Q3 2022 MasTec Inc Earnings Call
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When it comes to my Stakes third quarter 2022 earnings Conference call. Initially broadcast on Friday November four 2022.
Let me remind participants that today's call is being recorded goes.
At this time I'd like to turn the call over to our host Barbara Doyle Gnostics, Vice President of Investor Relations Mark.
Thanks, Elena and good morning, everyone.
Welcome to <unk> third quarter call.
The following statement is made pursuant to the safe Harbor for forward looking statements described in the private Securities Litigation Reform Act of 1995.
These communications, we may make certain statements that are forward looking such as statements regarding <unk> future results plans and anticipated transit in industries, where we operate.
These forward looking statements are the company's expectations, although they had initial broadcast of this conference call and the <unk>.
Company does not undertake to update these expectations based on subsequent events or knowledge various risks uncertainties and assumptions are detailed in our press releases and filings with the SEC.
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 today's call.
Today's remarks by management, we'll be discussing adjusted financial metrics reconciled in yesterday's press release and supporting schedules. In addition, we may use certain non-GAAP financial measures in this call a reconciliation of any non-GAAP financial measures not reconciled in these comps to the most comparable GAAP financial measure can be found.
That in our earnings press release.
With us today, we have Jose Mas, our CEO and George Pita, our executive Vice President and CFO . The format of the call with opening remarks and analysis by Jose followed by a financial review from George These discussions will be followed by Q&A period, and we expect the call to last about 60 minutes, we had another good quarter and a lot of important things to talk about today. So I'll.
Turn the call up for Jose So we could go out okay.
Thanks Mark.
Good morning, and welcome to <unk> 2022 third quarter call.
I'll 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 before getting into the quarterly details I'd like to offer my perspective on where I think mostek stands today.
Just two short years ago on March six 2023rd quarter call, we laid out our long term goal of achieving annual revenue of $10 billion plus.
It is important to remember at that time <unk> was on pace to generate just over $6 billion of revenue in 2020.
With 28% of that coming from our oil and gas business.
Still somewhat unsure of where the Covid pandemic would take US we had seen a significant impact to our oil and gas business and the demand outlook for pipeline projects entering 2021.
Our ability to provide our $10 billion outlook was dependent on the strength, we're seeing across our non oil and gas businesses and our ability to expand our footprint and capabilities to capitalize on those markets.
Considering 56% of our operational EBITDA in 2020 came from oil and gas the growth of these other markets needed to happen not only quickly but profitably.
As a result, we focused heavily on growing our communications power delivery and clean energy businesses.
Combined with investing heavily in growing our resources and capabilities organically. We made a number of acquisitions that are effectively transformed <unk> into a leader in the energy space.
With the acquisitions of entrants and Henkels, <unk> Mccoy and 2021 and with the recent addition of IAA, we've positioned ourselves at the forefront of markets that have significant demand and growth opportunities.
While we faced a number of challenges during this transformation.
Truly believe that our third quarter results begin to show the potential of <unk> long term earnings power.
I'd like to highlight some key financial accomplishments during the quarter.
We now expect revenue to approach $9 7 billion in 2022, a 22% year over year increase and are confident 2023 revenues will approach or exceed $13 billion. So far exceeding our ambitious $10 billion goal. So just two years ago.
Our non oil and gas segment revenues were up 38% year over year and represented 85% of revenue and 80% of operational EBITDA for the third quarter significantly diversifying both our revenue and earnings mix.
Our non oil and gas segments achieved double digit EBITDA margins, improving 250 basis points year over year, and 370 basis points sequentially.
Communication and power delivery EBITDA margins, both exceeded 12%.
While clean energy and infrastructure EBITDA margins were below our expectations. They did improve 170 basis points year over year, and 550 basis points sequentially.
And finally backlog not including IAA is at record levels and our second to third quarter backlog increased sequentially for the first time since 2018.
In summary, while the quarter was not perfect and quite frankly, we could have and should have done better I do believe it properly reflects the cadence of improvements we had previously laid out.
More importantly, we expect our non oil and gas segments that performed very well in the fourth quarter and are very confident we will deliver solid fourth quarter improvements in our clean energy and infrastructure segment.
Embedded in our results, we continue to make significant investments in growth.
Demand for our services is incredibly high and our prospects to deliver long term revenue and earnings growth are I believe better than at anytime in our history.
I'd also like to take this opportunity to welcome the IAA team members to the Master family.
The transaction, which is the largest in <unk> history closed a few weeks ago, and we look forward to playing a critical role in our country's energy transition.
I'd like to highlight key points that I believe make this an excellent strategic fit for master.
First it continues to grow our presence in the energy market and enhances our ESG profile and what we believe is an ongoing energy transformation related to both power generation and delivery as the country transitions to a carbon neutral economy.
Second <unk> roots are those of the union renewable contractor, while mostek had been an exclusively non union renewables construction company. This transaction expands our renewable business into Union markets. More importantly, it allows us to cross sell complementary service to the same customers with the investments we made last.
Year in growing our union transmission and distribution presence.
<unk>.
<unk> adds nearly 6000 team members in a market where skilled labor to serve a growing market is so scarce.
In a challenging procurement and labor market. This added scale gives us the ability to more efficiently serve our customers with consistency at scale.
Fourth.
<unk> is led by an excellent management team with deep generational roots in the business and a strong family type culture with an emphasis on safety.
Our cultures are similar and complementary.
We believe with Mostek support there are great opportunities for future growth and margin improvement.
And fifth IAA civil and infrastructure business combined with <unk> civil and infrastructure business creates an improved competitor of size and added scale and yet another market thats undergoing strong growth with the benefit of investments from the infrastructure Bill.
It's also important to note that we announced <unk> intention to acquire IAA on July 25.
And just two days later on July 27, the inflation reduction Act was announced.
This piece of legislation contains nearly $370 billion in incentives that will directly impact the markets that <unk> serves.
The acquisition of IAA significantly enhances the number of opportunities available domestic as a result of the inflation reduction Act.
Now I'd like to cover some industry specifics.
Our communications revenue for the quarter was $889 million a.
A 33% year over year increase and we expect full year revenues to grow by over 25%.
EBITDA margins in this segment was 12, 4%, a 170 basis point improvement year over year, and a 200 basis point improvement sequentially.
It's good to finally see the impact of the infrastructure growth associated with both <unk> and the rural digital opportunity Fund finally start to show up in our financials.
Our growth in the quarter was driven by year over year growth of 33% with AT&T, 21% with Comcast, 50% with T mobile, 42% with Verizon and strong increases with a number of our dock funded customers.
In addition to the significant demand related to fiber opportunities. The <unk> Revolution continues to transform the communications ecosystem, requiring networks to be upgraded and expanded to meet the ever increasing demand for data and internet usage.
Not only must new equipment be added to existing cell towers millions of new small and micro cells must also be built and connected including fiber and power.
All of these new points of presence not only need to be built but they will require ongoing maintenance and service, creating a significant long term maintenance opportunity.
Moving to our power delivery segment revenue was $688 million versus $365 million in last year's third quarter.
Margins were up 460 basis points sequentially and our outlook remains strong.
We are in the midst of an energy transition in the United States and our customers focus on reliability hardening renewable connectivity and meeting the challenges of providing power to customers for electric vehicle charging demand usage are transforming the grid.
We believe the scale, we have been able to achieve along with our history of performance and safety uniquely position us to play a significant role in helping meet the needs of utilities and energy developers.
Moving to our clean energy and infrastructure segment.
Revenue was $563 million for the third quarter.
Results for the segment do not include IAA, although a partial quarter for IAA will be included in our fourth quarter results.
Backlog in this segment was at record levels and also did not include IAA backlog, which will be added in the fourth quarter.
Despite the challenges we face this year in the renewable energy market with the Commerce Department Solar panel investigation.
<unk> is incredibly strong heading into 2023.
We expect activity to further increase as the inflation reduction act benefits begin to impact our business in the second half of 2023.
We are in the very early innings of dynamic market that will offer us tremendous opportunities for growth.
We look forward with a combination of IAA to providing our customers with solutions at scale.
The acquisition has been very well received by both existing and new customers and we believe that our cross selling opportunities uniquely position us in this segment.
Moving to our oil and gas segment revenue was $376 million versus $858 million last year.
Margins remained solid despite the significant revenue drop.
Backlog was up year over year and sequentially.
Last quarter, we announced our largest award in over three years.
We have seen a significant uptick in project activity for 2023, 'twenty, four and 'twenty, five and expect backlog to materially build by year end.
We expect significant growth in this segment in 2023.
With or without the completion of the mountain Valley pipeline.
To recap I'm incredibly proud of how we've transformed and transition mostek over the last two years.
I truly believe this quarter offers a glimpse of our potential as a company.
Today, we enjoy a significant presence in some of the most resilient growth markets and our economy.
We are honored to work with our customers supporting the need for bandwidth and communications and helping our energy customers as we transition to a carbon neutral economy.
I'd like to take this opportunity to thank the men and women of Mastec for their performance and hard work.
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 and.
Integrity honesty and in providing our customers a great 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 results in a challenging environment and position ourselves for continued growth and success.
I will now turn the call over to George for our financial review George.
Thanks, Jose and good morning, everyone.
Today I'll review, our third quarter 'twenty, two financial results and provide additional color on our guidance expectation for the balance of the year, which now includes partial quarter operations for the IAA acquisition completed in early October .
Yeah.
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.
Reconciliations and details of non-GAAP measures can be found on our press release, our website or our SEC filings.
Third quarter results were generally in line with our guidance expectation with revenue at $2 5 billion.
And with a slight beat in adjusted EBITDA at $246 million.
Third quarter adjusted diluted earnings were $1 34 per share compared to our expectation of $1 29 per share.
And this was driven by about <unk> <unk> per share beat in adjusted EBITDA with the balance due to lower income tax expense in the quarter, resulting from tax true ups, partially offset by higher interest costs.
Third quarter consolidated adjusted EBITDA margin rate showed a 200 basis point improvement over second quarter levels and approached 10% of revenue.
Importantly, this performance level was achieved despite an approximate $500 million year over year decline in oil and gas segment revenue.
In summary, third quarter performance was driven by approximately $600 million.
Of year over year, non oil and gas segment revenue growth and with strong adjusted EBITDA margin rate performance of 10, 2% of revenue.
While we feel we can further improve on these results in the future. This performance begins to demonstrate the potential of <unk> future earnings profile, driven primarily by expanded and improved non oil and gas segment operations.
Third quarter revenue growth and non oil and gas segment operations was driven by approximately $300 million or 88% and our power delivery segment.
Approximately $200 million or 33% and our communications segment.
And approximately $50 million or 9% and our clean energy and infrastructure segment or clean energy.
We continue to expect strong revenue growth in these areas in the future and this belief is supported by record third quarter backlog levels for all our non oil and gas segments.
During the third quarter, we substantially completed our integration efforts for the Henkels <unk> Macquarie acquisition and incurred initial acquisition related expenses for the IEA acquisition completed in October .
During the third quarter, despite the working capital requirements associated with a sequential revenue increase of over $200 million.
We generated $118 million in cash flow from operations and our net debt level was unchanged.
We continue to expect strong cash flow from operations during the fourth quarter as legacy operations seasonality and project timing typically utilize lower levels of working capital during the fourth quarter.
We remain committed to maintaining a strong balance sheet supportive of our investment grade rating and expect that the combination of improved 2023, adjusted EBITDA performance and moderate levels of 2023 capital expenditures and strategic investments will reduce overall net debt will overall net debt levels.
And significantly improve our leverage metrics in 2023.
We have ample liquidity of approximately $950 million at the end of the third quarter and this level was not impacted with the fourth quarter IAA acquisition.
In summary, while 2022 has had its challenges we are encouraged by our third quarter results and strongly believe that we are well positioned for long term growth opportunities in both revenue and operating margin expansion.
Now I will cover some detail regarding our segment results and expectations.
Third quarter Communications segment revenue was $889 million.
A 33% increase when compared to the same period last year.
An 8% sequential growth when compared to the second quarter.
Reflecting expanded wireless wireline services as telecommunications partners accelerate the deployment of spectrum in fiber for transformational <unk> network enhancement.
Third quarter Communications segment, adjusted EBITDA margin rate was 12, 4%, a 200 basis point improvement over second quarter levels.
Primarily due to overhead leverage from increased wireless revenue levels and improved wireline results as new art off wireline markets transition from startup mode to operations mode.
Okay.
Based on normal year end seasonality, we expect fourth quarter communications segment revenue to moderate from third quarter levels and slightly exceed $800 million.
With adjusted EBITDA margin rate approximating last year's fourth quarter.
This equates to a continued expectation that annual 2022 communications segment revenue will approximate $3 2 billion.
And annual 2022, adjusted EBITDA margin rate will be in the low to mid 10% range.
If you do the math you will note that our annual 2022 expectation.
<unk> strong and accelerating second half 2022 trends.
Which we believe will continue into 2023, giving us significant near term growth opportunity in this segment.
Third quarter clean energy segment revenue was $563 million a nine.
<unk> increase when compared to the same period last year.
Third quarter adjusted EBITDA margin rate was four 4% of revenue up 170 basis points from a year ago, and a 550 basis point sequential improvement compared to the second quarter.
While performance improved third quarter adjusted EBITDA margin rate performance. In this segment was still negatively impacted by select industrial projects discussed during our second quarter call.
As we look forward with fourth quarter 2022 segment was clean energy segment results will include partial quarter operations of IEA, which we estimate will add approximately $500 million in revenue and a mid single digit adjusted EBITDA margin rate.
Inclusive of IEA, we expect fourth quarter clean energy segment revenue to approach $1 1 billion.
At a mid to high single digit adjusted EBITDA margin rate that exceeds last year's fourth quarter level.
And this represents the highest clean energy segment quarterly adjusted EBITDA margin rate performance in over two years.
This equates to an annual 2020 to clean energy segment revenue expectation of approximately $2 6 billion.
With an annual adjusted EBITDA margin rate expectation in the mid 4% range.
As we have previously stated the combination of IEA and Mastec scale capacity and resources, coupled with lower levels of solar panel supply chain disruptions and increased levels of governmental funding support for our customers from the recently enacted inflation reduction act are expected to accelerate.
Renewable power energy transition and civil project activity for years to come.
Accordingly, we expect that this segment can approximate $5 billion in revenue in 2023.
With an improved annual adjusted EBITDA margin rate performance in the mid to high single digit range.
Third quarter power delivery segment revenue was $666 million and 88% increase when compared to the same period last year, and a 6% sequential growth when compared to the second quarter.
During the quarter, we substantially completed integration efforts for the Henkels <unk> Mccoy acquisition.
Adjusted EBITDA margin rate was 12, 1% of revenue a 260 basis point improvement over last year's third quarter, and a 460 basis point improvement sequentially from the second quarter.
Within the third quarter performance for the power delivery segment, our electrical and gas distribution services continued to perform well.
And we had strong sequential improvement in our legacy transmission operations driven by the non recurrence of second quarter project startup delays and project closeout costs.
Okay.
Looking forward, we expect fourth quarter power delivery segment revenue will approximate $700 million.
With adjusted EBITDA margin rate in the high single digit range.
This equates to an annual 2020 to power delivery segment revenue expectation of approximately $2 7 billion with.
With an adjusted.
Our EBITDA margin rate in the mid 9% range.
Third quarter oil and gas segment revenue was $376 million.
And adjusted EBITDA margin rate was 13, 4% of revenue.
As expected this represented a significant revenue and adjusted EBITDA quarterly decline when compared to last year and that has been largely offset during the third quarter by non oil and gas segment operations.
We anticipate that fourth quarter oil and gas segment revenue and adjusted EBITDA margin rate levels will decline from third quarter levels as lower overhead absorption impacts a seasonally slow quarter.
This equates to an annual 2022 oil and gas segment view of approximately $1 2 billion in revenue.
With adjusted EBITDA margin rate in the mid to high 13% range.
As Jose mentioned, we have strong visibility into higher levels of bidding and awards for 2023 pipeline services and believe that the oil and gas segment will show a sizable growth in 2023.
This expectation is not dependent on a restart of construction activities for the MVP pipeline, which continues to be delayed due to permitting and judicial actions.
Third quarter adjusted corporate segment net costs were approximately $29 billion or 115 basis points of consolidated third quarter revenue and we expect a similar cost level in the fourth quarter.
Turning to our business mix based on the strategic diversification of our revenue stream during the third quarter no customer represented more than 10% of our total revenue.
Third quarter 2022 revenue derived from Master service agreements reached 52% of our total revenue compared to 37% for the same period last year, a significant increase and this was primarily derived from recurring utility services spend greatly increasing the repeatable nature of our revenue profile.
Yeah.
As of September 30, 22, we had a record total backlog of approximately $11 2 billion.
Sequentially up approximately $220 million and up approximately $2 7 billion.
When compared to the same period last year.
It should be noted that we closed the acquisition on October 7th and thus no IAA amounts are included in our record third quarter backlog levels.
Importantly September 32022 backlog represented record third quarter levels across all non non oil and gas segments.
Demonstrating the end market revenue shift that is occurring in our operations.
That said 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 contract signings.
Now I will discuss our cash flow liquidity working capital usage and capital investments.
During the third quarter, despite the working capital requirements associated with the sequential revenue increase over $200 million, we generated $118 million in cash flow from operations and our net debt level was unchanged.
We continue to expect strong cash flow from operations during the fourth quarter as legacy operations seasonality and project timing typically utilize lower levels of working capital.
This equates to an annual 2022 cash flow from operations expectation in the low to mid $500 million range.
Including approximately $1 billion and issued and assumed debt during the fourth quarter from the IAA acquisition, we expect year end net debt levels will approximate $2 8 billion.
Based on the combination of the acquisition debt and higher levels of floating interest rates, we have updated our fourth quarter interest expense estimate.
We remain committed to maintaining a strong balance sheet supported by our investment grade rating and expect that the combination of improved 2023, adjusted EBITDA performance and continued moderated levels of 2023 capital expenditures and strategic investments will reduce overall net debt levels and significantly improve our leverage metrics.
Bricks.
We have ample liquidity of approximately $950 million at the end of the third quarter and this level was not impacted by the fourth quarter IEA acquisition.
With regard to our working capital profile during the third quarter Dsos were 89 days compared to 88 days at the end of the second quarter.
As we look forward, we anticipate that year end 2022, dsos will slightly improve to the mid <unk> range.
As discussed during our second quarter earnings call, we accelerated capital expenditure purchases during the first half of 2022, as we ensure delivery of supply chain constrained equipment.
During the third quarter, we moderated our level of capital expenditures with only $23 million in gross cash Capex, which was fully offset by Capex disposals.
We anticipate a continuation of a moderated capital expenditure program during the fourth quarter as we focus on deleveraging.
In summary, our long term capital structure is solid with ample liquidity and we continue to be committed to our investment grade rating.
We are mindful at the IAA acquisition will impact near term leverage ratios and we've communicated our pant our plan to normalize our post transaction leverage profile during 2023 with credit rating agencies, who have maintained our investment grade rating.
Moving to our recently updated 2022 guidance inclusive of the partial quarter results of the IAA acquisition, we expect fourth quarter revenue of $2 9 billion.
With adjusted EBITDA of $257 million or eight 8% of revenue now.
Adjusted diluted earnings of $1 per share.
This equates to an annual 2022 expectation of approximately $9 $7 billion in revenue with adjusted EBITDA approximating $780 million.
And adjusted net income of $232 million.
With adjusted diluted earnings per share at $3 <unk>.
This concludes our prepared remarks, and we'll now turn the call back to the operator for Q&A operator.
Thank you if you would like to ask a question at this time Please press star.
One on your telephone Poles.
One to ask a question.
Keith you limit your questions to one with the release.
As a follow up.
Okay.
I'd now ask first question Tom.
Justin Hauke Robert W.
Yeah.
Hi, good morning, everyone.
And nice to see.
The non oil and gas contribution coming through there.
Earnings results so.
I guess I had.
Questions.
Thinking about that.
The debt structure.
And kind of the interest rate or for next year.
Yes.
Maybe two questions that I would put in that would be.
R R.
The two tranches of debt that you have now with the.
The.
Not getting it fully redeemed from the IEA bondholders.
What costs do you have to carry that next year and is there any expectation of being able to refinance those and then I guess the second question is that the $45 million of interest expense.
Youre assuming in <unk> is that a good run rate to think about.
Quarterly for next year kind of fully baked yet.
Thanks, Josh This is George I'll take that.
I'll take your second part first in terms of the $45 million run rate.
I would say this I mean, we talked about that we expect to Delever in 2023.
I would think 45 is more of a high mark in terms of an expectation.
As we would expect to Delever during 2023 that said it is hard to predict how interest rates would change over the course of time and into 2023. So the combination of factors. Those are two factors to consider in terms of.
Of modeling going forward.
You look at our capital structure today at the end of Q4, we'll have about 45% of our capital structure on a floating rate basis, and obviously ups costing us more than it did a year ago. As that's moved I mean, we are constantly we have ultimate flexibility in our capital structure, even the additions that we did with IEA and the term loans are.
Pre payable and we're constantly looking at monitoring what is the best mix of.
Of our future capital structure going forward.
Said relative to the IAA bonds I mean, we've assumed all $300 million of those bonds as we close the transaction here on October seven.
Per the terms of the indenture it did not trigger a change of control put option.
And at this point $75 million of those amounts have been converted into mostek notes as a result of our exchange offer.
That puts them at terms consistent with our existing bonds.
The remaining $225 million that's out there remains that of IEA.
Both tranches are now rated investment grade.
And at this point.
IAA bonds coupon rate is comparable to what our new issue rate might be.
Relative to pricing and therefore, we intend to keep these bonds in place.
Okay. Okay. That's helpful.
And the second question I had was just you had previously.
Previously you guys had given.
EBITDA.
Guidance, I guess or at least a framework of one $1 7 billion for 2023.
I just was curious if theres been any change in that outlook. It sounded like the revenue outlook that you gave this is unchanged.
Nothing's really changed so we talked about.
$13 billion in revenue for next year, I think that that's becoming more and more clear. The obviously the market is supportive of that.
We laid out the margin profile of that early I still think it's very attainable.
I think we've laid out $1 50 to one 2% and I think somewhere in that range, while we're not providing guidance for 'twenty three because theres a lot of work to do I think thats reasonable.
Thank you very much.
Thanks, Justin.
Thank you next question from Alex.
Thank you.
Please go ahead.
Good morning Jose.
Nice quarter here.
Thank you.
A couple of quick questions first obviously with the macro concerns of an economic slowdown in front of us.
Do you think your business.
May be affected by that understanding that some of your activities are kind of in the last mile. But yet there is a lot of government funding out there and other stimulus activities out there that are driving the clean energy marketplace. So just broadly speaking how do you think a mild recession is going to affect your business.
So first I think we're in and we have an incredibly resilient portfolio and I think you laid out some of it but if you think about telecom.
So much government funding has gone into art off there is no question about the need for bandwidth and speed <unk> is here <unk> as is being pushed fiber activity is probably at the highest levels that I've ever seen in my career and actually significantly expanding as we look into 'twenty, three and beyond I think that.
The truth is there is there is theres more work there than we can currently do so we're aggressively trying to grow into that as fast as we can when you think about our energy market and the conversion to renewables I think thats going to be unaffected. When you think about the hardening of the grid. That's been approved by so many public services across the country I think thats unaffected when you think.
About transmission lines being built to connect renewables, that's not going to be impacted when you think about.
Different utilities and how they are meeting the challenges of electric vehicle usage that won't be impacted when you think about pipe pipelines in the commodity prices, where they've been and gas as a transition aerie fuel with the needs that exist today and moving it I think thats an affected when you think about the infrastructure bill relative to our civil business I think thats unaffected.
So the reality is that there's a very very small piece of our portfolio that you could even equate to something like housing that might be mildly effective and I would argue the opposite Alex which is.
Somewhat of a decline in the economy will probably actually helps us because it will deflate the inflationary pressures that we see in our business today. So I think that the revenue outlook for our businesses incredibly resilient and anything that might happen could actually help us from a cost perspective.
Secondly on the IEA acquisition, you've only owned it for a couple of weeks, but can you talk about sort of the quality of backlog that you've discovered and the opportunity for synergies both either revenue or cost.
Sure. So again, we're super excited I think the market is.
Incredibly robust demand for the services is off the charts I think youre going to see that.
Coming quarters, both Mastrich's legacy business and a tremendous backlog growth just based on the conversations and our rewards we're seeing from customers.
It did.
Report backlog, a little bit differently than we did so we think the IAA add to backlog will be somewhere in the $2 billion range in the fourth quarter.
And as the quarters Mt. We think theres going to be considerable considerable additions to that so you think about solar even when even a lot of these transition aerie fuels that we're thinking about whether it's hydrogen or carbon secretariat sequestration that market is incredibly active and again I think it's going to be very resilient over the course of.
The next couple of years, regardless of what happens with the economy.
Nice quarter good luck. Thanks.
Thanks, Alex.
Next question comes from Amit.
So I think it will.
Good morning, guys.
Good morning, Andy.
Well as I see you had a nice step up in communications margins. They can talk to about to $12. Four I know supply chain has been very difficult. So maybe you could talk about what went right in the quarter was this better utilization of your people will be able to renegotiate any of your significant contracts, maybe fuel costs have been coming down a little anymore color there would be helpful.
Well first I'd say, Andy we expected it right.
If you thought about the way we guided to Q3, we expected a step up I know that.
Theres been concern out there relative to our ability to hit that but we felt comfortable we've seen it in our business we've been growing the volumes finally came in.
33% revenue growth in the quarter is fantastic.
I'd also say there's pressure in that rate while the results are good and the moderate a little bit in Q4, because it's just timing and the seasonality of it. The reality is that we can achieve more than that rate. Once we get on a run rate. Once we're fully utilized once we've got the right number of people onboard we actually think those are margins at.
Over the long term could be improved solid performance again.
It was good to see us deliver and nothing special about the quarter. There was no individual areas, where we had any big significant pickups, just solid performance throughout.
Thanks, San Jose and then can you talk a little bit more about your clean energy business, you mentioned mid to high single digit margin in clean energy for Q4 could.
Could you give us what the EBITDA is that's coming in from IAA in key solar are you thinking that your industrial problem project drag is getting behind you and how much improvement. If any are you seeing in solar markets to help with utilization in the segment.
Yes, sure. So we still had some drag in Q3 with some of the industrial projects. We talked about in Q2, I think George alluded to that in his prepared remarks.
When we think about Q4 and beyond into the last quarter that IAA reported was about I think it was about $5 $60 six points. In Q2, there are third quarter was a little bit weaker than they originally anticipated for a lot of the same reasons that ive been <unk> been talked about in the industry. The solar panel investigation in the renewable issues.
When we think about Q4 for them, we're kind of thinking about it in a way that they delivered Q2.
It's probably a conservative view.
Again, we've only owned it a few weeks, but I think it's better to be conservative at this point.
We laid out our longer term outlook for them for 23 of 160 to 170 of EBITDA. When we did at $40 to 50 and net income for 2003 quite.
Quite frankly, we think thats unchanged and if anything conservative our job is going to be to see how much we can improve that and the synergies. We can build out of the business to ultimately make that a much better number.
Our customers.
Really reaction to the acquisition has been fantastic again, there is an incredible amount of demand for the services that we offer.
Our job is going to be to pick the right projects the right customers find the right utilization levels make sure that the project stack on each other and we don't have any holes or any any significant starts and stops and thats going to be through the management of the project acquisition process. As we think about it throughout 2003, I think we're going to do a great job at that.
And I'm.
Very very optimistic and confident that we're going to be able to do a lot of great things there, but we're just getting started so as we talk about our next on our next call on our year end call, we'll hopefully be able to highlight that a lot more with.
A lot of New awards, and a lot of expectations going into 'twenty, three but we still got some work to do there.
I appreciate all the color.
Dan.
Next question.
Sure.
Thanks, Ken.
Goldman Sachs.
Yes, good morning team.
That's on a good quarter here that the first question is just about managing inflationary pressures that exist in the market ranging from diesel to labor how are you guys.
Working through those are you able to push some of these costs.
Onto.
On through pricing.
And that like used efficiently.
<unk>.
Built into the way you're thinking about 2003.
Yes, Neil I think.
Couple of things right, we talked a lot about it on our second quarter call, even as far back as Q1, obviously fuel is a huge difference for us in the first half of 'twenty two versus where it was in 'twenty. One I think we modeled that correctly through the balance of the year. We did see some of that we saw some improvements in <unk>.
Fuel costs in the third quarter, obviously ebbs and flows all the time I think we've been very vocal about the inflation inflationary pressures on labor. We've seen it we think it's still exist, it's probably moderated just a little bit.
But it's something that we've got to keep an eye on and again theres. So much demand for our services that I think the inflationary wage pressures will continue for a little bit.
So some of the earlier points as the housing market does cool off a little bit and we think it will it will open up a significant pool of labor that we can draw from that will hopefully counteract some of the wage inflationary pressures that we've historically seen so we're working hard at it.
<unk>.
Team member acquisition is one of the most important things that we do here at <unk>, because we're all about our people and we think we've got a good process in place as we think about 'twenty. Three obviously, we have some tremendous opportunities. We expect a lot of further revenue growth across all of our markets and labor is going to be a key component of that so.
There is no question that we're seeing and we've seen inflationary pressures we've had a lot of discussions with our customers. Since early this year, we've gotten a lot of relief from our customers in many cases, we've talked at length about being able to do it on anniversary dates of contracts on the annual escalators.
Those have come in as as we've expected and due process and into negotiation, we expect that to continue through 2023. So we think it's something that.
Obviously impacted us in the first half of the year, we think we're managing it well we were very vocal about the issues that have caused and are intent on how we're going to manage it and again I think in the third quarter Youll see some of the some of the results of that execution.
And then that backlog with very significant this quarter, where are you seeing it surprise.
Upside and where do you think the backlog.
Translates.
The entire revenue into revenue recognition.
No. It's a great question, it's actually and we said it in our prepared remarks, but it's the first time since 2018 that are second to third quarter backlog increases and it's relatively rare because our third quarter is normally such a high revenue quarter that it's hard to book to bill at the same level and historically.
We've had large pipeline pipeline awards that have really impacted that number. So the beauty of this backlog print was it didn't come from any particular project right. It was really broad based it was across every segment.
A lot of strength a lot of book to Bill. So we're we're super proud of that accomplishment I think we're going to see it across all of our segment I think it's very supportive of the dialogue that we've laid out for 2023 relative to the growth in each segment.
If you were to ask me what could potentially surprise me most of the upside in 'twenty three it's probably our oil and gas business, because we've been expecting it to be down for such a long time, and we're seeing a lot more strength in that market than than than we've seen in previous quarters and are pretty excited about what that means but we think it's pretty broad based.
Obviously, we think the inflation reduction act is going to have a massive impact on our backlog over time.
Some of the rules are still being written so we don't expect to see significant impact from that until the second half of 'twenty three but.
Frankly, all things are trending in a fantastic direction and we're really excited about what we think we can accomplish.
Thank you chip.
Thanks Neil.
Next question.
Cool.
Okay.
Hi, good morning, and congratulations on a nice quarter I guess my first question, obviously, we've done a lot with the portfolio and you have some debt right now because you can't do M&A, but given how you've transitioned the portfolio as we think over the medium term is there anything else you think you need or is the portfolio.
Size for any growth opportunities that you see ahead.
And as we're pitching this Q.
As the investment community do you think as we exit 2023 on a more consistent basis is this a portfolio that can generate.
Low low teens type margins.
On a normalized basis. That's my first question and then second question George just trying to think about how we think about the free cash flow conversion.
Company, just with the addition of Henkels <unk> Macquarie and IEA. Thank you.
Sure Jamie So a couple of things right as we think about the future. Obviously the margin profile is going to continue to improve.
One of as you think about total company margins, obviously are clean energy and infrastructure business.
Especially near to mid term is going to have.
More challenges achieving.
<unk> type margins, we think it's a high single to low double digit margin business, we think we'll achieve that and it will obviously drive the.
The EBITDA profile of our business up we think we can get our EBITDA margins in time to double digits that won't be our that's not our guidance for 2003, our guidance for 'twenty three will come in lower than that for sure.
But there is no there is no doubt in my mind that Thats achievable.
And depending on the strength of the market and where we can take the portfolio I think that's only going to improve over time relative to what happens to the portfolio I think we're in a great position today I think we've got so many growth markets in front of us that we've got to execute on I think organically, we're going to be capable of doing a lot.
<unk>.
With that said, we're always looking for opportunities. We think in these these levels of higher that it is going to put a lot of pressures on companies that are levered and I think we will we will have a competitive advantage relative to that in the markets that we serve.
And we'll see what happens over the course of the next couple of years, but we think our portfolio is in a better position than its ever been and we think our growth opportunities are better than they've ever been and again. We're just we're super excited about what the future holds and Jamie relative to free cash flow. We've said before as we've transitioned as we move in this transition in the business morphs.
Less or more away from.
Being centered on oil and gas pipelines, which historically has been the most capital intensive business that we operate in that our free cash flow profile over time, I think is a better profile because our capital intensity is lessened as we've moved into the electric distribution business. If we move now into larger weighing to the renewables business as those businesses are.
Generally are less.
Capital intensive so that would be our expectation going forward I mean, obviously, we started to moderate our capital expenditures during the third quarter and we'll do so into 2023 I think we certainly accelerated some spending in the first half of the year because we were trying to make sure that we were able to secure deliveries of some things that have been supply chain constraints and did that but.
Our free cash flow profile as an entity as we go through this transition is a stronger profile because I think we have a similar working capital profile with an improved capex or capital intensity.
Okay. Congrats thank you.
Thanks, Jamie.
Thank you next question.
Steven Fisher with UBS.
Great. Thanks. Good morning wondering if you could just give a little more color on the margin buildup in the clean energy segment in.
In Q3, and then into Q4, maybe should we assume that the.
The civil piece and renewables, including IEA I guess in Q4 are going to be more at similar levels, but the industrial piece more of like a breakeven or low single digits. How do you see that kind of the buildup within the segment and then trending into into next year.
Sure so.
I think thats accurate right I do think that our civil business is performing well I think over time, our renewables markets will outpace will be the highest margin profile of that group.
I think that the industrial business based on the project profile, we expect to have in 'twenty three will be significantly better than it was in 'twenty, two and it will probably be at similar levels to at least our civil business.
I do think that the margins will be tighter if we think about the three pieces of that business in 'twenty three I do think the fourth quarter of 'twenty, two we will see a little bit of improvement in the industrial segment, but it <unk>, we do expect civil and renewables to outperform the industrial business in the fourth quarter.
Okay. That's very helpful. And then just I apologize if you covered this earlier I missed part of the call, but can you talk a little bit about the visibility you have to renewables projects in say through the first half of 2023.
Have.
Good knowledge of what the slotting is going to be for your customers and how is there and a panel.
Stability and availability in the solar side of things.
Sure so.
I think we've talked about in our clean energy and infrastructure delivering.
At or above $5 billion for 2023, which we think we're highly confident we can achieve.
A significant portion of that will be renewables, probably 60%, 60% plus of that is our renewables business.
I think when we look today at whats in backlog, what's been verbally awarded what we're chasing and we feel really good that we've got most if not all of that currently identified.
Which is an incredible place to be in October of a previous year.
Leads me to believe that we can do a lot better and quite frankly, we will have the ability to move projects in or out depending on.
Really slotting and when Theyre ready a lot of the solar work that we'll be working on and we've been talking about this for a long time, our newer projects, where solar or some people are at the end of their projects, where they are requiring solar panel installations. So theyre waiting on solar panels, but for those that are starting new solar plants.
They're starting they will start to build without the solar panels, because they don't need the solar panels for six to nine months. So it depends where you are in that cycle, we feel good about where our years laying out obviously, it's early we've got a lot of work to do and we will give a lot more updates on our future calls, but obviously spending the level of detail as to understanding how each.
Each project lays out what month it lays out in work and you put your resources. How do you make sure you don't have gaps in your resource schedule, that's exactly what we're building for 'twenty three.
We're hyper focused on it we're hyper focused on making that as efficient as we possibly can and as having the highest utilization rates that we can and I think we'll have a lot more clarity over the course of the next couple of months of how thats going to lay out on a quarter by quarter basis for 2023.
Thanks Jose.
Thanks, Steve.
Next question.
Okay.
Davidson.
Hey, great. Thanks.
Jose the acquisition and integration expenses and power delivery were up quite a bit from last quarter can you just talk about what's embedded in that what you are doing internally and the integration processes.
<unk> an end to end deals and then I guess the follow up to that just sort of how all of that on a sort of internal work Youre doing informs your view of segment margin potential and power delivery going forward.
Hey, Brent this is George I'll take that.
The power delivery number was up this quarter. We've made the point that's why I kind of indicated we really finished substantially completed the integration of henkels.
So what you're seeing there is the finalization of the cost changes that we've made in terms of indirect overheads.
Changing insurance.
Programs a lot of different things that have been that have been in.
In our in our in the process of being evaluated so we've completed that so that number was significantly drop here in the fourth quarter.
And we.
We have a view that our power delivery segment margins should certainly improve in 2023.
As we continue to start realizing more benefits in the in the program as we as we move forward and as we continue to grow so we anticipate the improvements here in that segment going forward.
And.
That's where we're headed we're happy to have completed the.
The integration for Henkels, we started to incur some costs in the third quarter relative to IEA, but a lot of those were acquisition costs right in terms of investment advisor fees bridge fees et cetera, et cetera. So we will have some more of that in the fourth quarter and we'll evaluate from there, but thats a little bit of a different lift than henkels acquisition, which was had some.
More structural changes.
Okay, great. Thanks, John .
To your second to your second question on that Brian in terms of margins I think.
I think the integration has gone really well we've talked.
Previously about the strength of the business and the upside and the growth that we think we can achieve in that business. We're more optimistic today than we were at the time of acquisition about our ability to.
Not only help make them better, but I think we've achieved a lot of that and I think the growth profile of that business will hopefully outpace.
What we originally expected going into the deal.
Yes.
<unk> business. Thank you. Thank.
Thank you.
Next question.
David.
Okay.
Hi, guys. Thanks for taking my question. Thanks for taking my question.
I think this is this is.
Geared more for George George just given.
A fair amount of the capital structure, I think about 45% is floating rate debt.
How are you thinking about just the risk of higher rates at the moment, what do you think about interest rate caps or swaps.
To mitigate potential additional increases just curious sort of how youre thinking about that at the moment. Thank you.
Yes look we're constantly evaluating it.
The reality is obviously, we have a more elevated level right now post the IEA acquisition. We did we did the financing on that in a way to maximize flexibility for us going forward. So we are term loans and whatnot and they are floating rate, but theyre also pre payable at times. So we are constantly looking at what we think depending.
And where the market is what we think is the right <unk>.
<unk> of our capital structure and I guess the answer to that is TBD right. We don't want we don't know yet.
Depending on what market conditions are when we might be able to evaluate whether we should be moving and changing the structure. We certainly have the flexibility to do so.
And to put the current capital structure in a way where that's the case I would also point out that while obviously by floating rate debt is more expensive than it was a year ago. It's still it's still cheaper than fixed rate debt in terms of most most cases, so so based on that.
Certainly a fair question is one that we're evaluating.
Constantly and we will do so in this in this environment.
Okay, Great and then I think you addressed this to some extent with Andy's question.
But is there any can you provide us with any more detail on sort of how IAA performed in the third quarter and sort of what youre expecting.
Overall for the company as a result in 2022.
I know you reiterated your expectations for EBITDA in 'twenty, three but any additional detail there would be helpful.
So noelle I mean third quarter was below there.
The original expectations.
That some public expectations out there to be honest, we haven't spent an enormous amount of time on the trailing 22, because it's somewhat and different for us other than understanding the deal dynamics.
I think we're starting to get our arms around Q4 with them, we've taken again, a very conservative position.
Relative to their forecast I think there are definitely helping to do better than what we've laid out here today, but.
So we own the numbers now so we're going to be more cautious our view on 2023 has is unchanged if not improving.
We laid out.
On earnings capability that we thought was achievable at the time quite frankly.
And I'll say it again, we did this deal two days before the inflation reduction Act got announced the inflation reduction got announced and in my mind. It significantly enhances the prospects of that company for a long long time, including in 'twenty three so I'm very bullish that we'll be able to do better than what our original anticipation was in 'twenty three but we've got a lot of work to do and I think there.
There's lots of opportunities.
Between the combined entity to.
To take out costs.
Be more efficient and to grow faster. So that's stuff that we can't we can't baked in today, we have to execute to that but that's what we'll be working on and I'm incredibly bullish in terms of their long term capabilities. The second half of 'twenty three as everybody has talked about in the industry was challenging for renewables you see it in our numbers you see it in other People's numbers.
And I don't think it was any different for IAA, but it doesn't change the long term outlook for their business and we expect them to have a good fourth quarter right. We were conservative with our numbers, we're hoping they beat them, but it's still.
It's a good fourth quarter relative to the market.
Got it okay. Thank you that makes sense.
Okay.
And as Tom.
Tom Timer Thompson Davis.
Hey, good morning, guys.
Hey, good morning, Adam how you doing.
Great good stock up so much this morning.
Jose on the oil and gas can you just give a little bit of flesh that out a little bit you said done.
You or George but I think something like sizable growth next year.
And then you talked about the projects you were looking at between 2023 and 2025.
I'd just be curious.
If that's kind of traditional oil and gas work or if the opportunities have kind of expanded there.
Yes, so a couple of things first I'd say 'twenty two is a lot softer than we originally anticipated right. So we laid out our longer term outlook of a 1 billion $5 2 billion in the business, we're going to deliver.
Closer to $1 billion to this year.
Think that when we think about 2003, when we say outsized growth we think the one five to two is achievable.
Without the Mountain Valley pipeline, obviously with the Mountain Valley pipeline is dramatically bigger.
Despite the comments that we made today, we still feel comfortable that mountain valley pipeline is going to move forward and it's going to be built and we think there's a highlight we hope it gets built in 'twenty, three but we're probably not going to count on it.
With that said, we're seeing significant strength across all markets right where.
There is a significant number of gas pipelines that are being planned.
And all different stages. Some are very imminent some are more 2425 projects but.
A lot of work is going into them pipe is being bought lot of commitments are being made relative to those projects that we feel really good they're going to happen and then obviously, we've been talking about the carbon sequestration lines, you've been talking about hydrogen we think those projects are closer to fruition than they've been I think will hopefully we'll be talking a lot more about those in the coming quarters.
And again I think weather.
I think our pipeline business generally defined not just oil and gas pipeline in general.
Is going to have a really good run for the next few years and that's somewhat surprising vis vis where we were just two short years ago.
Thanks for that.
Thanks, Adam.
And with data over the last question from Sean Eastman of Keybanc capital markets.
Hi, guys nice update here and thanks for taking my questions.
So Jose you alluded to the oil and gas segment being kind of the one.
Kind of core upside risk driver to the preliminary expectation for next year I wondered if we could round out that discussion a little bit just in terms of how youre thinking about kind of the major kind of upside drivers or.
Risk factors to the downside relative to the preliminary look we have in place here.
Yes, let me let me be clear I think that my commentary was more around what most surprised me from one expectation base right I just.
We've been so negative on oil and gas for a long time that I actually think it's getting better and I think that's somewhat surprising.
The truth is that.
When you look at the balance of our business, what's happening in the energy space is unprecedented.
No.
More bullish on power delivery and clean energy.
Then I am in oil and gas long term I'm more surprised by oil and gas. So I want to be clear on that because I don't want to I don't want to rank them, but the truth is that.
What we're seeing in the energy industry today with <unk> for the first time in my lifetime everything is changing and we're in the middle of that and I think it's going to.
Position us incredibly well for many many years of growth. So unbelievably bullish there, but it's nice to have a full portfolio of businesses that all have in our mines tremendous upside, including communication. So I think.
We've had to manage through ups and downs in different businesses, we've had cycles, where some businesses are doing well and others are struggling and I think we're going to enter a period here for the foreseeable future. While all of our businesses are going to have tremendous upside as we think about the way we've laid out 23.
I am highly confident that we're going to we're going to achieve that if not better I think the risks become macro risks right and again I think very little very little can change in the short term because of all of the government spending involved in the different industries that we're in but obviously inflationary pressure is one that dictates margins and I think we've got probably.
<unk>.
While I'm less concerned about the revenue variations because I think that the market is so strong.
We obviously have to keep an eye on what's happening with inflationary pressures, we've got to keep an eye on.
What we can do relative to passing those costs on that that we that we see and how do we ultimately reduce the level of costs that we experienced so how do we more efficiently bring on new team members, how do we train them how do we make sure. Our people are the most efficient safe workers in the industry and pass along with our customers and Thats.
That's what we're focused on so.
I'm actually incredibly bullish about 2023 at this point.
Okay got it.
If I rewind to the fourth quarter reporting season.
This year.
This past year.
The when you guys rolled out the first quarter guidance. It was just kind of jarring for some folks in terms of kind of the starting point for the year.
I realize it's early here, but I thought maybe we could get ahead of that a little bit in terms of.
Just how pronounced sort of that first half back half could be.
As we get those numbers in place.
For Q2 'twenty two.
Earnings.
Yes, Shawn obviously it started.
We can give directional color Ryan I think.
It's fair to say that the first quarter is typically a very slow quarter. So I think.
Ah seasonality cadence generally speaking.
Roughly maybe a little bit better than last year, but in that similar kind of cadence is probably in the cards I think.
When you look at the different components.
We'll see how the timing of clean energy comes together, it's obviously a different cadence for US now in 'twenty three with the addition of IEA, but I think I think clean energy generally has a slower first quarter alright.
Think communications should be better than in general terms, because we should see some more continuation of.
Maybe at the same rate, but certainly a higher rate of spend than what we saw in the first half of last year on <unk>.
So those are just some factors to consider and we'll obviously give more color when we're when we when we go through the guidance components, but but I think the first quarter typically is a slow start for us and it's not necessarily I don't think there was a big significant change in that as we think of 'twenty three given what we know today.
But I would add a couple I would add a couple of things to that which I think are really important.
When you compare historically, our first quarter, especially in 'twenty two.
Comps were really difficult because oil and gas was so big so just take a step back in the first quarter of 'twenty, one we did $725 million in oil and gas business in the first quarter of 'twenty. Two this year, we did $211 million, we had a $500 million drop off in the first quarter of the year. When you look at the second quarter, we had almost a 280 million.
Drop off in that same oil and gas business, 22% to 21. The reason I say that is R. 23 comps will be dramatically better than R. 22 comps, we're looking back at 'twenty. One so while in 'twenty. Two is very pronounced the growth we had to have to offset the oil and gas decline that will not be the case in 2023.
So I think that phenomenon that we had to live through at the beginning of 'twenty, two which was so challenging for us, which I think created a lot of the issues that we had in the first half of 2022 should not exist in the first half of 'twenty, three making the comps dramatically better than the year being a lot more consistent relative to the look back obviously, we made the acquisition.
<unk> of IAA, it's going to have a huge benefit to us in the first half of the year without anything working against Us and I think that's a big distinction between 'twenty three and 'twenty two.
Jose George Thanks, very much I appreciate it.
Thanks, John I appreciate it.
Thank you.
Further questions at this time I would like to hand, the call back to Jose Mas.
Yes, so again I just want to thank everybody for your interest.
We're happy to print a quarter that we did we look forward to updating you again on our year end call in land and laying out our guidance for 2023, so be safe and talk soon thank you.
Okay.
Thank you and this does conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.