Q3 2021 MasTec Inc Earnings Call
[music].
Welcome to <unk> third quarter 2021 earnings Conference call initially broadcast on Friday November 5th 2021.
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 <unk>, Vice President of Investor Relations Mark.
Thanks, David and good morning, everyone welcome to <unk> third quarter 2021 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.
Communications, we may make certain statements that are forward looking statements regarding <unk> 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 does not undertake to update here.
Patients based on subsequent events or knowledge.
Various risks uncertainties and assumptions are detailed in our press releases and filings with the SEC.
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 today's call.
In today's remarks by management, we'll be discussing adjusted financial metrics reconciled in yesterday's press release and supporting schedules.
We may use certain non-GAAP financial measures in this call a reconciliation of any non-GAAP financial measure not reconciled in these comments to the most comparable GAAP financial measure can be found that our earnings press release or our 10-Q.
In the investors and news section of our website located at Mastec Dot com.
With us today, we have Jose Mas, our Chief Executive Officer, and George Pita, Our executive VP and CFO. The format of the call will be ultimately box analysis by Jose followed by financial review from George.
These discussions will be followed by Q&A session and I would expect to cause last about 60 minutes.
We had another good quarter and a lot of important things to talk about today. So I'll go ahead and Jose Jose.
Thanks Mark.
Good morning, and welcome to March six 2021 third quarter call.
Today, I will be reviewing our third quarter results as well as providing my outlook for the markets we serve.
I'd like to thank you for joining us today, and I hope and pray that you and your loved ones are healthy and safe.
Before getting into the quarterly details I'd like to offer my perspective on where I think mostek stands today.
At this time last year during our 2023rd quarter call. We laid out a long term goal of our pathway to achieving annual revenues of $10 billion plus.
It is important to remember at that time <unk> was on a path to generate just over $6 billion of revenue in 2020.
Still somewhat unsure of where the Covid pandemic would take us we have seen a significant impact to our oil and gas business and the demand and pricing issues. It has created.
Our ability to provide that outlook was a testament to the strength, we're seeing across our non oil and gas business and the growing opportunities we were expecting.
Fast forward 12 months this year, we expect to generate $8 million in revenue and our long term goal of reaching annual revenues exceeding $10 billion is now within reach and what we hope will be a much shorter timeframe.
Opportunities in our communication transmission and clean energy segments continue to expand and give us great confidence, we will be able to meaningfully grow revenue over the coming years.
We believe we are in the midst of a very unique opportunity.
Since becoming CEO in 2007, we've been able to grow mostek from $900 million in revenue to $8 billion today.
And while I've seen and experienced great cycles of growth during that time I've never seen the number and scope of opportunities we are seeing across our business.
<unk> for our services is incredibly high and again, our prospects to deliver long term revenue growth or better than I've ever seen.
While our business continues to expand and our mix continues to diversify away from oil and gas our focus is on margin improvement and execution.
Our margin execution across our non oil and gas segments has been below our expectations in 2021.
We've been challenge and impacted for multiple reasons, including Covid labor availability supply chain delays and poor performance on projects.
With that said we are confident we can achieve the margin targets. We previously disclosed as we continue to grow the business in the coming years.
We understand and believe that our ability to create shareholder value is driven not only by our revenue growth opportunities, but more importantly by our ability to achieve our targeted margins.
While wed like to see our results materialized sooner.
We believe the longer term outlook is not only fully intact.
But actually improving.
Now some third quarter highlights.
Revenue for the quarter was $2.404 billion in.
Adjusted EBITDA was $278 million.
Adjusted earnings per share was $1 81.
And backlog at quarter end was $8 5 billion a year over year increase of $821 million.
In summary, we had another excellent quarter and are on track for another great year.
There are a number of catalysts that could have a significant impact on our growth.
These include within our communications segment, a ramp up of <unk> related activity and the spend including in building solutions.
Continued focus on expanding fiber networks, both in rural communities and in major cities to support broadband services as well as wireless backhaul.
An increased focus on smart city initiatives with increased availability of capital from both the public and private sector.
Within our electrical transmission transmission and distribution segment catalysts include grid modernization, including significant investments for improve grid reliability and system hardening to better prepare for storms and fires.
The growing need for new transmission lines to tap into renewable rich geographies.
And the focus on grid architecture related to growing electrical vehicle charging demands.
And our clean energy and infrastructure segment catalysts include the growing focus on sustainability and climate initiatives, including zero carbon emission goals.
Significant investments in renewable power generation, including wind and solar.
A focus on other clean energy generating fuels, including biomass geothermal and hydrogen.
Opportunities around carbon capture and its potential benefits and finally, the role of battery storage and its improving economics.
We believe we are very well positioned to benefit from these growing and accelerating trends in our business segments.
Now I'd like to cover some industry specifics.
Our communications revenue for the quarter was $670 million, we expected revenues to be slightly higher and we continued to experience delays in COVID-19 impacts that affected the acceleration of AT&T and Verizon is build plans related to last year's spectrum auctions.
Highlights for the quarter included our growth with T mobile, whose revenue more than doubled over last year's third quarter.
In addition, we had another quarter of strong backlog growth.
The second quarter of this year represented the largest quarterly sequential segment backlog increase in the company's history.
And in the third quarter, we were again able to sequentially grow segment backlog by over $200 million.
We expect another similar increase during the fourth quarter.
Margins for the segment were 10, 7% in the third quarter and were impacted by both lower wireless revenues than expected along with project Closeouts related to a large fiber build that is nearing completion.
We expect sequential margin improvement in the communications segment in the fourth quarter and excellent momentum heading into 2022 based on our backlog build.
Over the last few quarters, we've talked about the opportunities related to the rural digital opportunity fund or our dock, which will provide 20 billion of funding over the next 10 years to build and connect gigabit broadband speeds and underserved rural areas.
And the <unk> Fund for Rural America, which will provide up to $9 billion in funding over the next decade to bring <unk> wireless broadband connectivity to rural America.
In addition to these programs the current pending infrastructure Bill has another 65 billion allocated for broadband infrastructure.
While not built into any of our models. This amount of investment would likely have a significant impact on the on the potential opportunities for us in this segment.
Moving to our electrical transmission segment revenue.
Revenue was $365 million versus $129 million in last year's second quarter.
The increase was driven by organic growth of nearly 50% in the quarter on a year over year basis in the first full quarter contribution of interim which we acquired during the second quarter.
Margins for the segment were nine 5%, which exceeded our expectations.
The integration of our instrument acquisition has gone very well and we are seeing a number of cross selling opportunities, which are positively impacting both mostek an interim.
While backlog was flat sequentially, we have an increasing number of opportunities that should allow us to continue to grow this business at solid double digit rates for years to come.
We believe the changes in electrical distribution and transmission needs led by grid Modernizations and hardening.
Liability and renewable integration coupled with the transition towards increased electrical vehicle usage will have an enormous impact on our last mile distribution of electricity.
Moving to our oil and gas pipeline segment revenue was $858 million.
And margins remained strong.
During the third quarter, we were able to accelerate project timing and complete some projects early our fourth quarter revenue guidance level is impacted by this acceleration as.
As a reminder, last year, we forecasted a longer term recurring revenue target of one $5 billion to $2 billion a year, assuming a continued depressed oil and gas market.
As commodity prices have increased and maintained strong levels. We have seen an increase in customer requests as we are working with a number of customers repricing previous projects and are optimistic we will see an uptick in opportunities.
Challenge our customers are facing has been the increased cost of steel pipe related to the supply chain issues.
Pipe materials, often account for nearly 50% of project cost.
While we believe there will be an increasing number of large pipeline projects, we expect the opportunities to materialize in 2023 and beyond as the supply chain issues improve.
That coupled with the continued growth of carbon capture and sequestration and the potential of hydrogen have improved our longer term outlook of our pipeline business.
While we still expect 2022 to be within our previously disclosed revenue targets, we are becoming a lot more bullish about our opportunities for 2023 and beyond in this segment.
Moving to our clean energy and infrastructure segment revenue was $518 million for the third quarter.
As a reminder segment revenue has grown nearly sevenfold since 2017.
We expected a slight sequential improvement in margins that did not materialize.
While I believe we have done an amazing job in growing and diversifying the segment margins haven't materialized as quickly with that said we believe we are at the cusp of seeing significant improvements in margins.
At Mastech, we take great pride in having been able to perform at high levels over a long period of time.
Our conviction and improving margins in this segment are no different.
We understand and are addressing the issues that have led to the underperformance and we have tremendous confidence in the potential of this market and the associated margins we can generate.
We believe our diversification is our strength in this segment as we are capable of meeting any of our customers demands. We are actively working on renewable projects, including wind solar and biomass.
Baseload generation projects, including dual source hydrogen capable projects as well as our growing presence in the infrastructure market.
With a clear national focus on sustainability and clean energy, we have seen a significant increase in planned clean energy investments from our customers as they improve their carbon footprint.
As a leading clean energy contractor and partner Mostek is uniquely positioned to benefit from these investments.
Backlog at quarter end, and clean energy was $1 $570 million versus $891 million at the end of last year's third quarter.
Year over year increase of nearly $700 million.
And a slight sequential reduction of over $100 million from the second quarter.
Since quarter end, we've either signed or have been verbally awarded another roughly $800 million and projects.
In addition, the level of project proposal activity and negotiations has never been higher.
To recap, we're having a solid 2021 and are very excited about the opportunities in the markets we serve.
Finally, I'd like to highlight the potential opportunities of the pending infrastructure Bill.
With a significant presence in the telecommunications market, which include fiber build out capabilities.
Our involvement in maintaining and building the electric grid, coupled with our exposure to the clean energy market, including wind solar biofuels hydrogen and storage and our recent expansion into the heavy infrastructure, including road in heavy civil we believe we are uniquely positioned to benefit from the potential infrastructure spur.
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We are confident we can hit our growth targets was solely private investments in infrastructure, but do recognize the potential acceleration in our markets with significant government spend.
I'd like to again congratulate and thank the men and women of Mastec for their fantastic performance I'm honored and privileged to lead such a great group the men and women of Mostek are committed to the values of safety environmental stewardship integrity honesty and in providing our customers a <unk>.
Quality project at the best value.
These traits have been recognized by our customers and it's because of our People's great work that we've been able to deliver these financial outstanding results in a challenging environment and position ourselves for continued growth and success.
I'll now turn the call over to George for our financial review George.
Thanks, Jose and good morning, everyone.
Today I'll cover our third quarter financial results and our updated annual 2021 guidance expectations.
As Marc indicated at the beginning of the call our discussion of <unk> financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
Reconciliation and details of non-GAAP measures can be found on our press release on our website or in our SEC filings.
In summary, we had strong third quarter results with revenue with revenue of approximately $2 4 billion.
A 42% increase over last year.
Adjusted EBITDA of approximately $278 million and adjusted EBITDA margin rate at 11, 6% of revenue.
This represented a record level third quarter revenue and adjusted EBITDA.
Yesterday, we announced a new and increased credit facility of $2 billion.
Which adds to our ample liquidity.
Bruce pricing and eliminate security requirements.
I would like to thank our banking partners for the continued long term support of Mastec.
Our strong cash earnings profile, coupled with our focus on working capital management. During 2021 has allowed us to easily fund organic working capital needs associated with approximately $1 5 billion.
And year to date revenue growth.
While investing approximately $600 million.
Strategic acquisitions.
At the end of our third quarter, we maintained a strong balance sheet and capital structure with liquidity approximating $1 3 billion.
Comfortable leverage metrics and with net debt at only one three times adjusted EBITDA at quarter end.
Given our strong balance sheet and cash flow performance.
Coupled with the unsecured nature of our new credit facility we.
We have approached credit rating agencies will review and are hopeful of a positive rating agency actions in the near term.
Now I'll cover some details regarding our third quarter segment results and guidance expectations for the balance of 2021.
Third quarter Communications revenue was $670 million approximately.
<unk>, 4% growth compared to last year.
This growth level was a few percentage points lower than our expectation as project startup issues slowed revenue during the quarter.
Our third quarter Communications segment, adjusted EBITDA margin rate was 10, 7% of revenue and.
An 80 basis point sequential decline.
Primarily related to the overhead impacts of lower than expected third quarter revenue levels.
Our annual 2021 Communications segment expectation is that revenue will range somewhere between two five to $2 $6 billion.
With annual 2021, adjusted EBITDA margin rate approximating 11%.
This implies fourth quarter year over year revenue growth in the high teens range. Despite some continued slower revenue impact on new project startup activity.
This also implies strong improvement in fourth quarter, adjusted EBITDA margins, both sequentially and compared to the fourth quarter of last year as we begin to ramp towards significant expansion in 2022.
Third quarter clean energy and infrastructure segment or clean energy revenue was $518 million and adjusted EBITDA was approximately $14 million.
Or two 7% of revenue below our expectation.
As we indicated.
<unk> on our last quarter's call. We anticipated some continued negative impact on third quarter clean energy adjusted EBITDA margin rate as two underperforming projects highlighted during the prior quarter would generate third quarter revenue with no margin.
We substantially completed those projects during the third quarter with performance largely as expected.
However, during the third quarter clean energy segment results were also negatively impacted by COVID-19 outbreak on a project that caused delays and additional cost.
At one point during this project approximately one third of the project field group and 50% of critical path electricians, we they're infected with COVID-19 or in corn team effectively stopping project production.
Thankfully no significant long term health issues arose during this outbreak to our into our employees and we have substantially completed this project.
Absent this unique impact third quarter clean energy segment, adjusted EBITDA margins would have been generally in line with our expectation of a slight sequential adjusted EBITDA margin rate improvement.
We believe the issues that have negatively impacted our clean energy segment year to date adjusted EBITDA margin performance are largely behind us and based on project timing expect that fourth quarter segment revenue will be the largest revenue quarter of the year with over 60% year over year revenue growth and strong.
Fourth quarter, adjusted EBITDA margin rate improvement to a high single digit level.
As we have previously indicated our clean energy segment has grown from $300 million of revenue in 2017 and will approach $2 billion in revenue during 2021.
In order to achieve this growth we have significantly expanded our field crew operations and head count very quickly.
This rapid expansion has caused some growing parent efficiencies, which has impacted our annual 2021 adjusted EBITDA margin performance.
As I just indicated we expect improved performance during the fourth quarter, and importantly continued strong revenue and adjusted EBITDA margin rate improvement in 2022.
Third quarter oil and gas segment revenue was $858 million and adjusted EBITDA was $171 million.
During the quarter, we accelerated work on a large project and achieved substantial completion ahead of schedule.
This increased our third quarter revenue by approximately $100 million.
Accelerating revenue previously expected to occur in the fourth quarter.
We would like to recognize the men and women of our mostek teams for their commitment to safety and quality during this difficult project.
Yes.
We currently expect annual 2021 oil and gas segment revenue will range between $2 five to $2 6 billion.
With annual 2021, adjusted EBITDA margin rate for this segment, especially in the high teens to low 20% range.
Third quarter electrical transmission segment revenue was $365 million and adjusted EBITDA margin rate of nine 5% of revenue.
Third quarter results reflected a full quarter of electrical distribution and storm services from interim which contributed revenue of approximately $175 million to the quarter.
Excluding entrant organic segment revenue during the third quarter grew $64 million and adjusted EBITDA margin performance was strong.
We expect annual 2021 revenue for the electrical transmission segment to approximate $1 billion.
And annual 2021, adjusted EBITDA margin rate to range somewhere between six 5% to 7% of revenue.
This expectation includes the assumption that second half of 2021 segment adjusted EBITDA margin rate will approximate a low 8% range a significant improvement when compared to first half of 'twenty one performance.
We continue to believe that multiple macro and market trends, including renewable power generation increased distribution needs to support electric vehicle expansion and grid investments for storm and fire hardening are continuing to develop.
And should provide our segment substantial future growth opportunities.
Now I will discuss a summary of our top 10 largest customers for the third quarter period as a percentage of revenue.
Enbridge was 21% of revenue, reflecting the previously mentioned pipeline project acceleration.
Newly defined AT&T services totaled 7% of revenue.
As indicated on our 10-Q filed yesterday reported AT&T revenue amounts have been reclassified to exclude Directv services for all periods. As this entity has been spun off into a separate third party entity.
Revenue perform for AT&T includes wireless wireline and other services, including Smart city deployment projects.
Nextera energy was 6% of revenue comprising services across multiple segments, including clean energy communications and electrical transmission.
<unk> midstream was 5%.
Entergy and Comcast were each 4% of revenue.
Duke energy, Directv and Exelon reached 3% in.
<unk> Green power was 2%.
Individual construction projects comprised 63% of our third quarter revenue with Master service agreements comprising 37%.
With the combination of unexpected resurgence in wireless MSA work, coupled with the entrant acquisition, whose revenue is virtually all MSA driven future MSA revenue is expected to increase as a percentage of our total revenue highlighting an increased level of <unk> revenue expected to be derived on a recurring basis.
Lastly, as we've indicated for years backlog can be lumpy as large contracts burn off each quarter and new large contract awards only come into backlog at a single point in time as a result of actual contact science.
As of September 32021, we had total backlog of approximately $8 5 billion.
Approximately $821 million when compared to last year.
Importantly, each of our non oil and gas segments backlog represented a record third quarter level, reflecting continued and expanding strength in these end markets.
As noted in yesterday's press release as expected oil and gas segment backlog was down both sequentially and compared to the third quarter of last year.
And we continue with the expectation that 2022 segment revenue will range somewhere between one $5 billion to $2 billion.
With potential sizable growth opportunities in 2023 and beyond.
Now I'll discuss our cash flow liquidity working capital usage and capital investments.
As I mentioned earlier and these remarks yesterday, we announced the closing of a new unsecured 2 billion credit facility, which reflects a $250 million increase from our prior facility with improved pricing and extended term.
We are hopeful that the combination of our consistent and strong cash flow performance, coupled with our new unsecured credit facility will provide us a path towards an investment grade credit rating in the near term and we are engaging with rating agencies for an updated outlook.
During the third quarter, we managed to reduce our net debt levels by approximately $80 million. Despite the working capital associated with approximately $450 million and sequential revenue growth.
We ended the quarter with $1 3 billion in liquidity and net debt defined as defined as total debt less cash and cash equivalents at $1 6 billion.
Which equates to a very comfortable one three times leverage metric.
2021 year to date cash provided by operating activities was approximately $500 million.
We ended the third quarter with Dsos at 72 days compared to 85 days at Q3 last year and this level is well below our target DSO range of mid to high Eighty's.
We are proud of the strength resilience and consistency of <unk> cash flow profile.
As we look forward to closeout to the closeout of 2021, we.
We expect continued strong cash flow generation, despite the working capital associated with our 2021 revenue growth and expect that annual 2021 free cash flow will once again exceed adjusted net income.
Assuming no Q4 acquisition activity net debt at year end is expected to approximate $1 2 billion.
Leaving us with ample liquidity and.
And an expected book leverage ratio of slightly over one times adjusted EBITDA.
In summary, our long term capital structure is extremely solid with low interest rates no significant near term maturities and ample liquidity.
Giving us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value.
Moving to our 2021 guidance view, we predicted annual 2021 revenue of $8 billion.
With adjusted EBITDA of $930 million or 11, 6% of revenue.
And adjusted diluted earnings of $5 55 per adjusted diluted share.
Which is a 10 per share increase over our prior expectation of $5 45 per adjusted diluted share.
And the earnings per share increase is primarily due to the benefit of lower expected annual 2021 income tax expense.
This translates into our fourth quarter revenue expectation of $1 $85 billion.
With adjusted EBITDA of $218 million or 11, 7% of revenue and.
And earnings guidance of $1 33 per adjusted diluted share.
As previously mentioned our fourth quarter revenue view includes approximately $100 million and lower revenue expectations for the oil and gas segment due to the acceleration of project revenue during the third quarter.
As we have previously provided some color regarding 2021 segment expectations I will briefly cover other guidance expectations.
We anticipate net cash capex spending in 2021 at approximately $120 million with an additional $160 million to $180 million to be incurred under finance leases.
As we have previously indicated as our end market operation shift with non oil and gas segments, becoming a larger portion of our overall revenue our capital spending profile should reduce as the oil and gas segment has historically required the largest level of capital investment.
We expect annual 2021 interest interest expense levels to approximate $54 million with this level of including approximately $600 million and year to date acquisition funding activity.
For modeling purposes, our estimate for 2021 share count continues at 74 million shares.
We expect annual 2021 depreciation expense to approximate four 3% of revenue inclusive of year to date 2021 acquisition activity.
As we have previously indicated this expectation incorporates an increased level of 2021 oil and gas segment depreciation expense when compared to 2020 as we are utilizing conservative depreciation life and salvage value estimates on previous capital additions to protect against future market uncertainties.
Given these trends, we anticipate that annual 2022 depreciation expense dollar amount and percentage of revenue will decrease when compared to annual 2021 levels.
We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of slightly under 1% of overall revenue.
And lastly, we expect that annual 2021 adjusted income tax rate will range, approximately 22% with our third and fourth quarter adjusted income tax rates ranging in the 19% to 20% range, primarily due to the benefits of income mix and tax true up adjustments.
This concludes our prepared remarks, and now I will turn the call back to the operator for Q&A operator.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Please limit yourself to one question and a follow up.
And if you have further questions you May press star one to get back in the question queue.
Again press Star one to ask a question.
I'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will take our first question from Alex Rygiel of B Riley.
Thank you and good morning Jose.
Hey, good morning, Alex.
Another really really strong quarter here. So congratulations on that my first question wants to focus on capital allocation. So clearly you've got an enormous amount of opportunities ahead of you. So my question here is how should we think about capital allocation over the next.
Okay. Two years should we think about you investing a greater amount of your free cash flow back into the business through M&A and some of these organic opportunities.
Do you feel like your biggest bang for your Buck is investing and buying back stock at this time.
Great question, Alex a couple of things right I think we've been making a lot of investments in the business over the course of the last few years.
We've added an enormous amount of people in <unk> and <unk>.
We're thankful for that right our employee count is probably up about 6000 from where we were at this time last year roughly 2000 of that came from the <unk> acquisition, but the balance of that came organically. So I think we've been really investing and our ability to execute on the longer term opportunities we see in the business with.
With that said we've also been.
Active on the M&A front.
It's an incredibly active market and we think theres a lot of good assets out there. So I think youll continue to see us be active in that market.
And as we continue to generate cash and we are in the advantageous position of being a really good cash flow generator I think we've done a great job with cash this year relative to the growth that we've had.
After after really investing in those two then we would focus on potentially looking at where we are from a value perspective.
To invest capital in buying back stock I think if you look at US historically, we have always been one to buy our stock at what we think are very attractive levels.
We are disappointed about where we trade today from a valuation standpoint, so I think there's a lot of arguments to be made as to why.
It makes a lot of sense to consider doing that.
But I think we've got a lot of priorities a lot of good things happening.
Hopefully we're in a great position from a cash flow generation perspective last year to take advantage on multiple fronts.
And my second question I believe you might have.
Said that subsequent to the end of the quarter you received another $800 million.
Awards that will be dropped into backlog was that the case what markets where these in generally speaking and then you seem to have a renewed excitement about the oil and gas sector looking out into 2022 and 23, So maybe you could.
Round out that segment for us.
Sure. So a couple of things the $800 million was specifically to the clean energy and infrastructure segment. So since quarter end, we've been awarded $800 million we were.
Up about $700 million on a year over year basis on backlog and clean energy, we were down just over $100 million.
About $150 million on a sequential basis, so I think that.
The wins that we've had post quarter end really gives us an enormous amount of confidence in our ability to continue growing that business I think more importantly to what we've already been either awarded or verbally awarded is what's still outstanding. There is an enormous amount of activity happening in that market of which we feel really really good about so again.
Growth in the clean energy side, obviously hasnt been are concerned we have done a great job being able to do that I think for us it's about executing our margins, which I think hopefully we'll start seeing in the fourth quarter as it relates to the oil and gas business look we're really excited I think.
Compared to where we were a year ago and the challenges we were facing in that market.
Obviously commodity prices have been high we have a lot of customers.
That are looking at a lot of different pipeline projects that were kind of put on the backburner a year ago, there's still some challenges to get some of those projects to market, but we're actually seeing potential large pipeline activity on multiple projects that are somewhat surprising to us relative to where we've been when you also look at what's happening with hydrogen with carbon capture.
The potential for our pipeline business longer term.
I think is amazing I think.
Long term, we could have a a.
A carbon capture and sequestration business that consumes our pipeline business and ultimately is the predominant nature of our pipeline business long term again, something that we wouldn't have expected a year ago. So I think the outlook in that market beyond 'twenty, two is really bright and looking a lot better.
So very exciting for us.
Okay.
Very helpful. Thank you very much.
Alex.
We will take our next question from Neil Mehta of Goldman Sachs.
Good morning team.
Good morning, Neil Good morning, Sir Yes, I want to start on the communications segment and just your thoughts on some of the slower top line growth that we've seen here.
What are the drivers.
To unlock the pace of growth that you anticipate talk a little bit about.
Customer conversations.
Around the <unk> rollout.
And are there certain types of communications activity, that's being impacted more versus less in the current environment.
Sure. Thank you Neil.
It's actually very frustrating right, we're seeing our backlog grow at levels that we haven't seen in a long long time.
We continue to win work we're chasing work.
The opportunities for us to continue to grow our.
Again are as good as we've seen in a long long time.
We expect further backlog growth in Q4, as we said on the call.
It should be at least at the levels of which we saw in Q3. So again, we're going to exit 2021 with unbelievable backlog in that segment and then the frustrating part is it obviously hasnt hasnt shown up in the revenue numbers, yet and I think there's lots of reasons for it right. There is no question that.
When we look at our wireless work with AT&T and Verizon, it's been a lot slower to really kick off in a meaningful way than what we expected we see it right. We know it's coming we understand the issues as to why it's not happening we don't necessarily want to get into all of them here today, but.
No.
It's not a matter of.
If it is going to happen, it's just a matter of timing and again I think the third and fourth quarter will end up being slightly lower there than what we expected it's offset by some positives right T. Mobile has been a fantastic account for us. This year. It continues to grow the opportunities with them are very exciting for our firm and then what we're seeing on the fiber side right. The fiber business is growing leaps and <unk>.
Bounds the engineering work that we're doing today is has significantly ramped, which which is really the leading indicator to the construction work actually starting so we think that will have a meaningful impact for us in 2022.
With multiple customers, right, even including AT&T, which which which we think is going to be a big part of our business with them next year. So the mix is a little bit different today than what we probably expected into the second half of the year I would say that for the.
Two larger accounts for as the wireless business has been a little bit slower than we anticipated.
With that said right in the third quarter it was probably.
A lot a lot more shrinkage in Q1 and Q2 with those customers than we saw in Q3, we actually saw At&t's business start coming back in Q3, just not to the levels that we expected so.
Again, we're very bullish we know it's coming we see it around the corner, we're positioning and gearing ourselves for it.
<unk>.
We actually think we had an okay quarter relative to what was happening in the market from a topline perspective on the margin side, we were impacted by some closeouts as well on one of the fiber projects that I think the whole industry has talked about but if not for that I think margins would have come in in line, where everybody expected I think our core of our fourth quarter margins are going to be really strong.
That segment again wireless revenues are going to be a little bit light, which is why we lowered our revenue targets a little bit there for Q4, but outside of that that market.
And the opportunity going into 'twenty, two and beyond for that market is just fantastic.
Thanks, Jose and then the follow up is just a clean margin clean energy business and the margin profile is a huge focus of the last conference call. Just talk about where you are in that progression and what are the milestones we should be watching for to get confidence in the margin improvement story there.
But we were hoping for more improvement in Q3, obviously, we were impacted by a couple of things I think.
Truly were.
Very related to the quarter right I think we're through most of our issues I think we're going to see significant improvement in Q4, we're excited to be able to deliver that.
We've been working very hard with that group I know they are extremely focused on it and.
Again somewhat frustrating because we see we see the light at the end of the tunnel, we see are turning.
And hopefully we are here in the fourth quarter, having a very different conversation related to that segment. Thank.
Thank you Sir.
Thanks Neil.
Our next question comes from Noelle Dilts of Stifel.
Thanks, and good morning.
Good morning, all.
So I wanted to hit.
Taking into clean energy a little bit more.
Obviously really strong backlog going into next year I was hoping first you could touch on the mix of that backlog and how we should think about wind versus solar.
And I think last quarter, you talked about the expectation for sort of an ability to grow that business 25%.
Annually you also have one of the largest players in the market talking about flattish revenues for next year. So I was hoping you could comment on.
Yes.
How youre thinking directionally about growth and how we should think about that.
Discrepancy.
Okay.
Yeah sure. So a couple of things right I think when we look at our clean energy and infrastructure business I think we have the best diversified biz.
Business mix of any player in the industry. When you think about everything we can do not just from a renewable perspective, but just about every power generation need that our customers are going to have.
When you look at renewables in particular right you have a big difference between wind and solar for wind business was a business that over the course of the last year or so has has been impacted relative to the available projects in the transmission assets related to wind and the availability of bringing new wind farms on I think when you look at the solar side of the business the solar side of the.
Business has been on fire, it's growing leaps and bounds. So depending on where you are skewed is going to depend on revenue growth opportunities going into 'twenty to 'twenty. One for US was a year in which we saw some wind revenue declines which is partly what you see happening in Q3 radar business is converting to much more of a solar business from a growth perspective, I think we will.
Have a.
A relatively flattish year in 'twenty two on wind and we think it will pick up again in 2300 <unk>. Some of these transmission lines come.
<unk> built and are in place to really open up a lot of that wind quarter in the meantime, if you want to grow this business you've got to grow your solar right I think when you look at.
The Purion competitor you are talking about I think.
They actually had a we think a fantastic one year this year, which we didn't necessarily experience. So we think we saw that wind decline in 'twenty two we think.
121 that we think they will probably see it more in 'twenty, two which is which is why we are.
I think is where the differences.
Okay. Thanks.
And then second just.
I know, it's a little bit early to be talking about 2022.
But I was hoping you could maybe comment on how generally youre thinking about the timing of work next year.
As past.
On the telecom side, you tended to see kind of a slow start to the year and then a really strong fourth quarter, but you have some different dynamics here with work appearing to kind of accelerate in the fourth quarter and into into the first.
Wondering just how you're thinking about the timing there and then also on the clean energy side, we've heard some others talk about some projects pushing to the right. So do you think you will see a slower start to the year, there and a stronger back half any sort of high level.
<unk> there just some.
Thoughts there on how to think about the cadence of earnings through the year would be helpful. Thanks.
Sure.
I think we're obviously working through budget season, now and we'll have a much better outlook on our next call relative to timing.
Just generally right I think our communications business there'll be a lot more evenly distributed next year with with the with the amount of projects that we hope to be starting early in the year I think our oil and gas business will probably be a little different right, where we've got some projects that may delay in Q1, and we expect some of that activity to really start in Q2 and beyond clean energy is a mixed right I think.
We were very.
Cognizant of the fact of what is happening with the supply chain issues in and what could potentially how that could potentially skew project. So.
I think it's going to be a fantastic year, but I do think we've got to be cognizant of the fact that some of that stuff.
We're going to have to manage through and then on the transmission side I think it's relatively similar to what we saw this year.
When you pro forma in the interim acquisition so.
So we feel good about it.
The challenges ahead, we're dealing with these vaccine mandates that we're going to have to fully understand how it affects the workforce. We're doing everything we can to prepare ourselves for that and to make sure that we have no disruption a lot of those rules came out yesterday so.
Lots of things that we're managing but I think all in all the demand for our services through the roof. So I think it'll be.
A really good year across the board.
Regardless of how you look at it maybe.
Couple of a couple of thousand different segments, but it should be a great year.
Thank you I appreciate that.
We will take our next question from Andy Kaplowitz of Citigroup.
Good morning, guys good.
Good morning, Andy how are you. Good how are you Jose electronic transmission margin in the high single digits is the highest it's been a while I think since 2014.
I know, that's probably a lot of in trend, but with the alleviation of pressure I think your problem projects are over there.
And then in trend, obviously nice scale to the business what kind of opportunities can that open up for you in 2002, and do you see a path towards double digit margin.
We're super excited to Andy.
Just the level of opportunities we are seeing there.
I think the way the customers have reacted to the acquisition the opportunity subset that's come from it we.
We feel really good that we'll be able to grow the business and grow it at solid margins good quarter for us from a margin perspective, right. We will have a little bit of seasonality in Q4, while we definitely think that the level of margin profile that we saw in Q3 is sustainable throughout all of 'twenty two.
And again, it's I think really one of the bright spots.
What we were able to deliver in this quarter and hopefully we'll be able to talk about some of the other segments and similar light in the coming quarters.
That's helpful. And then I know, you're still guiding to that sort of one $5 billion to $2 billion run rate in the oil and gas next year, but as you know oil and gas for Mastec has continued to beat expectations on I know, maybe there's a little bit of pull forward here, but especially on the margin side. So I guess why shouldn't we think that that's possible in 'twenty two that you saw.
To sustain these higher margins and there is some upside.
At that one $5 billion to $2 billion.
I think supply chain is having an impact on the industry right. So I think projects that started that had commodities.
Bought already in other words, the pipe projects that had pipe pipe sitting.
<unk> is different than somebody who is trying to build something to you today and looking for five just because of the dramatic increase in pipe costs. Those costs are up north of 50% over the course of the last few months I think that has to kind of.
And Thats pure project cost right. So at the end of the day, we've got customers that.
We know what to do things, but are hesitant to pull the trigger based on that they are working hard to try to figure it out.
As I think that becomes clear then we could probably look at our story a little bit differently, but I think with what we know today, we still think thats the reasonable outlook for 2022.
I appreciate it Jose.
Thanks, Andy.
We will take our next question from Justin <unk> of Baird.
Yes, hi, good morning, I've got two one bigger picture. So I guess I'll start there and then and then one more maybe more financial but.
It sounded like the supply chain issues really are more on the oil and gas side that you talked about the clean energy margins, maybe more pressured a little idiosyncratic with that.
The Covid outbreak that you had in some of the problem projects, but.
Are there are there supply chain issues that youre seeing as well, there and where the bottlenecks.
Youre seeing particularly on the solar side that could impact the timing of some of those starts.
Well the reality is that their supply chain issues everywhere right. So the issues, how do you manage through them and how do you ultimately.
Have the least impact on your business as possible, but we're seeing it in some of the telecom equipment and some of the shipping times of getting stuff here different customers handle it differently right. Obviously, the larger customers I think are less impacted by it and some of the smaller customers. We're seeing some of it on the solar side with some of the suppliers that you need in the solar business, we're seeing it in some of your <unk>.
Everyday materials that you use on a construction site. So again I don't think it has had.
Meaningful challenges for us relative to pushing schedules and things, but it's something that we're obviously paying a lot of attention to.
The cost of the we don't we don't have a lot of commodity risk in our contracts, but we do have some small miscellaneous items that we buy we have seen cost pressure related to that as well. So I think everybody in today's world is impacted in some way or another I think we've been able to mitigate those impacts with the exception of a couple of projects here, there and hopefully that's our aim.
To manage through it until it gets better.
Okay, that's fair enough.
I guess the other one is just on the new credit facility and the potential for you guys to get an investment grade rating here on your debt I'm, just wondering what kind of interest expense savings or are you thinking about for next year I think.
What could you.
Possibly kind of look at that preliminarily versus the $54 million this year.
Hey, Justin.
Looking obviously again for next year will consider at the cash flow performance. This year has been very strong we would anticipate it's going to be continue to be very strong next year.
<unk>.
Our capital profile right now.
<unk> is a combination of fixed and floating.
We've just redone the facility a facility at slightly improved terms, so that'll improve that should improve the interest expense a little bit year over year.
Unknown for us going forward is going to be what would happen to short term rates. So it's a little hard to predict.
Generally speaking there is a little bit of a bias towards a reduction year over year on our costs.
Obviously, we have to approach the rating agencies, and we have to get and we have to get them.
Change in rating before we can see anything else happened relative to our capital structure.
But I think the most direct impact US right now is a slight improvement that we have on our credit facility, which will help us.
Unknown when you think about next year, so what happens to short term rates and how those move generally speaking I think most folks would anticipate they're going to go up some so maybe together have you pushed it together, it's kind of a push in terms of the initial view for next year I think with the investment grade ratings would give us right. It would give us meaningful flexibility going forward right in terms of financing.
As we look at alternatives and opportunities to maximize shareholder value. So obviously, we'd be very pleased if we can get into that profile in that rating. We think gate based on our cash flow based on our balance sheet management based on everything else and now with the change that we've made in our facility, which is now an unsecured facility that's kind of a precursor.
Towards improving our ratings profile and we think with where we are today. We think we're at that point, but obviously, we have to get the rating agencies to to agree with us. So we're hopeful for that and.
No.