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Text: 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.
The format of the call will be remarks and announcements by Jose, followed by a financial review from George.
These discussions will be followed by a Q&A period, and we expect the call to last about 60 minutes.
We had another great quarter and have a lot of things to talk about today.
MasTec continues to excel during these challenging and unprecedented times as we manage through the COVID-19 pandemic.
During this time, the safety of our team members has been our top priority.
I have to say, I'm so proud of the men and women of MasTec.
Their sacrifices, resilience, creativity and commitment have been inspiring.
Millions of families throughout the United States rely on the power, communications, entertainment and other services we help our customers provide.
First, some third quarter highlights.
Revenue for the quarter was $1.7 billion.
Adjusted EBITDA was $265 million.
Adjusted earnings per share was $1.83.
Year-to-date cash flow from operations is $712 million, and backlog at quarter end was $7.7 billion.
In summary, we had another excellent quarter and are on track for another great year.
I believe the third quarter demonstrated the strength of MasTec's business diversification.
To me, the highlight of the quarter was the growth of our non-Oil and Gas segments.
Revenue for these segments grew at 19% and EBITDA for these segments grew at 83% on a year-over-year basis.
We expect continued growth of these segments in both revenue and earnings driven by a number of growth catalysts in both Communications and Clean Energy.
Catalysts in Communications included the continued rollout of 5G and the ever-increasing fiber opportunities tied to it, the growing focus on increasing consumer broadband speed by both the telecom and cable TV carriers and the launch and growth of a 5G home product.
Clean Energy catalysts include the continued focus on carbon neutrality.
As one of the largest clean energy contractors in the country, our expertise in constructing wind farms, solar farms, biomass facilities, high-voltage transmission lines, substations, battery storage and hydrogen-enabled solutions uniquely position us to take advantage of growth in this market.
Now I'd like to cover some industry specifics.
Our Communications revenue for the quarter was $645 million.
More importantly, margins came in strong at 12.3% and were up 390 basis points year-over-year and up sequentially.
The pandemic has helped highlight the importance of our nation's telecommunication networks, and our customers are working hard at providing their customers with reliable and high-speed connectivity.
We expect this trend to continue and believe there will be a renewed focus on continuing fiber expansions in the residential markets.
To illustrate, on an earnings call earlier this week, the CEO of Verizon said, and I quote, "Fiber richness of our network is a core element".
The CEO of Corning on their call this week said, "The density of fiber necessary to deliver its promise is yet another example, illustrating that up to 100 times more fiber is required to deploy 5G in the city than 4G".
And at a conference in September, the CEO of AT&T made two statements.
First, he stated, and I quote, "Anything we can do to put more fiber out into the network, serve both our consumer and business segments and use that to power what, over time, is going to become a much more dense and distributed wireless network.
That's, first of all, one of our key focus areas and something we see is very important to us".
He followed that up and reiterated, "That priority #1 is to make sure that we're investing in our core business, and that includes fiber and making sure we have broadband connectivity on 5G".
And when you think about it, those two are not dissimilar.
When you have a great 5G network, you're deploying a lot of fiber.
Based on those comments, I think it's important to note that MasTec's wireline business has grown 180% over the last five years, 57% over the last three years and about 13% over the third quarter of last year.
Couple this with the continued opportunities around 5G deployment, and this provides us with significant opportunities to grow our business.
In September, Samsung announced a $6.6 billion deal with Verizon to provide network equipment and 5G radios through 2025.
Deals like these are very important to MasTec as they need to be in place for the next phase of network expansion to take place.
The analytics firm IHS Markit estimates that over the next 15 years, the 5G investment in the U.S. will approach $1 trillion.
Over the coming months, we expect two important government initiatives that will be catalyst to our business.
The first is the award of funds from the Rural Digital Opportunity Fund to help bring high-speed Internet to rural communities.
The second is the mid-band wireless spectrum auctions expected later this year.
Both of those should lead to significant opportunities for MasTec.
I believe we are entering one of the most exciting periods in the history of telecommunications and that the deployment of 5G wireless technologies and the associated networks is truly a game changer for the consumer, our customers and for MasTec.
Moving to our Electrical Transmission segment.
Revenue was $129 million versus $103 million in last year's third quarter.
Margins improved sequentially, and we expect further improvement in the fourth quarter.
Backlog remained strong and improved year-over-year.
We are confident that we can deliver strong revenue growth next year as we have a number of new projects starting.
Scale in this segment is important for us as we strive to achieve double-digit margins.
We believe we are very well positioned for 2021 and beyond as the drivers for this segment remain intact, which include aging infrastructure, reliability, renewable integration and system hardening.
Moving to our Clean Energy and Infrastructure segment.
Revenue was $469 million for the third quarter versus $262 million in the prior year, a 79% year-over-year increase.
Margins for the segment were strong at 7.3%, and we continue to expect full year margins to improve over 2019 by over 100 basis points.
The size and scope of the opportunities we are seeing in this segment continues to grow.
Between verbal awards and projects we are competing on, we expect backlog to hit record levels over the coming quarters and expect revenues in 2001 (sic) [2021] to approximate $2 billion.
We have made significant investments in this segment to profitably grow our business through organic opportunities.
We continue to add talent and resources to meet the increasing demand for our services.
While we've highlighted this segment more over the last few quarters, I still think it's an underappreciated part of MasTec's portfolio.
Over the course of the last few months, the focus on Clean Energy has been palpable.
We have seen companies like Shell, NextEra, Duke Energy and many others highlight their significant planned investments in lower carbon technologies.
As a leading Clean Energy contractor and partner, MasTec is uniquely positioned to benefit from these investments.
Moving to our Oil and Gas pipeline segment.
Revenue was $463 million compared to revenue of $973 million in last year's third quarter.
Revenue was impacted by the effects of COVID and its impact on demand for both oil and gas.
While this was already factored into our guidance, we also had two major projects that have been impacted by regulatory delays.
Those projects, whose construction was expected to begin in the third quarter, have now started in the fourth quarter with the majority of work slipping into 2021.
Looking at third quarter results, large project activity represented a very small portion of revenue.
We believe that third quarter revenue levels are representative of what levels would look like without large project activity.
Margins for the quarter were very strong and positively impacted by the reimbursement of delayed project idle equipment costs.
Without associated revenue, these reimbursements had a significant impact on margin.
We expect a more normalized margin level as project revenues increase.
We ended the third quarter with backlog just over $2.4 billion, and we expect Oil and Gas revenues to increase in 2021.
Subsequent to quarter end, we have been awarded one large project and a number of smaller recurring-type projects.
As a reminder, over the last three years, only 6% of our revenues have come from oil pipelines with the majority of our business being tied to natural gas.
We continue to see strong demand for integrity services, gas distribution and line replacement activity.
We are focused on continuing to diversify our revenues in this segment.
I'd like to take a minute to cover 2020 guidance.
Today, we increased our EBITDA guidance to a range of $800 million to $811 million versus our previous guidance of $800 million.
We lowered our revenue guidance to $6.4 billion to $6.6 billion versus our previous guidance of $7 billion.
The change in guidance is directly attributable to the two Oil and Gas projects I covered earlier.
Our initial expectation was the projects would start in the third quarter.
Our range takes into account the possibility of further delays.
I'd also like to note, our guidance, at the midpoint of the range, assumes an almost $1.2 billion reduction in Oil and Gas revenues, while our total revenue will only be down about half that, meaning that we'll grow our other segments by nearly $600 million in 2020, again, showing the strength of our diversified model.
I'd also like to comment on our longer-term goals.
As I think about our future business mix, I think we have a solid path to becoming a $10 billion-plus revenue company, even in a depressed Oil and Gas backdrop.
Based on market opportunities, we believe our Communications business should grow to the $3.5 billion to $4 billion in annual revenue; Clean Energy should exceed $3 billion; Transmission, over $1 billion; and Oil and Gas, on a recurring level, to be about $1.5 billion to $2 billion.
To recap, we had a good third quarter and are confident that we are mitigating the effects and impacts of the COVID-19 virus.
While times are challenging and uncertain, opportunities always arise from these challenges.
Our customers are looking for ways to change and improve their business models and are looking for strong partners to help them.
In that lies our opportunity.
Our greatest strength has been to understand these trends in the industry and our customers' needs.
Our ability to provide services, whether existing or new, has always been a strength.
I'm excited for what the future holds for MasTec.
Keep up the good work.
Today, I'll cover our third quarter results, our current guidance expectation for the balance of 2020, including the ongoing impact of the COVID-19 pandemic, as well as our strong cash flow performance, capital structure and liquidity.
As Marc indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, our third quarter earnings results were better than expected with adjusted EBITDA beating our guidance expectation by $11 million and adjusted diluted earnings per share exceeding our guidance expectation by $0.16.
Third quarter adjusted EBITDA of $265 million represents a record level for MasTec and was achieved despite lower than expected Oil and Gas segment performance, which was impacted by delays in large project start-ups that have now initiated in the fourth quarter.
As Jose noted, it is important to note that year-over-year strength in our non-Oil and Gas segments, namely, the Communications, Clean Energy and Infrastructure and Electrical Transmission segments, which on a combined basis, despite COVID-19 impacts, showed third quarter year-over-year revenue growth of 19% and adjusted EBITDA growth of 83%.
This performance highlights the strength, diversity and growth potential of MasTec.
Third quarter 2020 results also continued our strong cash flow performance, generating $216 million in cash flow from operations and reducing sequential net debt levels by approximately $129 million.
On a year-to-date basis, 2020 cash flow from operations of $712 million represented another record performance level for MasTec.
And we have reduced net debt levels by almost $300 million since year-end 2019 despite approximately $150 million in share repurchases and other strategic investments.
As indicated in yesterday's release, we continue to expect that annual 2020 cash flow from operations results will mark the third consecutive year of record performance.
Regarding our capital structure, my belief is that we have never been in a stronger position, affording us full flexibility to invest in strategic opportunities as well as giving us a strong advantage with our customers as we navigate through the uncertain economic climate resulting from the COVID-19 pandemic.
Now I will cover some more highlights regarding our third quarter segment results and guidance expectations for the balance of 2020.
Third quarter 2020 Communications segment revenue of $645 million was down 5% compared to the same period last year and essentially flat sequentially.
Third quarter 2020 Communications segment adjusted EBITDA margin rate was 12.3% of revenue, representing a sequential increase of 60 basis points and a 390 basis point improvement when compared to last year's third quarter.
It's worth noting that this improved performance includes disruption and loss revenue related to the COVID-19 pandemic as we continue to have selected markets in which construction activity has been impacted due to local municipality permitting-approval delays.
We expect annual 2020 Communications segment revenue levels will decline slightly from 2019 levels with fourth quarter activity slowing sequentially and with the continued expectation of strong double-digit revenue growth in 2021.
Based on our strong adjusted EBITDA margin performance over the past two quarters, we currently expect annual 2020 Communications segment adjusted EBITDA margin rate to improve approximately 230 basis points over last year's rate to approximately 10.3% of revenue.
We are pleased with the expected Communications segment adjusted EBITDA margin rate improvement in 2020, particularly considering the challenging conditions.
We continue with the believe that the evolution toward 5G technology, coupled with increasing remote workplace and education trend in the U.S. because of the COVID-19 pandemic, will drive significant long-term demand for our wireless and wireline services in 2021 and beyond as the COVID-19 pandemic effects diminish and conditions begin to normalize.
Third quarter 2020 Oil and Gas segment revenue of $463 million decreased 52% compared to the same period last year.
Revenue fell short of our expectation as start-up activity on selected large projects was delayed due to regulatory and judicial issues.
As a reminder, given the size of our large projects, a 30-day delay in project activity can impact monthly revenue by up to $200 million.
As indicated in our release yesterday, during the fourth quarter, we've initiated start-up activity on two large oil and gas projects.
And accordingly, we expect fourth quarter 2020 revenue levels in this segment to increase substantially and exceed last year's fourth quarter level.
Due to the potential impact of final regulatory and judicial approvals or challenges, coupled with the volatility of the onset of winter weather, our expected fourth quarter 2020 Oil and Gas revenue is presented in a range.
And we now expect annual 2020 Oil and Gas segment revenue to range somewhere between $1.8 billion to $2 billion.
Third quarter 2020 Oil and Gas segment backlog was approximately $2.4 billion, and we have continued significant fourth quarter activity -- award activity, including the recent Keystone pipeline announcement by TC Energy.
In summary, we have clear visibility into strong 2021 revenue growth in this segment.
Third quarter 2020 Oil and Gas segment adjusted EBITDA margin rate was 34.7% of revenue.
This continues our strong performance trend across numerous smaller pipeline projects as well as the benefit of approximately 10 percentage points for the combination of project closeout and change order recoveries and contractual fees on selected delayed project activity for the recovery of idle owned equipment and other costs.
As a reminder, the Oil and Gas segment requires significant capital investment in equipment fleet, and these costs are primarily reflected in depreciation expense below the adjusted EBITDA line.
Looking forward as we close out 2020, we anticipate strong Oil and Gas segment adjusted EBITDA margin trends will continue into the fourth quarter with an expectation in the mid-20% range.
Third quarter 2020 Electrical Transmission segment revenue increased approximately 25% compared to the same period last year to approximately $129 million, and segment adjusted EBITDA margin rate was 7.1%.
We anticipate fourth quarter results for this segment will slightly exceed and generally approximate the third quarter.
Third quarter 2020 backlog remains strong at $545 million, and we continue to expect that market conditions for this segment are supportive for strong 2021 revenue, adjusted EBITDA and adjusted EBITDA margin rate growth.
Third quarter 2020 Clean Energy and Infrastructure segment revenue of $469 million increased approximately 79% compared to the same period last year.
Third quarter 2020 adjusted EBITDA margin rate was 7.3%, a sequential increase to 20 basis points and a 640 basis point increase compared to the same period last year.
During the last two quarters, this segment has generated approximately $900 million in revenue, with adjusted EBITDA margin rate exceeding 7% each quarter.
And this trend begins to reflect our longer-term expectation for this segment in the high single-digit range.
We expect to close out 2020 with annual segment revenue in the $1.5 billion range, which equates to an annual growth rate in the mid-40% range.
We also expect that annual 2020 adjusted EBITDA margin rate for this segment will show approximately a 140 basis point improvement over last year.
As Jose indicated in his remarks, we have continued a significant growth expectations in 2021 and beyond for this segment in a very active Clean Energy market.
I will now discuss a summary of our top 10 largest customers for the 2020 third quarter period as a percentage of revenue.
AT&T revenue, derived from wireless and wireline fiber services, was approximately 12% and install-to-the-home services was approximately 3%.
On a combined basis, these three separate service offerings totaled approximately 15% of our total revenue.
As a reminder, it is important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within their organization, giving us diversification within that corporate universe.
WhiteWater Midstream was 7%.
Permian Highway Pipeline, Iberdrola Group and Comcast Corporation were each 6%.
Energy Transfer affiliates, Xcel Energy, Duke Energy Corporation and Verizon Communications were each 5% and NextEra Energy was 4%.
Individual construction projects comprised 68% of our revenue, with master service agreements comprising 32%, once again highlighting that we have a significant portion of our revenue derived on a recurring basis.
Lastly, it is worth noting as we operate in a COVID-19-induced period of macroeconomic uncertainty that all of our top 10 customers, which represented over 63% of our third quarter revenue, have investment-grade credit profiles.
Now I will discuss our cash flow, liquidity, working capital, usage and strategic investments.
During the third quarter of 2020, we generated $216 million in cash flow from operations and ended the quarter with net debt, defined as total debt less cash, of $1.07 billion which equates to a very comfortable book leverage ratio of 1.4 times.
As we have previously reported, during the quarter, we also strengthened our capital structure with a favorable refinancing of our four and 7/8% senior unsecured notes, and we ended the quarter with $238 million in cash on hand as well as record liquidity, defined as cash plus volume availability, of approximately $1.4 billion.
During the nine months -- the first nine months of 2020, we generated a record-level $712 million in cash flow from operations, which allowed us to reduce our net debt levels by approximately $300 million while still investing approximately $150 million in strategic share repurchases and investments.
During the first nine months of 2020, we repurchased approximately 3.6 million shares or approximately 5% of our outstanding share base, with the vast majority of this activity occurring in the first quarter.
Regarding our share repurchase program, we expect to opportunistically invest in this program as conditions warrant while also prudently managing our balance sheet.
We currently have $159 million in open repurchase authorizations, and as of today, have not executed any share repurchases during the fourth quarter.
We ended the quarter with DSOs at 85 days, down five days from last quarter.
Depending on the timing of our fourth quarter revenue activity, we anticipate some modest working capital usage as we close out 2020.
We are proud of the expectation that annual 2020 cash flow from operations will mark the third consecutive year of record performance.
In summary, our record 2020 cash flow expectation, coupled with a long -- a solid long-term capital structure, low interest rates, no significant near-term maturities and ample liquidity, places MasTec's balance sheet in an extremely strong position to take advantage of any and all opportunities our markets afford us.
During the third quarter, we incurred net cash capex, defined as cash capex net of equipment disposals, of approximately proximately $39 million, and we incurred an additional $41 million in equipment purchases under finance leases.
We currently anticipate incurring approximately $190 million in net cash capex in 2020, with an additional $130 million to $150 million to be incurred under finance leases.
As we look forward into 2021, based on the investments we have made to date, we expect 2021 capex levels will decline significantly when compared to 2020 levels.
Moving on to our current 2020 guidance.
Our fourth quarter 2020 revenue expectation is expected to range between $1.7 billion to $1.9 billion with adjusted EBITDA guidance ranging between $252 million to $263 million and adjusted diluted earnings per share guidance between $1.64 to $1.73.
We are projecting annual 2020 revenue to range between $6.4 billion to $6.6 billion with adjusted EBITDA expected to range between $800 million to $811 million and adjusted diluted earnings per share to range between $5 and $5.09.
This includes our expectation of strong adjusted EBITDA performance across multiple segments as well as slightly improved expectations on below-the-line items such as depreciation, interest and income taxes.
These guidance expectations incorporate the impact of projected lower 2020 Oil and Gas segment revenue, as regulatory delays on two large projects are expected to cause lower 2020 project activity and shift award work into 2021, as well as improved 2020 adjusted EBITDA margin rate expectations across multiple segments.
As we have provided -- previously provided some color as to 2020 segment expectations, I will now briefly cover other guidance expectations as highlighted in our release yesterday.
Based on our expected strong cash flow, lower nominal interest rates and our recent senior notes offering, we expect annual 2020 interest expense levels to approximate $60 million, with this level only including share repurchase activity executed to date.
Our estimate for full year 2020 share count is now 73.7 million shares.
It should be noted, for valuation modeling purposes, that our year-end 2020 share count will approximate 73 million shares, inclusive of the full impact of 2020 share repurchases.
We expect annual 2020 depreciation expense to approximate 4% of revenue due to the combination of lower expected Oil and Gas 2020 revenue levels and the timing impact of capital additions and acquisition activity.
And lastly, we expect our annual 2020 adjusted income tax rate will approximate 24% with the fourth quarter tax rate expected to be slightly higher than the annual rate.

user
sees q4 2020 revenue $1.7 billion to $1.9 billion.
sees q4 2020 adjusted non-gaap earnings per share $1.64 to $1.73.
q3 revenue $1.7 billion versus refinitiv ibes estimate of $1.92 billion.

assistant