MasTec Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 11 speakers on the call.

Operator

Welcome to MasTec's Third Quarter 2023 Earnings Conference Call initially broadcast on November 1, 2023. Let me remind participants that today's call is being recorded. At this time, I'd like to turn the conference over to Mark Lewis, MasTec's Vice President of Investor Relations. Mark?

Speaker 1

On the call. Thanks, Elaine, and good morning, everyone. Welcome to MasTec's 3rd quarter 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 on the financial results, plans and anticipated trends in the industries where we operate.

Speaker 1

These forward looking statements are the company's expectations on the day of the 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 on the call. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, on the call, actual results may differ significantly from results expressed or implied in today's call. In today's remarks by management, we will be discussing adjusted financial metrics on the call. In addition, we may use certain non GAAP financial measures in this call.

Speaker 1

On on the press release. Please note that we have two documents associated with today's webcast on the Investors and Events and Presentations page of our website at mastek.com. There is a companion document with information and analytics on the quarter just ended and a guidance summary to assist in developing your financial models going forward. On both PDF files are available for immediate download. With us today, we have Jose Mas, our CEO and Paul DeMarco, our EVP and Chief Financial Officer.

Speaker 1

On the call, the opening remarks are announced by Jose, followed by a financial review from Paul. These discussions will be followed by a Q and A period, and we expect the call to last about 60 minutes. On the call. We have a lot of important things to talk about today, so I'll now turn it over to Jose so we can get going. Jose?

Speaker 2

Thanks, Mark. On Good morning and welcome to MasTec's 2023 3rd quarter call. Today, I'll be reviewing our 3rd quarter results as well as providing my outlook for the markets we serve. As you all know, we moved up our earnings release in this call by 2 days from our normal cadence. And the forward information we were receiving from some of our segments, we determined that it was important to get our earnings release out to the market as soon as our procedures had reached the point that we had sufficient clarity on the data.

Speaker 2

We appreciate everyone adapting your schedules so that you could join us on this call today. Thank you. On the call. Now some Q3 highlights. Revenue for the quarter was $3,257,000,000 a 30% year over year increase, on organic growth of roughly 10% and a 13% sequential increase, but well below our previous guidance.

Speaker 2

On the call, adjusted EBITDA was $271,000,000 a 10% increase over last year, but again well below our previous estimate. Adjusted earnings per share was $0.95 Cash flow from operations generated during the quarter was $294,000,000 with a $213,000,000 reduction of net debt during the quarter. We expect further cash flow strength during the on the Q4 and the Q1 of 2024, which Paul will cover later. And finally, backlog at quarter end was $12,500,000,000 In summary, we continue to face challenges this year. We now expect full year revenue to be about $1,000,000,000 or 7% below our previous estimates.

Speaker 2

This revenue shortfall is primarily related to the continued challenges in our Clean Energy business, where full year revenues will be off about $900,000,000 versus our initial expectations. The bulk of that shortfall occurred at IEA, which we acquired late last year. As a reminder, on IAA generated approximately $2,400,000,000 in revenue in 2022. While we knew the wind market would be challenged this year, on the Q1 of 2019. We expected the solar market to allow them to achieve revenue growth in 2023.

Speaker 2

We now expect revenues for IEA in 2023 to to be approximately $1,700,000,000 While there is no question we are disappointed in our ability to understand forecasting risks based on project timing, on IEA. IEA to a greater degree than MasTec's legacy renewable business had a customer base that was more dependent on using tax equity to help finance projects. On the financial results. While the Inflation Reduction Act has created significant tax incentives that are expected to have a materially positive impact on the solar industry and our business, on the call. The delay on clear defining the specifics of the law, for example, domestic content, has created a significant delay to certain customers' ability to on Access Tax Equity.

Speaker 2

While this delay has impacted our ability to achieve our projected revenue, on the call. I'd like to make clear that these projects haven't been canceled, but rather delayed. And while there has been some negative commentary on the solar market in general lately, on the Q2 of 2019. We continue to experience significant demand for our renewable services. While we have started a number of new projects in the second half of twenty twenty three, our 4th quarter guidance does not assume new project starts after October.

Speaker 2

So our Q4 guidance is made up of projects we are currently working on. We also believe this to be prudent. It's taken us time to get to know the IE customer base and we believe we are bringing the right scrutiny to both our legacy and IEA projects as we fill our 2024 pipeline and believe we will be much more consistent in our ability to forecast this segment's revenue. On We are disappointed with the forecasting assumptions we made in 2023 and our understanding of projects risks in our revenue assumptions. On We have made significant changes on how we go to market and how we assess projects and risks.

Speaker 2

While we're incredibly disappointed about our performance this year, on our future. The level of interaction we are having with our customers around projects and timing today on

Speaker 3

our earnings call is as good as

Speaker 2

we've ever had in our business. We have a level of verbal and expected awards that gives us an opportunity to significantly grow our clean energy business. While we need to be prudent on timing and understand the risks associated around financing, interest rates and interconnect agreements, on our outlook for this market is unchanged. We expect considerable backlog growth both by year end and into 2024. On the call.

Speaker 2

And while again I'm very disappointed with our 2023 results, I truly believe that the combination of IEA and our legacy Clean Energy business will end up being a great acquisition for MasTec and our shareholders. We will appropriately manage expectations and risks going into 2024 on the call and make conservative revenue assumptions until the market stabilizes. With that said, we expect strong double digit growth revenue in 2024 in our Clean Energy segment. In our Oil and Gas segment, revenues were below our previous estimate as our ramp on the MVP project took longer than expected. On the call.

Speaker 2

Despite this, our full year revenue target of $2,000,000,000 is unchanged with more activity expected in the Q4 than we originally expected. On the call. We now expect the MVP project to extend through the first half of the year. We expect 2024 revenue levels in our oil and gas segment to be slightly lower than 2023, but with slightly better margins as we expect there will be lot less cost plus work versus this year. On our communications segment, revenue fell short of expectations, primarily related to a slowdown in wireless spend.

Speaker 2

On the call. For the full year, we expect revenue from our 3 primary wireless customers, AT and T, Verizon and T Mobile to be down about 14% year over year. On We expect this to be offset by strong growth from our wireline customers. As we look ahead to 2024, on post quarter end, we won a significant maintenance contract for our largest communications customer for services we weren't previously providing. On the call.

Speaker 2

This program should be fully ramped by the Q2 of next year, and we expect over $100,000,000 a year in annual revenues. On this call. This award combined with a number of large wireline program awards under which we are currently performing engineering services that we expect will convert into construction in the first half of next year gives us confidence in our ability to grow our communications revenue in the high single digits for 2024 despite some continued CapEx weakness as some of our customers managed through higher cost of capital. On our power delivery segment, revenue fell short of expectations as we had a significant year over year decline in storm revenue, which also impacted year over year margins along with the number of utilities moderating their spending plans as they dealt with the changing interest rate environment. On the quarter.

Speaker 2

Margins were up sequentially and we expect similar performance in both revenues and margins in the Q4. Over the course of the last few months, on. We've had a very good quarter increasing our market share, on having been awarded increased scope for 2024. Post quarter award activity has been strong on the call. And while we've seen some short term fluctuations in capital spend, we believe the long term fundamentals of the business has only improved.

Speaker 2

On the call. We expect some continued capital discipline on behalf of the utilities, offset by growth associated with transmission and substation work, leading to expectations of single digit revenue growth in 2024 with modest margin expansion. On the call. Before turning the call over to Paul, I'd like to reflect on where we are today. Post pandemic, we took steps to fundamentally transform MasTec.

Speaker 2

On the Q3. In the 3 to 4 years since, we've more than doubled the revenue of the business despite seeing a significant drop in our oil and gas pipeline revenues. We believe that our transformation, which has seen us significantly increase our presence in power delivery and clean energy, positions this company better than at any point in our history. But this transition has been much more difficult than we expected. The 2 power delivery acquisitions we made in 2021 are performing well and have strategically positioned us with significant expansion opportunities for future growth.

Speaker 2

On the call. However, they came with their sets of challenges and setbacks and took a lot of effort and time as we integrated them in 2022. On the call. Much more difficult has been the combination of IEA as our full year performance and revenue deterioration have been difficult to manage and put stress on the organization. On the call.

Speaker 2

While again, not pleased with our performance, I think we have created an optimal structure as we look to effectively grow and manage this business. On our financial results. Our market strategy has been well received by our customers and the relationships we've created, solidified and grown over the last year gives us great confidence regarding our future in clean energy and the market leading position we believe we can capture. On Exiting 2023, we are keenly focused on growing and effectively managing our business for growth, strong margins and cash flow. On the call.

Speaker 2

For the first time in a few years, we have no new acquisitions to integrate, which will allow us to fully focus on the areas that we need to improve. On the call. For those of you new to MasTec, this is my 16th year as CEO. Our revenue for my 1st year as CEO was around $900,000,000 and EBITDA was less than $50,000,000 Those of you that know me know how competitive I am and I always want to succeed and perform. On the call.

Speaker 2

This has been a challenging year, but understand I'm as motivated and determined as ever to make sure MasTec reaches its full potential. On the call. My family is the largest single shareholder at MasTec and our interests are aligned with all shareholders. On the call. I bear a great sense of responsibility in knowing that our shareholders have made an investment with their hard earned dollars in MasTec.

Speaker 2

On the call. I do not take that for granted. I can also say, and I know actions speak a lot louder than words, that I believe we are better positioned today on our website at any point in our history. The long term opportunities in our segments are better than I think people realize. On the call.

Speaker 2

Despite the short term challenges, our long term outlook is intact. Our communications, power delivery on Clean Energy segments give us not only strong revenue growth opportunities, but each segment has the ability for margin improvement. On our long term margin goals are unchanged and have been more impacted not by pricing, but by volume and our ability to absorb costs on higher revenue levels. On the call. We look forward to delivering on these expectations and regaining the confidence of the investment community.

Speaker 2

I'd like to take this opportunity to thank the men and women of MasTec. On the call. Men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty and in providing our customers a great quality project at the best value. I also know how competitive our people are and the desire they have to perform at a very high level. I know they're up for the task.

Speaker 2

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

Speaker 1

On the call. Thank you,

Speaker 3

Jose, and good morning, everyone. First off, I wanted to echo Jose's comments and thank you for the flexibility and accommodating on schedule. We hope the earlier visibility into our results and outlook will provide some value. On our financial results. We are committed to providing clear and accurate visibility into our performance and strategy and we'll continue to work towards that goal.

Speaker 3

On the call. Turning to our Q3 results, MasTec generated consolidated revenue of $3,260,000,000 up 30% year over year 13% sequentially, but below guidance by approximately 13%. We had lower than anticipated activity versus our expectations in each the Q1 of 2019, which I will cover in more detail later. Adjusted EBITDA at $271,000,000 missed our guidance by $90,000,000 driven by decreased operating leverage associated with lower volume, unabsorbed costs due to ongoing project delays and execution challenges on certain legacy projects. Lower than expected adjusted EBITDA also drove underperformance and adjusted earnings per share of $0.95 Overall, it was a very disappointing quarter.

Speaker 3

On a quarterly basis, where we faced a number of challenging developments. We took a hard look at the business and our prospects for the balance of the year, and we believe our outlook appropriately captures the closeout risks and projects that have challenged us this year and the anticipated lower activity with certain customers. On the call. Despite these challenges, we are pleased with the $294,000,000 of cash flow generated by operations during the quarter and the corresponding $230,000,000 of net debt reduction. Turning to some segment details.

Speaker 3

3rd quarter clean energy revenue was $1,100,000,000 and adjusted EBITDA was $58,000,000 or 5.2 percent of revenue. On the call. While we did achieve 12% year over year organic revenue growth in the quarter, revenue and adjusted EBITDA were both

Speaker 4

well below expectations, driven

Speaker 3

by delays in execution of certain contracts and performance challenges on certain legacy projects. While margins held flat with the 2nd quarter, margins were almost 100 basis points below expectations due to lower fixed cost absorption. We also incurred additional costs on the legacy industrial project that reduced margins by almost 100 basis points. This project has been challenging to close out for the past few quarters, but we expect to be off-site in Q4 and believe that we have appropriately accounted for potential risks in our guidance. Our Oil and Gas segment generated revenue of 6 on $72,000,000 in Q3, a year over year increase of 79%, but approximately 20% below our expectation as we saw a slower ramp on the Mountain Valley Pipeline.

Speaker 3

As a reminder, we had to mobilize almost 3,700 crew members to the site. We encountered some delays due to the ongoing legal challenges the project faced even after receiving approval under the debt ceiling relief bill passed over the summer. On adjusted EBITDA was $97,000,000 in line from our rate expectation at 14.5%, but lower than guidance commensurate with the revenue shortfall. On the project and expect construction to be completed in the first half of twenty twenty four. Our communications segment also had less activity than expected with revenue of $824,000,000 $76,000,000 below forecast.

Speaker 3

On the call. We saw continued pullback from our wireless customers in excess of previous expectations and we also experienced moderated fiber spending late in the quarter, which we expect to continue through year end. Adjusted EBITDA was $78,000,000 for Q3 or 9.5 percent of revenue. Lower volume in the quarter impacted absorption of our indirect expenses, lowering our margins by approximately 200 basis points versus guidance. On the call.

Speaker 3

Lastly, our Power Delivery segment had Q3 revenue of $665,000,000 $85,000,000 below guidance and adjusted EBITDA of $57,000,000 or 8.6 percent of revenue. While margins were up 40 basis points from Q2, we fell short of our guidance due to lower utilization of our crews and equipment. Several of our utility customers have indicated their spending will slow down for the balance of the year as they manage annual capital budgets on this higher cost of capital. We began to see pullback late in the Q3, but we expect this to be a short term trend that will be alleviated as we

Speaker 4

move into 2024

Speaker 3

annual budgets are replenished. Emergency restoration services also trended below our expectations and very little activity is expected in the 4th quarter. Backlog as of the 3rd quarter was $12,500,000,000 reflecting a 7 on Percent decline versus the 2nd quarter. The decline was driven by lower near term activity expected in our communication and power delivery MSA work, on the significant Q3 revenue burn in oil and gas and timing of contract executions in our Clean Energy segment. On the call.

Speaker 3

For some additional color, we signed over $500,000,000 of contracts in clean energy alone since September 30 that are not included in Q3 backlog. Additionally after these contract signings, we continue to work on projects under limited notice to proceed that have approximately $2,000,000,000 of contract value. On our call. For our policy, these contracts will be included in backlog once fully executed. We have also signed or received verbal awards total over $300,000,000 for both the communication and power delivery segments.

Speaker 3

These awards are related to work for new customers, geographic expansion or new services with existing clients. Q3 cash flow generated by operations was $294,000,000 on reducing our net debt by $213,000,000 to about $3,000,000,000 The cash flow was driven by improved working capital metrics with DSO and DPO, both improving and now in line with historical levels. DSO improved to 85 days, down from 90 days at Q2, and we expect further improvement in subsequent quarters. For the Q3, net debt leverage improved slightly to 3.4 times and liquidity also improved to approximately $1,200,000,000 Factoring in the developments during Q3, on the call. We now expect 2023 revenue to approximate $12,000,000,000 with adjusted EBITDA of $850,000,000 or 7.1 percent of revenue.

Speaker 3

On the call. This reflects a significant reduction from our prior guidance driven by the near term developments we are experiencing across the business. On the 2020 3 expected results, we feel confident this outlook is appropriately conservative in light of the current market. On the call. From a segment perspective, our Oil and Gas segment full year revenue expectation remain unchanged for 2023 at $2,000,000,000 with adjusted EBITDA margins in the mid teens.

Speaker 3

For the Q4, we expect revenue of approximately $740,000,000 and adjusted EBITDA margins in the low double digits. On full year Clean Energy segment revenue is now expected to be approximately $4,000,000,000 with adjusted EBITDA margins in the low to mid single digits. On the Q3. We have a very strong pipeline of projects and are pleased with the post Q3 project signings, but expect specific project start dates to produce some quarter to quarter variability. Margins are expected to trend lower than our previous expectations due to the continued costs we are with adjusted EBITDA margins similar to the 3rd quarter.

Speaker 3

For full year 2023, we on our communications segment to generate $3,250,000,000 of revenue with adjusted EBITDA margins in the high single digits. On the Q4. We anticipate some further margin pressure versus prior guidance due to reduced operating leverage from the lower revenue expectations. On the Q4 revenue was forecasted at $750,000,000 with adjusted EBITDA margins down slightly from the 3rd quarter. On the call.

Speaker 3

Looking to 2024, we're having good dialogue with customers on ways to drive further efficiency in their capital spend, something we are well positioned to provide through our industry leading scale. Finally, full year 2023 Power Delivery segment revenue is now expected to be $2,700,000,000 with high single digit EBITDA margins. Margins are expected to be lower than previous forecasts due to reduced operating leverage on the Q3 and the expectation of very little emergency restoration work. 4th quarter expectations are roughly similar to Q3 performance for both revenue and adjusted EBITDA. On.

Speaker 3

We've also revised our full year 2023 adjusted earnings per share guidance to $1.75 driven by lower anticipated earnings, partially offset by a lower expected effective tax rate. On. In light of the revised guidance, we now expect to generate cash flow from operations of approximately $500,000,000 for the second half of twenty twenty three and $400,000,000 for the full year. This equates to approximately $200,000,000 of cash flow from operations in Q4. On the financial results.

Speaker 3

Net debt leverage is expected to remain in the low three times at year end, higher than our sustained target of 2.5 times, But we are committed to return to this level next year and we believe our 2024 outlook will readily support our leverage objectives. Recall that Q1 is generally our slowest quarter, so our lower working capital requirements should support continued cash flow generation. On the call. Finally, while we are still early in our 2024 planning process, we felt it was important to provide investors with some preliminary achievable guidance of the disappointing results for 2023. To recap the initial 2024 outlook provided in yesterday's release and expanded on by Jose, we currently expect mid to high single digit revenue growth for the company.

Speaker 3

On the call. We expect this growth to be driven by double digit growth in clean energy, mid single digit growth in power delivery, high single digit growth in communications on a mid single digit revenue decline in oil and gas. We expect each segment to improve margins in 2024, the call, resulting in total company adjusted EBITDA margins of 7.5% to 8%. I'll now turn the call over to the operator for Q and A.

Operator

To allow your signal to reach our equipment. On

Speaker 3

on the

Operator

call. We will take our first question from Alex on Regal from B. Riley. Please go ahead.

Speaker 5

Good morning, Jose and Paul.

Speaker 2

On Good morning, Alex.

Speaker 5

Clearly, this looks like a kitchen sink quarter and probably no surprise given the macro environment and how cloudy it's gotten out there. On But how can we be reassured that the reset here sort of reflects your most conservative assumptions given sort of all the crosscurrents?

Speaker 2

Well, look, there's no question, Alex, that we struggled in forecasting this year in 2023. Quite frankly, we don't want to miss. I think we spent years beating and raising. We took a lot of pride in that. We've obviously struggled here in the last A little bit.

Speaker 2

So we needed to set a base. This is very early for us providing outlooks for 2024 for sure. On both coming off of the results that we were having, and we wanted to give people an indication of what we thought would be a base set of earnings for 2024.

Speaker 5

Helpful. And then, can you talk a bit about your backlog and possibly quantify backlog that Maybe at risk or cancellation and also talk about sort of that base level of backlog that you have from MSAs and how stable that is in this economic environment?

Speaker 2

Yes, it's a good question, Alex. And I think it's important When you think about our backlog, right, because we go through so much scrutiny in our backlog and what it actually takes to put in backlog that we even in 2023, right, we didn't experience on a significant amount of or any really cancellations or delays based on something once it was in backlog. To make it through backlog, we've got to have a signed contract In our Clean Energy business, it means it needs to be a finance project. So backlog is generally not fully reflective on the call. The work that we see in front of us, it's usually understated.

Speaker 2

In our other businesses, it's very heavy MSA driven. Obviously, there's some impact as the MSA, If utilities start to come back a little bit, it impacts your go forward rate, but it doesn't put work at risk. So we feel really good about at least as the initial targets that we've set on 2024. We've vetted them with customers. We've vetted them with backlog.

Speaker 2

Again, we think this is really the entry level base for us as we think about 20

Operator

on the call. On Thank you. We will take our next question from Andy Kaplowitz from Citigroup. Please go ahead.

Speaker 6

Good morning, everyone.

Speaker 2

Good morning, Andy.

Speaker 7

Can you give us some more color into your on Our delivery business. I know you said that several customers push CapEx into next year, but power delivery think it's supposed to be more long cycle and if anything higher rates would seemingly impact Q4 versus Q3. So was it more on a couple of big projects moving to the right, was it broad based delays? And then how are you thinking about the longer term growth profile in that business and your confidence level of reaching your growth target for 2024?

Speaker 2

Yes. Andy, so I kind of break the business up in 2, right? One is comparing to last year. On a full year, year over year comparison, one of the biggest challenges we had, especially from a margin perspective, was the lack of storm work in Q3. So we probably had $50,000,000 decline in storm work on a year over year basis, which impacted again not on margins that impacted revenues as well.

Speaker 2

So I think when you're comparing last year to this year, that was probably the biggest driver of what you see in power delivery. When you compare it sequentially with Q2, right, we were still down. We were down about $35,000,000 in revenue from Q2 to Q3. Some of that was just the transition of projects. We finished some projects.

Speaker 2

We're starting others. We probably didn't get as quick of a start on some of those projects. Some of that comes back. And then I think that the balance of that, which is probably $10,000,000 to $15,000,000 or so was really the beginning of what we saw with some pullbacks in utilities. So it wasn't a huge number, but it was significant.

Speaker 2

It will continue into Q4 to some extent. And then we think that, Again, we talked about these vendor consolidation efforts, which again, we think we've actually fared really well in and position us well going into next year. So as we think about it, right, we'll grow revenue slightly in 'twenty three versus 'twenty two. We've talked in previous calls about some of the contracts that we kind of got out of late last year, early this year that impacted revenue on a full year basis, especially from some of the acquisition activity that we had previously made. So I think it really sets up the year nicely for us in 2024.

Speaker 2

We've come out with on an initial guide of mid single digits in growth. We're hoping that that tends to be conservative. There's a ton of activity out there on transmission and substation and it's an area that we've really focused on. So lots of opportunities for us, but again, really early, we're still in October. On We feel really comfortable that we can achieve that just based on the MSA contracts that we have, the awards that we've been given and what we're expecting from on our client base predominantly in our distribution work.

Speaker 7

Very helpful, Jose. And then maybe just can you give us a little more color into How you're thinking about clean energy at this point and the quality of your customer base, particularly at IA. What's the risk that announcements such as the recent announcement on one of your customers to pause their construction are not just one offs, but are a function of some more challenged customers. And how do you scrub your backlog to make sure you aren't surprised again by the type of announcement you disclosed from that customer.

Speaker 2

Yes. So I mean one of the things I want to be really clear about Because one of the questions we had to ask ourselves over the course of the last few months is, I mean, did we buy an inferior customer base with the acquisition of IA, and I think the flat out answer to that is no, we did not, right? I think we have a great customer base at IA, on customers with lots of history, lots of installed capacity. They know exactly what they're doing. They're customers that in some cases on We're more dependent on different financing strategies.

Speaker 2

It doesn't make them better or worse. It just made them different this year. So I think When we think about the challenges that we had in 2023, obviously, I do think we should have better understood the risk and positioned on the opportunities in the business to be more broad based with different types of clients and that's exactly what we're doing for 2024. So we've spent months on going through every possible project that exists, every project that we're being asked to participate in. We're prioritizing those that we think have a really high degree and level of confidence that are going to absolutely happen in 2024 and that's how we're building our 2024 plan.

Speaker 2

I mean, what really changes is if the market improves, right? If once tax equity gets behind us, which we expect to happen by year end and people get to start financing projects in multiple ways. We think that's going to create a huge on the 2020, which is

Speaker 3

a catalyst of new projects,

Speaker 2

of which many we're going to be involved with, and we think that will be a big catalyst of the business. We're not really including a lot of that as on We think about 2024 because we're not 100% sure of the timing. So again, we're hoping that as the year starts, we've built our plan with on a very solid customer base and then we can grow that based on some of the opportunities are going to come as the year progresses.

Speaker 7

On Appreciate the color, Andre.

Speaker 8

Thanks, Andy.

Operator

We will take our next question from Steven Fisher from UBS. Please go ahead.

Speaker 9

Thanks. Good morning. I wanted to

Speaker 10

focus on the cash on the call. So a little bit specifically in terms of the timing. I think you may have mentioned that the positive cash flow will continue into Q1 of next year. And I'm really just kind of curious about the cadence of how that cash flow will develop on next year. Is it positive you're saying in Q1 and Q2 is maybe a little weaker and then Q3, Q4 again just And I'm curious how the debt reduction might go over the course of the year.

Speaker 3

Yes, Steven, this is Paul. So I think it should be a similar cadence to the year. We haven't laid out each quarter yet, but we do expect Q1 because of weather and normal seasonal challenges to be a lower volume quarter, so that should facilitate less working capital requirement. And then you're right, as we ramp through the on Middle of the year, we'd expect some investment there that hopefully can largely offset with stronger earnings, but on We'd be less cash flow generation in the middle of the year and then some ability to reduce debt going into Q4.

Speaker 10

Okay. That's helpful. And then just on the communication side of things for next year, I think you said high single digits. Maybe you can just clarify that. And within that, I guess, I'm curious and that's the growth.

Speaker 10

On if there's any color you can give in a breakout between wireless and fiber because it sounds like you are experiencing on a bit of a slowdown in fiber as you go into Q4 here. What have you assumed on some of those trends on the Q4 for next year, just to kind of gauge the comfort of getting to what looks like a pretty robust Growth number and estimate given some of the overhangs of what we're experiencing right now from some of these telecom companies.

Speaker 2

On Yes, Steve. So it's Jose. I'd say a couple of things, right? I think this year, we were obviously impacted by the slowdown in wireless. I think our wireline business on is up strong for the full year, will be strong for the full year as we close the year out.

Speaker 2

A little bit of a slowdown in the second half of the year that on We were hoping it wouldn't happen and I think that is some management of CapEx and obviously on As the credit environment changes, we've had different customers do different pullbacks. With that said, we on got a bunch of awards during this year in 2023 that didn't have a lot of volume, that had a lot of engineering associated with the projects We knew the volume would kick in 2024 and these were a lot of the government RDOF funded projects where that initial activity in engineering on It's really important, but it's low dollar and once it turns into construction, it has a meaningful impact. And we have a number of those on starting late Q1, early Q2 going to construction, which are going to have a significant amount of increased revenue in 'twenty four versus 'twenty three. So as we've planned out 'twenty four and again we're really early. We took a very conservative assumption on where wireless goes from here based on the conversations we've had with our customers.

Speaker 2

On and we've kind of built the balance in that growth plan based on really project activity awards from 2023 without making much assumption on the 2020 4th even though there are some opportunities. Again, it's important to talk about bead funding, which we really don't even see impacting the business on 'twenty five because a lot of that's going to be awarded in 'twenty four. So we feel good about our ability to grow that business in 'twenty four. On the Q1 of 2019. Just based on the awards that we've had here in the last few months, we think that's important.

Speaker 2

We've taken a very conservative approach on how we think our customers will guide CapEx based on recent commentary. And again, any improvements to that Should actually allow us to improve on the numbers that we've talked about today.

Speaker 10

But just to clarify, so Are you assuming the wireless business is actually up next year?

Speaker 2

We are not. We are not making that assumption. We're assuming that it's flat.

Speaker 10

Flat. Okay. All right. Thank you very much.

Speaker 2

Thank you, Steve.

Operator

On the call. We will now move to our next question from Justin Hauke from Baird. Please go ahead.

Speaker 6

Hi, good morning guys. A lot of my questions have been answered here, but I wanted to I guess the risk profile of just cost overruns on some of the fixed on price contracts at IEA. You guys, at least as of the last 10 Q, we don't have the one from the quarter, but on the revenue on unapproved change orders has kind of moved materially higher over the last year and a half. And just as we go into 4Q and kind of the annual closeout, the resolution on some of those Through change orders, you talked about a legacy industrial project. I mean, just can you give us some context about what's been driving that balance increasing?

Speaker 3

Yes. So we do we should see a slight reduction when the Q3 numbers come out. But a lot of it is with the legacy industrial projects that we had

Speaker 2

challenges on in 2022 and the early part of

Speaker 3

this year. On in 2022 and the early part of this year. Some of them were resolved in the ordinary course in Q4 and some will work with the customers on the call. We think our contractual obligations that on the call.

Speaker 2

We're recording those. We have

Speaker 3

a very strong track record of realizing those change orders and we

Speaker 6

on the NBP revenue contribution that you're assuming in 4Q and then how much will be there in the first half of twenty twenty four? I know they've on the cost estimate for the project is higher. Just kind of giving some context to on Help us understand how much that's contributing.

Speaker 2

Yes. Look, I think it's unchanged for the full year in 'twenty three. It's just It's heavier on the Q4 than it was in the Q3 because of the delays. Remember, we started ramping that project in September. We had to get roughly 3,700 people with some of the delays.

Speaker 2

And early on in that project, there was a lot of delays just in terms of fully understanding what was going to be allowed and not allowed. We got to that full ramp towards the latter half of the quarter, so it moved some revenue into Q4. And I'd say we're probably at this point, I don't know what they've said publicly, so I don't really want to give a revenue number for 2024, but for us it'll be In the 100 of 1,000,000.

Speaker 6

Okay, fair enough. Thank you.

Speaker 2

Thank you.

Speaker 10

On the call.

Operator

We will take our next question from Neil Mehta from Goldman Sachs. Please go ahead.

Speaker 4

Good morning, Jose, Paul. I wanted to start off on tax. On the call. Have been a big driver of some can you hear me okay, Jose? Sorry.

Speaker 2

We can. Go ahead, Neil. Good morning.

Speaker 4

Okay. On Good morning. I think some of the concerns to your point have been around tax equity and that's Created a lot of the volatility in the Clean Energy segment and you had made a comment that you expect to get a little bit more clarity by the end of this year around that. So Can you talk about what gives you confidence on that? And do you think that's going to translate into greater activity for the new customer base?

Speaker 2

I mean, so the short answer is absolutely. I think there's been an enormous amount of work that's happened since guidance was released on some of the language on the Q2 of 2019. In the summer, I think the industry customers are feeling really comfortable and better about the conversations that have been happening with everybody from treasury to energy to commerce. I think the final language will be out by the end of the year, on the balance sheet. And I think that will spur an enormous amount of activity because it will open up.

Speaker 2

It will give people the understanding of what it means to hit the bonus tax on depreciation opportunities that exist within the bill, which makes tax equity clear, which makes then makes it sellable. And We have a lot of customers who it significantly changes their capital profile and their return profile and they don't want to give it up. So they don't want to commit to tax equity today until they fully on the Q2 of fiscal 2020. I understand what all their bonus opportunities are, and I think we're getting very close to that being finalized, which again, I think adds a tremendous amount of activity to the on And I think it's important to again, we're trying to build our 2024 plan with projects that aren't super dependent on that And then really use that as potential upside as we think about the year. Yes.

Speaker 3

And I would just add, Neil, that direct transfer There's another provision of the IRA that's starting to become much more prevalent, right? I think there was some uncertainty on the how that transaction how those transactions would be effectuated early on, but what we're seeing is more and more developers on renewable power generators finding ways to monetize their tax equity through direct transfer, which as long as it becomes efficient from a cost perspective, from a value perspective, it's a much more efficient from an administrative perspective. So we are positive on developments.

Speaker 4

Thanks, Paul. That's helpful. And then Jose, Paul, the follow-up is just on margins. We spent a lot of time on this call talking about the top line, But margins have been a source of volatility over the last couple of years as well. So can you give the market confidence in the way that you modeling out the margin profile, where do you think the biggest risks are and where do you think the areas for upside surprise could be?

Speaker 2

Sure. Again, as we thought about 'twenty four and then what we're saying here, I think we took again a view as to where we are today and how we're thinking About that with where the revenue is going. We haven't changed our long term margin profile expectations, Which I also think is important. There's nothing that we're seeing in the business that we don't that we think doesn't allow us to reach our previous targets. On If anything, I think we've said, as we've talked about, the full company margins for the year, I think they're based on very reasonable and conservative assumptions with quite frankly upside across the board, right.

Speaker 2

We're starting the year in on mid teens in oil and gas in a year where there's a lot of newer coming on projects where they've traditionally beat those types of margin returns. We think there's upside there. On the communications side of the business. Obviously, we started the year stronger than we had the previous year. We've had a on We've taken a step back here in the second half, but when we think about where they were for 2022, there's no reason we shouldn't get back to those levels on very soon, which are significantly better than where we'll end the year this year.

Speaker 2

Our power delivery business, again, this was this is really the first post on post year 1 after acquisition. So I think there's been some noise in and out of the margins, but I think that we're our ability to hit double digit margins there is on the call. And I think clean energy despite even despite all the challenges that we've had, margins have improved on a year over year basis and held somewhat steady. And I think that with the volume that we're expecting, margins have an opportunity to really increase. So on I feel good about where margins are going to go over time.

Speaker 2

And again, I think we've said a really conservative base level for 'twenty four that Everybody should feel comfortable with.

Speaker 4

Okay. Thank you, both.

Speaker 6

Thanks, Neil.

Operator

On the call. We will take our next question from Marc Bianchi from TD Cowen. Please go ahead.

Speaker 9

Thank you. The first question I had relates to the electric businesses, so clean energy and power delivery. And on You had mentioned and I think like the market has been generally concerned with the higher cost of capital on that's affecting those businesses. So if you think about project development and higher cost of capital, that's one thing for clean energy and then higher cost of capital in the utility sector. On And you mentioned some customers slowing spending.

Speaker 9

So that systemic issue seems to be on the 2020 4, but you made the comment that you've got some of the utility customers picking spending back up on the Q1. Once they renew their budget. So can you kind of talk about how much of that systemic risk do you think is continuing to overhang the business in 2024 and how much of getting cleared up and what the maybe mechanisms are for that?

Speaker 2

Yes. So I think when we think about planning for 2024 and again, we're very early in the cycle, The way we've thought about it is we've had a lot of success in growing our business. So basically either picking up territory or expansion within existing territories in the last on 6 months, right? And we've done that with major customers, with major utilities on both the East Coast and the West Coast. And on We feel really good about that margin expansion.

Speaker 2

And in a normal typical year where we wouldn't have this overhang of on concern relative to what's happening with interest rates and costs, Our growth projections just based on that would be dramatically higher than what we laid out today. So I think we're hedging on the opportunities that we're getting from a growth perspective with some of the challenges we think utilities will continue to face. We're hopeful that as the year develops, on those utilities will actually perform better or have less issues than what we're projecting, which will allow us the opportunity to grow at a faster rate. On the Q1. For us in our power delivery business to set a mid single digit growth rate going into next year is a really low number.

Speaker 2

It's one that is lower than we would have expected. And then when you throw on to that some projects that we've won, that should help that. I think we're being really conservative as we think about on where they are from a capitalization perspective and what they need to do to fund projects. And I'd say it's exactly the same answer on our clean energy business as well.

Speaker 9

Okay. Thanks, Jose. The other one I had relates to oil and gas. So you've got MVP helping on the first half of twenty twenty four, but talked about an overall revenue decline for the year. So it would look like the second half is quite a bit below sort of the $2,000,000,000 run rate that I think you talked about as a steady state level for that business.

Speaker 9

So can you talk about, is it in fact that Did you see the steady state run rate now quite a bit below $2,000,000,000 or is that another maybe source of conservatism?

Speaker 2

No, look, I think we've said for a while that the right level for that business was $1,500,000,000 to $2,000,000 We've been feeling more comfortable that it's on Closer to the higher end of that. We also knew that MVP would present its own set of challenges and that it would start, it would be a lot of revenue in particular periods and it would go away. As I think about 2024, obviously, the first half of the year is going to be a little bit stronger because of MVP. We've got a lot of projects that on We've previously talked about that are filling in 'twenty four. So we actually feel really good about 'twenty four.

Speaker 2

I think The first half will be higher than it was in 2023, the second half will be slightly lower. Again, I think that's based on the projects we know today. I think there's some opportunities on But there's also projects that we know about that are going to start in 2025. On So I think it's going to be a much more consistent year versus the ebbs and flows that we've had this year or quite frankly that we had last year as well in that

Speaker 4

business. Okay.

Speaker 9

Thank you very much.

Speaker 2

Thank you.

Operator

We will take our next question from Brent Thielman from D. A. Davidson. Please go ahead.

Speaker 8

On the 2020. Jose, just one more on the Clean Energy Margins. I guess the question is, does the profile of the on projects in the backlog or under LMP support the margins you're hoping to eventually achieve for that business once that work gets underway? On Or do you need to work through that first before we start to think about something sort of nicely above this mid single digit range?

Speaker 2

If we could hit the volume profiles that we're talking about, the margins associated with our pricing and on the Q3. It definitely allows us to achieve that and we actually think it potentially allows us to achieve more. On So we don't believe we have a pricing issue. We as we look at on a project by project basis as we've been delivering projects this year, project performance at the job level has on the Q2 of fiscal 2020. It's been the absorption of costs.

Speaker 2

It's been more of a problem. So as we get revenue levels to where they need to be, on We start getting into the margin profile, not even that we're talking about today, but over time what we've laid out previously on our longer term outlook.

Speaker 8

Okay. And I guess I'll ask this question on 24 maybe another way. I mean that on the preliminary view sort of mid to high single digit growth for next year. To what degree does that include on executing on through the renewables projects inherited from IEA that you've seen sort of defer thus far this year.

Speaker 2

Brent, I missed a slight part of the question after. Can you repeat the question because it cut out for a second?

Speaker 8

Yes. Jose, I guess The question is just as you think about that 2024 preliminary view for growth, to what degree does that include assumptions for The work from IEA that you've seen deferred so far this year.

Speaker 2

Well, what we've done for 2024 in Clean Energy is we've kind of on Gone back to the start, right, and we took every project regardless of where it came from, whether it was IAA or our legacy business, on projects where we think have very little issues to proceed in 'twenty four And that's how we're building our plan. We're not abandoning any projects. We're not abandoning any customers. To the extent that we can pull them in, we will obviously do that. But we're really trying to build a plan based on a combined work schedule of jobs that we think have the highest likelihood of going and performing well.

Operator

On on. We'll take our next question from Adam Thalhimer from Thompson Davis.

Speaker 4

Hey, good morning. Thanks guys.

Speaker 2

Good morning, Adam.

Speaker 4

Jose, to what extent

Speaker 3

are

Speaker 4

higher rates and macro uncertainty impacting bidding?

Speaker 2

Well, I don't know that they're impacting bidding as much as they're impacting on customers' ability to ultimately perform on projects as a concern in bidding, right? So I think on what it does to our bidding strategy is it really makes us get a very good understanding of where the customer is, what the potential of that job on a go forward basis is and their ability to execute. And to the extent that they can meet that from a cost perspective, right, we're building in our current costs as we know them. We're building on whatever we think may change from a labor perspective or materials, a lot of that gets locked in at bid time. So from a pricing mechanism perspective, we're not overly concerned.

Speaker 2

We're more concerned with making sure that the projects that we're bidding and the time that we're spending bidding on projects Well served relative to the potential of that project moving forward.

Speaker 4

Okay. Sorry, I was kind of more thinking about just The pace of bidding or the flow of bidding or the amount of projects that people are giving you to look at for 2024?

Speaker 2

Yes. And that's the issue, right? It's I mean the amount of work that is being presented, right, or people ask us to bid on on is more than we could ever do. So the challenge is making sure that you're down selecting from that list to a list that you think is really doable. I want to reiterate this because we try to say it different ways.

Speaker 2

The market is incredibly healthy. There is an enormous amount of the same period of time. You can meet dozens and on dozens of customers that have massive portfolios of build plans. The question is how many of those on We'll go forward and when. I think they will all go forward quite frankly or most of them will go forward, but the question is when and that's where we're really spending a lot of time.

Speaker 2

So we're not in the same position that we were in

Speaker 4

on the

Operator

call. It appears there are no further questions at this time. I would like to turn the call back over to Jose Mas for any additional or closing remarks.

Speaker 2

Yes. So just want to take this opportunity to thank everybody again. Thank you for changing your schedules, and we look forward to updating you on our Q4 call.

Speaker 4

Thank you. On the

Operator

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

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MasTec Q3 2023
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