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MasTec, Inc. (MTZ)

February 20, 2013 9:45 am ET

Executives

Jose Ramon Mas - Chief Executive Officer and Director

C. Robert Campbell - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Andy Kaplowitz - Barclays Capital, Research Division

Seth Smith - Gradient Analytics, Inc.

Andy Kaplowitz - Barclays Capital, Research Division

Again, for those of you who don't know me, I'm Andy Kaplowitz. I'm the engineering and construction and machinery analyst. We're very excited to have MasTec with us here today. I've seen this company sort of grow into the great company that it is today. Jose Mas is with us. He is the CEO, son of the founder, and he has done a tremendous amount of work on this company and we're very happy to have him with us. Bob Campbell, the CFO; and Marc Lewis is the VP of Investor Relations. You guys kind of know the drill now around these automatic response questions. What I'm going to do is I'm going to ask the first 2 questions just to kind of get a view of sentiment in the room. Then we're going to move into some of the questions. Again, it helps if you guys participate with me and ask questions as well. So let's start with question number one. Do you currently own the stock? One, yes, you're overweight; two, yes, you're equal weight; or three, yes, we're underweight; or fourth, flat out, no. Go ahead.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

A lot of people have been convinced today, Jose, that's good. That's very good.

Jose Ramon Mas

I feel like we're on Jeopardy.

Andy Kaplowitz - Barclays Capital, Research Division

So let's do the second question if we could. What is your general bias towards the stock right now? One, positive; two, negative; or three, neutral.

[Voting]

Question-and-Answer Session

Andy Kaplowitz - Barclays Capital, Research Division

Okay. So a lot of neutral people. It's good for this presentation format because we can -- you can convince some people today. So...

Jose Ramon Mas

I want to meet the negative ones.

Andy Kaplowitz - Barclays Capital, Research Division

So, Jose, one of the things that I really want to ask you, is when I first started covering the company, the company was still very levered to DIRECTV, more communications. And you had a vision of first sort of growing the company and getting into high-growth areas. And also really to get EBITDA margins up. I think those were the 2 goals that you really had. And it seems like generally, you've achieved those goals. There's been some bumps along the way but generally, you've achieved those goals. So now as we look out now over the next 3 to 5 years, what's the new vision for the company, basically?

Jose Ramon Mas

So just taking a step back and I don't think people realize because we've had a lot of growth, we've done very well as a company, we've gone from just under $1 billion in sales to $3.6 billion, $3.7 billion from $50 million in EBITDA, to $325 million, which is the current guidance for '12. We did that from ‘07 to ‘12. And between 2007 and 2012, the markets that we served were just as negatively impacted as the rest of the economy, and I think people don't give us credit for that. We had a great run, but we did it in a market that was choppy. And the market that was choppy over the last few years is really improving. The end -- trends in our end markets are getting a lot better and we’re really had a very early cycle in most of our businesses where we're going to see a lot of growth, a lot of improvement in pricing, a lot of improvement in trends, which I think is going to bode really well for our company for a long time. There's no question that we've made some very good decisions as to the end markets that we want to participate in, and I think, especially when you look at what's happening with the power cycle and with natural gas and with our gas and oil pipeline sector, I think we've got so much room. I think there's so many parts of that business that we're not touching today. I think there's -- I think you're going to see us expand our service offering within our different market sectors to become more of an end-to-end player across all of the end markets that we serve, which I think is going to give us a lot of opportunities. So for us as we talk about the next few years, it's not about the markets that we serve. The markets that we serve are going to be great and those that participate in these markets, all the companies that participate in these markets are going to do very well. For us, it's about execution. We're going to have plenty of opportunities for growth. It's going to be about our ability to execute, to deliver higher margins, which I think we've done a good job at but to your point, we haven't done a great job at. So we've got to get better there and I think we will.

Andy Kaplowitz - Barclays Capital, Research Division

To your point, I mean you've transformed the company. As of gone through, what have you really learned? What have been some of the lessons that you learned over the last few years that will help you as you go over the next 5 years?

Jose Ramon Mas

If you go back to 2007, a lot of our story was about accountability. It was about making sure that we're driving accountability through our company. One thing that I think I've always known but there's no question that it's been driven over the last few years and become very evident, our business is all about people. We're a services business. At the end of the day, we're providing a service to our customers, it's a manual services, a lot of labor involved. There's obviously a lot of equipment and capital expenditures involved. But at the end of the day, it comes down to a person, an individual that's running a particular market, running a particular job and he becomes key to our organization. And our ability to track his performance and manage his performance and hold that individual accountable, both good and bad, drives our business. And I think that's become more evident over the last few years. I think that's where we spend all of our time and focus, is on our people, generating the best reporting mechanisms that we can get about the performance of our people, measuring them, holding them accountable, rewarding them because I think ultimately, those that have the best people in our industry are going to be the most successful. And we've done -- if you go back the last 5 years, I mean we pretty much turned over our entire management team at a field level. And a lot of that happened early on, a lot of that happened in '08 and '09. I think that today, we've got the best team we've ever had at the company and that's what's going to drive our success. So it's all driven in the culture, and all driven in the people and in pushing people to be successful and helping them be successful.

Andy Kaplowitz - Barclays Capital, Research Division

Well I know we've talked about this before, that execution is key. You've just mentioned it again. You've got better people now, but you're still an E&C company and we've seen, even for new guys, we've seen hiccups. What controls have you put in over time to help you avoid the hiccups that inevitably come in this space?

Jose Ramon Mas

So 2 things. There's no question we're an E&C company but we're very different than the E&C company that a lot of people think. So when you think about a big E&C company, you think about the fact that they have multi-billion dollar projects over a very long period of time where they take huge risks, right, because you're taking market risk over an extended period of time, you're taking commodity risks, you're taking labor risks. Our typical project is 3 to 4 months. So we take very little risk. I think we are an E&C company, but at the very low end of the risk profile when you think about E&C, we've got 40% of our business that comes from master service agreements, which are really contracts that are work-order driven. So a lot of our work is given to us on a daily basis. Some of them are very short-term project. But even our 60% of projects that we have, a lot of them are very short term in duration. We do a lot of book and burn, which I think puts us almost in a subcategory of E&C with like companies because we're not taking large project risk profile, which I think is important because you do end up with all of the construction activities that you have. The more you get into the very long cycle projects, the higher the reward, but the higher the risk, and I think we've done a really good job of managing that. And I think part of our DNA going forward is going to be, how do we manage that risk profile between having a larger book of business being longer term in scope versus our normal business, which is very short term in nature.

Andy Kaplowitz - Barclays Capital, Research Division

So you have ramped up -- I mean you've won a lot more large transition projects lately. So as you look at these -- I mean, often a question I get is, MasTec has won several of these jobs, how is it going to sort of keep them altogether and do well on them, because invariably, it’s all of that who -- the people you put on each job, so if your best people are working only 1 or 2 jobs, then what about the other 2 jobs? So how do you manage that as you move up the spectrum, especially in electric transmission?

Jose Ramon Mas

Well, specifically, to transmission, if you think about it, we've said from the beginning exactly what we were going to do. So we started with one big job and we executed that one big job and one of the criticisms we got for a long time is when are you going to announce your next big job? Because it took a while, right? And a lot of that was planned. We didn't want to necessarily win a bunch of jobs upfront and be in a position where we were going to have a difficultly executing on the jobs that we've got. So after 1 year of performance on that job, we did a lot of things, right? We learned a lot about that business. That was a new business for us, large, high voltage transmission projects was new for us. So as we became more familiar with the intricacies of that business, we said we're going to eventually win a second job and we want to have 2 simultaneous jobs working. Then we want to have a third job. And that was -- we've been saying that really since day 1. Well we executed, we got our second job, now we've got our third job. Now we're working 3 jobs simultaneously. What we're saying today is as we're working these 3 jobs simultaneously, we're working to set up a fourth team. I mean that's been what we've been doing for the last few months, is at some point in the future, and it’s probably not in early 2013 but in later 2013, our goal is to have a fourth job going on simultaneously, which gives us the ability to expand and grow our revenues substantially, because each one of those are big. So I think we've grown specifically in that market in a very, very controlled environment. Very methodical, very planned out and I think we're executing to it and I think you'll see it as we continue to deliver on our numbers over the course of the next year and transmission becomes a bigger piece of it. You'll see the numbers.

Andy Kaplowitz - Barclays Capital, Research Division

So let's clear up a misconception I think that some people ask me about is that they say, "Okay, so MasTec is relatively new player in electric transmission so they must have sort of bought their way into the market and did aggressively." Could you talk about that, because these projects generally tend to be high margin and if you execute well, they're very lucrative. But some people said, "Well Andy, they bought their way to the market." What do you say to that?

Jose Ramon Mas

Well, I mean, in essence we did buy our way into the market because we bought a great bunny [ph] , right? We didn't buy ourselves in the market by low bidding on a project and taking the job at a substandard margin. The reality is that every time you win a project, the commentary and the rumors in the industry are, "Well, they must have bought it, or they must have been really low prices to get it." Suffice, whether we win a project or not, you always hear that rumor come out of every single project that ever gets bid, and yet most projects are very good and very effective projects. We knew going into the business, and we spent a long time in the -- in that 2008, 2009 timeframe trying to break into the transmission space in a bigger way. We've always been a smaller player in transmission. We've always done a lot of the smaller utility work. But we wanted to break into the high-voltage world, and it was hard, we were unable to do it organically, incapable. We couldn't get invited at a table. When we get invited, we wouldn't be taken seriously. We thought we would put in very good numbers, customers wouldn't invite us to shortlist because they didn't have the trust and we didn't have the credibility to be able to build those projects. And we knew that. So we knew that the only way to break into that market was to associate ourselves with the team that had the credibility and the background, where customers -- it wasn't just about the size of your company, it wasn't just about your price but it was about a combination of all of it, including ability to perform. And we invested in a company very early on that had a very long track record of very successful transmission builds. They had just started. I mean, the reality is the company was formed specifically for this, to go after high-voltage transmission projects. They had sold a company previously to one of the larger players in the space, and we invested in that company. Early on, we put an equity investment in with an option to buy the rest of the company. And when we jointly won our first project, we exercised our option and bought the company. So again, we had a very specific plan as to how we were going to break into the market. We did buy into it because we didn't build it organically, but once we had the team, and once we understood that we had the capability and the credibility and we had the balance sheet to support it, we were a credible player. I think the biggest success of what we've done in transmission is we've become, in a very short period of time, when a lot of others have tried, we've become a very credible player in that market that's capable of competing with anybody on any single project in the country. We're going to be taken seriously, we're going to have a chance to win and that is a very different place where we're at today than where we were at a couple of years ago. And again, when you look at that market, that's a market that's in a very early stage of the cycle. There's been some transmission awards in the last few years, but the reality is, as you look at the first [ph] schedules and all the projects have been planned, I mean the growth of that business is going to be phenomenal. And again, everybody that's in that business, anybody that's capable of working in the high-voltage space, is going to be successful.

Andy Kaplowitz - Barclays Capital, Research Division

Great. So if we step back for a second, you've got transmission ramping up, you've got pipeline ramping up, and these are your highest margin business. You've got lower margin wins sort of ramping down. What's stopping you from having very good margins over the next couple of years, if anything? I mean, you -- we know you've been sort of dragged down a little bit by the Marcellus stuff from the last couple of years, but now that's done, and so as we look forward, I mean, you really should have double-digit margins, but why stop there? Why not have 12 or 13 instead of 10?

Jose Ramon Mas

Yes, and the only reason -- we should, I mean, the reality is that we should. We keep talking about 10 because we haven't delivered a full year of 10. So we want to be able to say we delivered a full year of 10 and now our goal is x. But there is absolutely no reason why -- if you back out the Marcellus, the 2 jobs, because Marcellus is actually a very good region for us, so the 2 jobs that we had, if you back those 2 jobs off, we are at 10. So the reality is that getting to 10 in 2013 isn't a stretch. But it's a goal that we've set because we want to deliver it. Getting to 11 or 12 in the short-to-near term, it's realistic. I mean, the reality is that if things fall our way, that's a very realistic target and something that when you look at short-to-mid term, we should absolutely be hitting. We're in a very different environment today than we were a few years ago. A few years ago, our markets were struggling, people were struggling to get work. There was a lot of pricing pressure on the markets, that's all turning today. And it's not that it's all hit yet because it hasn't, because pricing pressure is much better but it's going to swing in a big way, I think, to the positive and we haven’t and there's some things that need to happen for that to hit. But as they do, we're going to benefit and there's no reason why we shouldn't do dramatically better than what it is that we're talking about in 2013.

Andy Kaplowitz - Barclays Capital, Research Division

So you do touch a lot of end markets with that leg, have you seen any more positive flavor out of your end markets over the last 3 months? Or is the fiscal uncertainty still weighing on the market? We know specifically, you're doing well in transmission and pipeline. But just generally, you talk about pricing starting to get better, but are we still -- how has it been over the last 3 months?

Jose Ramon Mas

I think it's been improving over the last year. I don't think it's a 3-month issue. We've seen improvements in our markets from the middle of last year across the board. Even in things like electric distribution and telephony wireline. The markets have really struggled for years, a lot of that's driven on housing. Seeing slight improvements in the housing market, I don't think we've -- I don't think the housing market is back by any stretch of the imagination but it's improving, which is good for all of our businesses, it's good for our install-to-the-home business with DIRECTV. So there's a lot of positive trends happening in the business. I mean, when you look at the big growth potential for us, or the big growth in pipeline or the big growth in wireless or transmission, that's more industry-driven. And when -- one of the biggest things that's impacting us is going to be the growth in deep pipeline sector and what's happening in the long haul environment relative to oil and gas pipelines. The pricing, we know pricing is going to react very favorably to that because there's not going to be enough supply to meet the demands that there are. The demands in the shales aren't going away. They're actually increasing and all of a sudden you're going to pile on all these long haul work with really not enough contractors to be able to perform. So pricing is going to come up. I think in the pipeline sector specifically, the fact that Keystone hasn't been approved has been kind of a ceiling on that. I think once Keystone gets approved and there's a very clear timeline for Keystone, that's going to have a big impact across the entire industry, all the way from gathering lines in the shale play to midstream to long haul. So I think that's a very positive development and one that when it happens, will have a big impact on the industry as a whole. So those are drivers that are going to drive our business to the next level. But generally, the economy is improving, we feel it. Our customers are more optimistic. Our customers are talking about '13, '14 and '15 a lot more bullishly than they were 1 year ago. So we're very excited.

Andy Kaplowitz - Barclays Capital, Research Division

What if Keystone doesn't get approved? I mean it's something that unfortunately, we have to be prepared for given sort of -- so I wouldn't say it. But like generally, what if it doesn't get approved? Is there still enough -- are there enough other projects out there? A, you've been mostly shale related. Do you look at the next 3 years and say, your long-haul business is still going to be better than it was because there really wasn't much long haul over the last year anyway?

Jose Ramon Mas

No question. The market will be better no matter what happens with Keystone. The long-haul market will be very active regardless of what happens with Keystone. Keystone is an interesting play to follow and track not just for the opportunities in the U.S. but what's going to eventually happen in Canada because if Keystone doesn't get built and that oil doesn't flow south, it's going to flow west. At some point, they're going to build the pipeline to go west, they're going to export. And that's going to create enormous opportunities in Canada if Keystone doesn't get approved. So we've got to track that closely. We've got to understand what that's going to mean to the market, long term. Regardless, there's a possibility that, that happens anyway, even if Keystone is built, because of all the findings that they're having in Canada. So it's the way that Canada and the U.S. are interplaying, there's a lot of political issues surrounding that, right, whether Keystone gets approved or not between the U.S. and Canadian relationship. So it's something to track. We're very bullish on Canada, we're very bullish on where that market's headed. We want to be a bigger player there. So we're tracking it closely. If it doesn't happen, the market is going to be fine. There's more than enough work today to offset that for the next few years. But obviously, if it happens, it exasperates the problem that much more.

Andy Kaplowitz - Barclays Capital, Research Division

Let me ask you about Canada while we're at it, I mean you bust that core what, maybe 2 years ago though, something like that. Yes, and so it's -- the last time I checked it was a $100 million business, give or take. What's the growth potential in Canada for you? And then, you're going to acquire you're way more into end market or...

Jose Ramon Mas

So we've been there for about 1.5 years. We've doubled the size of the business since we bought it. So we've had a really nice growth. The reality is that the market is much larger than what our current capabilities are to meet it. So we think that the growth potential there is awesome. We're going to grow very nicely, organically, in that market at a normalized cliff. So for us to get hyper growth in that market, we’re probably going to have to do something different, maybe make a subsequent acquisition, which we're looking at.

Andy Kaplowitz - Barclays Capital, Research Division

Okay, great. I want to open up to the audience, please feel free to participate. If not, we'll do a couple more automated questions. But does anybody have any question? Anybody? Over there.

Unknown Analyst

Jose, with the growth in revenue across the businesses, can you talk a little bit about the DIRECTV business? And if there's potential revenue opportunities you could grow market share? What I think, it's one of your better businesses, great cash returns on DIRECTV. And given your growth, is there an opportunity to maybe pick up more installed business from DIRECTV?

Jose Ramon Mas

So we're big fans of our DIRECTV business. Obviously, we're big fans of the installation market. We've had a phenomenal run with DIRECTV over the period over the last 10 or 12 years. They're a company that's gone from being a very small company to today, a very mature company. Their goals and objectives today are different than they were a few years ago. They can move the needle very quickly on what they’re trying to accomplish today. They're managing for cash flow, so they're trying to lower churn, which dramatically helps our upgrade business. We've got service, which is a big performance of our business. And the big driver in that business that -- this figure comes on and off for is installed, and their stated goal is to kind of add a couple of hundred thousand customers a year. They obviously have meet churns. So the installation piece of that business has kind of been flat for the last 3 or 4 years, and 2 years ago, we grew that business to 20%, 1 year before that we grew it at double digits. This last year, it was a marginally -- similar year, it was kind of flat year-over-year. We're expecting some slight growth in '13 versus '12. For us, the majority of the business is service. I mean, 67% of what we do is with existing homes, whether it's upgrades or service calls, and the balance is install. So one of the things that we've always tried to do and we really try to focus on, is within the markets that we serve, we're the largest third-party installation company in that market, period, right? There is no larger third-party installation company that exists in the markets that we serve. That's how many technicians that we put on the road. So we've always tried to find a secondary source of revenue, how do we diversify our revenue base within our installation network? And the biggest opportunity that we have today is AT&T has recently launched a product called Digital Life. They announced it at the Consumer Electronics Show. It's basically a security product, where they're going to compete with the ADTs of the world. They're obviously a big brand. It's a good business. We've been selected as one of the installers for that. So we're one of a very select group that would be installing that product. And that product is launching March. So to the extent that, that product is successful, it's a huge revenue opportunity for us and one where we can really begin to diversify away. We're very keen on the security space. We think security is, regardless of what happens with AT&T, security’s the market that we need to focus on harder and figure out a way to play. There's an installation component and a big service component to security and it ties so well with what we do on our DIRECTV business, that it's a market that we're looking at harder today than we've ever looked at before. Yes?

Andy Kaplowitz - Barclays Capital, Research Division

Alex [ph] ?

Unknown Analyst

There's a lot of talk of deals out of capacity of petrochemical and chemical plants in North America to take advantage of the cheap natural gas feedstock. Do you view that -- this market as attractive, medium term, long term? And is it an area where you would want to develop?

Jose Ramon Mas

I heard natural gas, but I didn't hear the specific market.

Unknown Analyst

Let me say it again. There's a lot of talk of capacity build out in North America of petrochemical and chemical plants to take advantage of the cheap natural gas feedstock. Is it a market that you view as attractive? How far away do you view it as attractive? And if so, would you see to develop into more downstream kind of part of the market?

Jose Ramon Mas

So, for us, if you go back a few years, we purchased a company called Wanzek in 2008. They were pretty much an industrial contractor. History had been in building up on all plants based in Fargo, North Dakota because of where they were based, because of what was happening. They kind of retooled their company and to became one of the largest wind contractors in North America. So they started building renewable energy and more specifically, wind farms, which is when we bought them. We bought them at a point in time where we thought wind was very attractive, wind was going to grow significantly over the next few years as the market demand and obviously the price of gas and oil at the time was very different than it is today. It was a very attractive market for us, one that we penetrated. As we got into that business and we've done well, we're, today, probably the second or third largest wind contractor in the country. And the challenge of wind is it's so dependent on tax credits, right? So it's so dependent on the political flavor of the month, and where they are long term via tax credits. And we've known that. So for the last few years, we've taken a very different path in that business saying, what do we want that business to look like 5 or 6 years from now. And we very aggressively went out and hired a lot of power expertise. So we went out and hired guys from big E&C companies like SNC-Lavalin and Fluor and Bechtel and so on, and built a power team. With really the vision to create an organization that's capable of participating in the construction, specifically of natural gas power plants, because we think that with the price of natural gas where it's at, whether it's our wind business which is a natural hedge to natural gas or our pipeline business, there's going to be in explosive amount of growth every -- we think, almost every future energy plant in this country is going to be based off of natural gas. So how do we play in that long term? It's not a 1- or 2-year business, but how do we set ourselves up to be a bigger player in that industry? And we've been building. We've been working as a sub on some projects. Last year, we were awarded 2 peaker plants that we're currently building, on gas-fired peaker plants. So we are definitely trying to position ourselves to be a much bigger player on that side of the market. Now we're trying to do it organically. We're doing it slowly. We think it's going to offset, over time, the challenges that we're going to face in renewables with tax credits. So as I look at our -- and we've kind of change the name of that business to be power industrial generation, right? Over time, that's going to be a key business for us. Our participation in generating assets and being able to work on the generation side of power, from the construction of a power facility, whatever type -- whatever generation form it may be, whether it's wind, solar, gas fired, biomass, whatever facility is being built, we want to participate in it. We want to build the transition lines that feed from that generating asset to the substations, we want to build the substations, and we want to be involved in the distribution of that power to homes and businesses. So we truly want to be a full end-to-end provider for our utility customers. Now what has the renewable business given us relative to that? I mean, today, we are a major contractor for every major utility that's building out renewables. So if talk about the largest utilities in the country, they all have a renewable portfolio, they're all building out wind and solar, and we are a significant contractor for a lot of them. Our ability to play off that relation to get opportunities on the power side of the business are high. Now we're not -- it's just like all our other businesses, right? We're not going to get an opportunity to do something we've never done before. We not going to be -- we'll have some credibility based on what we've done, but we're not going to have all the credibility that we need to be competitive on a specific project. And that's what we're building. So these projects, these peaker plants were incredibly important for us, not because of what they represent in revenue, not even because of it represent in skill set, but more importantly, it's our resume building. And as we build a resume of being able to build peaker plants and we can take that experience, coupled with the other things that we're doing, we won the terminal station on the southern portion of the TransCanada Keystone pipeline job, that's a big job in the gas facility world. So as we start combining the work that we're doing in gas facilities with the work that we're doing on the power side, we really start building out a very interesting portfolio and resume as it relates to what I think is one of our next big growth engines, is which is the power side of the business -- power generating side of the business.

Andy Kaplowitz - Barclays Capital, Research Division

Any other questions from the audience for now?

Jose Ramon Mas

Going to that point, just one last comment. I mean, if we see -- and I think that's a very -- I think we're going to see that market change a lot over the next few years and then there's going to be an acceleration in that market that hasn't happened yet. And as it does, we'll be very aware and keen on following acquisitions within that market. And there may be a point where we decide, this is a great entry point, this is a nice company that complements our services, and it's a market that we think is going to expand rapidly for the next few years. Then we'll look at that. We've been somewhat hesitant to pull the trigger on acquisition in that market because we still think the market is a little bit early. We don't think the market is where it needs to be for us to really double down yet.

Andy Kaplowitz - Barclays Capital, Research Division

Well then let me just ask you a follow-up question on sort of the power business. If you look at your traditional wind and solar business, I would argue that there are fewer competitors than if you go into like building a natural gas plant. Like when I talk to a lot of E&Cs, or large E&Cs, they'll say, we don't want to really do natural gas plants because there's very low margin and everybody can do them, basically. So how do you factor that in when you're speaking about what ultimately this industrial construction business will be because I worry that if I'm thinking that, that is going to be a high-margin company, this is not going to be high margin when it comes down to it.

Jose Ramon Mas

Again, I think that's where we differ from a lot of the big E&C companies. And if you think about your traditional big E&C company, they tend to be predominantly project management companies. They tend to do a lot less self-perform. We're very different. We're a self-performing construction company. We do a lot of self-perform work. So we're not going to be -- we're never going to build billion-dollar power plants because we're not a project management business. We don't have the engineers and the project management and tools or the perceived value within project management to be competitive on those bids. But where we do really perform and do well is on the physical construction side of that business, where the margins are better. Right? If you're only doing project management and you're only marking up subs, your margins are going to be more limited. But when you're actually doing the work and you have the potential, the risk reward potential of making margins, you're margins are higher. That's the part of the business we want to be in. So we think there's a very interesting niche play within the power side. Not on the really big work, but we think the smaller to mid-size work, we actually think it's an underserved market, where you have some big private companies, which there aren't a lot of public companies in that space. And again, if the market is not growing, it's a challenged business. But if we start seeing a lot of the coal plants start to be decommissioned, you're going to have a huge ramp up in that business and the capacity that doesn't exist to meet that, that's where we think we fit in.

Andy Kaplowitz - Barclays Capital, Research Division

But for instance, like it seems to the peaker as well, are they double-digit margin projects?

Jose Ramon Mas

Yes, they are.

Seth Smith - Gradient Analytics, Inc.

Can we do question 3 from the automated response system? In your opinion, 3 cycle EPS growth for MasTec will be: One, above peers; two, in line with peers; three, or below peers?

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

That's good, 82%. Let's keep that going.

Jose Ramon Mas

We agree.

Andy Kaplowitz - Barclays Capital, Research Division

There's not much you can say about that. Okay. Question 4. In your opinion, what should MasTec do with excess cash? One, bolt-on M&A; two, larger M&A; three, share repurchases; four, dividends; five, debt paydown; or six, internal investment?

[Voting]

Jose Ramon Mas

So they get a vote on our strategy, huh.

Andy Kaplowitz - Barclays Capital, Research Division

Yes, this is a vote on your strategy. Okay, so bolt-on M&A, let's talk about this a little bit. I mean you have used share repurchases relatively often, but the way that you've grown the business is through bolt-on M&A. And it seems like the audience agrees with that. Where are the opportunities right now? We talked a little bit about Cana, it seems like you're very focused on security. How do you balance sort of the risk/reward of bolt-on M&A versus share repurchases, what you've done in the past?

Jose Ramon Mas

When we look at just maybe taking a step back and look at the share repurchases that we did between '11 and '12, we bought back $150 million worth of shares at, I don't know what the average was, CAD 15.84 roughly, high 15s, just below 16. And we did that with a very specific goal, and the goal was, we knew we had to converge. We have $250 million of outstanding converts that we did in late '08, they come due next year in '14. We knew that over time -- we didn't do those in '08, we did those in '10, in '14, they come due, we knew they were in the money in a big, big way and we wanted to -- in a perfect world, we would have bought back all our converts 1.5 years ago and try to get our converts off the table. The problem was that there was such a high premium to the converts because of the options value even though they were trading at right at the conversion price or slightly below, there was a 30% premium on that. So why buy your converts back at a 30% premium when you can go and buy the stock at the straight value and save the 30%. So it made absolutely 0 sense to buy back our converts. So we went on and -- and really, a lot of our strategy around the share repurchase was to offset whatever future potential dilution there was relative to the converts. Now irrespective of that, our next big share repurchase decision will happen in 2014 relatively to the converts. I don't think you're going to see us actively be in the market buying back shares. Our next decision will be what do we do with our converts in 2014? We've got 2 tranches. One is just after the summer; one is at the end of the year. And that will be a time where, based on a lot of things, how much cash we have, what's happening in our business, where is cash flow, we'll make the decision around what we do relative to those converts. So I don't think that's going to be -- I don't think you're going to see us focus on doing another share repurchase plan in 2013, unless, it's value driven. And we've always said we're going to be opportunistic around our stock. And if for whatever reason something happens to our stock that we think is unwarranted, we're going to step in and support it. Relative to M&A, a lot of people think that the bulk of our growth has come from M&A, and I think that's a fallacy. The bulk of our growth has been organic. And one of the -- probably one of the things we don't get enough credit for, things that I think we've done extremely well, is our ability to grow acquisitions after the fact of ownership. I mean, we've had companies that we bought that have tripled revenues, quadrupled revenues. But almost across the board, every business that we bought has had significant revenue growth in one way or another, 2, 3, 4 years our, because I think it goes to a lot of the idea and planning that we put upon buying a company. Why are we buying them? We're not buying them for the sake of buying them. We're not buying them for their revenues. We're not buying them for their margins. We're buying them for what they do to our overall portfolio. And if we don't think that we can dramatically change the growth profile of the business that we're buying, we shouldn't buy it. With that said, there are a lot of opportunities in the M&A market. Towards the end of 2012, it was incredibly active because of what was coming along with tax changes. We were somewhat active in the market, not as active as I would have expected to be early in the year based on what's happening with taxes. But now in '13, you're seeing we probably have as big of a pipeline as we've ever had because you've got a lot of people that are starting to feel better about the market, are starting to see opportunities that they haven't seen in 4 or 5 years, and now don't have the capital to execute on these opportunities. So our strategy for the last 4 years has been we're buying capital-constrained businesses. We're buying business that have good opportunities but for whatever reason, have hit a wall relative to capital. They can't get the dollars necessary to grow. Not to turn their business around, not to fix a broken company, not because they're not making money, but a company that's executing but has hit a wall relative to growth. That's where we fit in. We come in, we give capital, we help them manage their business going forward, and we can grow them, hopefully, on a hyper-growth mechanism. Those opportunities exist. And they exist in a manner where we can get into them at attractive valuations. So when we do the math, and we run all of our internal rates of return, that is our best place for investment. If we can find the companies under the valuation criteria that we've been buying at, we're better served spending our money on growing our business and growing our geographic presence and our customer presence than virtually anywhere else. And to the extent that we can continue to do it, we're going to continue to do it. When we can't do it anymore, then we'll figure out other uses of capital.

Andy Kaplowitz - Barclays Capital, Research Division

A lot of companies have fallen on their swords when they've done your strategy. You really haven't -- I mean, if I look across your businesses, I would agree with you on like 95%, one's like is a little debatable. But generally speaking, you've done exceedingly well. Is it just because you've been able to provide capital to these companies, is it the earn-out strategy that you have, and is there any sort of secret sauce as to why -- and there's a lot of people that don’t own your stock, what can you tell them to make them comfortable as you still probably will do acquisitions over the next couple of years for growth?

Jose Ramon Mas

Look, I think it comes down to, the largest shareholder in this business is my family. My dad came from Cuba in 1959 with nothing but the shirt on his back and built and the business from scratch. And capital preservation is about as important to us as anything else in the world. So when we make an investment decision, we're not taking risks. When we make an investment decision, we've got to know it's going to work. A failure of a company buying a company and it not executing, that's not -- it's not even in our vocabulary. It can't happen, right? So I think part of the success that we've had, we're incredibly conservative buyers. When we buy a business, we're assuming worst case. What happens if this business doesn't execute the way we think in the next 12 to 18 months, how do we get our money out? And most of the businesses that we're buying have very large tangible net worth, they've got large assets that we can redeploy. So every deal that we go into, we figure out what's our worst case scenario. How do get out of this business if it melts and how do we get most of our money back? And when that passes the test, then we feel really comfortable that no matter what happens in that business, we're going to be successful. Now obviously, we buy it because we think we can grow it and we're expecting the success to happen. But it comes from that. So the fact that, at the end of the day, when we're buying a company, it's our money. Not MasTec's money, it's our family's money that's investing in that business and we do not have the luxury of failure, period. It's not going to happen. So that's what drives our business model. And I think that it served us well. We say all the time, we don't participate in auctions of businesses. And we have bankers, bankers, and bankers come and see us and pitch businesses, and we won't participate because it's not our model. Not because it might not work, not because it might not be a great investment decision, but it's just not our model today. And there's enough to do within our model that we don't have to that. And I think that's why we've been successful. We buy people, we buy people that we think can grow their businesses and manage their business. Again, going back to the first comment, our business is about the people, so when we buy a business, it's as much about the people that we're buying as it is business that we're buying. And I think that's a big differentiator in what we do versus anybody else in our space, and I don't expect it to change.

Andy Kaplowitz - Barclays Capital, Research Division

Bob, I want to get you involved for one question, and that is around cash. But again, we've had questions over the years on cash. You've started to do -- your DSOs have improved a bit, you have a goal out there of sort of high 70s. AT&T has been a very tough customer when it comes to sort of receivables. So what are you doing to sort of just improve your DSOs in general? I mean what can we look forward to over the next couple of years?

C. Robert Campbell

First of all, we said all year that 2012 was a much better cash flow generation year, that cash flow from operations and free cash flow -- I have to read the K next week, but we said all year and if you look at the September year-to-date results, we've been generating good cash flow with better DSOs. Specifically with AT&T Wireless, we really turned the corner on that by the end the first quarter of '12. We had a real spike in growth. It was sort of a high-class problem. We had a ton of growth late in 2011 and both MasTec and AT&T were challenged to close out what was really tens of thousands of jobs with a lot of paperwork that's required. We turned the corner on that and we've invested frankly, in systems that will help us on the billing and job closeout side. And frankly, we've had hyper growth in wireless. We went from $70 million in '08, $600 million very, very quickly and we'll do dramatically better than that in 2013. So we've invested in management and systems, high 70s is a good long-term goal or a day-to-day goal. We'll be a little lumpy based on jobs starting and jobs closing out and jobs settling. But with the kind of earnings trajectory that we have and the kind of margin expansion that we expect, a great source of cash flow is just earnings. And working capital will be a little lumpy but better over the next few years. And we will, by the way, spend a little bit more in CapEx. The opportunities we have in transmission and pipeline, we've been steadily investing, especially in those 2 markets for what we think '13, '14 and '15 are going to offer to us. So long answer on cash, but cash flow is clearly better at MasTec.

Andy Kaplowitz - Barclays Capital, Research Division

Let's give questions 5 and 6 of the automated system. In your opinion, at what multiple of 2013 earnings should MasTec trade? One, less than 10x; two, 10x and 12x; three, 13x to 15x; four, 16x to 18x; five, 19x to 21x; 6, higher than 21x.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

16x to 18x. All right, that's pretty good. I would think 19x to 21x, come on. Okay, question 6. What do you see is the most significant investment issue for MasTec? One, core growth; two, margin performance; three, capital deployment; or four, execution/strategy.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

It's all about execution, Jose, and I think you can do it.

Jose Ramon Mas

And it's a good place to be because it's not -- it's a much more difficult place to be when you don't know where your markets are going or you don't know where you're going to generate your revenue. That's not going to be an issue for us.

Andy Kaplowitz - Barclays Capital, Research Division

Excellent. Well, thank you very much for joining us. Appreciate it

Jose Ramon Mas

Thank you for participating.

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Source: MasTec, Inc. Presents at Barclays Industrial Select Conference, Feb-20-2013 09:45 AM
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