Q4 2022 MasTec Inc Earnings Call
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Welcome to Mastec, So fourth quarter 2022 earnings Conference call. Initially broadcast on Friday February 24th 2023, Let me remind participants that today's call is being recorded and at this time I'd like to turn the call over to our host Marc Lewis <unk>, Vice President of Investor Relations Mark.
Thanks, and good morning, everyone.
Welcome to mass techs fourth quarter earnings call.
All statements made pursuant to the safe Harbor for forward looking statements described in the private Securities Litigation Reform Act of 1995.
Indications will make certain statements that are forward looking such as statements regarding Maastricht 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 initial broadcast of this conference call and the Covenant is not undertake to update these expectations based on subsequent events or knowledge.
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 these communications.
In 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 conference call a reconciliation with the non-GAAP financial measure not reconciled in these comments that most comparable GAAP measure can be found in our earnings release.
Earlier earnings press release that can be found on the website.
Yesterday, we have Jose Mas, our CEO , George Pita, our executive Vice President and Chief Financial Officer, and incoming CFO , Paul Demarco. The format of the call will be opening remarks analysis by Jose followed by 'twenty two financial review from George.
Today longtime financial executive part of our incoming CFO when George retired at the end of March will give our outlook for 2023. These discussions will be followed by a question and answer period, and we expect to call to last about 60 minutes.
Good quarter and a lot of important things to talk about so I'll go ahead and turn it over to Jose Jose.
Thanks, Mark Good morning, and welcome to <unk> 2022, fourth quarter and year end call.
Today, I'll be reviewing our fourth quarter and full year results as well as providing my outlook for 2023 and the markets we serve.
I'd like to start today by thanking the men and women of Mastec their sacrifices and hard work helped us achieve another strong year.
I'm honored and privileged to lead such a great group demand.
The men and women of Mastec are committed to the values of safety environmental stewardship 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 and position ourselves for continued growth and success now.
Now some fourth quarter highlights revenue.
Revenue was $3 billion or 66% year over year increase fourth quarter, adjusted EBITDA was $258 million and fourth quarter adjusted EPS was $1 three.
For the full year 2022 revenue was $9 8 billion, a 23% year over year increase 2022, adjusted EBITDA was $781 million in 2022 full year adjusted earnings per share was $3 five.
While our results met our expectations for 2022, our highlight for the year was really how we positioned <unk> for the future.
Over the last 24 months, we believe we've delivered a transformative effort to further diversify master and positioned ourselves to be a leader in some of the most dynamic and robust industries and our nation.
Just two short years ago in 2020, Mostek was a $6 billion revenue business with nearly 30% of that revenue coming from our from our oil and gas pipeline business.
While the long term prospects of the pipeline business have improved our oil and gas business represented only 12% of revenues in 2022, and EBITDA went from 60, 56% of total company segment EBITDA in 2020 to under 20% this year.
We have delivered on creating a much more diversified and recurring model over the last two years.
While the effort has come with its sets of challenges. We believe we are incredibly well positioned for what is and will continue to be a period of strong growth opportunities for our business I would like to highlight what I believe have been some of our key accomplishments.
We focused on growing our presence on the electrical grid market and have increased our revenues in electric distribution and transmission from $500 million in 2020 to over $2 7 billion in 2022.
Through the acquisition of IAA at the end of this year, we have significantly increased our market share in the clean energy space and now the clean energy.
And infrastructure segment to approximately $5 billion of revenue in 2023 versus $1 5 billion in 2020.
Our communications segment delivered strong 2022 growth with full year revenue growing 27% in 2023 revenues expected to again grow at a double digit rate.
We've delivered on diversification and believe we have created a more predictable and recurring model.
For example, our non oil and gas segments are now expected to generate almost 88% of our revenue in 2023, having gone from $4 5 billion in 2020 to $11 5 billion in 2023.
A two five times increase in three years.
Over the last two quarters, we've begun to demonstrate the earnings potential of our business margins improved 260 basis points from the first half of 2022 to the second half with communications improving over 300 basis points.
Power delivery, improving 200 basis points, and clean energy and infrastructure, improving over 500 basis points offset by oil and gas declining over 300 basis points.
Backlog is at record levels up over 30% year over year and visibility to 2023 revenue guidance is very strong.
And finally as a result, we provided 2023 guidance on yesterday's release, we expect 2023 revenue of $13 billion and EBITDA to range from $1 1 billion to $1 5 billion both record levels again, our diversification and expansion has come with it sets a chat.
<unk> and while we are proud of our guidance and it's a big improvement from 2022, we know there is a tremendous room for further improvement over the coming years.
Assumptions in guidance include communications segment revenue growth of about 10% with a slight improvement in margins to approximately 11%.
Oil and gas segment revenue growth of about 30% with margins similar to 2022. This guidance does not include the completion of the mountain Valley pipeline.
Power delivery revenue is expected to increase roughly 10% and we expect margins to approximate last years levels as we continue to organically ramp our transmission capabilities.
And clean energy and infrastructure revenue is expected to be 5 billion with margins in the mid to high 6% EBITDA range again, we believe that our visibility into our full year guidance is very strong now.
Now I'd like to cover some industry specifics our communications revenue for the quarter was 859 million a 26% year over year increase in revenue for the full year increased 27%.
We enjoyed strong broad based customer growth with all of our major customers.
Backlog in this segment is at record levels, and we continue to invest in increasing our capabilities as we expect demand and opportunities will continue to increase over the coming years.
While we are seeing the impact of current funding related to our das the rural digital opportunity fund the amount of federal grants available to the industry are going to exponentially increase the.
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 would be added to existing cell towers millions of new small and Microsoft 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 $740 million versus $285 million in last year's fourth quarter for the full year revenue exceeded $2 7 billion and represented nearly 28% of <unk> revenue.
We are in the midst of an energy transition in the United States and our customers focus on reliability.
<unk> renewable connectivity and meeting the challenges of providing power to customers for electric vehicle charging 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.
With our integration efforts over the last two years of our acquired assets, mostly complete we are now focused on growth off of our current base and on driving margin improvements throughout the organization.
We have significant near and long term opportunities related to growing our transmission business and have been investing heavily in resources and equipment.
Moving to our clean energy and infrastructure segment revenue was just over $1 1 billion for the fourth quarter. Our fourth quarter results included about $600 million in revenue for IAA for the full year segment revenue was $2 6 billion.
If you include IAA on a pro forma basis revenue would have been approximately $4 4 billion for the full year as.
As a reminder, 2022 renewables revenue was impacted by the solar circumvention and supply chain issues, while our 2023 revenue guidance of 5 billion assumes roughly 50, 15% growth. The reality is the demand in the market far exceeds that.
Guidance includes a conservative view relative to project starts and we have assumed a certain level of project delays and guidance.
Demand for our services in this segment is incredibly strong and for the most part not inclusive of any governmental impact from the inflation reduction Act.
Based on interactions with our customers, we are confident that as the supply chain issues. He's coupled with the incentives available through the inflation reduction act the future demand for our services will significantly increase.
While we just completed our first quarter with IAA as part of the Master family I'd like to highlight key points that I believe make this an excellent strategic fit for us.
It continues to grow our presence in the renewable 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.
Iaa's routes are those of the union renewable contractor.
While mostek had been an exclusively non union renewables construction company.
<unk> expanded our renewable business and the union markets and states.
More importantly, it allows us to cross sell complementary services to the same customers with the investments we've made in the last two years and growing our union transmission and distribution presence.
In a market where skilled labor is so scarce IAA added thousands of team members to the monster family.
<unk>, increasing our scale and giving us the ability to more efficiently serve our customers.
And finally IAA 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 or.
Our cultures are similar and complementary.
We believe with Mostek support there are great opportunities for future growth and margin improvement.
Moving to our oil and gas segment revenue for the year was $1 2 billion versus $2 5 billion last year.
Margins remained solid despite the significant revenue drop.
We expected 2022 to be a difficult year. As this was the first full year of the impact of the pandemic on projects up until 2022, we were still burning off some pre pandemic backlog with that said we've been vocal about the significant uptick we've seen for projects for 2023.
24, and 25 and.
In addition to takeaway capacity projects for natural gas activity levels for both carbon capture and hydrogen projects have intensified.
As reflected in guidance, we expect revenue in the segment to increase approximately 30% in 2023 versus 2022 and that assumes that the mountain valley pipeline continues to be delayed.
We have a number of larger projects that are expected to kick off in early summer and expect further growth in 2024 and 'twenty five.
To recap I'm incredibly proud of how we've transformed and transitioned mostek over the last two years.
I truly believe our second half of 2022 performance 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.
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 again, thank the men and women of master for their commitment to safety their hard work and their sacrifices keep up the good work.
Before turning the call over to George as many of you know, Georgia is retiring and today is his last earnings call.
On behalf of myself my family and the entire <unk> team I'd like to thank George for his dedication and work ethic.
He has been my partner for nearly 10 years and mostek wouldn't be where it is today without them.
He will be missed and he knows he will always be part of the <unk> family.
I'd like to give a shot out to his wife Delilah.
Not to embarrass George but the Leila was my high school teacher and she also made significant sacrifices on behalf of monster, which had been greatly appreciated.
Wish you all the best my friend George.
Thanks, Jose before we get started on 2022 results.
I would be remiss, if I didn't take a moment to acknowledge and thank Jose Bob.
Bob Apple.
<unk> and the board for providing me this incredible opportunity over the past decade.
We have grown from less than $4 billion in annual revenue.
To approximately $13 billion in 2023.
Earned fortune 500 status.
Achieved an investment grade rating profile.
And completed transformational M&A to position Mastec with great future opportunities.
He has really been the highlight of my professional career to participate and support this process.
And I look forward to sharing in the mosque tech's future growth as a shareholder.
And I guess since Jose opened the door here.
After I retire my wife, and I are planning on starting to work on a book called young mass the high school years.
Complete with pictures. So if there is any publishers on the line we are open to the highest bidder.
In all seriousness I Didnt know Jose until our Mas Tech period together here over the last decade, but I do remember as a young man my wife mentioning student who is class President had convinced her of allowing an evening Pep rally something that had never been done before and one of the word she used to describe him was a visionary.
I think if you were to describe Jose today that term would still be at or near the top of the list.
So I guess the moral of the story is the more things change the more they stay the same.
Today I'll cover some highlights of our fourth quarter and annual 2022 financial results and Paul will cover our 2023 guidance expectations.
As noted in yesterday's press release, we are planning on filing our 2022 Form 10-K next week and we anticipate that we May report identification of a material weakness in internal controls primarily related to general it controls at 2021 acquired operations, which underwent first time Sox controls.
<unk> in 2022.
Okay.
We have completed multiple substandard procedures and identified no issues or errors in this matter will not result in any change to our 2022 financial results.
As a reminder, during 2022, we undertook significant integration combination and streamline activities for transformational end market acquisitions completed in 2021, including the implementation of incremental internal controls.
We certainly take control issues seriously and we expect to continue and complete remediation of any deficient internal controls during 2023.
Turning to some 2022 highlights.
Fourth quarter results were generally in line with our guidance expectations with revenue approximating 3 billion and adjusted EBITDA approximating $258 million.
Fourth quarter 2022, adjusted diluted earnings were $1 <unk> per share <unk> <unk> per share above our guidance, primarily due to lower income tax expense in the quarter, partially offset by higher interest costs.
Annual 2022 results include revenue of approximately $9 8 billion.
With adjusted EBITDA of $781 million or 8% of revenue.
As we have previously discussed during 2022, we began implementing a significant shift in our end market operations emphasizing energy transition services.
While also navigating with several headwinds, including challenging supply chain issues exasperated by a governmental anti circumvention investigation on solar panels.
Project permitting delays as well as wage and material inflation challenges.
As a point of reference to highlight the significance of our 2022 and market operations shift oil.
Oil and gas segment operations experienced a year over year $386 million adjusted EBITDA decline.
Which was largely offset by approximately $271 million and increased non oil and gas segment adjusted EBITDA.
To further demonstrate the significance of this shift in 2022, only 19% of our segment adjusted EBITDA was generated from oil and gas segment operations compared to 56% in 2021.
Both our fourth quarter and second half 2022 results highlight some important developing business trends, namely.
Consolidated results showed strong second half 2022 improvement with consolidated revenue at $5 5 billion.
Compared to $4 3 billion in the first half of the year.
And with second half 2022, adjusted EBITDA margin improving to nine 1% of revenue compared to six 5% of revenue during the first half of 2022.
As Paul will cover in more detail, we expect a similar first half second half trend in 2023.
Both fourth quarter and second half 2022 results reflect the expanding growth in non oil and gas segments offsetting decreased oil and gas segment operations.
Importantly, fourth quarter results marked the first time in 2022 were increased non oil and gas segment adjusted EBITDA exceeded the decline in oil and gas segment results with.
With consolidated fourth quarter, adjusted EBITDA, increasing 17% over the fourth quarter of last year to approximately $258 million.
We believe that this performance demonstrates the potential of <unk> future earnings profile.
We ended 2022 with record backlog of approximately $13 billion sequentially growing backlog, excluding approximately $1 5 billion of acquired IEA backlog.
And this reflects strong expected future business demand for our services across multiple segments.
As a clarification point.
Backlog as of our year end 2022 is being reported under Mohs Tech policies at approximately $1 5 billion.
This reflects only signed contracts and thus no verbal awards.
And includes only 18 months, so comparisons to any IEA previously reported pre acquisition backlog amounts are apples and oranges.
Stated another way if reported in the same manner as the pre acquisition stand alone public company.
IEA year end 2022 backlog would have been approximately 10% higher than the backlog reported by that entity at year end 2021.
Turning to our business mix based on our strategic diversification of our revenue stream.
During 2022, no customer represented more than 10% of our total revenue.
And annual 2022 revenue derived from Master service agreements exceeded 50% of our total revenue a significant increase over the prior year.
This was primarily derived from recurring utility services spend which greatly increases the repeatable nature of our revenue profile.
During the fourth quarter of 2022, we completed the acquisition of IEA, adding approximately $1 $1 billion.
Of acquisition financing and assumed debt.
We finished 2022 with approximately $2 $85 billion in net debt a $350 million reduction in net debt during the quarter following the IAA acquisition.
While our net AR right, while our year end debt levels showed strong reduction post the IAA transaction and was generally in line with our expectation.
Annual 2022 cash flow from operations at approximately $350 million was approximately $100 million below our expectation.
And the majority of this shortfall is due to a fourth quarter cash expenditures made in connection with the acquisition, which among other items included <unk> in IAA legal and banking advisory fees change in control payments and cash outlays to initiate transfers of letter of credit commitments that under GAAP accounting rules, we're required to be shown as.
Operating cash flow amounts rather than as part of the acquisition price.
At year end 2022, we had ample liquidity of approximately $1 2 billion.
Our UN receivables were well managed with DSO or days sales outstanding of 83 days within our anticipated range of mid eighties.
As we indicated at the time of the acquisition, we remain committed to appropriate capital structure management and maintaining a strong balance sheet supportive of our investment grade rating.
We expect that improved 2023 adjusted EBITDA performance.
With the reduction in overall debt levels.
Through from cash flow operations, and moderated levels of capital expenditures and strategic investments will significantly improve our leverage metrics over the course of 2023.
Before I turn the call over I'd like to say, how thrilled I am to pass the baton over to a very capable longtime mostek colleague and Paul to Marco.
Shortly after I joined Mazda as I began to work with Paul It was obvious to me that he had an exceptional combination of strong financial background and critical thinking capacity.
And as a result over the years, we continually expanded his role within the company to prepare him for this moment.
Paul Congratulations through time is now and I wish you the best now I'll turn it over to Paul.
Thank you George and good morning.
To begin I wanted to thank Jose and the board for putting their trust in me as <unk> CFO .
I have been incredibly fortunate during my 15 years at Mastec to work under two great financial leaders and George Bob Campbell.
They are both in key mentors to me and I look forward to following their legacy helping loss that capitalize on the incredible opportunities afforded by our end markets.
Turning now to our segment performance and expectations.
Fourth quarter Communications revenue was $859 million with adjusted EBITDA margin of 11, 1%.
Annual 2020, do communications segment revenue was $3 2 million or 27% increase when compared to last year and.
In 2022, adjusted EBITDA margin was 10, 3%.
2022 performance is characterized by a strong and accelerating second half.
We anticipate that 2023 communications segment revenue will approximate $3 $5 billion in.
And that adjusted EBITDA margin will improve to approximately 11%.
Within the 2023 expectation, we anticipate revenue to be more balanced with second half revenue contributing just over 50% of the annual total and second half adjusted EBITDA margins approximating 12%.
For the first quarter, we expect communications segment revenue to grow by approximately 15% over 2022.
With adjusted EBITDA margins in the mid 7% range. This compares to six 2% in last year's first quarter.
Fourth quarter clean energy and infrastructure segment revenue was $1 1 billion with AIA acquisition contributing almost $600 million of revenue during the quarter.
Fourth quarter clean energy adjusted EBITDA margin was 7% a 260 basis points sequential improvement in the segment's highest adjusted EBITDA margin performance over the past two years at.
That said fourth quarter adjusted EBITDA margin continued to be negatively impacted by select industrial projects that we expect to close out in 2023.
Annual 2022 clean energy segment revenue was approximately $2 6 billion and adjusted EBITDA margin was four 2%.
For 2023, we expect to clean energy segment revenue will approximate $5 million and adjusted EBITDA margin will improve to the mid to high 6% range.
Based on project timing and typical seasonality, we anticipate second half of 2023 revenue to comprise approximately 65% of the annual total in second half 2023, adjusted EBITDA margin should improve over the first half and be in the mid to high single digit range.
For the first quarter, we expect to clean energy revenue to approximately $800 million.
With a low single digit adjusted EBITDA margin.
This margin rate is impacted by seasonally lower revenue levels. Some continued impact from the select industrial jobs and continued solar panel delivery delays.
It's also important to recall that IAA reported $17 million negative $17 million of adjusted EBITDA for the first quarter of 2022.
On a pro forma basis clean energy first quarter 2014 to adjusted EBITDA margin would have been negative 1%.
As 2023 first quarter levels will be similar or first quarter expectation reflects a strong improvement year over year.
Fourth quarter oil and gas segment revenue was $292 million with adjusted EBITDA margin of 11, 5%.
Annual 2022 oil and gas segment revenue was approximately $1 2 billion with.
With adjusted EBITDA margin of 14, 1%.
While expected this performance represented a significant decrease in both revenue and adjusted EBITDA when compared to 2021.
We anticipate 2023 oil and gas segment revenue will show strong growth and approximate $1 5 billion.
Adjusted EBITDA margins in the mid teens.
Based on expected project startups, we expect this growth to occur in the second half of the year with second half revenue approximating 60% of the annual total.
And second half adjusted EBITDA margins in the mid to high teens.
For the first quarter revenue is expected to be similar to last year with adjusted EBITDA margins in the mid single digits.
Lower year over year as we invest the pipeline project starts later in 2003.
Fourth quarter power delivery segment revenue was $740 million and adjusted EBITDA margin was seven 7%.
Fourth quarter adjusted EBITDA margin was impacted by investments in new project starts and some adverse project closeouts.
Annual 2022 power delivery segment revenue was approximately $2 7 billion with adjusted EBITDA margin of eight 9%.
We expect 2023 power delivery segment revenue to approximately $3 billion with annual adjusted EBITDA margins of approximately 9%.
First quarter revenue is expected to decline approximately 10% year over year and first quarter adjusted EBITDA margins are expected to approximate 5%.
This decline in revenue in margin is due to delay in certain program startups, a rationalization to exit certain acquired underperforming contracts and services and a reduction in storm related activity, which has been considerably slower to date.
Similar to 2022, we expect stronger adjusted EBITDA margin performance sequentially in the second quarter, continuing with strong momentum into the second half of 2023.
Power delivery second half adjusted EBITDA margins should reach the low double digits as crew utilization and productivity improve over the course of the year.
Revenue is also expected to ramp through the third quarter with approximately 55% of power delivery revenue coming in the second half of 2023.
Corporate segment costs are expected to approximate 95 to 100 basis points of consolidated revenue for 2023.
Investments reported in our other segment are expected to generate approximately $25 million to $30 million of adjusted EBITDA.
While we are in the early stages of the clean energy integration process. Our initial estimate is that we will incur acquisition integration expenses of approximately $15 million to $20 million over the course of 2023.
Turning now to our consolidated guidance announced yesterday.
As we've been messaging and our public comments for some time, we expect a slow start in the first quarter with expected revenue of $2 4 billion.
Adjusted EBITDA of $100 million.
Four 2% of revenue.
And an adjusted diluted loss per share of <unk> 57.
This expectation includes the combination of a normally slow first quarter accentuated by the previously mentioned supply chain delays investments for the coming ramp in various segments and costs associated with exiting certain acquired underperforming contracts and services.
In terms of the cadence for 2023 first half and second half revenue as a percentage of the total year should approximate 2022 levels.
We expect adjusted EBITDA margin to have strong sequential growth in the second quarter that will continue into the second half of 2023.
This margin expansion should exceed the improvement we achieved in 'twenty two second half as we do not foresee the negative effect of supply chain disruptions and select industrial projects that we experienced in 2022.
Our guidance indicates a 50 to 80 basis point improvement in full year adjusted EBITDA margins and we expect the majority of this expansion to come in during the second half of 2023.
For our annual guidance, we are projecting 2023 revenue of approximately $13 billion, a 33% increase over 2022 with adjusted EBITDA ranging between one one and one 5 billion.
Adjusted diluted earnings per share is expected to range between $4 64.
And $4 91.
These forecast market strong improvement over 2000, <unk> results and represent record levels of revenue and adjusted EBITDA for all of the non oil and gas segments.
Sure.
More importantly, this further demonstrates <unk> transformation to a more diversified and sustainable earnings generation.
Now I'd like to briefly cover some additional guidance details for modeling purposes.
We expect to generate approximately $550 million of cash flow from operations in 2023, despite significant revenue growth over the course of the year that will drive working capital investment.
This cash flow generation, coupled with our anticipated growth and adjusted EBITDA should allow us to reduce leverage to the low twos by the end of 2023.
As George mentioned, we are committed to maintaining our investment grade rating and we'll continue to manage our capital structure Accordingly.
We anticipate net cash capex in 2023 to approximate $100 million with an additional $150 million to be incurred under finance leases.
We expect annual 2023 interest expense to approximate $200 million to $205 million.
This reflects our expectation to pay down debt over the course of 'twenty, three offset by continuation of higher interest rates.
We will actively monitor the capital markets for opportunities to adjust our interest rate and maturity profile.
Our estimate for annual 2023, a share count of $78 5 million shares. This includes shares issued in connection with the fourth quarter IAA acquisition.
Remember Q1 loss, we will utilize our basic share count of 77 million shares not the fully diluted number.
We expect annual 2023 depreciation to be in the low 3% range of revenue and lastly, we expect that annual 2023 adjusted income tax will approximate 25%.
This concludes our prepared remarks, I'll now turn the call back over to the operator for Q&A.
Thank you very much ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, if youre using a speakerphone make sure. Your mute function is turned off to allow your signal to reach our equipment and again that is star one to ask a question will go to our first question will we assemble the rest of that Q when that comes from Steven Fisher.
From UBS. Please go ahead.
Thanks, Good morning, George Best wishes and thanks for all your help.
So I guess Jose Paul with your $100 million of EBITDA guidance for Q1, which is kind of well below consensus it seems like you've.
It kind of cleared the decks bid to set a better bar for the first part of the year.
But in keeping that full year the ramp up for for Q2 to Q4.
Pretty steep so I guess, what gives you the confidence in that ramp up.
And that you are on track for four.
For the opportunities and hitting the numbers for <unk> for full year 2023, maybe you can give us something like the most important pieces of evidence that you see that gives you that confidence.
Sure Good morning, Steve So.
First I'd like to address the first quarter, because I know there's been a lot of notes written on it. So if you take if you look at the first quarter and you kind of break it up and I think we gave a lot of detail on the call.
Our communication segments in line basically where we expected it to be if you take clean energy and U and you take into account the loss at IAA had in the first quarter of 2022.
We're actually going to deliver about a 400 basis point improvement in the first quarter relative on a year over year on a pro forma basis for the full year, we're expecting a 200 to 250 basis point improvement. So if we can actually maintain that 400 basis point improvement through the year, we're actually going to significantly beat our plan relative to that our oil and gas business, which is part of the issue in Q1.
Margins are.
Just under half of what they were last year and that has a lot to do with the fact of revenue getting pushed in projects that are starting in the second quarter. We got a bunch of unabsorbed costs that were preparing for these larger jobs that we've won.
No concerns whatsoever about that segment's ability to perform as long as the work is there and we know it's there. So we're just really preparing and that's having a unseasonably slow first quarter for them probably more than we expected.
And the biggest impact of I guess, our previously stated.
Expectations for Q1 are probably in the power delivery section there, we're going to see about $100 million of revenue less than what we expected in the first quarter and it's made up of a bunch of reasons one of them Paul alluded to a storm.
Which could change because we're mid quarter, but at the same time, we haven't seen a lot of activity. So I think we took a very conservative look at with storm was going to look like.
Had a supply chain issue on one particular project, that's pushing some revenue into Q2.
And then we're also exiting some contracts from some of the acquired entities. After a year, we have decided and have the ability to exit those which are going to put some cost pressures on the business. So I think we had a fabulous year in power delivery in 2022, I think we are.
Set up incredibly well for 'twenty three so unfortunately, I think it's just a lot of stuff hitting in Q1 on lower volume levels.
When we think about the cadence for the year and I think we laid it out as well on the call.
The difference in second half versus first half revenue isn't that significant in 'twenty three versus 22, I think 56% of our revenue in 'twenty two came in the second half and we're talking about being 58% in Q3 and that difference is really driven by the oil and gas projects that start in the second half and by the increase in clean energy business that we know is getting pushed into the second half is <unk>.
Out of the wind and solar projects Youre going to start.
So we feel really good about it we think we've got a really achievable plan.
Even in clean energy, we did $4 4 billion on a pro forma basis, we're talking about doing five next year. So I think it's again I think the demand is far greater.
Do think it's important to note in that business that backlog is probably <unk>.
Significantly understated as we reported we only book in backlog.
<unk>.
As the contracts are signed and the full projects are completed a lot of these projects start with something called <unk>, which is a limited notice to proceed which is a very small percentage of the revenue and thats. What initially hits backlog. So as those projects go into full production backlog significantly increases on projects that have already been awarded and I think all of these things when you think about what's happening with oil and gas when you think.
About what's happening with clean energy as we leave 2003, and we exit with the second half we're going to have I think next year's first quarter and 24 and even in the first quarter and 25, we're going to be significantly different than what we saw in 'twenty, two and 'twenty three because we're going to have broad based strength across all of our segments, which is going to make those comparable is really easy. So we're pretty excited about what that's going to lead down the road.
Very helpful. Maybe just a quick follow up on communications specifically.
Beyond 'twenty three I am curious what gets you from the $3 5 billion of revenues in 2010.
To your $4 billion, I think you're calling a near term target, which I assume is somewhere between 24 and 2025.
I know you talked about the tower wiring and connection.
Yes, there is.
Some concern in the market.
Wireless thing.
On <unk>, So I guess I'm curious how do you see.
Well see that.
Pretty solid growth to that next level is that the art off a shift to more kind of fiber how do you reconcile that thank you.
So Steve I'd say, it's both.
The wireless industry is really just getting started with <unk> deployment.
A lot of the initial deployments are just really touching the network and then you have to add an enormous amount of capacity over time I think we're very early in the <unk> cycle. When you think about what's happening on the wireline side of the business really the only the first half of Bardolph got funded which is roughly $10 billion.
Those $10 billion is really all of the activity that us and all of our peers in the space have seen over the last few years the impact that it's had in the business has been massive.
Aside from the remaining <unk> funds, we've got all of the other federal money that was in the infrastructure infrastructure Bill and the inflation reduction which is over $50 billion of additional government spend. So you are talking at least another $60 billion of.
A federal spend thats going to hit the telecom market, where I could argue we've only seen the effects of 10, so the <unk>.
A multiplier effect on that business is going to be massive and I think that if we.
If we think we can only do $4 billion from <unk> base today, I think we're significantly understating the long term potential of that business.
Thanks very much.
Thank you and our next question comes from Andy Kaplowitz from Citigroup. Please go ahead.
Hey, good morning, everyone.
Good morning, Andy.
George Thanks again for all your help congratulations Paul looking forward to working with you.
So let's say maybe.
A little bit or what's going on in power delivery in Q1, I know you mentioned lower storm work, but what exactly are you getting out of.
I assume they're henkels projects because they have a tail that impact you at all moving forward past Q1 did you guide for that I think any more color would be helpful.
No Andy I think it's.
We had an opportunity after a year.
To really rationalize and exits and things, which is what we're doing I don't I don't I don't think Thats. The revenue impact I think that's more of a cost impact that is only going to impact Q1, I think out of Q1, we won't have that going forward.
We have one large project that had some material delivery delays, which is having a.
Pretty significant revenue impact on the first quarter that I think.
Hopefully by the end of the first quarter first quarter early second quarter that project restarts. So we feel really good about our $3 billion target for the year.
We've built up from a bottoms up utility by utility. So we're really comfortable with the metrics. Unfortunately, the cadence of it is a little different than what we originally expected.
Helpful. And then Jose GE yesterday conference suggested that when customers are beginning to get in line to secure capacity for the wind manufacturers, which I would assume it's still a bit upstream from you guys. But are you starting to see some movement from your major when customers are buying one and secure capacity. It seems like youll begin to see more of a city.
If we can ramp up the Wyndham could you give us some more color on what you're thinking about renewables ramp up over the next couple of years, particularly in wind.
Well, we'll start with wind and wind we are seeing a dramatic increase in activity. If we think about our capabilities for the second half of 2023, we're pretty booked up at this point.
We're really just trying to make sure that the projects, we're committing to our projects that are going to be completed when you take the impact of what that means into our 24 year. It means a much much bigger 24, then what we're going to deliver and 23% to 23 is going to be a really strong second half of the year relative to win 24 is going to be a full really strong year and growing so.
We feel great about the outer years relative to what's going to happen in the wind market. Its been slow for the last couple of years and we expect it to ramp pretty significantly starting in the second half of this year and solar similar right solar we've had so many start and stop because of the issues. We think a lot of that is resolving itself, we think theres going to be.
A significant improvement in the supply chain as we as we get into the year and it's the same thing right.
We're really we're solidly booked in the second half of the year.
And when you multiply that into what it means for the full year and 20 forwards. It's quite astonishing. So I think again I think the investments that we've made in the last year position us incredibly well I think it's a market that's going to exponentially grow over time I think we're in a great spot I know it hasnt shown up in our numbers.
But we're really really bullish about what it means for us.
I appreciate it all day.
Thanks, Dan.
Thank you and our next question comes from Jamie Cook from Credit Suisse. Please go ahead.
Hey, Good morning, I guess my first question, if I look at the implied margins in the back half of the year for our power delivery and clean energy and infrastructure given what you've said it looks like margins in the back half would be starting to approach.
Your peers, so I'm wondering as we think.
As we exit 2023 going into 2024 do you see a path that the margins in those business should be more comparable to peers.
The double digit range.
And then my second question.
I understand we have a lot going on in 2023 in terms of the acquisitions et cetera, but.
You know what type of investments are you, making any 2023 that could potentially be weight on margins.
That go away as we're approaching 24. Thank you.
Yes, Jamie a couple of things if you think about our second half of this year and let's let's break it up by business. So if we look at clean energy our expectation is that in 'twenty three.
In the second half margins are going to improve over 'twenty two by about 200 basis points, just over 200 basis points. So.
Lot of that has to do we had we've talked about it ad-nauseum right. We've got it we had a lot of impacts to our industrial business and quite frankly, we were under absorbed relative to our renewable business because there wasn't a lot of work when you take into account the level of activity that's going to exist in the second half of 'twenty three in renewables and you take into account. The fact that we're not going to have these.
Headwinds with industrial.
We actually think that 200 basis points again is relatively conservative we're going to be Q1 on a year over year basis, we think by over 400 basis points. So we actually have the improvement moderating in the second half of the year versus what we're seeing in the first quarter. So again, we think that's very achievable and power delivery. When we look at the margin profile in the second half of 'twenty three versus.
<unk> last year.
Again, it's about 100 basis point improvement and quite frankly with the opportunities that exist there and both of those businesses by the way we would still be significantly below some of our peers. So these are not by any stretch of the imagination. What we think are.
Optimal margins Theyre not we've got a lot of work to do to continue to improve we think the ability there to continue to improve over time exists and to your last question. What is driving down. Some of these margins are the investments that we're making right we're going to grow revenue substantially not just in 'twenty three but we think in 'twenty four we're making the investments in people across every segment.
We operate in we have tremendous revenue growth opportunities, it's about having the resources in place to be able to execute on that and we're trying to prepare ourselves.
Again, we feel really good about our ability to achieve our current targets for 'twenty three but embedded in those targets our elevated level of cost to prepare us for further growth in 'twenty four 'twenty five.
Thank you.
Thanks James.
Thank you and our next question comes from Alex Rygiel from B Riley. Please go ahead.
Thank you good morning, and George wish you nothing but the best there.
Couple of quick questions here first.
Can you talk a bit about telecom and its economic sensitivity historically, whether you're sensing any conservatism by your customers as they start the new year.
So Alex it's a great question, Ryan and I think one of the differences.
Historically quite frankly, I actually think it's Ben.
It's been a relatively solid industry, but I think all bets are off the table because of all the government spending thats involved in the business today right every one of our major customers is trying to find ways to.
Ty Federal dollars, whether it's through <unk> or any of the other available resources storm and with that they're all they're all overbuilding each other they're all trying to expand footprint.
AT&T recently announced their joint venture two to build out a market networks.
Going on in this industry is unprecedented I have been that's been the one business that I've kind of been in all my life I've never seen anything like it. The reality is that it's not going anywhere its not going to slow down.
Sure.
I struggled to understand how the industry is going to be in a position to meet all the demands.
That it's going to happen and that's where our challenges lie right is understanding what we can do understanding what we can gear up for picking the right customers and ultimately delivering.
The best margin profile, we can in that business, but from a level of activity from revenue basis I mean, that's.
That's something that quite frankly, we're just not very worried about because of the level of activity that we see from our customers and the demand that our customers have for our services.
That's helpful. And then I think we understand sort of the target EBITDA margins for communications team with the range for oil and gas but.
In your opinion do you think the target EBITDA margin in oil and gas.
Excuse me in power delivery and clean energy could be over time.
So it's great questions Redstone power delivery, we generated about 9% margins in 2022.
We definitely think thats, a double digit margin business again, where we are.
Made two big acquisitions in the last two years.
While a lot of our integration efforts are concluding we still have a lot of work to do to the <unk>.
Prove the profile of those businesses to improve the margin profile.
When you look at our closest peer there are hundreds of basis points above us in that market and I think the market is there to accomplish that we just need time to build into it so.
We are guiding to roughly 9% we've got some solid growth in that business. This year, we are preparing for and we're spending some money on what we think we're going to be future growth and the ability to improve margins over time and we've got we've got to spend some money to ultimately we think improve those margins over time, but in the next couple of years, we definitely think that's a solid double digit business and growing in clean energy.
We're targeting roughly six 5% full year EBITDA profile with really a second half.
Acceleration.
If I was sitting here thinking about 'twenty four with the full year acceleration available to us I would be trending more to what we think our second half margin guidance is going to be in that business.
For the full year, which is roughly in that 8% range and I think that if we could our first target will probably be to achieve somewhere between an eight and made it happen.
And our full year and over time I also think that's a double digit margin business as the market continues to expand and.
And create opportunities.
Thank you very much.
Thanks, Alex.
Thank you and our next question comes from Justin Hauke from Robert Baird. Please go ahead.
Okay Alright, great.
I don't know if that counts as one of my first questions, but I guess just I think we're all wondering when we can get an advanced copy of the mass the high school years from George So that was good.
Great.
Such that in there so well.
Okay, that's great.
We look forward to that but.
No.
I guess, maybe one thing to kind of help with the confidence on the margins.
Energy is.
It sounds like maybe there were some discrete efforts that you took from from exiting some of those challenged industrial projects in the portfolio and maybe just.
I don't know to the extent you can quantify that.
Revenue impact that you are having maybe in <unk> or the first half from those.
The percentage of completion. They are are those are those running.
Running at zero margin or just kind of some context to understand how that's dragging on the margin and the beginning of the year.
Yes.
This is George I'll take that.
The industrial projects are largely complete but youre right. There is there is some level of revenue that is still going to happen in the first half of 2023.
Is that basically had no margin rate the vast majority of them are complete at this point, but there is some wrap up and some other items that we're doing so it's a relatively small portion of the first quarter and have less of an even smaller portion maybe not much at all in the second quarter of the of the revenue profile for the CNI group.
That those revenues that are coming in in the first half of the year will be at zero margin.
Substantially complete with them and we think that'll be the end of it.
Okay.
And then I guess my second question just.
On the the power delivery backlog I guess this is kind of the <unk>.
<unk>.
Clean year over year organic number with Henkel and Mccoy.
I guess I was just a little surprised that it.
Alan.
Im thinking that some of that might be because of some of the projects that you've kind of right size moved away from but maybe.
Maybe just some context on what you're seeing in terms of.
Bookings in power delivery on organic basis.
Yes, I think what youre going to see in 'twenty. Three is really strong bookings, obviously, it's seasonal and it's hard to predict exactly what quarter its going to hit in but I think when we look at the end of 'twenty three versus 24, we're going to see really big bookings.
We're in the middle of a bunch of things right now we feel really good about so.
We think that the opportunity set that's been created with the acquisitions that we made and with our legacy business.
Has really resonated with customers, we feel good about our competitive position in the marketplace and I think in the near future you're going to see.
Youre going to see the results of that show up not just in backlog, but ultimately in our numbers as well.
Okay.
Great. Thank you guys.
Thank you and our next question comes from Noelle Dilts from Stifel.
Hi, guys. Thanks.
Thanks, and again George Congratulations.
So you had mentioned kind of investing in the businesses for future growth a few times.
And when I think about some of the segments like for example, oil and gas and maybe a little bit cleaner energy. It feels like it seems like you might have some excess capacity today, but can you give us a better feel for some of the things you're investing in equipment is it front end services like how do we think about some of these investments that you're making in a little bit more detail.
Thanks.
Yes, there are different for each business. So if you think about oil and gas.
Based on todays levels, we wouldn't have the workforce that we have in place today, but we know that we are starting a bunch of projects in the second quarter. So today, we've got a bunch of under absorbed labor quite frankly that we're holding onto because we know that the best is yet to come there. So.
That's not necessarily new investments, but it's holding onto people and equipment that in a normalized fashion at the current revenue rates, we would never hold onto.
When you think about what's happening in telecom, where we have tremendous opportunities for growth. That's all about expanding markets expanding people, adding equipment because of the opportunity subset there as if we had more people the ability to put them to work is there. We just have to continue to grow our resources and we're trying to do that in a meaningfully thought out way, where we don't.
Overexpose ourselves to nonperforming so.
It's been continually and we will continue.
On the.
Power delivery side.
With the acquisitions that we've made we have tremendous opportunities on the transmission side of the business. We have been reinforcing our resources. There. We've added a lot of people were starting to add some specialty equipment. So those are the kind of investments, we're making there and quite frankly on clean energy. We've we've got a great base of.
People historically, we've done a significant significantly more volume than what's going through the books today. So I think on wind were not necessarily making huge investments in equipment or people from a new perspective, but we're obviously holding onto people at lower revenue rates, because we know what's coming and then on solar is a little bit different much like communications, we're adding a lot of people because that market is export.
Actually growing right so.
When we talk about investments are twofold, there either penetrating new markets, where they're trying to keep our we're holding onto our level of cost in anticipation of revenues to come and there is a mix of that in our business and by the way. We always expect there to be a mix of that in the business I think today, especially in the first quarter its unseasonably hot.
Okay perfect that's helpful.
And then.
Steve and Alex touched on this a little bit on your question, but can you talk about how youre thinking about the relative growth rates of wireless and wireline for 2023, and if you have.
A bit more confidence in one side or the other as you look out for the year.
Well I think today in today's world.
The wireline business is growing much faster than the wireless business because there's so much federal funding round that everybody is building. So there are a lot more opportunities on that side of the house a lot of the wire less activities are obviously somewhat dependent on fiber. So until fibers deployed there are certain things you can and can't do so we do think theres going to be a.
Delayed spend related to wireless versus wireline because of the.
The need for fiber.
With that said some some carriers have been a lot more active than others over the last couple of years T. Mobile has been extremely active in deploying <unk>, while some of the others maybe delayed a bit we're seeing so we're seeing a transition we expect to see much bigger Spence from AT&T and Verizon This year with maybe a little bit less coming from T mobile so.
The years are different but I think the.
The requirements are there the need is there and over time, it's going to we think grow really nicely.
Okay, great. Thank you very much.
Thank you and our next question comes from Ben Friedman from D. A Davidson.
Thanks, George Congrats as well very impressive career.
You've got a few moving pieces within the clean energy and infrastructure backlog I wanted to understand a bit better pretty encouraging comments.
On the wind side it sounds like you're seeing some good things developing for the second half and more into 'twenty four and beyond.
Yes, I'm curious.
Mom and pop yet to your bookings and backlog in a material way or is this sort.
The decline we've seen.
And the segment outside of IEA is still largely than solar because I think thats the material step up.
And as that market accelerates.
So I got to quote what was the last part of the question I heard wind and then I lost you.
Was it always related.
Yes.
I'm also curious whether you've really seen a material impact to your backlog and booking as a function of this kind of recovery in the wind market, so to speak and whether that bill of materials.
Tom.
Yes look I mean, if you look at our clean energy backlog, it's a fraction of our revenues and the reality is that when we look at our revenues for 2003, we've identified every job every customer where it's coming from so we think that again, our backlog and clean energy is dramatically understated because were working under a number of <unk>, which is a limited <unk>.
It has to proceed its a very small percentage over the overall contract. If you actually if all of those contracts when our backlog would be dramatically.
Dramatically higher than it is today and as those contracts go into full execution youre going to see that play and so yes, we think that.
Our clean energy backlog is going to considerably grow as 23 plays out.
Yes.
That's helpful.
I guess the second question.
The experience on the industrial projects.
Change your view of wanting to participate on.
On these things in the future because it still seems like a huge opportunity in terms of what youre doing there.
We talked about last quarter it's.
Obviously, we've taken our luxe and we've had our challenges when we look at the projects that we're working in 2023, we're really excited.
We've got the large lithium recycling plant that's cost plus job that we're working on which we think is.
And incredibly interesting project very unique project.
Got other jobs that were working for customers that I think are.
Our similar relative to a lot of the newer technologies that are going to get government funding and support. So I think we built an incredible resume its come into huge costs. Unfortunately.
But we're being very prudent about the jobs that we take the contract structures that we take and we think that that business is actually going to do fairly well. This year comparatively speaking and again, if we're going to be we're not going to be as aggressive we're probably going to be a little bit Tim. It is we look at these projects because of what's happened, but we're in an incredibly.
Incredibly well positioned.
I think that'll be a nice growth market for us as we continue to execute and get better at it.
All right very good thank you.
Thank you and our last question comes from Adam Thalheimer from Thompson Davis.
Hey, good morning, guys.
George and Paul Congratulations to you both.
I don't know if I just missed it did you give 2023.
Free cash flow guidance and also kind of curious on how the timing shakes out there.
Yes, so we did it in pieces right. So if it's $550 million of cash flow from operations and $100 million of net cash capex that we did.
<unk> 50 of free cash flow.
Okay.
And then.
Jose maybe you can just shed a little insight into what youre seeing on the pipeline bidding side and.
Maybe what the outlook is beyond 2023.
Yes, well look I think what we're going to do in 2003, we've kind of already gotten right. So I think.
There's a number of projects that are out there. Those we've won a bunch of projects for 2004 starts at this point. So there's definitely things that are going to fall into 'twenty, three but I think the bigger opportunities to there for $24 25.
And based on what we want and what we know is coming as kind of how we built our 'twenty three plan. So we've got again, roughly 30% growth expected in 'twenty three but.
But I think the opportunity for 'twenty four is considerably higher mbps the wildcard MVP.
Could still potentially go in 2003 and change all of these numbers, but we are feeling more and more comfortable with that project's going to ultimately come to conclusion over the course at least for the next two years.
Okay. Thanks, guys.
Adam.
Thank you very much I would like to turn it back over to our CEO Jose Mas.
So just before closing the call I would like to take this opportunity to congratulate Paul Demarco.
Paul has been with <unk> for a long time and he has demonstrated his talent over his career in Maastricht.
No. It is not a lot of great ideas and I'm excited that it will be leading our financial organization. So again, congrats Paul and thank you all for joining us and we look forward to updating you on our first quarter call.
Thank you, ladies and gentlemen that does conclude today's conference. We appreciate your participation and have a wonderful day.
Yeah.
Sure.