MasTec Inc (MTZ) 2017 Q1 法說會逐字稿

Welcome to the MasTec First Quarter 2017 Earnings Conference Call, initially broadcast on May 5, 2017.

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?

Thanks, Christina. Good morning, everyone, and welcome to MasTec's First Quarter 2017 Earnings Conference Call.

The following statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. In these communications, we may make certain statements that are forward-looking such as statements regarding MasTec's future results, plans and anticipated trends in industries where we operate. These forward-looking statements are the company's expectations on the day of initial broadcast of this conference call, and the company does not undertake to update these expectations based on subsequent events or knowledge.

Various risks, uncertainties and assumptions are detailed in our press releases and filings with the SEC. 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.

In today's remarks by management, we will be discussing adjusted financial metrics as discussed and reconciled in yesterday's press release and supporting schedules.

In addition, we may use certain non-GAAP financial measures in this conference call. A reconciliation of any non-GAAP financial measures not reconciled in these comments to the most comparable GAAP financial measure can be found in our earnings release, our 10-Q, our 10-K or on the Investors and News sections of our website located at mastec.com.

With us today, we have Jose Mas, our CEO; and George Pita, our CFO.

The format of the call will be opening remarks and announcements by Jose, followed by a financial review from George. These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes.

We had another great quarter and have a lot of important things to talk about today, so I'll turn the call over to Jose. Jose?

Thanks, Marc. Good morning, and welcome to MasTec's 2017 First Quarter Call.

Today, I will be reviewing our first quarter results as well as providing my outlook for the markets we serve.

First, some first quarter highlights. Revenue for the quarter was $1,158,000,000, an increase of 19% over last year's first quarter. Adjusted EBITDA was $135 million, an increase of 150% over last -- over the prior year's first quarter. Adjusted EBITDA margins were 11.6%, more than double from last year's first quarter. Adjusted earnings per share were $0.59 and cash flow from operations was $154 million.

In summary, we had an excellent quarter. We're very proud of our first quarter results and the momentum we've built over the last year.

But more important than our historical results are the accelerating opportunities we are seeing across our business. While our Oil and Gas segment performed very well in 2016, we knew 2017 would be even better. While we expect strong year-over-year growth in the segment this year, we are now even more encouraged about the opportunities for continued growth in 2018 and beyond. We have been positively surprised by the accelerated demand we are seeing, and we are making further investments in our fleet to take advantage of these opportunities.

We have also seen a substantial increase in the demand of telecommunication infrastructure services during the quarter. We think we are at the cusp of what will be a significant investment in 5G-related wireless services across all carriers, along with continued strong demand for the expansion of fiber facilities across the country. These opportunities, along with both operational improvements and improving market dynamics in our Electrical Transmission business, give us solid confidence in our ability to continue to grow and excel at MasTec.

I am also pleased to announce that we've made our first acquisition in more than 2 years. Subsequent to quarter-end, we've closed on the acquisition of SEFNCO Communications. SEFNCO is a telecommunications service provider primarily servicing the cable TV industry in the West Coast. This acquisition considerably expands our wireline construction capabilities in a geography and with a customer where we've historically had limited exposure. We are very pleased with the quality of their management team and believe we have significant opportunities to help them grow and expand. I'd like to welcome the SEFNCO family to MasTec.

Now I'd like to cover some industry specifics. Our Communications revenue for the quarter was $560 million versus $512 million last year. The increase in revenues was driven by growth in both the wireline and wireless markets, offset by the expected slowdown of our security installation business.

In our install-to-the-home market, revenues were down year-over-year. This decline was driven by both the slowdown in our security business, coupled with the wind down of our Direct 2 You phone delivery trial. It's important to remember that we're coming off a very strong growth year in our fulfillment business, having grown more than 20% in 2016.

We expect 2017 to be down, but at strong historical levels. As we've said before, we believe we are the largest third-party independent fulfillment company in the United States with broad geographic coverage. With strong demand for our customer-touching workforce to help differentiate product offerings, we believe we are well positioned to build this demand in the marketplace.

Our wireless business was up about 6% year-over-year. We expect a solid 2017. More importantly, we are beginning to have better visibility to the long-term investments that will be made in 5G. Every major carrier has now publicly disclosed some of their plans and initiatives for 5G. While we're still probably a year away from major CapEx spending related to 5G by the carriers, we are now more confident of the impact it will have on our business for years to come.

Also, this year, AT&T was awarded FirstNet, a nationwide public safety wireless network. We are confident that FirstNet will have a multiyear positive impact on our business starting in late 2017 or in early 2018.

Wireline revenues for the quarter were up over 30% year-over-year and we continue to see strong demand in everything from electric distribution to fiber rollout and expansion.

In fact, just a few weeks ago, Verizon announced a significant deal with Corning to secure over 37 million miles of fiber cable material over the next 3 years. That's over 12.5 million miles of fiber cable a year starting in 2018.

Just to be clear, I didn't mispronounce that. Yes, I said 12.5 million miles of fiber cable a year from one customer. This, in conjunction with continued strong nationwide fiber deployment projects, both from telephone companies and cable TV companies, give us solid opportunities for growth.

In fact, most of our backlog growth in the first quarter came from these initiatives. We have continued to win work subsequent to quarter-end and expect further backlog growth next quarter. We look forward to providing more clarity on future calls.

Moving to our Power Generation and Industrial segment. Revenue was $47 million for the first quarter versus $81 million the prior year. While backlog has dropped, we expect it to strengthen this quarter. We have been awarded a number of projects subsequent to quarter-end, and in addition, we are in active discussions on a number of larger projects.

Revenue in our Electrical Transmission business was $99 million versus $86 million in last year's first quarter. More importantly, margins were much improved and we continue to build off of our fourth quarter momentum.

While we're not satisfied with our first quarter margins in transmission, it was the best margins we posted in over 2 years. While backlog in our transmission segment was down sequentially, we have also, subsequent to this quarter-end, been awarded a number of projects that will significantly add to backlog in the second quarter.

We're also competing on a number of large awards, and we're confident that 2018 is going to be an excellent year for our transmission business.

Our Oil and Gas pipeline segment had revenues of $456 million for the first quarter compared to revenues of $293 million in last year's first quarter or a 56% year-over-year increase. Backlog also increased to a record $2.3 billion in this segment.

We're off to a great start in 2017. Our backlog is solid, and more importantly, activity for 2018 and beyond continues to strengthen. We have begun to see some constraints in 2017 relative to the availability of pipeline equipment, and we expect it to become a bigger issue as larger projects begin construction.

We have made significant investments over the last few years and really believe this to be a competitive advantage for MasTec. Based on the strength of future projects activity we are seeing, we are again increasing our investment to take advantage of these opportunities.

We are actively involved with our clients on a number of future opportunities in our pipeline segment. At this point, 2018 is shaping up to be another great year, and we're already in discussions for projects starting in 2019. This, coupled with the improvements we are seeing in the shale market, have created a very active and robust market. We are well positioned for future growth opportunities.

To recap, we're off to a great start. We expect 2017 to be another record year, and we're very excited about our prospects going forward across our entire portfolio of businesses.

I'd like to take this opportunity to thank the men and women of MasTec for their commitment to safety, their hard work and their sacrifices. Our people are our most important asset, and it's because of their performance that I'm so excited and bullish about our future.

I will now turn the call over to George for our financial review. George?

Thanks, Jose, and good morning, everyone.

Today, I'll cover first quarter financial results, including cash flow, liquidity and capital structure, as well as our increased full year 2017 guidance expectations.

In summary, we are pleased with our strong first quarter results and to be in the position of increasing our full year 2017 guidance expectation to yet another new record level.

While 2017 is shaping up to be a great year, we are also very excited about our momentum and growth prospects in 2018 and beyond.

As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA. Reconciliations and details of all non-GAAP measures can be found in our press release, on our website and in our SEC filings.

When addressing our first quarter 2017 performance, adjusted results exclude the impact of approximately $7 million net of tax related to our proportional share of an expected project loss on a noncontrolled Canadian joint venture. We acquired this 35% minority joint venture interest as part of the Pacer acquisition in 2014 and have had minimal direct construction involvement since that time, as the joint venture's sole activity is constructing a bridge in Western Canada, a type of service MasTec does not otherwise engage in.

Construction and project management under this venture are directly managed by a third party, and MasTec's interest automatically terminates upon project completion. The project has experienced various delays and increased costs over an extended period, and our joint venture partner currently expects substantial completion toward the latter part of 2017.

While we have reflected the full amount of our proportional share of those projects losses, the joint venture is actively pursuing several viable alternatives for potential recovery.

In addition, MasTec is also pursuing recovery from other parties. Because this joint venture doesn't relate to any current MasTec construction operations, its results continue to be included in the Other segment. And consistent with our prior treatment, we are excluding it from our adjusted results.

Here are some summary comments regarding our first quarter 2017 performance, which by virtually all financial measures represented the best first quarter performance in MasTec history.

First quarter 2017 revenue grew $184 million or 19% when compared to the same period last year, with strong organic revenue increases in Oil and Gas, Electrical Transmission and Communications segments. This represented a record level of first quarter revenue for MasTec.

First quarter 2017 GAAP net income was $40.6 million or $0.50 per diluted share, with both of these metrics representing record first quarter performance levels.

First quarter 2017 adjusted EBITDA was approximately $135 million, $10 million above our guidance expectation. This level compares to $54 million last year, representing a 150% increase.

On a rate basis, first quarter 2017 adjusted EBITDA was 11.6% of revenue, and all first quarter 2016 adjusted EBITDA measures represented record levels of first quarter performance for MasTec.

First quarter 2017 adjusted diluted earnings were $0.59 per share, $0.08 per share above our guidance expectation. This record level compares to $0.02 per adjusted diluted share for the first quarter of 2016, an increase of $0.57 per share.

The primary driver for first quarter results exceeding our guidance expectation was stronger Oil and Gas segment results. Additionally, we were pleased to see continued sequential improvement in our Electrical Transmission segment results.

We ended the quarter with a record level of backlog at approximately $5.7 billion with a sequential $250 million increase in the Communications segment's backlog as we received several new wireline fiber deployment awards that will commence towards the latter part of 2017 and drive growth into 2018 and beyond.

Oil and Gas segment backlog also slightly increased sequentially despite a significant revenue burn during the quarter.

And reported first quarter 2017 backlog is based on our organic operations and does not include any amounts for the April 2017 wireline fiber deployment acquisition announced yesterday.

As a result of our strong first quarter performance as well as our improved outlook, we are increasing our full year 2017 revenue guidance expectation by approximately $200 million to $5.7 billion. We are also increasing our full year 2017 adjusted EBITDA guidance expectation to $575 million or 10.1% of revenue, and increasing our full year 2017 adjusted diluted earnings guidance expectation to $2.45 per share.

Now I will cover some more segment detail regarding our first quarter 2017 results. Oil and Gas segment revenue increased approximately $163 million or 56% compared to the same period last year to approximately $456 million. First quarter 2017 Oil and Gas segment adjusted EBITDA margin was 20.6% of revenue, a 1,390 basis point improvement over the same period of the prior year with this improvement due to the combination of project efficiencies, closeout and mix; a nonrecurrence of a previously disclosed 2016 Canadian project loss; and improved cost and overhead utilization due to higher levels of revenue.

Consistent with our previous 2017 guidance, our current 2017 guidance expectation continues to prudently estimate a moderated second half 2017 Oil and Gas segment adjusted EBITDA margin rate until we have better clarity of weather and other conditions associated with the expected significant level of second half 2017 project activity.

Communications segment revenue increased approximately $48 million or 9.4% compared to the same period last year to approximately $560 million. First quarter 2017 Communications segment adjusted EBITDA margin was 8.7% of revenue compared to 12.1% last year.

The adjusted EBITDA margin rate decrease versus last year is due to the combination of a nonrecurrence of a previously disclosed 2016 $10 million settlement gain from an acquired business, continued growth-related production inefficiencies and approximately $3 million of certain expense reduction actions primarily incurred with the wind down of certain service offering trials within our install-to-home group and the timing of legal and other settlements.

As we've indicated last quarter, we have been experiencing some growth-related production inefficiencies in our wireless and install-to-home operations as we absorb and train a significant level of new employee technicians we added in the past year.

We anticipate Communications segment adjusted EBITDA margin rate will show sequential improvement in the second quarter of 2017 as well as in the second half of 2017, with year-over-year segment adjusted EBITDA margin rate comparisons becoming less challenging during the second half of 2017.

Electrical Transmission segment results reported a fourth consecutive sequential quarterly improvement with segment first quarter 2017 adjusted EBITDA of approximately $4 million or 3.8% of revenue.

As we have previously indicated, simply eliminating 2016 loss levels in this segment will drive sizable improvement in our overall 2017 adjusted EBITDA when compared to 2016, and our first quarter 2017 results show we are well on our way towards achieving this guidance expectation.

That said, we continue to see 2017 as a transitional year for this segment with expected improvement in end-market large project activities in 2018 and beyond.

Power Generation and Industrial segment revenue was $47 million, and while this was generally in line with our guidance expectation, it was a $35 million decrease when compared to the same period last year.

Adjusted EBITDA was approximately $1 million or 1.8% of revenue as lower revenue levels impacted cost and overhead utilization. We expect that second quarter 2017 segment revenue levels, when compared to last year, will decline at a similar rate as our first quarter 2017 results and then expect improved segment revenue levels in the second half of 2017 as we are seeing a good amount of renewable project bidding activity that should lead to higher levels of second half 2017 construction activity.

That said, our current full year 2017 guidance expectation includes a more moderated view of annual revenue in this segment.

To summarize, we had record first quarter 2017 performance with revenue increasing approximately 19% organically and adjusted EBITDA increasing 150% over the same period last year.

Our top 10 largest customers for the first quarter as a percentage of revenue were AT&T revenue derived from wireless and wireline services was approximately 21% and install-to-home satellite and security services were approximately 15%.

On a combined basis, these 4 separate service offerings totaled approximately 36% of our total revenue.

It is important to note that all of these service offerings, while falling under the AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe.

Energy Transfer affiliates was 17%. Comanche Trail Pipeline was 8%. Trans-Pecos Pipeline was 5%. And Duke Energy, Pioneer Transmission, Diamond Pipeline, American Electric Power, Navigator BSG Transportation and National Grid were all 2%.

Individual construction projects comprise 54% of our first quarter 2017 revenue, with master service agreements comprising 46%, and this mix reflects the higher level of current large project activity.

We ended the quarter with a record level of backlog at approximately $5.7 billion with a sequential $250 million increase in Communications segment backlog as we received several new wireline fiber deployment awards.

Oil and Gas segment backlog also slightly increased sequentially to a new record level of $2.3 billion despite a significant revenue burn during the quarter as we finalize several project contracts that were previously in process last quarter for project execution in the second half of 2017.

It should be noted that upcoming 2017 Oil and Gas backlog levels may moderate over the next few quarters as we burn off significant amounts of large project backlog, with potential future large project awards generally tending to be added to backlog towards the end of the year.

And as we stated repeatedly, we believe we are in the midst of a multiyear cycle of long-haul project activity in the U.S. that will drive significant demand for our future services well beyond 2017.

Regarding other areas of the income statement below the EBITDA line, first quarter 2017 depreciation and amortization expense was approximately $43 million or 3.7% of revenue compared to 4% of revenue for the same period last year. Interest expense for the first quarter of 2017 was $12.6 million or 1.1% of revenue compared to 1.2% of revenue for the same period last year.

Finally, first quarter 2017 adjusted diluted earnings were $0.59 per share, well above the same period last year of adjusted diluted earnings of $0.02 per share.

Now I will cover our cash flow, liquidity and capital structure. As we have previously noted, our long-term capital structure is solid, with low interest rates and no significant near-term maturities, and we have an excellent and supportive bank group.

We had strong first quarter 2017 cash flow from operations of $154 million and enter the second quarter with ample liquidity of over $650 million.

Our first quarter 2017 book leverage ratio, defined as gross debt levels divided by trailing 12-month adjusted EBITDA, was 1.7x, exhibiting continued improvement and affording us sizable financial flexibility as we are below our stated leverage target range.

Our first quarter 2017 accounts receivable days sales outstanding, or DSOs, were 70 days compared to 74 days for the same period last year. Our working capital metrics are in excellent shape and slightly better than our expected DSO range in the mid- to high-70s.

Regarding our spending on capital equipment, first quarter 2017 net cash CapEx, defined as CapEx net of equipment disposal, was approximately $28 million, and we also procured approximately $35 million of equipment under capital leases.

Based on our visibility into a multiyear cycle of large Oil and Gas project activity with potential equipment shortage, as well as capital requirements associated with projected geographic expansion in the wireline fiber deployment market, we are increasing our expectation of net cash CapEx for the full year 2017 period to approximately $110 million and approximately $125 million in equipment purchases through capital leases.

The combination of increased levels of full year 2017 capital expenditures, coupled with additional depreciation and intangible amortization associated with the second quarter SEFNCO acquisition announced yesterday, is included in our current full year 2017 depreciation and amortization expense guidance expectation of approximately 3.3% of revenue.

Moving on to our 2017 full year guidance. We are currently projecting annual revenue of approximately $5.7 billion with adjusted EBITDA approximating $575 million or 10.1% of revenue and adjusted diluted earnings per share approximating $2.45.

We anticipate our full year 2017 GAAP income tax rate will approximate 40% and our full year 2017 adjusted income tax rate will approximate 39%, with this difference due to the estimated tax effect of all adjusted items, including the impact of share-based compensation. This expectation does not reflect any potential actions that may be taken by the U.S. government related to corporate tax reform. Although depending on the nature and timing of such changes, it could afford us with significant cash flow and net income opportunities.

Lastly, our share -- estimated share count for diluted earnings per share is about 82.5 million shares for both the second quarter and annual 2017 period. This guidance expectation assumes no 2017 share repurchase activity.

Turning to our second quarter 2017 guidance. We currently estimate that second quarter 2017 revenue will approximate $1.5 billion, which represents a year-over-year revenue growth of approximately 22%.

Second quarter adjusted EBITDA is estimated to approximate $150 million or 10% of revenue, and this represents approximately a 44% increase in adjusted EBITDA when compared to the second quarter of 2016.

Lastly, adjusted diluted earnings per share is estimated to approximate $0.65 per share compared to $0.36 per share in the second quarter of 2016, and this is an increase of approximately 81%.

In summary, we are proud of our first -- our record first quarter 2017 results and pleased to increase our full year 2017 guidance expectation to yet another record level. We have strong and visible opportunities across our end markets and support optimism for multiple years. And our capital structure is in excellent shape, leaving us well positioned to take advantage of the various opportunities our markets afford us.

That concludes our prepared remarks, and I'll turn the call back over to the operator now for questions-and-answers. Operator?

(Operator Instructions) And we'll take our first question from Matt Duncan with Stephens.

So first question I've got is just with respect to the Oil and Gas segment and what's driving the growth here in the first quarter because my recollection is Rover really didn't get going from a construction perspective until the 2Q. Maybe if you could talk about an update on Rover progress. And then what were the projects specifically that we were closing out there in the first quarter that helped the margin level?

So look, Rover is going exactly as we expected. We were able to finish what we needed to do in the first quarter to get that project rolling and going. We expect to finish that project and be pretty much complete by the end of this year. We'll have some cleanup work that goes into next year. I think our Oil and Gas business is pretty broad based. We've got a number of projects that we worked in Q1. Obviously, we were coming off the completion of the Mexican projects. We finished the DAPL project, so we had a couple of projects to finish, a bunch of projects started. And we're seeing a lot of activity in the shales again, of which, quite frankly, we're trying to take advantage of that as best as we can, although we don't have a significant amount of availability left, but we're working it. We've got some pockets of work we can continue to do. So we're just seeing very strong broad-based activity across our entire Oil and Gas group. Maybe with the exception of Canada. I still think we're seeing some weakness in Canada, although we are seeing slight improvements already.

Sure. And then second question, just on outlook for each segment, both from a revenue growth and margin perspective for this year, and in Communications, if you could break it down between the various pieces, that would be helpful as well.

We're super optimistic. I've been doing this a long time. I don't think we've ever seen the broad-based opportunity set that we're seeing today across all of our Communications businesses, quite frankly, across all of our businesses, not just Communications. Specifically, in the Communications, we went into this year knowing we had some headwinds, right? We knew that Google was slowing down. We knew that our Direct 2 You phone delivery service was probably at risk of being shut down. We knew that one of our customers in the security side was going to slow down their business. So we went into this year and we'll probably have, just based on those 3 things I mentioned, somewhere between $120 million and $150 million of headwinds for the year. We had them in Q1. I think we more than offset that, which we were very pleased with. I think we're seeing a lot of activity, and we feel comfortable that we'll be able to offset those headwinds and then some. Not really changing our outlook. I think we still have a relatively conservative outlook for the balance of the year, but we expect it to be a somewhat flattish year and then really expect to see significant ramp going into '18, driven by primarily 2 big factors. One, really, the beginning of 5G. 5G is really not a '17 play, but there's a lot of things happening around 5G that give us tremendous confidence that we're going to start to see a big boost in 2018 for a long time. And then what we're seeing relative to fiber deployment. Some were very active in '17. Others are going to be very active in '18. So you look at what Verizon announced. They're going to be an outer-year play into '18 and beyond, but it's just what's happening in that market today is fantastic. It's way beyond what our expectations were and what we could have hoped for. And I think we'll take advantage of it and I think it'll play well for MasTec and give us again tremendous growth opportunities for year to come -- for years to come.

And we'll take our next question from Tahira Afzal.

So Jose, first question is just I understand the back half, you need to fill out on the pipe side. But if I look at your second quarter guidance, the dip down assumption on margins seems fairly conservative. So any color you can provide on what's your assumptions on profitability and why? Because if your margins are similar to what they were in the first quarter, your guidance should be up by another $0.20.

Yes. Well, I think if you look at Q2 on a year-over-year basis, we are guiding to much improved margins on a year-over-year basis. I think as -- look, as we think about guidance overall in our entire business, we're being somewhat conservative. We understand that. We don't have pipeline margins in our guidance at Q1 levels. We've talked about that in the past. We had an excellent 2016 from a pipeline perspective. We've had an excellent first quarter. The opportunity to continue to deliver on really high pipeline margins is there, but it's about execution and it's about things going right. So we're conservatively modeling that out as the year goes on, whether it's Q2 or the back end of the year. If projects go the way that we hope they can and performance goes well and we execute and we don't have any issues, then the opportunity is there to do a lot better. But I think as we look at it, we've been prudent and conservative based on what we've seen historically, and I think that's kind of how we've built our guidance for the balance of the year.

Got it, Jose. And really, a follow-up to that. More on the telecom side. If you look at Verizon's CapEx spend trends in the first quarter, on the wireline side and the fiber side, it seems they're already up 12% year-on-year. As you look forward, and we try to translate all that fiber miles and quantify it in terms of year-on-year growth, are we looking at the mid-teens for the industry, and much higher for you because you're growing within that? Can you add some perspective on what the 5G and the general fiber upgrade cycle means to you in terms of growth rate?

Improving every day is probably what I would say. On the wireless side, again, every carrier is out there talking about -- maybe a little bit differently each carrier, but they're all talking about their 5G initiatives and what it's going to mean long term. Again, I think we're going to see a lot of activity starting in 2018 across a number of carriers. It's going to be a very active market. We're going to get our share. I think it's going to be very good for our wireless business. We're very excited about that. When we think about the wireline side of it, for us, historically, it hasn't been our biggest business so I think the upside potential for us there is really, really good. I think we can grow it at very high levels. We've done very, very well this year on project wins and really establishing relationships with new customers. We're very excited about our SEFNCO relationship and what that brings to us and the customer relationships that it brings. So we're really excited. We think the opportunity is there for us to have really good out-years in that business. And I think that the sentiment's only getting better. I think we've been very positively surprised with what's happened over the first 4 or 5 months of this year.

We'll take our next question from Noelle Dilts with Stifel.

So first, just focusing on the Communications business. For years, we've sort of talked about wireless being the higher-margin work and install-to-the-home and wireline being a little bit lower. Just given the changing dynamics in the wireline market, how should we think about the margin profile going forward?

I don't think anything changes. I think that wireline has the opportunity to get a lot better. Wireline's always dragged our margins in the Communications group a little bit. It's greatly improved over the course of the last couple -- actually, the last couple of years. I think the opportunity as we get bigger and as utilization picks up, that only gets better. So we're probably very encouraged about -- from current levels, as more of the work moves into wireline, we feel really good about its ability to increase margins and not really drag margins down for the whole segment.

Great. And then switching over to transmission. Given the optimistic outlook you have for '18 and into '19, combined with the improvements that you made in that profitability of that business, how should we think about where you think margins can go over the longer term as we look out over the next few years?

Look, we had -- we actually have had a very good second quarter in terms of bookings in that business. So we're very excited about other future opportunities that exist for us, that we think we'll be successful on some. We're going to see, hopefully, a lot of growth in that business in 2018. I think if we do, there's no reason we shouldn't get back to our historical higher-margin levels in the double-digit side, which are obviously significantly different than where we are today and where we've been in the last 2 years. So again, very excited about that business and where it's headed.

We'll take our next question from Alex Rygiel from FBR & Co.

This is actually Min for Alex this morning. I was wondering if you could provide any additional detail on the SEFNCO acquisition just in terms of trailing 12-month revenue, just what their customer base looks like. I understand it's more cable, kind of who their largest customers are, and just in terms of their margins versus the Communications margins at MasTec.

Sure. So SEFNCO reminds me a lot of the Nsoro acquisition that we made years ago. It was roughly the same size, types of businesses. SEFNCO is a roughly $100 million annual business. It performs at roughly the same margins that we do in our Communications segment. Their biggest customer is Comcast. They work for the other cable companies as well. And what we love about it is it really brings us back into that cable TV space that we haven't been in, in a long time. Really gives us the geography that we haven't performed a lot of work in, which is the West Coast, especially on the wireline side. So it opens up a tremendous amount of opportunities across a lot of different customers, both existing SEFNCO customers as well as MasTec customers. We haven't included SEFNCO in our backlog number, so I think that will definitely help. From a profitability perspective, we think depreciation and amortization for the balance of the year will roughly equate to what their earnings will be. So we don't see a big EPS pickup, but I think we've conservatively guided them for the balance of the year and are really looking forward to seeing them grow and what we can do with them.

Okay, great. That's very helpful. And I'm assuming that they're not in your -- so they are in your Communications guidance so far, kind of flattish revenue, flattish margin?

They are. I think they are conservatively in there.

Okay. The next question comes to kind of oil and gas market. Obviously, it's sounds like Canada is improving a little bit. Any update on Waha and just kind of pricing in general that you're seeing in the market as well?

Look, the market is awesome. I mean, there's so much activity going on. There's an enormous amount of demand for pricing, and RFPs are at historically high levels, both for not just the balance of this year but in '18, '19. Quite frankly, we're having a hard time keeping up with everything. We're having to decide on what we chase and what we go after. Again, the business has tremendous tailwinds. We feel great about it. We think we're going to continue to excel. What we talked today about, there are further investments in equipment. We do think equipment's going to be a big issue in that business. We're already seeing that to some extent. So as all these bigger projects start and the market gets even hotter, we think our competitive positioning in that market is great. So we feel great about it. Canada still is significantly lower than historical levels, but it is improving. It could be a really nice driver for us in 2018. So everything is going great in that business right now and we're really excited. Waha is complete, so there -- a lot of projects announced in the second quarter are complete. We have our equity interest in that line. So excellent project for us.

We'll take our next question from Adam Thalhimer with Thompson, Davis.

Jose, on SEFNCO, you said it'll get you into the cable business, which you haven't been in for a while. What kind of demand trends are you seeing on the cable side?

I think it's similar to all of the other broadband/Internet providers. I think we're -- they're going to have their own rounds of upgrades. They're going to have their own rounds of deepening fiber within their system. So it's a lot of what we're seeing across the industry, just with another customer, and I think it gives us a great customer diversification and the opportunity for us to continue to do that, not just in the West Coast, but in other markets. And this is more of actual wireline construction, not actual installation. So it's a little bit different than what we've done in the past.

Got it. Okay. And then I'm trying to understand your 5G comment. Could there be fiber work in anticipation of 5G that starts this year? And then we're a year away from antenna work that will hit your wireless segment. Is that the right way to look at it?

Well, I think we're still -- it depends on what customer we're looking at, right, and they're all a little bit different. I think everybody is deepening fiber into their system. A lot of the wireless carriers are looking at it. If you specifically look at Verizon and their announcements, I think that's more of a 2018 play anyway because that's really when they'll have a bulk of their wireline construction happening at the kind of levels that they discussed on their Corning announcement. But 5G is a little bit of everything. 5G, like all wireless today, is predominantly on fiber. So I think most of the wireless sites across the country today are fed by fiber. 5G requires that. So as you think about 5G, as everybody expands their fiber network, one of the issues that all wireless carriers are having is they need to densify their networks. We've been talking about that for a very long time. Densification of the networks is critically important. Fiber doesn't densify your network. Fiber gives you the ability to densify your network. So yes, there's going to be a lot of products that get installed on to fiber, whether they're small cells, whether they're micro cells, macro cells. And that's what's going to drive the wireless business for a very long time. So I think everything's happening in conjunction. I don't think that 5G is waiting for fiber to be deployed. It all works together. And I think we're going to see increased activity as everything's happening at the same time.

We'll take our next question from Jason Wangler with Wunderlich.

You mentioned a lot of the equipment issues and ramping up some spending there to make sure that you're in front of that. Could you talk to maybe the labor side of that? Are you seeing any tightness there yet or kind of what your expectations are as you start to deploy that equipment?

So on the pipeline side specifically, which is where we've made those comments, one of the fortunate things for MasTec is we got started really early in a lot of these projects. So we've done a good job of building a solid workforce. We think we've got a fairly loyal workforce and one that's going to follow us from project to project. As we think about equipment, we still rent a lot of our equipment. So our projects are comprised of a significant amount of owned equipment. We think we've got one of the biggest fleets in North America. But in addition to that, you don't want to own all your fleet, so you look at rentals to help you from different geographic projects or projects in general. As equipment gets tighter, obviously, rental prices change and that becomes a tougher market. So some of what we're thinking about doing is just increasing our internal fleet to not have to depend on rentals as much, so it becomes more of an equipment issue than a true labor issue because the labor we've kind of gotten taken care of. But on a pure growth basis, labor is an issue. The market is tightening a little bit. And again, I think based on the growth levels we've had, the amount of volume we have, we think we're an employer of choice and that'll continue to help us long term.

And on the Communications side, the Direct 2 You and install-to-home in general, are those projects now just being looked at of tweaking them, maybe bringing them back out in different ways, and obviously, you'd be involved in that? Or just kind of where do you see that as we take a breather from the tests, if you will?

Again, in our business, we've done a few different things, right? We've had our DIRECTV relationship for a long time. That's kind of what's allowed us to build the fulfillment network that we have. That business is doing well. We've tried to expand and really grow our business and use and utilize our warehouses and our people to do multiple things, and I think that's what we've been exploring. I still think the security market is a fantastic market with great opportunities for MasTec. It just happens to be that one of our customers is slowing down in that initiative. As we look about -- as we look at what was happening with DIRECTV with Sprint, just a product that they threw out as a trial, we ran it for about a year and they've decided to pull back on it. There's always going to be projects like that, that come in and come out. I think we've benefited from that over the last couple of years. This year will be a little bit more of a headwind related to that, but there a lot of other things and other customers we're talking to that, hopefully, over time make that up. So again, that's our business. We're excited about it. We think it's got good long-term potential, but we'll definitely see a little bit of a slowdown in that part of our business this year.

We'll take our next question from Brent Thielman with D.A. Davidson.

Jose, on the Communications margins, to get back to those kind of solid double-digit levels, do you need to see a big ramp in kind of 5G, FirstNet, or just some other initiatives that can kind of get you there?

We've got a couple of issues there, right? We had a lot of ramp last year in our fulfillment business. So I think we're going to get the benefit of that. We're still mining the benefits of that, so we still have a lot of employees that have less than a year tenure in that business. I think as that improves, we're going to see improving margins there. That definitely hit us at the back end of '16. We're still feeling that here in early '17. I think our wireless business -- our wireline business, excuse me, is in a significant ramp, right? We grew 30% year-over-year. But the reality is if you back out the fact that we didn't have the Google -- the levels of Google business in this first part of the year that we did in the last first part, the growth rate was actually a lot greater than that. So we've talked about the fact that there are some depressed margins as you're growing. That -- we'll catch up to that in time. Our wireless business has been relatively flat over the last year or so. As that ramps back up and 5G becomes a bigger part of that, I think, again, we'll be able to leverage in utilization rates, which drive margin. So I'm very optimistic about where we can get to on our margins in Communications, and I think they'll continue to improve. I still think '17, with all the things that'll be starting, will be somewhat of a challenge. But as I look out in the outer years, no reason that our margins should (sic) [shouldn't] get back to historical levels there.

Okay. That's great. And then on Oil and Gas, as you look out over the next few years, what do you think is the kind of bigger opportunity for MasTec? Is it kind of the Canadian market coming back or some of the activity around the shale basins, Permian and such?

I think it's everything, right? Right now, long-line construction is very active. It's going to be very active for years to come. That's kind of what's been driving the market over the last 18 months. As the shales come back, which they're starting to, it's going to further add opportunities and pressure to that business. Canada is an entity unto itself. So as it -- that begins to come back, it's going to have significant impact to MasTec. And I still think Mexico, over the long term, is going to be a really good driver for our business. So I think we've got a lot of opportunities, a lot of areas where, over time, as things develop, we're going to do really well on. And I think it's just a matter of time.

Your next question comes from Bobby Burleson with Canaccord.

So just curious. With FERC, there's been lack of a quorum for a couple of months now and I'm wondering whether or not there's any impact in terms of holding back, if there's some pent-up approval kind of demand that you guys are expecting, if there's any kind of impact from that lack of additional nominees there.

We're not worried about it. Obviously, 2017 for us is a year in which we've got more than we can handle on everything that's already approved. As we look at some outer-year projects, there might be some approvals needed, but we think that's going to get taken care of in short order. So it really doesn't affect our business, and we're not overly worried about that at all.

Okay, great. And then in terms of -- you mentioned you're in good shape labor wise, I'm wondering, in terms of labor costs, whether or not you feel like you need to be proactive about wage increases, considering how tight overall construction labor's getting.

Again, different parts of our business have different dynamics. We feel great about our ability to manage our labor. This is something that we've been doing -- this is our business, right? So we think we've got a good handle on that. Again, we think we've got a very loyal and solid workforce. And as the market moves, we'll adjust accordingly and our customers will pay us accordingly. So again, not something that we're very concerned at how it'll affect our -- or impact us financially.

We'll take our next question from Alan Fleming with Citi.

Jose, maybe another question on how to think about Oil and Gas backlog here. I know George had said that backlog could moderate a little bit over the next few quarters, which I think is understandable given the lumpiness of awards, but do you feel like you're in a position here to enter -- or exit '17 with backlog at similar or higher levels as you are today?

Yes.

Okay. Easy enough. And then maybe, George, a question for you. Given the strength of the cash flow in the quarter, we've seen pretty sustainable improvement in cash flow over the last few quarters. So maybe you can talk a little bit more about some of the changes you've made internally to get cash flow up. And is this just kind of better blocking and tackling on working capital? Or are you starting to see some benefits from maybe better terms and conditions on some of these larger projects that you booked recently?

I mean, it's a little bit of a combination of both. We've certainly been focusing on the blocking and tackling aspects of working capital management. You've seen a pretty sizable reduction in our DSOs over the last, say, 1.5 years. And that's been a combination of blocking and tackling and then some improvement in terms. I mean, we've been able to negotiate and obtain some improvement in terms in some of our project [duty], which is kind of a little bit of a sign of some of the strength of our markets. And so we've been able to benefit from both. And we're very comfortable with where we are today. Obviously, we're sitting at 1.7x book levered. So we're in a great spot with our capital structure.

And Alan, the only thing I'd add to that is significant kudos to all the MasTec team because it's their productivity and execution that have allowed us to improve our margins and make a lot more money, which is obviously going to cash flow. So kudos to them and their ability to deliver that for us.

Our next question comes from Andrew Wittmann with Baird.

My questions were on the pipeline side. I was hoping you could give us a little bit of detail, anything you can give us to help on the characteristics, maybe the basins, customers, project names of the pipeline that you signed in the quarter that I think you mentioned will be going to construction in the second half of the year. Also with that, just wanted to understand the permitting environment around those projects. As you look at them today, are they fully permitted and ready to go? That would be helpful to know, I think.

Yes. Andy, we don't talk about project specifics, so we're not going to get into that. We'll say it again, it's a very active and robust market. What we have in backlog is ready to construct, so we feel very comfortable about our ability to execute on our backlog and deliver it in the time frame that we need to, to support our guidance numbers. As we look at outer-year projects, obviously, there's more stuff left in permitting that needs to be accomplished. Again, we think that's going to be one of the big changes as we look forward, is this administration's desire to permit quicker and to get things active. And I think that sentiment is starting to bleed through at different levels across the country. And I wouldn't say we're seeing a ton of that yet, but I think we're going to and I think that's going to allow permitting and some of the issues that we've had in the past in past years to really not be there or to be a lot better. So we're encouraged by that. Again, it's -- we're seeing increased activity everywhere. We're seeing it in all the shales. We're seeing it in customer plans for outer years. It's a very well-diversified market today, much better than it was last year.

Great. My last question here, my follow-up question is on the 5G comment. I think we can all appreciate that, that does seem like a very significant rollout. But just maybe for comparison to help quantify that, can you compare it to the early days of the 4G rollout or even the 3G rollout in terms of how much business MasTec was doing then? And obviously, you've done some acquisitions over time, just to give us a sense of what it could mean as we get into '18 or '19, to, I don't know, give a magnitude in terms of how it could affect you guys.

Sure. So on a pro forma basis, our best [gen] in wireless was just over $1,400,000,000. Business is just under $1 billion today. So obviously, if we get back to historical levels on -- with deployment activities, we have tremendous opportunities for growth. We're going to attack and go after every customer opportunity that exists. And our hope is that over time, we're going to be able to get back to historical revenue levels that we saw in that business.

And your final question comes from Chad Dillard with Deutsche Bank.

So now that FirstNet has been awarded to you, or one of your key customers, can you speak to the opportunity set (inaudible)? And how big of an opportunity is it for MasTec, if you can quantify it? Also, should we think about the revenue contribution -- how should we think about the revenue contribution ahead?

So on our prepared remarks, we said we expect it to start affecting us either in late '17 or early '18. I think we're not going to get into specifics about rollout or anything like that. We feel very confident that it's going to be a driver of our business for a long time. It's a very ambitious plan. We expect to be a significant participant in it, and we're very excited about it.

And then just secondly, with the $200 million and $25 million guide up in revenue and EBITDA, can you just give us an update on how to think about each segment on a full year basis?

Well, we've talked before. Obviously, we're going to have a sizable growth this year in Oil and Gas, and we've talked about that in the past in terms of expecting that. So I think that view has maybe come up a little bit in terms of our expectation. I think on the Communications side, our expectations are roughly the same. I think you'd include a little bit more with the -- in the second half of the year with the addition of SEFNCO, but basically the same. And in terms of Transmission and Power, the transmission market, we think, will be slightly down year-over-year, basically about the same in '17 as it is in '16. And we're moderating our view a little bit on Power on an annual basis given the softness in the first half of the year.

We'll take a follow-up question from Noelle Dilts.

So just given that you're making these investments in equipment, I guess, a couple of questions. One, I understand that you're maybe shifting some of that from rentals to ownership, but maybe if you can give us a sense of how much you're adding to your owned fleet capacity. And second, when you think about buying and owning equipment for years, how many years do you expect to keep that equipment busy for? And I guess, how confident are you that you'll be able to do that?

Sure. So our total add, I think the incremental CapEx that we're talking about is roughly $50 million versus where our previous guidance was. So it's not like we're talking about hundreds of millions, but we think that's pretty sizable and important. And it's predominantly in 2 areas. One is pipeline and one is in wireline construction. We still -- again, as I was saying earlier, we still rent a significant portion of our pipeline equipment. So our rental expense is probably close to half of what our total expense are. And we always adjust that, so we're always trying to find -- we kind of like being in that 50% to 60% owned. So part of this is just regauging based on the growth of the business that we've had and we expect to have to make sure that we stay there for a longer period of time. And then on the wireline side, it's just -- there's incremental opportunities. We're seeing a lot more. So we always think about CapEx in 2 ways. We think about maintenance CapEx, which really hasn't changed, and then we think about growth CapEx. And I think everything we're talking today is somewhat about growth CapEx and meeting the demands that we're going to see in the future.

And that concludes today's question-and-answer session. Mr. Mas, at this time, I would turn the conference back to you for any additional or closing remarks.

Sure. I'd just like thank everybody for participating on today's call, and we look forward to talking to you again in -- about our second quarter in the next couple of months. So thank you for being here today.

This concludes today's call. Thank you for your participation. You may now disconnect.