a significantly worsening economy. The pretax profit margin related to our annual guidance is 5% to 5.5% and that compares to 4.4% in 2007. The 4.4% pretax profit margin for 2007 is pro forma excluding the Q3 $39 million charge for legacy litigation. Our short-term pretax profit margin goal is 6% and longer term we believe we have margin expansion opportunities well above 6%.

Now let me make a few comments about Q2 and our Q2 guidance. It should be noted that Q2 for 2007 was far and away our best quarter last year and it will be our toughest comp this year. We could have a good Q2 and have a very good 2008, and hit our full year guidance but not match last year's Q2 number of $0.24. Some of the items that will affect Q2 are as follows: First, we will have some growing pains in our energy business. With two acquisitions and changes in management we have had some short-term inefficiencies to overcome. However, as we ramp up energy offering and begin the already booked business for a second half of the year, this business should improve significantly on both the top and bottom lines. We believe that Q2 will be an inflection point for this business with future period operations beginning to benefit from increased revenue and margin. Second, Q2 is always softer seasonally for our consumer installed to the home business and also it may be affected by softness in the economy. However, with exceptional programming and high-definition offerings, we expect this business to outperform other offerings as we move in to the traditionally busier second half of the year. Third, fuel costs will be a factor in Q2 compared with last year.

Even though we are negotiating fuel surcharges with some of our customers, it will take time for these to be negotiated and put in to place. As I mentioned earlier, fuel was up in Q1 by $2.5 million versus last year. Fourth, net interest expense will continue to be affected by the feds monetary policy and widespread flight to quality which has been depressing yields in our traditional investments. The negative Q2 impact will be about $600,000 or $0.01. I hope these comments regarding Q2 are helpful. Our Q2 guidance is as follows: Revenue for the second quarter of 2008 is expected to be between $265 million and $285 million with diluted earnings per share of $0.20 to $0.22. The revenue compares to $256 million in Q2 last year, the $0.20 to $0.22 diluted eps guidance compares to $0.24 last year. In closing, just to echo what Jose said, we had an excellent quarter and we expect to have a good year. Our revenue is growing and our margins are improving as we continue to reduce costs and become more efficient. Our balance sheet remains strong and we are well positioned to grow profitably as we implement our diversification and expansion plans. That concludes my remarks. Now let me turn the call back to the conference operator for the Q&A session.

(OPERATOR INSTRUCTIONS) Your first question will come from Alex Rygiel with FBR. Please go ahead.

Good morning, thank you gentlemen.

Morning, Alex.

Couple of questions, first, revenue growth year-over-year was 9% or up 21 million, what was the revenue contribution from the four acquisitions that were completed last year?

Alex, most of the acquisitions or revenues were already in Q1 last year so both for our Direct Star business, which is our DirectTV sales business, we had over two months of revenues in the first quarter. Last year our Globe Tech business or water and sewer business, all of the revenue was in Q1 last year, so the acquisitions we made last year contributed 2.5% of the overall revenues.

Power partners, three-phase line and one month worth of Direct Star worth 2.5% of 9%?

That's right.

Okay. Could you also comment a little bit on DirectTV pulling its techs in through the acquisition of 180 connect and what that means longer term to your relationship with DirectTV?

Sure. I think focusing on the short-term first, it really has no effect on our business. From a geographical perspective, we are in completely different areas and the markets that we currently have with DirectTV we have 100%. I think DirectTV has publicly stated over the course of the last year that they had an intent to get into the business, much like they do in the call center business where they have about 30% of the business in house. I think it's actually going to be a positive for the network and that DirectTV will really begin to understand the challenges in the businesses and working together we can actually make the business a lot more efficient. We are actually quite excited about it.

They also mentioned in a recent analyst meeting that they were planning on re-engineering or reconstructing the compensation with its HSPs. Could you comment on that, please?

Alex I'm not aware of that. We resigned our contract may of last year, additional four-year term. And there has been no further talk of actually changing the compensation model.

Have you had any success in passing on fuel surcharges with that customer?

We are not going to get in to negotiations with each and every customer. I think for the most part we have had customers that in Q1 gave us fuel relief. Some of that was in our numbers. Despite that, we still had a $2.5 million increase obviously. Other customers didn't and we're working with them and hoping to really reach as many customers as we can and get some fuel relief not only for Q2 but as the year goes on.

Lastly, I noticed in your proxy that you published a few weeks ago that you changed your executive compensation structure this year from a target based model to being completely discretionary. Could you comment on why the board or your perception of why the board might have changed that methodology of compensation for the executives?

Sure, Alex, last year our executive comp was tied to EPS. There is some concerns from the board's perspective as to fully tying compensation metrics to earnings per share. They took really the position that they wanted to have a more subjective measure. Our targets, our earnings, our internal goals will drive compensation and obviously the compensation of the executives so it's still a performance driven model even though there is no specific set targets tied to EPS.

Great. Thank you, very much.

Thank you, Alex.

Our next question comes from Eric Kainer with Thinkpanmure. Please go ahead.

Thank you very much. Congratulations on a very nice quarter gentlemen.

Thank you, Eric.

First, I wonder if you could talk to the tenor of the business at AT&T. Obviously they now kind of digested the Bell South acquisition. Bell South had been a very long, strong customer. But it looks like maybe revenues there are a bit soft and, quite frankly, in what looks like a strong order book. Wonder if you can talk to us specifically about some of the things that you're seeing in their business.

Eric, I think their business is similar to a lot of the businesses we are dealing in. I think you've got two pieces to most of our customers. One is the traditional maintenance business that is somewhat tied to the overall economy both from their CapEx and also from what is happening from a new housing start. There is no question that that piece of our business for most of our customers has obviously softened. I think we expected that going into 2008. The other side of the business is really what they are doing from their whole you verse play and a lot of their CapEx that they are dedicating to that. While we haven't seen the increase we would have liked through '07, we are seeing an increased level in planning and activity as the balance of the year plays out. We expect our AT&T numbers to improve throughout the year. I think one of the other interesting trends that we are seeing from AT&T is their commitment to wireless spend. I think they put out a lot of announcements and press release over the last few months to the tune of about $2 billion that they are dedicating to the wireless infrastructure play. I think that's an area of their business that we traditionally haven't played a big role in with AT&T but it is one that has really piqued our interest based on what's happening both from a CapEx trend and what is happening from their overall customers and the conversion to wireless at both Verizon and AT&T. Verizon recently also upped their, they outspent their wireless CapEx more so than they did their wire line. The trend that we are seeing with our major customers is there may be more spending going on in the future on the wireless side of the business versus the wire line and we are focused on that and looking for a way to play in that game as well.

We are also obviously seeing a lot of pick up in wireless both at AT&T and Verizon as well as more generally across the industry. And so I wonder if you can talk about some of the kinds of activities that you're interested in picking up in the wireless space.

So first, we have been very involved in the past in the actual equipment installation side related to wireless. Its an area of the business where we do a lot on the wire line side. We think there's a lot of synergy and fit with the wireless business and it is one that we are actively pursuing where we responded to a number of RFPs. We're also interested in the overall deployment of sites. Not necessarily climbing towers or building towers, but in the actual deployment of wireless sites which we think is going to be a bigger area of spend over the course of the next few years for some of the wireless carriers.

Great. On Verizon, have you seen a change in any of your work there, specifically towards doing installations from them or is that still kind of an area of potential opportunity somewhere down the line?

To really move the needle, I think it's a potential opportunity down the line. I think both Verizon and AT&T have played in the space a little bit with contractors. I think it is a current opportunity but a very small scale. I think over time that's obviously potentially a large opportunity and we continue to play a role in that and to track that very closely with the hopes that at one point in time that will be a bigger opportunity for us.

Okay. Obviously very nice performance here on both gross margin and area of a special interest for DSOs. I wonder if you might be able to speak to DSO improvement and was that kind of really coming out of the communications business? Was energy a big contributor there? Was maybe, was it more government? What drove the DSO improvement there?

Eric, this is Bob. The improvement, we improved another day from year end. And from 54 to 53 and that was pretty much across the board. Versus a year ago when we were at 61 days dropping to 53 days. I would say some of it was in cable, some of it was in energy. To some degree it was still somewhat across the board.

Okay. Well, congratulations and good luck gentlemen.

It's worth Noting that every day is worth about $2.8 million to us. So it does add up.

Thank you.

Thanks Eric.

Our next question will come from Michael Novak with Frontier Capital. Please go ahead.

My question was already asked, thank you.

Go with [Darren Maloney] with [Meradore] Funds. Please go ahead.

Hi. Good morning, gentleman. Thanks for taking the call. Apologies. I joined the call here a little bit late, so just let me know if the questions have already been asked. Did you already go through your top ten customers for the quarter?

Yes, we did.

Very good. And then I had a question about your utilities business. The run rate is, I guess we have seen in the past few quarters here, substantially higher than it was a year ago. Could you maybe comment. Is that kind of a run rate that you anticipate continuing going forward?

We actually expect the run rate to increase. We focused hard on that business over the course of last year. We expect it to be probably our fastest growing sector in the company. We also announced today the fact that we secured about $45 million in wind farm contracts which will all be completed in 2008. We expect furtherer growth in that business and we think there is great opportunity there. We think that is going to help be a further catalyst as that business continues to expand and grow. We actually expect a much stronger second half of the year than the first half of the year in that business. We actually expect that trend to continue in an uptick.

Okay. Great. Then I wanted to talk about Q2, maybe your, I guess the trends your seeing in your communications business with specific comment regarding Direct television. Do anticipate the general traditional seasonal pattern that you see? Any lift in your business? What I guess I'm trying to get to is there any slowing related to softening economy and the consumer and sell through of the Direct television product? Are you seeing that showing up in fewer orders on your end?

Sure. Couple of comments. As we look at Q2 we actually gave a wide range from a revenue perspective, wider than we typically give. Part of it is we are starting a number of larger projects, we expect some of those projects to start in June which would help us achieve the higher end of that target. If for whatever reason those projects get pushed back a week or two for material delivery or whatever it may be, some of that may push in to Q3 and that's part of the reason for the wide range in the revenue side. Obviously the bottom line margins would follow. Specifically related to DirectTV, historically we always see a dip in Q2. In 2006 we had a 5% dip from Q1 to Q2. Last year we had about a 1% dip from Q1 to Q2 and I think last year was somewhat of an anomaly with all of the new product DirectTV was putting. They had obviously a backlog of upgrade orders that had come through as they began to launch hi-def. We are expecting a typical seasonal slowdown more like the 2006, maybe a tad bit more, maybe not. They have done a phenomenal job. They have not released earnings yet. We really don't want to talk about what we saw from an order perspective in Q1 or what we're seeing in Q2. Again, we are very confident about their ability to gain market share in today's market. We think they got a tremendous product offering and we expect their business to be solid for the rest of the year.

Okay. Great. I guess one last question related to Direct television. In Q4, on their Q4 call they were commenting on Bell South and really that that was one of their larger resellers and accounted for 300,000 grow sats per year. They anticipated losing 50% of that volume that wasn't going to actually be recaptured by other sellers of their offering in the marketplace. When I look at Bell South's footprint, that's consistent with your geographic territory. I guess what are you seeing? I guess I'm trying to infer Direct television's concern. I guess is that a concern for you any loss of business in those areas based on the fact that Bell South is not a reseller for Direct television?

Well, that business relationship terminated on March 31. If you look at our business with DirectTV, we basically cover four of the nine historical Bell South states. Bell South was in nine states and of those nine, our DirectTV presence was in four of those. We also believe that DirectTV is a far better product than Dish Network, especially in the areas that we cover which are Florida, Georgia, North Carolina and South Carolina, there is a lot of exclusive programming only found on DirectTV such as NASCAR, such as the DirectTV NFL Sunday Ticket which we think play well in the geographies that we cover. So we actually think DirectTV is going to do a good job at making up a significant amount of that difference. There is no question that we have seen and will continue to see some impact from that and obviously as the quarter goes along and they start rolling out their offers for that region, we think DirectTV is going to do just fine in picking up a good chunk if not most of the lost orders.

Okay, so, I guess for your business that you do in those regions, I guess you say you're still going to see your more traditional 2006 type pattern and not anything incrementally less than that or substantially less than that based on Direct television's loss of Bell South as a reseller?

No. Again, in 2006 it was down 5%. Could we see our business down 6, 7, 8%? Maybe. Could we see it down 3 or 4%? Maybe. I think that's the range. I wouldn't expect a variation much greater than that.

Okay, thank you very much for your time.

Thank you.

Next question will come from Paul Bonenfant with Morgan Keegan.

Thank you. Dialing in for Simon Leopold today. Have a question for you on your Q2 guidance. You mentioned earlier that your fuel impact year-over-year this quarter was 90 basis points. Do you have a sense for where that might be for the second quarter?

So a couple of things, there is no question that the average cost of fuel from Q1 to Q2 has gone up probably to the tune of about 10%. Could we see that number going maybe to 3.5 million over Q2 of 2007? The answer is maybe. The flip side of it is what kind of fuel surcharges can we get from our customers which we are working on and how much of that difference does that make up? We expect to see impact in Q2, obviously if we saw $3.5 million impact it starts at a $0.05 a share. The question is how much can we recover from that? Some of the 2.5 million that we saw in Q1 was recovered from customers, so the net affect wasn't that severe. However, obviously that number is going up in Q2 and we need to continue to be successful with our customers to offset some of that. We will see a greater difference in Q2 versus Q1 of last year.

Thank you. We are not looking for the type of gross margin increase that we saw in the second quarter of last year?

It will be slightly lower. I think if you look at and compare the pretax guidance, G&A depreciation and interest has been running at about the same rate over the last few quarters. We do not expect that to change. So any variability in our pretax operating margin you're going to see in the gross margin line.

Okay. Also looking out further towards the operating model improvements, seems like trends in the utility and energy business are improving. It seems like your plans for expanding that business in margin improvement that you talked about last May in the analyst meeting in Charlotte are working. I'm wondering if you could update us on your expectations for growth in utilities and energy and even the government business year-over-year. I think you talked about over the longer term getting to maybe each of those business units contributing a third versus the more heavy weighting towards the communication's business today.

Paul, there is no question that diversification is a very important part of our strategy and plan going forward. We think the more diversified we are, obviously the more protected we are. We are working hard at growing the utility business. We think it offers tremendous potential in a lot of different areas. Our goals really haven't changed. We are at a clip of really nice growth in that business over where we were in '07. We expect it to accelerate so we could potentially see that business being closer to that, to our overall equal percentage of the over all business quicker than we had originally anticipated. That's really our goal. On the government side of the business, especially in these times where the economy is somewhat suffering from a private company perspective, government is a nice place to go, it's a safe haven. You almost see an inverse pattern. You almost see more spending because the government is trying to get some funds out on government projects. We have actually seen an increase in the amount of projects available. Obviously there is a little bit more competition on those jobs as well, but from a backlog perspective we have done an excellent job in that business at really building a solid backlog of business for the remainder of 2008 and really beginning to get some backlog for 2009. We also expect that business to grow. We think as the year goes on we don't expect that to be a large part of MasTec or one of the bigger divisions, but we do expect it to be bigger than it is today. Overall, again, diversifying our customer base, diversifying our businesses are key objectives. I think one of the take aways hopefully today is that our operational performance is improving. It's improved. We are working hard on it. We think diversity is going to help both from a revenue side and more importantly from a mix and margin side of the business.

That's helpful, thank you. Final question if I may. I think Bob mentioned earlier that your goal was to get to 6% or better pretax margin. And I'm wondering if you have any color around that regarding time frame, when we might start to see that type of performance or maybe a quarterly or annual run rate.

Our guidance through the year is 5 to 5.5. As Bob mentioned, if you extrapolate our Q2 numbers, our guidance is about 5 to 5.2, so it's within our annual range. Obviously the back end of the year we expect improvement and we think we'll go up obviously to hit our year-end numbers. We are hopeful that at that point those margin trends will be somewhat sustainable. So, again, from a short-term perspective as we look over the next 18 months, we are striving hard to get to six or better. More importantly, I think as we look long-term in to this business we see the potential for better than six. We are going to work there to get as fast as we can. First things first. Hopefully we get to six relatively soon.

Okay. Thank you for taking my questions.

Thank you, Paul.

Our next question will come from Marcus Kupferschmidt with KRC. Please go ahead.

Good morning, guys.

Good morning.

I want to understand. A quarter ago we talked about how there were, I think you said, like 900 third party dollars in your territory of DirectTV and you thought coming out of the end of '07 that you had fully displaced them. Is that kind of you think about where you are in terms of 1Q and did you see the benefits of that over 1Q?

The answer is yes. We have our markets back. The first quarter we saw about an 11% increase over last year. We saw slight sequential increase from Q4. It's probably important to note that our first quarter with DirectTV this year was our highest revenue quarter ever with them. So, again, it's a important customer. We saw a lot of activity. We have done a lot from a cost perspective there with our employees and really have now the ability to work our employees differently to give them days off to let them have floating schedules and I think the big difference between the first quarter this year and the first quarter last year is we are in a really good position to really get ready for the spike in volume that we expect in the second half of the year. It's somewhat of a seasonal business. We see spikes in Q3 and Q4. Q1 we see a lot of carryover from the balance of the previous year and then we see somewhat of a slow down in Q2 really the way we looked at the business for the last few years. What is different about MasTec this year is we are going to be a great position when the volume comes back to really have the man power and the employees on staff and not have to go through the growing pains that we did in the last few years of making up that volume. No question going into 2008. We are better prepared than we have ever been to meet the challenges and demand of that customer long-term.

Great. So then speaking along those lines, should we assume you got a whole bunch of fixed cost sitting in P&L in the first quarter that you didn't have all the way through the fourth quarter and hence and margin and business is depressed on a sequential basis?

It's somewhat is. At the same time, just from a overall compensation perspective, we pay our technicians based on piece rate. So our technicians are not hourly. So idle technicians don't necessarily cost us all of the labor component. It doesn't necessarily effect us from a labor component; however, it does effect us from all the other intangible costs such as vehicles and fuel and any other costs related to those employees, supervisors, so there is definitely somewhat of a margin hit but it's not a significant as one might think.

Just last thing to clarify, if I understood correctly in terms of energy business, you said some costs are escalating or some things slipped out a little bit and margins are not as good as you thought. Could you clarify, anything more to clarify about what kind of are the moving parts there and where do you think the energy business profile can be year-end '08 relative to what corporate average is right now?

Couple of things on energy. I think we have done a good job of growing that business and obviously some of the growth came from some of the acquisitions there was growth that came organically. Even within the acquisitions we worked hard at helping them grow and investing in their businesses to help them grow. With that comes some growing pains. When you look at our ability to secure $45 million in wind farm contracts this quarter, they barely had revenue in Q1. And as we look at it, we are investing in the future of that business so there is no question that some of the start up and some of the growth comes at an expense. We think it is well worth it. As we look at the margin profile of that business and as we model out the rest of our year, we actually think that could be the best margin business in MasTec when you look at mix opportunity and some of the things we have happening there. We are actually very excited about the margin profile of that business, where we think we are headed, the momentum we got in that business, and where we think we are taking it. Partly the way we are looking at it is we are making somewhat of an investment for the balance, the second half balance of the year and into the future, and we think that investment will pay off very, very well.

Great.

Thank you.

Our final question comes from John Rogers from D.A. Davidson. Please go ahead.

Hi. Good morning. Most have been answered but one thing, Bob, you mentioned growth in your sewer and water business. Is is that a specific project that you've already booked in to backlog or what were you referring to there?

John, this is Jose. We started a joint venture years ago called Globe Tech which we talked about a lot. We made, we purchased the remaining interest in that joint venture in late 2007 . Basically that business centers around doing work for municipalities and governments predominantly for water and sewer, and it's an area of our business that it's the predominant nature of what we call government in our filing. So if you look at our sector break out, the predominant numbering government is the Globe Tech business and it's obviously been growing as a percentage of our total revenues and it's one where we see a lot of upside and a lot of stability here at least for the next few

I guess what I was wondering, was that a specific project or just your impression of call out work there?

It is not a specific project. We work on a lot of different projects, some are smaller than others. It's not one win that is really driving that business. It's a number of projects and a total book of business that makes up the bulk of those revenues.

Okay. Great. Everything else was answered.

Thank you, John.

This does conclude today's Q&A session. I will turn it back over to Jose Mas for closing comments or remarks. Please go ahead.

Again, we are pleased with our first quarter. We think we started to show improved operational performance and expect that to continue throughout the year. I would like to thank everybody for participating today and we look forward to our second quarter call, thank you.

This concludes the teleconference. You may not disconnect your lines. Thank you and have a great day.