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MasTec, Inc. (NYSE:MTZ)

Q2 2009 Earnings Call Transcript

July 30, 2009 9:00 am ET

Executives

Marc Lewis – VP, IR

Jose Mas – President and CEO

Bob Campbell – EVP and CFO

Analysts

Alex Rygiel – FBR Capital Markets

Liam Burke – Janney Montgomery Scott

Todd Mitchell – Kauffman Brothers

Adam Thalhimer – BB&T Capital Markets

Veny Aleksandrov – Pritchard Capital Partners

John Rogers – D. A. Davidson & Co.

Operator

Welcome to MasTec second quarter 2009 earnings conference call initially broadcast on July 30, 2009. Let me remind participants that today's call is being recorded. At this time, I'd like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Please go ahead.

Marc Lewis

Thank you, Steffi. Good morning everyone. Welcome to MasTec's 2009 second quarter earnings conference call. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995.

In these communications, we may make certain statements that are forward-looking such as statements regarding MasTec's future results, plans, and anticipated trends in the industries where we operate. These forward-looking statements are the company's expectations on the day of the initial broadcast of this conference call and the company will make no effort to update these expectations based on subsequent events or knowledge.

Various risks, uncertainties and assumptions are detailed in our press releases and filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications.

In addition, we may use certain non-GAAP financial measures in this conference call. A reconciliation of any non-GAAP financial measures not reconciled in these comments to the most comparable GAAP financial measure can be found in our earnings release from yesterday or on the investor relations section of our website located at www.mastec.com.

With us today, we have Jose Mas, our President and Chief Executive Officer; and Bob Campbell, EVP and Chief Financial Officer.

The format of the call will be opening remarks and analysis by Jose followed by a financial review from Bob. These discussions will be followed by a Question-and-Answer period and we expect the call to last to approximately 45 minutes. Jose?

Jose Mas

Thank you, Marc. Good morning and welcome to MasTec's second quarter call. First, some second quarter highlights. Revenue for the quarter was $388 million, a 27% year-over-year increase. Net income was up 21% to $19 million. Earnings per share were $0.25 this quarter versus $0.23 in the second quarter of last year, and EBITDA was up 36% to $36 million for the quarter. All in all, we had a slightly better quarter than expected.

Revenue for the quarter was impacted by acquisitions made in 2008. Acquisitions completed posts second quarter of 2008 accounted for about $105 million of our 2009 second quarter revenue. Organic revenue came in as expected, down approximately 7.5% on a year-over-year comparison. I will cover the performance of our different markets in a minute, some of which are doing better than others, but I would first like to make some comments on general market conditions.

While we delivered strong second quarter results, we are obviously in a very difficult overall market. In spite of that, we are seeing significant activity around new opportunities, bids, RFPs etc. Quite frankly, at no point in this company's history, have we ever had the magnitude and diversity of business opportunities that we are seeing today. However, delays in the implementation of the stimulus plan regulations, coupled with resulting lack of access to capital have caused our customers to hesitate on turning those opportunities into workable projects.

Over the course of the last few months, we have been surprised and disappointed by the stagnant nature of new awards. Historically, our company has experienced a significant ramp up in business activity and contract awards heading into the third quarter. This year, we expected that increase to be even more pronounced given the diversity of our service offerings, our involvement in alternative energy projects, and the positive impact we expected to see from stimulus spending.

While we still anticipate an acceleration of business over the next two quarters, the lack of actual committed start dates has tempered our expectations. Again, our business outlook remains positive. We are aggressively managing the company leading up to what we believe will be a period of significant growth opportunities for us. We have spoken extensively over the course of the last two years on our commitment to margin improvement. We feel we have executed extremely well on margin improvement over the last two years and continue to expect to see further margin expansion.

However, in the short-term, margins have been and will continue to be somewhat impacted by utilization levels. We are holding on to our skilled workforce and expect to be in a position to quickly mobilize and react to spikes in activities and volumes. One more general comment related to the first six months of 2009. I'm very pleased with the progress our team members have made from a business development standpoint.

We have been very aggressive in getting in front of both existing customers as well as new potential customers. In difficult economic times, customers take a closer look at their long-term partners. We had done an excellent job of putting ourselves in a position to participate on many more future projects with a more diverse customer base. Now, I would like to cover some industry specifics.

Within our communications group, our install to the home business had a very solid quarter. Revenues of DirecTV were up just under 10% on a year-over-year basis. As stated in our last call, earlier this year, AT&T began selling DirecTV as a bundled product. That relationship has been very successful and has had a positive impact on our operations. We expect revenue with DirecTV to remain strong and increase as we enter their seasonally strongest quarters.

As expected, our wireline communications market continued to struggle. We are seeing reduced levels of maintenance spend from many of our customers and a more moderate approach to fiber rollouts. While we do not expect much improvement in this market in 2009, we are more optimistic today about the potential impact that broadband stimulus spending will have on these markets in 2010.

During this last quarter, we had been involved in discussions with many customers that will be applying for government grants. Currently, applications are due on August 14th and award announcements are expected by November. To recap, over $7 billion have been allocated to broadband stimulus and a large portion of the money has to be used to build physical networks. We expect to get our fair share.

Our wireless market also performed as expected. Our largest customer in this area, AT&T, recently announced CapEx for the first six months of approximately $7 billion and annual CapEx guidance of $17 billion to $18 billion. That translates to the CapEx growth of nearly 50% for the second half of the year. Order activity has been very strong and we expect these markets to deliver strong growth for the balance of the year.

Wireless data growth continues to stress many of the carriers’ networks requiring significant investments in their infrastructure. Our natural gas market continues to face pressure. Activity has been spotty and competition has increased. There are a number of sizeable progress bidding in the next few quarters and we continue to have a very positive long-term outlook. Obviously, natural gas prices are depressed and we believe activity will pick up nicely as prices recover.

Our electrical utility distribution transmission markets also performed as expected. Revenues for these markets where flat year-over-year with distribution revenue declining and transmission revenue increasing. We continue to be very bullish on the long-term outlook of the transmission market and continue working it positioning ourselves to be a bigger player in that sector.

A market that we haven't talked much about is our heavy industrial construction market, which we entered as a result of our acquisition of Wanzek. Earlier this year, we were awarded our largest power plant project. The plant, a combined heat and power plant, will be capable of producing 100 megawatts of power at completion by mid-to-late 2010. We are also currently working with customers on proposals for both geothermal and biomass facilities.

Finally, I would like to cover our renewables market. We have made a significant investment in growing our renewable business and believe that our involvement in this market will lead to solid long-term growth. I spoke earlier about delays in customer spending and I would like to try to quantify some of those comments.

Since the beginning of 2009, we have bid or provided pricing on over $1 billion worth of wind projects. Of that total, we have been formally awarded approximately $100 million, we have lost approximately $275 million, and are awaiting final results on over $600 million worth of projects, a large number of which we believe we have a very high likelihood of winning.

Part of the challenge we are having is that, the number of these proposals and bids have been out since early this year. While pricing activity and dialogue with customers on these projects is very active, final awards and firm start dates are not materializing. However, we believe that this is a temporary issue. We expect a major catalyst to be the adoption of final language and guidelines around the stimulus’ federal government loan guarantee program.

The program currently has allocated $7 billion to be used to pay for credit subsidy costs which will translate in approximately $70 billion of loan guarantees and project spending. That should fund well over 40,000 megawatts of renewable energy projects that would need to begin construction by September 30th of 2011.

Considering that there are less than 30,000 megawatts of installed capacity to date and that installed capacity only increase by 400 megawatts in the US in the second quarter, the efforts and resources required to even approach these numbers is significant. Yesterday, for the reasons I have discussed, we have lowered revenue guidance to approximately $1.6 billion with earnings of approximately $0.85 per share for the year.

While we are disappointed with the level of growth we expect to experience for the balance of the year, it is important to note that we expect to deliver record revenue and record net income for 2009. Also, cash flows are very strong and our balance sheet is in excellent condition. Again, we believe the long-term prospects of MasTec had never been better.

I will now turn over the call to our CFO, Bob Campbell. Bob?

Bob Campbell

Thank you, Jose and good morning. My Q2 headlines are as follows. Q2 revenue was up 27% to $388 million compared with $305 million last year, that's record Q2 revenue. Q2 EPS was $0.25 per diluted share compared to $0.23 last year.

Our margins continue to improve. Q2 gross profit margin improved to 15.4% from 14.9% last year. Q2 EBITDA was $36 million compared to $26 million last year, that's a 36% increase reflecting revenue growth and margin expansion.

EBITDA margin grew to 9.3% compared to 8.7% last year, so we continue to improve margins. Cash flow from operating activities has been strong this year, $52 million year-to-date versus $14 million last year. The improvement is due to better earnings, good collections and minimal tax payments.

And finally, our financial condition and liquidity remained strong and our capital structure is in good shape. In the quarter, we replaced the $55 million Wanzek convertible note with a new $115 million convertible note. The old Wanzek note had an 8% coupon and $12 conversion price and the new note has a 4% coupon and $15.76 conversion price.

Now for the details; Q2 revenue was up 27% to $388 million. The increase comes from organic growth with DirecTV and from acquisition revenue in the wind form and wireless markets. I will cover the top 10 customers in a moment and as I mentioned, it was our record Q2 revenue.

Q2 gross profit margin improved from 14.9% last year up to 15.4% this year. The improvement reflects continued productivity gains and lower fuel costs. Depreciation and amortization was up 63% to $11 million, reflecting primarily the growth in fixed assets, but another big driver is $1.5 million increase in amortization expense for acquisition related intangible assets.

For Q2, G&A expense was flat at 6.4% of revenue. Net interest expense for Q2 was $5.8 million compared to $3.7 million last year due to higher debt and lower interest income. It is worth noting that the annualized interest expense on the new $115 million convertible note is only $200,000 higher than the interest on the $55 million Wanzek note that was redeemed. That’s a result of a 4% coupon on the new note versus an 8% coupon on the redeemed note. I will talk about our capital structure and share count a little later.

Q2 diluted EPS was $0.25 versus $0.23 last year. And as I mentioned, we had a pretty dramatic growth in EBITDA, growing to $36 million from $26 million last year. The EBITDA growth is stronger than the EPS growth, primarily because of a $4.2 million increase in depreciation and amortization, $2.1 million higher in interest, and a higher share count.

For the second quarter of 2009, the ten largest customers were, DirecTV was 30% of total revenue, down from 35% last year. With the future growth in the other markets that Jose talked about, we expect the DirecTV percentage to drop into the 20s over the next year or so and eventually to be under 25% of total revenue. We believe that we have successfully addressed our DirecTV concentration issue.

AT&T was 15% of total revenue, up from 6% last year. The growth is coming from our relatively new wireless business. Duke Energy was 7%; Verizon, 6%; (inaudible) ONEOK and Mortenson were 3% each; Dominion Virginia Power, LaSalle and Progress Energy were 2% each.

Regarding diversification, our top 10 customers that will include one satellite television customer, two telecom customers, three wind form customers, two natural gas pipeline customers and two electrical utility customers. Today, backlog is about $1.7 billion, that’s an 18 month backlog number. The comparable number for Q2 a year ago was about $1.4 billion and it was about $1.7 billion last quarter.

Now, let me make three comments about backlog. First, even though we believe that fiber deployment work will last for many years, our backlog includes only the specific work for which we have current visibility. Second, since almost 60% of our revenue comes from master service agreements or other contracts for continuing services, our backlog includes an estimate of the revenue from those contracts, but it is limited to 18 months.

And finally, for the project work, Jose gave you a pretty thorough review of our different markets and current market conditions. The soft market conditions and project delays that Jose talked about have caused backlog to be flat. As I mentioned, about 60% of MasTec’s Q2 revenue comes from, what we call, master service agreements or other similar contracts for recurring services.

Therefore, unlike many other construction companies, we have a large base of contractual non-project and generally recurring revenue. These master service agreements are generally for three to five years and generally are exclusive for a stated geographical territory. None of them have revenue guarantees, but the revenues are reasonably predictable.

Having said all of that, as Jose said, our electrical utility distribution work and our telecom wireless maintenance work is very soft as number of customers are trying to spend minimal dollars on maintenance. Now, let me talk about cash flow, our financial condition, and balance sheet.

Second quarter net cash provided by operating activities was about $3 million and year-to-date net cash provided by operating activities was $52 million compared to $14 million year-to-date last year. The dramatic year-to-date increase in cash flow from operations comes from higher earnings, good collections and minimal cash taxes.

Our cash flow from operations for both Q2 and year-to-date would have been even better, but we had several cash payouts on legacy legal settlements. This year, we have paid $11 million for legacy legal settlements. If you will remember, we took a $39 million charge in Q3 of 2007 to accelerate closure of some cases going back to 2000 to 2004.

We said at that time that the charge would be about half non-cash and half in cash, and that’s how it is worked out. Also, we have now basically settled and paid the cash for substantially all of the legacy litigation we accrued for in 2007. If you read our litigation footnote in the 10-K and in this 10-Q, you can get more details regarding our settlements. Most of the remaining open litigation has cash and P&L upside, but we don’t attempt to forecast outcomes.

Our cash flow continues to be helped by our tax position. Currently, we have a federal tax net operating loss or NOL of $164 million, which we can carry forward against our future cash tax liabilities. Book taxes for the quarter just ended were about 2%. We expect to resume accruing normal book taxes on a portion of the net before tax earnings next quarter giving us a third quarter tax rate in the range of 11% to 13%.

The Q4 tax rate should be a full book tax rate of about 40% and that would give us a full year 2009 book tax rate in the range of 16% to 18%. Please note that I am talking about our book tax rate for financial statement purposes. Because of our NOL, the overwhelming majority of our book tax accruals are non-cash. To be more specific regarding cash taxes, we expect to pay very modest cash taxes for both 2009 and also 2010.

We may be an almost full tax payer in 2011 and then finally be a full normal tax payer by 2012. Our tax position really helps our cash flows until 2012. At quarter end, our accounts receivable day sales outstanding, or DSOs, were 63 days, down 1 day from last quarter. We always had more room for improvement with DSOs, but I was reasonably pleased to see the DSO improvement in this tough economy.

Given our current business mix, our DSO goal today is to reduce DSOs to 60 days or better. 3 days doesn’t sound like much, but I think 60 day DSOs is a real stretch goal given today’s economy. Every day of DSO is worth over $4 million in cash. Regarding capital spending, we have only spent a $11 million year-to-date, that’s significantly lower than we originally expected due to the slower ramp up of business in 2009 and frankly some conservatism in our estimate.

We have been saying that we expect the CapEx to be some $40 million this year. Now that we are mid-year and generally know what we are going to buy over the rest of the year, we are reducing our estimate to about $20 million to $29 million. We spent $35 million last year. However, we do expect increased CapEx for 2010 and beyond. We are now much larger in size, and our wind form and natural gas pipeline businesses are more capital intensive than the historical core MasTec businesses. We will share our 2010 CapEx estimate with you when we give 2010 earnings guidance.

To summarize our cash flow characteristics, I would say this, EBITDA is going up nicely, DSOs are reasonable and improved, CapEx in mid 20s is modest, and our tax payments are immaterial. Therefore, our cash flow should be very good. At the end of the quarter, we had a strong financial position with cash, cash equivalents, securities available for sale and availability under the company’s credit facility totaling a $198 million, $18 million of the cash is restrictive.

I will talk about our capital structure in just a moment, but we obviously have an extremely solid financial position which gives us an enormous cushion to write up the worst economy that I have experienced in my career. It also gives us what we need to fuel above average growth over the next few years and we have some dry powder to finance acquisitions. I will talk about the securities available for sale which will auction rate securities in just a moment.

Now, let me talk about our capital structure. Personally, we remained very pleased with our overall capital structure and also the recent convertible note transaction which I will talk about in a moment. As I quit capital structure summary, at quarter end, we had $480 million in equity, $313 million of total debt, only $235 million in net debt, that’s net of cash, and we estimate $140 million to $150 million of 2009 EBITDA. Therefore, all of our balance sheet and credit ratios are in very good shape.

Now, let me remind you two things regarding our debt. First, it is very attractively priced and second, almost half of our debt matures in 2017 and most of the remaining debt matures in 2014. For a quick review of the debt, we have the following; $150 million of 7-5/8% 10-year notes maturing in 2017 and that's almost half the debt. We have $115 million in new 4% 5-year convertible note. The note matures in 2014, and it's convertible at $15.76 per share. We currently have no draws on our bank revolver at quarter end and it does support letters of credit backing up our insurance resources [ph].

Now, let me make a few comments about the recent convertible note transaction and I will also cover the secondary stock sale. During the quarter, we improved our capital structure and our liquidity with the sale of the new $115 million 4% convertible note and we substantially reduced the overhang on our stock by assisting Jon Wanzek in his June secondary offering in which he sold 5.2 million acquisition related shares.

When the Wanzek family sold to MasTec last year, we were able to get them to agree to take mostly paper, stock and a note instead of the initial all cash deal. With the recent offering and note redemption, we were able to give them the liquidity they originally sold and at the same time, get rid of the bulk of the stock overhang. By redeeming the Wanzek 8% coupon, $12 conversion price note and replacing it with a 4% coupon note with $15.76 conversion price, we in essence got incremental proceeds from incremental dilution equivalent to selling stock at $20 a share. It was a terrific transaction for us in terms of interest cost, capital structure and liquidity.

Now, let me clarify the accounting for the new convertible note. On the P&L and on the balance sheet, we treat the par value of the note as long term debt and our interest expense is equal to our coupon interest rate, which is lower on a convertible security. For EPS, we use the, if converted method. For this calculation, we add back the interest expense during the period to net income and we add the number of average shares that may be converted to the share count. For most periods, we will be adding back 7.3 million shares to our share count to calculate EPS.

If you need to know more foot note 4 in our 10-Q has additional details or you can call me. Now, back to the rest of our debt structure. Although, we have no draws on our $210 million bank line, I would still like to make three comments about it. First, we were fortunate in July of 2008 to expand the size of the revolver from $150 million up to $210 million. Second, we extended the bank line maturity until 2013 and finally it is very attractively priced. The pricing is LIBOR plus 225 effective August 1st or prime plus 125. Obviously, these terms are significantly better than could be obtained today.

To roundup the debt discussion, we also have about $48 million in other debt. The other debt consists of normal course equipment financing and capital leases. While there are modest maturities of this debt in 2009, they will likely replaced by new normal course equipment financing and capital leases.

In our quarter end balance sheet, we have $23 million of securities available for sale, which are our auction rate securities. We've taken a $11 million life-to-date temporary impairment charge against equity to reflect the estimated market value of these securities. We continue to monitor the market value and liquidity for these securities. In our litigation footnote in the 10-Q, we did disclose that we have filed a binding arbitration claim against Credit Suisse, our investment manager.

In our arbitration claim, we are asking that Credit Suisse buy back our auction rate securities at par which is $34 million. The arbitration is currently set for September, so we should resolve the matter with Credit Suisse this year. Now let me cover some details about our guidance. Our 2009 earnings guidance is revenue of approximately $1.600 billion with fully diluted EPS of about $0.85.

Full year EBITDA should be in the range of $140 million to $150 million. We expect Q3 revenue to be approximately $425 million with EPS of about $0.25. There is an EBITDA reconciliation table in the back of our earnings release. I mentioned this on the Q1 call, but I would like to reemphasize the two items that are negatively impacting our 2009 EPS. First, we have a much higher book tax rate for the full year of 2009 and second; we have much higher amortization expense of acquisition related intangibles.

Note that the amortization is non-cash and almost all of the tax expense is also non-cash because of our NOLs. Our book tax rate on the P&L for 2008 was 11% and we now expect the 2009 book tax rate as a percent of pre-tax earnings to be in the 16% to 18% range.

Also our amortization expense of acquisition related intangibles will grow from less than $4 million in 2008 to about $9 million for 2009. The impact of the jump in tax rate and in amortization expense significantly impacts EPS. In fact, these two items have a roughly $0.21 to $0.23 negative impact on 2009 EPS. I'd also like to make a couple of comments about the profit margins implicit in our 2009 guidance and about our profit margin trends. First, let me talk about pre-tax profit margin which we think is useful since we do not currently pay any significant amount of cash taxes.

Our pre-tax profit margins have grown from 4.4% for 2007 to 4.9% for 2008 and the margin in our revised 2009 guidance is 5%. Also note that the 2009 pre-tax margin is burdened with about $9 million of non-cash amortization of acquisition intangibles. Our EBITDA margins have grown from 7% in 2007 to 8% in 2008 and the EBITDA margin implicit in our May 2009 guidance is 8.8% to 9.4%. As a remainder, our short to medium term pre-tax profit margin goal is 6% to 8% and our EBITDA goal is to hit double digits.

We continue to believe that our goals are very obtainable, although it’s obviously difficult to hit them in this awful economy. The company's guidance assumes continuation of today's pretty awful economy and is not dependant on a recovery, and also assumes a current slow pace of business activity, primarily in the wind, transmission and natural gas markets. The guidance assumes that there will not be any significant stimulus impact on 2009.

On the other hand, it does not assume an economy getting worse than today. Our guidance also does not include any additional impact of our legacy litigation or any mark-to-market valuation adjustments on auction rate securities. These items are excluded either positive or negative.

That concludes my remarks. Now let me turn the call back to the conference operator for the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will take our first question from Alex Rygiel with FBR Capital Markets.

Alex Rygiel – FBR Capital Markets

Thank you. Good morning, gentlemen.

Jose Mas

Good morning, Alex.

Alex Rygiel – FBR Capital Markets

Jose, I appreciate you given us that end market color in the very beginning of your conversation, what would also incrementally helpful is if you could breakout the percent of revenue from each one of those end markets wireline, wireless, natural gas and so on.

Jose Mas

Obviously, our utility revenues were about 36% of the overall total volume for the quarter and if you have listened over the course of last couple of years, our goal is to get that 50%. We think that’s achievable and obviously wind is going to play a big role on that. So when you look at where we are expecting that to be for the balance of the year, its probably within that range, couple of points up or down from that. Obviously, our guidance has been impacted more significantly by wind. So if you add to that backend, we would actually be pretty close to those numbers. Of that, obviously of the utilities when do these -- we have always said, we thought wind would be half of our utilities business. We kind of backup the portion that we are dropping from a revenue guidance perspective and the percentage is pretty much equal out on the communication side of the business. Again, about half of that is -- continues to be our DirecTV business and the other half is pretty evenly split between wireline and wireless.

Alex Rygiel – FBR Capital Markets

And in the second quarter, it appeared as if gross margins from the acquired businesses declined about 500 basis points from the first quarter of 2009. Can you talk a little bit about why the margins in those businesses eroded despite revenues increasing?

Jose Mas

So couple of things. I think it might been you, Alex, you asked a similar question in Q1 about the strength of those gross margins and our answer in Q1 was around the natural gas business and what we said was, going into Q1 of ’09, we actually had a lot of backlog in that business with good margins which obviously helped those acquired businesses from a gross margin perspective. And I think I went to the extent to say that it was probably overstated by the strength in the natural gas business, if you would have backed up the natural gas business, it would have been a lot worse. And since a lot of that natural gas business is kind of fallen into the organic revenue line because we made that acquisition in early Q2 last year, you are kind of seeing what the gross margins for those acquisitions were in Q2. So for those businesses, it wasn’t much different in Q1.

And if you listen to our comments earlier, we kind of say that obviously utilization levels are low and its having a margin on impact, its having a bigger utilization impact obviously on those businesses that we acquired post second quarter of ’08 primarily wireless and the wind business are big piece of our wind business. The wireless business is ramping nicely; we always expected it, so we kind of modeled in an increase in gross margins as the year went on. On the wind side, obviously its volume driven and the fact that volumes continue to be less than what we anticipated that’s driving margins down. And while we had built that into Q2, we are kind of seeing that continue through Q3 and Q4 although they will get a little bit better.

Alex Rygiel – FBR Capital Markets

And lastly, as it relates to AT&T, your comments and their comment with regards to CapEx being up close to 50% in the second half of the year from the first half, have you actually seen an 50% increase in your activity with that customer in the month of July and going into August?

Jose Mas

The way we manage that business, Alex, is we manage it based on work order activity. They actually have laid out for us and certainly [ph] in the year, the projects that they expected us to be working on in 2009. And as the year goes on, they actually give you the individual work orders to begin on those projects. So as we look at Q3, we are expecting a pretty dramatic ramp in the business. I would say, it’s just slightly under 50% and then we are actually expecting a bigger ramp in Q4. The reality is that from -- and that business in particular, the customer continues to give us pretty much the same color they have given us all year, although internally we probably taken a little more tempered approach because the more you push out, obviously the harder it is to complete those projects over that six month period. So that’s a pretty aggressive ramp. Our customer says we are going to do it, our customer expects us to do it and if it works there, we will do it but we haven’t build in a 450% ramp in that business because we think it’s a toll order and we are not 100% sure that they get there, but if the capital is there and the work is there, and then you should see it in our numbers.

Alex Rygiel – FBR Capital Markets

Thank you.

Jose Mas

Thanks, Alex.

Operator

And we will take our next question from Liam Burke with Janney Montgomery Scott.

Liam Burke – Janney Montgomery Scott

Thank you. Good morning, Jose.

Jose Mas

Hi, good morning Liam.

Liam Burke – Janney Montgomery Scott

You talked about the bidding on the wind contracts, roughly $1 billion and the award of $100 million loss of $275 million, what were the deciding factors there and do you seem to feel that you will get a higher percentage of the winds on the balance of the bids, what would be different?

Jose Mas

So it’s a good question. We’ve got obviously a number of different customers that we are working with on the renewable side, especially on the wind side. And we have got a couple customers that we operate under with something similar to what we would call an MSA, we don’t classify them as MSAs and we don’t book them as MSAs, but the reality is that there are certain customers out there that have signed on in some cases two and some cases three, and some cases one, and they pretty much try to either negotiate the work with those selected companies or they bid it to a very small group and you obviously get a higher percentage of that business because there is just less competition. And that’s a big subset of the customer base that we work for there.

Now, we have also worked very hard at expanding our customer relationships. We are trying to get on a lot more people bidders list on reintroducing MasTec and Wanzek really since we purchased them and we have explained to a lot of customers what our capabilities are and I think done a great job at introducing and re-introducing to a much broader market, our skill set which I think is going to pay huge dividends in years to come. So we have seen a lot more bidding activity from some customers that may not have known us well, but in those cases, it may have been more price sensitive. We think we missed many of those -- I think we came in the ones that were price sensitive, we know we were short listed on lot of those projects to may be two or three finalists. We feel good about that, but I think the nature of who we bid to or who we lost those bids to is a little bit different than our historical customer base and I think with our historical customer base, we are going to get a higher win rate and as we look at lot of the bids that are still out there waiting for award, they happen to be with customers that we have historically done more work with that we think will do better with.

But again, I mean in general, we have done a good job at expanding the customer base. We feel good about where we are from a cost perspective in that business. We think we are extremely competitive. We think there is very few people that can be as competitive as us in that industry and we can still do very well at those numbers. So from a positioning standpoint in the market, we are in great shape. What we need is obviously for the activity to hit, the projects to turn into work and as the volume comes in the door, the rest of the storage is going to take shape because the margins are going to fall.

Liam Burke – Janney Montgomery Scott

Okay. And are there any other opportunities in wireless outside of the AT&T business?

Jose Mas

There are and we have been working hard on them. Obviously, Verizon has been very vocal about their LTE project to the long term evolution. They have got two trial markets that are starting at the end of this year and they are going into a bunch of markets in 2010 probably ahead of most of the other carriers. So we have been working hard at expanding our relationship with them. I think we have talked about it on previous calls. We think we are in a good position there and we said all along that our goal is to grow that business and grow the customer base of that business. The one challenge that we are having obviously is that AT&T is significantly ramping it’s spend in the second half of the year; we have got a lot of resources dedicated to obviously meeting that. But we are working hard on expanding the business. We have made some actually pretty nice inroads in the last couple of months, and we hope we can start talking about some solid awards here over the next couple of orders.

Liam Burke – Janney Montgomery Scott

Thank you.

Jose Mas

Thanks, Liam.

Operator

And we will take our next question from Todd Mitchell with Kauffman Brothers.

Todd Mitchell – Kauffman Brothers

Yes, thank you. Can you just give me some little more color on your DTV business being up? Is there anything specifically in the comp and is there any sort of shift in the mix of the work that you saw? What are the dynamics that you are seeing because of those outlines [ph] coming on?

Jose Mas

Sure, a couple of points. Obviously, last year second quarter was negatively impacted by the loss of the BellSouth relationship and obviously when AT&T bought BellSouth, they converted their bundled product from DirecTV to Dish. That affected our second quarter of ’08 a little bit more than traditionally. So our second quarter of ’08 had a bigger sequential drop than in previous years. Obviously, since that changed in ’09 and the whole AT&T family has gone back to AT&A, it’s almost been a double wan [ph]. We had a, quite frankly, a pretty easy comp based on what happened in Q2 of ’08 and in Q2 of ’09, we have had obviously the AT&T which has helped.

So, business was up almost 10% Q2 over Q2. As we look at the balance of the year, we continue to expect to beat last year’s comps and actually to see sequential growth over the next couple of quarters. So business is great. They are obviously doing very well. They are going into the NFL season, they just came out with a very, very aggressive package, in my opinion, probably one of the more aggressive packages we have ever had, it’s a $55 offer, it’s a five month free offer actually including the NFL Sunday Ticket and we think its going to do extremely well and that’s just went live I believe last week, so pretty bullish on that business for the balance of the year. It’s been a real bright spot this year for us.

Todd Mitchell – Kauffman Brothers

Have you seen a shift in the mix between new customer installations [ph] and upgrades?

Jose Mas

Not much. I think obviously a little bit of impact on new installs is just because of the AT&T relationship and were we sit geographically relative to that, but if you look at our overall mix, our existing customer versus new customer mix has just changed by a couple of points.

Todd Mitchell – Kauffman Brothers

Okay. Thank you very much.

Jose Mas

Thanks, Todd.

Operator

And we will take our next question from Adam Thalhimer, BB&T Capital Markets.

Adam Thalhimer – BB&T Capital Markets

Good morning guys.

Jose Mas

Good morning, Adam.

Adam Thalhimer – BB&T Capital Markets

Jose, with regards to the outlook for some of these wind projects to move forward, I guess it would have a couple of difficulties, one might certainly with the credit markets, you got uncertainty related to stimulus. And I guess the third bucket would be the economy and decreased load growth. It seems like credit market is getting a little healthier, you might get some clarity on stimulus in the next month or so. How that [ph] factors the economy and the lower load growth in booking these projects moving forward?

Jose Mas

You know, Adam, we are actually quite surprised with the number of projects that are on hold, that currently have PPA agreements executed. So many of the projects that we have been quoting many of the customers that we have been talking to actually have power purchase agreements signed with utilities, their issue is financing. That’s a very good sign because it obviously gives those forms the revenue source for which they are going to make their business successful, so it truly becomes an issue of getting the right balancing [ph] form and many of them are accounting on the loan guarantee program to start to a project. So when we look at the pending $600 million bucket that we are talking about, we actually think that, that business is very healthy with the exception of obviously the support of the financial credit markets. We think that’s going to improve.

You have got a lot of different customers and developers in the wind mix, you have got big companies, you have got small companies and obviously you have had some that have been somewhat active in 2009 and many that were active in 2008, that haven’t been active in 2007. So I think it has a lot to do with geographic location of where your resources are, where you can potentially build and I think there is certain parts of the country, there obviously going to be a lot more active than others based on renewable portfolio standards at specific states. So I actually do not think that that’s going to have a big impact to the overall wind business as we look at ’10. The wind business in ’09 is going to be significantly down from where it was in ’08. On a go forward basis, only 1,200 megawatts were installed in the second quarter which is a very, very low number. And we think there is just enough out there, even the stuff we haven’t bid that were just talking to customers about, we think there is a huge funnel of opportunities out there that are in a good shape to go forward, so we feel good about that.

The other thing that we really haven’t talked about today and we really tried to stick to the loan guarantee program in the stimulus because it’s what we really think should create a catalyst in the short term. But obviously some of these regulations update sign to them, some of the tax credits expire if you have a start to construction by September of ’10 obviously the loan guarantees go through (inaudible) projects by 2011. So there are certain things happening that I think are going to spur investment and the big one out there that we really not giving -- what I am talking a lot about could ultimately have a big impact, is the national renewable portfolio standard in the house, part of the energy bill, it was 15% national RPS [ph], its obviously being discussed in the senate. It’s still important to note that only 2% of our energy or just under 2% of our energy comes from renewable. So even 15% which is a much lower number than what was being talked about is a huge increase and a dramatic number that would force a lot of utilities across the country to sign PPAs and go forward. The economy plays a role, but there is -- I think there is so much other energy and interest around this that, its not going to have us big of an impact.

Adam Thalhimer – BB&T Capital Markets

Well, thanks for that color. And then, I mean I guess as an analyst as I look at the $250 million which you took out of the H2 ’09 guidance, I mean if that’s mostly due to wind and if we feel pretty confident that those projects will start to move forward next year, I mean is that a number that we could kind of bake into 2010 and kind of view that as real projects that we differ that’s growth versus ’09?

Jose Mas

You know I think there are undoubtedly, we are going to see a lot of that. Things are getting pushed out, there is a lot of plans for ’10 and our ‘10 view hasn’t really changed from what we originally anticipated because we got a lot of customers they haven’t put anything out to bid, they haven’t really looked for pricing, and we know what their ’10 activity looks like and it’s a lot more of an -- and obviously with a lot of them were doing in ’09. So I think that a lot of the stuff is getting pushed off is going to incremental to what was going to happen in ’10, but obviously things are turning out a little bit different. We are taking a more tempered view and I think that over the course of the next few months as lot of this plays out, we are going to have an extremely good look into 2010 and we are going to be able to provide a lot more color to where we think 2010 will be relative to both 2009 and to where we originally thought 2010 would be.

Adam Thalhimer – BB&T Capital Markets

Great. And then lastly, the housing start numbers kind of look like their bottoming out, may be not getting materially better. May you guys see any positive signs either your last mile telecom business or you like to call distribution business, and if not I mean do you have a feeling for where housing starts need to be before those businesses start to improve?

Jose Mas

Yes, the answer is no and I think that you got a couple of things right. I think we are -- when the housing market starts to decline, we are probably a little behind the curve and that utilities are going in after significant -- the houses are pretty much completed or close to completion. So as we funnel and backlog of those houses finish, we obviously still had some work going through that period. As housing starts start, we are going to be probably a couple of quarters behind it as some of that construction starts getting to the point where actually utilities are coming into the ground. So bottom line is, we haven’t seen any impact yet. Obviously, the fact that it’s getting better is great news for everybody and it will over time have an impact on our business, but we haven’t seen yet.

Adam Thalhimer – BB&T Capital Markets

Okay. Thanks, Jose.

Jose Mas

Thanks.

Operator

(Operator instructions). We will go next to Veny Aleksandrov with Pritchard Capital Partners.

Veny Aleksandrov – Pritchard Capital Partners

Good morning guys.

Jose Mas

Hi, good morning, Veny.

Bob Campbell

Good morning.

Veny Aleksandrov – Pritchard Capital Partners

I have a question, you mentioned that the final language and guidance from the stimulus bill is going to be a catalyst or when do you think this (inaudible) going to be September event or later or 2010, what are your internal projections?

Jose Mas

The language is supposed to come out obviously in July and we are at the tail end of July and the language isn’t out yet. We know drafts, we know that there have been some drafts that have come out on the language. We are actually expecting the language any day, whether it falls into the first week of August or the end of August, we really expect this to happen in the short term. Obviously, once the language is out, everybody -- I think most people already positioned to move very quickly and then we think funding will come in shortly thereafter. But I think that you are also -- what you are also seeing is, you got lot of people that were [ph] in financing projects that are on hold waiting for their language to come out or ultimately determine its the way they are trying to position themselves to finance that is accurate. So I actually think we will see some activity relatively quickly as that language comes out and again, we are expecting it any day and backed off of what we expect for the balance of the year from a workload perspective to hit us from that, but hopefully we will be positively surprised.

Veny Aleksandrov – Pritchard Capital Partners

Thank you. And then on the natural gas infrastructure business, do you see any new order coming or we have to see change in the natural gas price so that new projects are coming close. And how much of your backlog is for natural gas infrastructure project?

Jose Mas

In Q1, we talked about how, during that quarter, there wasn’t a lot of activity and we had seen a ramp up towards the back end of that quarter from an activity perspective. Actually Q2 from peer activity was kind of stayed the same way it was at the back end of Q1, which was a little bit better. The challenge is competition; there is a lot more competition because there is just overall less work and a lot of players going after the same work. So there has been a lot of pricing pressure in that market. I think part of the positive and we mentioned in earlier in the script, there are some pretty large projects that are coming up to bid in the next couple of quarters.

So, we think that with some luck and some hard work, we hope to be in a position where that business actually starts looking a little bit better from a backlog perspective as we go into 2010 in spite of the prices and where they are at. As prices get better, we are going to see a lot more work in that industry, but obviously price has continue to be very depressed. As a total backlog, our natural gas backlog piece of it actually went down a little bit quarter-over-quarter and it’s a very small piece of our billing [ph].

Veny Aleksandrov – Pritchard Capital Partners

Okay. Thank you so much.

Jose Mas

Thank you, Veny.

Operator

And we will take our next question from John Rogers with D. A. Davidson.

John Rogers – D. A. Davidson & Co.

Hi, good morning.

Jose Mas

Good morning, John.

John Rogers – D. A. Davidson & Co.

Just following up little bit more in terms of the wind projects and I guess this surprise the heavy construction projects as well, with the market slowing down or being pushed out six months a year, what are you seeing in terms of margins embedded in your bid? I mean is pricing coming down or have you felt any pressure to become more aggressive with your bids there?

Jose Mas

Sure. I think that we have been very disciplined from a bidding approach. Our price is down over where they were at the peak last year? The answer is, yes. Our price is dramatically down? The answer is no. So we continue to believe that on the work that we are looking at and the work that we priced, we can do well from a margin perspective. There is a lot of cause both from a material perspective and even from a labor perspective that have come back and lined a little bit, and we tweak those models to even if we are offering lower prices to really try to get the same margin profile out of the business, so we think that’s doable. I think the good thing about wind is that, there is small number of players that have done very well in that industry that have a very good reputation. And I think most projects are being awarded to a small group and I think that small group were obviously competitive and we have seen prices come down a bit. I think its reasonable bidding.

John Rogers – D. A. Davidson & Co.

Okay. And just to be follow-up on your comments about them, I think it was $600 million in pending awards out there?

Jose Mas

Yes.

John Rogers – D. A. Davidson & Co.

Based on your conversations with owners at this point, do you expect those at least the awards to come out in the second half of this year or--?

Jose Mas

Yes.

John Rogers – D. A. Davidson & Co.

Okay. And anything more on the timing on that or this is something that we are going to be hearing about in the next months or is it spread through the course of--?

Jose Mas

No, again, it’s pretty tied into the ability to finance the projects. So we, I mean what we proceed happening is we think that ultimately the rules are going to come out, ultimately there is going to be funding sources available for these projects and then we think we are going to see an awful launch of projects getting announced all at the same time.

John Rogers – D. A. Davidson & Co.

Okay. Great. Thank you.

Jose Mas

All right. Thank you.

Operator

And this concludes our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Jose Mas for any additional or closing comments.

Jose Mas

Again, we would like to thank all of you for participating on today’s call. We look forward to speaking again after our next quarter. Thank you very much.

Operator

And this concludes today's conference. We thank you for your participation.

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Source: MasTec, Inc. Q2 2009 Earnings Call Transcript
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