J. Marc Lewis - MasTec, Inc. José Ramón Mas - MasTec, Inc. George L. Pita - MasTec, Inc..

Andrew Kaplowitz - Citigroup Global Markets, Inc. Tahira Afzal - KeyBanc Capital Markets, Inc. Noelle Christine Dilts - Stifel, Nicolaus & Co., Inc. Jamie L. Cook - Credit Suisse Securities (USA) LLC Alex Rygiel - B. Riley FBR, Inc. Adam Robert Thalhimer - Thompson Davis & Co., Inc. Chad Dillard - Deutsche Bank Securities, Inc. Brent Edward Thielman - D. A.

Davidson & Co..

Welcome to the MasTec Second Quarter 2018 Earnings Conference Call initially broadcast on August 3, 2018. Let me remind participants that today's call is being recorded. At this time, I'd like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations.

Marc?.

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

In these communications, we may make certain statements that are forward-looking, such as statements regarding MasTec's future results, plans and anticipated trends in the industries where we operate. These forward-looking statements are the company's expectations on the day of the initial broadcast of this conference call on November 2, 2018.

And the 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, the 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 as discussed and 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 of any non-GAAP financial measures not reconciled in these comments to the most comparable GAAP financial measure can be found in our earnings press release, our 10-Q or posted in the PowerPoint Presentation located in the Investors and News sections of our website located at mastec.com.

With us today, we have José Mas, our CEO and George Pita, our Executive Vice President and CFO. The format of the call will be opening remarks and analysis by José, followed by a financial review from George.

These discussions will be followed by a question-and-answer period and we expect the call to last about 60 minutes We had another great quarter and a lot of important things to talk about, so I'll now turn the call over to José.

José?.

Thanks, Marc. Good morning, and welcome to MasTec's 2018 third quarter call. Today, I'll be reviewing our third quarter results as well as providing my outlook for the markets we serve. First, some third quarter highlights.

Revenue for the quarter was $1.977 billion, adjusted EBITDA was $226 million, adjusted earnings per share were $1.33 and backlog at quarter-end was $7.8 billion. In summary, the numbers speak for themselves. We delivered record revenue, record EBITDA, record net income, record EPS and more importantly record backlog.

In addition to our financial results, we are seeing accelerating opportunities across all of our business segments. In communications, we continue to experience high demand for fiber construction activity. Across the country, there is a significant amount of engineering and permitting work ongoing.

As these projects reach the construction phase in 2019 and beyond, we expect demand for fiber construction resources to grow exponentially. In the wireless market, activity has been stronger than expected and we believe the coming years will require a level of resources we've never before seen in the industry.

Bidding activity in both oil and gas and high voltage electrical transmission is tracking at historically high levels for us and we believe we are well-positioned in the market for continued future growth. As you can probably tell, I'm very excited about our future.

I'd also like to comment on our recent cash collections which George will cover in detail. We have now completed all contract negotiations on our Rover Pipeline project as well as proactively negotiated all changes on the Mountain Valley Pipeline which will now also be a significant driver of revenue for us in 2019.

Significant cash collections on these projects in October have significantly de-levered the company. We expect yearend 2018 debt levels to be down $500 million to $600 million from where it was at the end of the third quarter without taking into account any additional share repurchase or acquisition activity.

Again, resolution of these negotiations resulted in economics consistent with our prior expectations. Now, I'd like to cover some industry specifics. Our communications revenue for the quarter was $662 million versus $611 million last year.

The increase in revenue was driven by strong double-digit growth in our wireline and wireless business partly offset by a decline in our installation business. Wireline revenue for the quarter was up over 30% year-over-year.

Nationwide fiber deployment projects continued to expand, and we expect demand for those services to continue to increase over the coming years. We are actively working on engineering and permitting in several markets that we have been awarded and expect construction activity to ramp as these permits are approved.

We expect that demand will outstrip supply in the coming years, and those contractors with the ability to grow and train a safe and productive workforce will have significant opportunities. In our wireless business, demand for our services has increased faster than we expected.

Every major wireless carrier is actively ramping their build plans for 2019 and beyond. We are in the process of expanding our tower crew capacity by over 50% which is where we think we need to be to meet the demands of our customers over the next few years.

Moving to our power generation and industrial segment, revenue was $180 million for the third quarter versus $97 million in the prior year, and up 23% sequentially. Backlog more than doubled the last year's third quarter and was also up nearly $100 million sequentially. Our backlog of renewable projects is the largest we've ever had.

We're also seeing strong demand for wind repowering projects with multiple gigawatts of turbines planned for repowering throughout the United States over the next couple of years. Revenue in our electric transmission business was $99 million dollars versus $82 million in last year's third quarter.

During the third quarter, we signed in EPC contract for the construction of a 126 mile, 500 kilovolt electric transmission line. Work for this project has started under a limited notice to proceed with full construction expected to begin in the first quarter of 2020.

Because our backlog is only an 18 month backlog figure, the majority of the value of this contract has been excluded from our September 30 backlog. In addition, MasTec has been selected and has signed a letter of intent for an EPC contract to construct a 520 mile, 500 kilovolt transmission line.

Construction on this line is expected to begin in late 2019 or early 2020. This project is also not yet in backlog. We're confident that over the coming years, we will achieve significant revenue growth in this segment and return it to historical profitability levels exceeding double digits.

As it relates to Puerto Rico, we were expecting to mobilize in early October. While there have been some delays, we still expect mobilization in the fourth quarter. Our Oil and Gas pipeline segment had revenues of $1.035 billion for the third quarter compared to revenues of $1.161 billion in last year's third quarter.

EBITDA margin for the quarter was 15% compared to 9.3% in last year's third quarter. We had an excellent quarter, but more importantly the number of opportunities continues to expand. The pipeline market is very strong, activity levels for both long-haul pipelines and shale-related work continue to increase.

We expect backlog levels at year-end to exceed last year's levels. We're also seeing a greater diversification of both the number of projects and the geographic concentration for 2019. We are actively pursuing opportunities for 2019, 2020 and 2021 and are in discussions with several clients about five-year resource needs and planning.

We expect significant long term demand for our services. To recap, while we're performing well financially, we're even more excited about the opportunities in front of us for the balance of 2018 and beyond. We are expecting 2018 to be another record year for MasTec and believe 2019 is shaping up to be even better.

I'd like to take this opportunity to thank the men and women of MasTec for their commitment to safety, their hard work and their sacrifices. Our people are our most important asset and it's because of their performance that I'm so excited and bullish about our future. I'll now turn the call over to George for our financial review.

George?.

Thanks, José, and good morning, everyone. Today I'll cover third quarter financial results, including cash flow, liquidity, working capital usage and capital investments as well as our increased guidance expectation for 2018.

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. Reconciliation and details of non-GAAP measures can be found in our press release, on our website or in our SEC filings.

It's worth noting that third quarter 2018 GAAP results reflected an income tax benefit of approximately $18 million or $0.23 per share from completion of the re-measurement process of our U.S. deferred income balances, resulting from the Tax Cuts and Jobs Act.

And consistent with our prior treatment, this benefit was not included in our adjusted results. In summary, we had a great third quarter 2018. With record adjusted EBITDA and significant adjusted EBITDA margin rate expansion. And we have, once again, increased our guidance expectation for the 2018 annual period.

During the third quarter, we repurchased 1.6 million shares at a cost of $70 million. And in September, our board approved a new $150 million share repurchase authorization, the largest authorization in MasTec's history.

Importantly during the third quarter, as expected and previously communicated, we successfully finalized contractual resolution on a large oil and gas project, for which we have reached substantial completion during our second quarter.

As indicated in yesterday's release, in October we received over $700 million in cash inflows from this and other large oil and gas projects significantly reducing our leverage since the end of the third quarter.

This strong October cash inflow affords us the confidence to further increase our expectation for 2018 annual cash flow from operations to a new record level of over $550 million.

Excluding any fourth quarter share repurchase or acquisition activity, we expect to reduce our year-end net debt level to approximately $1.1 billion to $1.2 billion, a $500 million to $600 million reduction from third quarter levels.

We're providing visibility into our significant October cash inflow activity to give shareholders further clarity regarding the strength behind our continued expectation of record cash flow performance for 2018.

In short, over the past few quarters we have been discussing higher than normal working capital investments on selected oil and gas projects, and with our strong October cash inflows our working capital investments are now back to a normal level.

Here are a few summary comments regarding our third quarter 2018 performance which across virtually all financial measures showed considerable strength and exceeded our expectation. Adjusted diluted earnings of $1.33 per share grew by 62% over last year exceeding our expectation by $0.07 per adjusted diluted share.

Adjusted EBITDA was $226 million increasing $47 million over last year, with adjusted EBITDA margin rate at 11.4% of revenue, a 220-basis-point increase over last year. Third quarter 2018 adjusted EBITDA and adjusted EBITDA margin rate both exceeded our expectation.

Third quarter 2018 18-month backlog was $7.8 billion, another record level, providing us continued confidence for future growth. Now, I will cover some more detail regarding third quarter segment results. Third quarter 2018 Oil and Gas segment revenue decreased approximately 10.8% compared to the same period last year to approximately $1.04 billion.

While a year-over-year revenue decline was expected, third quarter 2018 Oil and Gas segment revenue levels were slightly impacted by regulatory-imposed work stoppages and hurricane flooding disruptions on selected large project activity.

As we have previously indicated, 2018 large project delays have caused an increase in our overall expected project contract value with incremental project activity and contract value expanding into 2019.

More importantly, third quarter 2018 Oil and Gas segment adjusted EBITDA was strong at $156 million compared with $108 million last year, a 44% increase. Oil and Gas segment adjusted EBITDA margin rate was 15% of revenue, a 570-basis-point improvement over the 9.3% of revenue reported during the third quarter of 2017.

And now, as a reminder, last year's third quarter Oil and Gas segment adjusted EBITDA margin rate was negatively impacted by large project activity on a cost reimbursable basis.

That said, third quarter 2018 Oil and Gas segment adjusted EBITDA margin rate of 15% of revenue is more typical of this segment's third quarter performance potential and was driven by multiple project efficiencies across the segment.

Third quarter 2018 Communications segment revenue increased approximately 8% compared to the same period last year to approximately $662 million. Third quarter 2018 Communications segment adjusted EBITDA margin rate was 11.3% of revenue, a 60 basis point improvement over the third quarter of 2017.

And as previously indicated, third quarter 2018 Communications segment adjusted EBITDA margin rate includes ramp up costs related to wireless and wireline fiber initiatives which will continue into the fourth quarter as we prepare for 2019 project activity growth.

Third quarter 2018 Electrical Transmission segment revenue increased approximately 21% compared to the same period last year to approximately $99 million, and adjusted EBITDA was $3 million or 3.1% of revenue, generally in line with our expectation.

Importantly, as José previously indicated, this segment secured a large contract award during the third quarter approximating $200 million of which only $20 million is reflected in our 18 month backlog due to the expected project timing start-up.

We continue to experience very active, large transmission bidding activity that we expect to lead to significant growth for this segment in the back half of 2019 and beyond. Third quarter 2018 Power Generation and Industrial segment revenue increased approximately 85%, with approximately 66% of this growth occurring organically.

We continue to experience a very active market in renewable project activity and expect this segment will approach $700 million in annual 2018 revenue, which would represent a year-over-year growth rate of over 130%. Third quarter 2018 adjusted EBITDA margin rate was generally in line with expectation at 5.4% of revenue.

Third quarter 2018 other segment, equity and earnings, from our equity interest in Waha pipeline operations was approximately $7.7 million. And we continue to anticipate this investment will generate approximately $25 million in earnings in 2018, as we benefit from commercial pipeline operations optimization.

Now I will discuss a summary of our top 10 largest customers for the third quarter 2018 period, as a percentage of revenue. EQT Corporation was 28%, reflecting 2018 large oil and gas project activity. AT&T revenue, derived from wireless and wireline fiber services, was approximately 15% and install-to-home services were approximately 6%.

On a combined basis, these three separate service offerings totaled approximately 21% of our total revenue. And as a reminder, it's important to note that these offerings, while falling under one AT&T corporate umbrella, are managed and budgeted independently within that organization giving us diversification within that corporate universe.

Energy Transfer affiliates was 12% consisting of multiple projects, and Enterprise Products Partners, Verizon, Comcast, Duke Energy, American Electric Power, The Southern Company, and Xcel Energy were all at approximately 2% of revenue.

Individual construction projects comprised 68% of our third quarter 2018 revenue with master service agreements comprising 32%, and this mix reflects the trend over the past year or so of higher levels of large project activity.

As mentioned earlier, our 18-month backlog as of the third quarter 2018 was approximately $7.8 billion, a $114 million sequential increase when compared to the second quarter and a 56% increase compared to the same period last year. Third quarter booking activity was driven by strong bookings across multiple segments.

As a reminder, and as we've indicated for years, quarterly backlog amounts can tend to be lumpy as large contracts burn off each quarter and new large contract awards typically only come into backlog at a single point in time.

Having said that, third quarter 2018 marks the fourth consecutive quarter of record total company backlog and this trend is noteworthy serving as a testament to the breadth and strength of our end market opportunities. A summary of third quarter 2018 segment backlog growth compared with last year is as follows.

Oil and gas backlog grew 148% reflecting the continued strength of this end market across multiple geographies. Electrical transmission backlog grew 123%, and as previously indicated this backlog level only includes a portion of a recent third quarter 2018 large project award.

Power generation and industrial backlog grew 121%, and communications backlog grew 21%. In summary, 18-month backlog levels as of September 2018 were at record third quarter levels across all major segments. This supports our optimism regarding the strength of our end markets with sizable multi-year growth opportunities.

Now, I will discuss our cash flow, liquidity, working capital usage, and capital investments. As indicated in yesterday's release, we've received over $700 million in October cash inflows from customers on selected large oil and gas projects significantly reducing our leverage since the end of the third quarter.

We ended our third quarter with net debt defined as total debt less cash of approximately $1.7 billion, a quarter-end book leverage ratio of 2.6 times and liquidity of approximately $265 million. With our strong October cash inflow, we expect to end 2018 with net debt of approximately $1.1 billion to $1.2 billion.

Our year-end book leverage ratio of 1.5 to 1.6 times, with year-end 2018 liquidity of $800 million to $900 million. This estimate excludes any fourth quarter share repurchase or acquisition activity. And as we've previously noted, our long-term capital structure is solid, with low rates and no significant near-term maturities.

Our estimated year-end 2018 net debt level and corresponding liquidity afford us ample capacity to finance all opportunities to generate additional shareholder value, including share repurchases and acquisitions. During the first three quarters of 2018, we have repurchased approximately 4.3 million shares or about 5% of our total share base.

During the latter part of the third quarter, our board of directors approved the largest share repurchase plan authorization in company history, at $150 million, reflecting our confidence and future growth opportunities. I will now discuss our working capital usage.

As indicated earlier, through the end of the third quarter 2018 period, we had higher than normal levels of working capital invested in a certain large oil and gas projects which caused an elevation of our third quarter 2018 DSOs or accounts receivable days sales outstanding to 101 days.

With over $700 million in October cash inflows from selected large oil and gas projects, we have now normalized our working capital investments. And, we expect our year-end 2018 DSOs will significantly improve and be within our stated DSO target range of mid to high 70s.

This gives us the confidence to further increase our expectation for 2018 annual cash flow from operations to a new record level of over $550 million. Turning to our spending on equipment.

During the third quarter of 2018, we purchased approximately $30 million in net cash CapEx defined as cash CapEx net of equipment disposals and we incurred an additional $9 million in equipment under capital leases.

We expect that for the full year 2018 period, we will acquire approximately $115 million in net cash CapEx, and we also expect to incur approximately $90 million to $110 million in equipment under capital leases. Moving to our current 2018 guidance. We continue to expect full year 2018 revenue of $6.9 billion.

We are increasing full year adjusted EBITDA guidance to $719 million and raising adjusted diluted earnings per share guidance to $3.76. We currently estimate fourth quarter 2018 revenue at $1.9 billion, with adjusted EBITDA guidance of $194 million or 10.2% of revenue, and adjusted diluted earnings guidance of $1.05 per share.

Relative to some additional details for modeling purposes of our guidance, we expect fourth quarter 2018 share count to approximate 78.5 million shares with full year 2018 weighted average share count approximating 80 million shares.

It should be noted while we have repurchased 4.3 million shares through the end of the third quarter, due to the timing of those of those purchases, our full-year 2018 weighted average share count of 80 million shares will only reflect a weighted average reduction of approximately 2.6 million shares, and this could cause a rounding issue in the summation of quarterly adjusted diluted earnings per share to the annual total.

We estimate fourth quarter 2018 interest expense will approximately $20 million with full-year 2018 interest expense anticipated at $80 million, and this reflects the impact of approximately $200 million in year-to-date share repurchases, higher than normal working capital investments through the first nine months of 2018 and rising interest rates.

We anticipate full-year 2018 depreciation and amortization expense will approximate 3.1% of annual revenue with a $1 increase in 2018 primarily due to the annualization of expanded 2017 levels of capital expenditures and acquisition activity.

And lastly, we continue to anticipate that our full-year 2018 adjusted income tax rate will approximate 29.5%. In summary, we are pleased to be in position to raise our 2018 full-year guidance expectation to new record levels for adjusted earnings and importantly for 2018 cash flow from operations.

Our record 18-month backlog supports our strong belief in multiple future growth opportunities our markets afford us for 2019 and beyond. And that concludes our prepared remarks. We'll now turn the call back to the operator for questions and answers.

Operator?.

Thank you. Our first question comes from Andrew Kaplowitz from Citi. Please go ahead. Your line is open..

Hey, guys. Close enough.

How you're doing?.

Good morning, Andy..

José, so you've been talking for a couple quarters now, about your estimated margin in oil and gas being in a 13% range. But you came in at 15% this quarter and that's despite significant interruptions in Mountain Valley. Last quarter you came in at 16% despite delays. So, maybe you could talk about the underlying margins here in that business.

Is it in the high-teens? Kind of like it used to be when you have good mainline pipe in there.

Did you have any closed out benefits in the quarter? And is it possible to quantify the regulatory weather delays that cost you in Q3?.

Sure. So, I think what we've been saying is we're going into these bids at 12%, 13%, somewhere in that area. We've got some contingencies built into the projects over the last couple of quarters. We've obviously performed better, been able to outperform some of our own estimates. And thus we had 16% margins in Q2 and 15% margins in Q3.

We're always closing projects out. So in every quarter, there are ins and outs related to a project. There was some close out benefit in Q3, but nothing abnormal, nothing that wouldn't have allowed us to make that kind of a margin in a normalized period.

On a go-forward basis, we're still kind of guiding to the same levels and we've been performing for a couple quarters, as we perform more consistently over time then we'd consider maybe moving that margin profile more to where our actuals are coming in.

So, built into guidance we still have the same types of level of margin guidance that we've done in the past, so we're hoping to be able to beat it. Things are going well. It's a very active market, but we've got to perform and deliver out on the field..

Okay. That's helpful, José. Maybe stepping back, at this point, can you give us any initial thoughts on the puts and takes that you see into 2019? You still have significant Mountain Valley work in 2019. It might trail off in the second half of 2019, but you have more Permian midstream, maybe Canada starts to come back.

I think you mentioned on this call you labeled the potential for communications as exponential growth, and you're booking these big transmission awards, one of them starts next year. So, as we look at next year, I think the Street has something like mid-single-digit revenue growth as opposed to double-digit EBITDA growth.

Is that kind of what you see at this point? I know it's early..

I do. I think that's – I think those are fair estimates. Obviously, we're very bullish on our business. Just to be clear, we see a lot of big pipeline work as well. So, I don't want that to be tempered. We've got a lot of opportunities.

I think in this call we're saying we expect to go into next year with at least the levels of backlog that we entered this year, if not better. So, we're very bullish about what we're going to win from here to the end of the year and really what our pipeline backlog and our total backlog is going to look like going into 2019.

It's an extremely active market. And again, we couldn't be more bullish about it. With that said, obviously we have to perform. I still think and we've been saying this for over a year, I still think of the communications growth you're going to start seeing at a slower ramp.

And I think middle of 2019 on is where we're really going to see a big pop there, but there's an enormous amount of work. There's a lot of obviously engineering and permitting work that's ongoing now.

Construction work is ramping we expect, and we probably – we obviously expect more growth in communications next year than we would across the rest of our business but again bullish across the board. One of the questions I didn't answer for you, Andy, was on some of the constraints and challenges that we did face in the third quarter.

Obviously we were shut down on the MVP project for a month. We had two hurricanes, Hurricane Florence and Michael, that actually significantly impacted that project in particular because it rained a lot along the project right away and along the project route. So, we're really proud of the results we've had.

We think there's tremendous excitement around the industry and just a lot of activity and work out there..

Thanks, José. Good quarter..

Thank you, Andy..

Thank you. Our next question comes from Tahira Afzal from KeyBanc. Please go ahead. Your line is open..

Thanks. Congrats, José, to you and your team, on a great performance..

Thank you, Tahira..

So, José, on the telecom side, obviously wireline and wireless commentary much stronger than we thought. Obviously you have some moving parts. Not everything ramps up at get-go as you've indicated.

Could we be exiting next year at sort of 20%-plus year-on-year growth in telecom?.

It's definitely doable, right? So, if you look at the trends in the business, the one business that continues to drop for us is that install business. Consistent on a quarter-over-quarter basis, we actually had slight growth quarter-over-quarter. But if you compare it on a year-over-year basis, it was still down mid-20%.

So, that's a headwind that we have facing the communications business. So, when you look at the overall numbers, really strong growth in wireline and wireless. I think if you look a lot of the models that are out there, that it's implying that kind of growth in communications for next year coming out of 2019 and we feel comfortable with that..

Got it, José. And is the electric transmission, the uptick you're now finally seeing, it's pretty exciting. Seems like you have, if I do my math correctly, probably $1 billion or so in bookings that you will be able to garner and recognize by, let's say, middle of next year just on the two projects.

If I go back historically, you've come close to doing $500 million plus in revenues there. Right now, you're underutilized. But the margins in that business have hit as high as 13%, 14%.

Could you conceivably see those type of margins again in this business in 2020, 2021?.

So first, we're super excited with the bookings that we've gotten. You're accurate in saying I don't think we've ever had bookings of this level in this business ever. So we actually have to translate that and let it hit backlog. Unfortunately, we're not going to see a lot of the revenue flow through our books until really late 2019, into 2020.

So this isn't necessarily a story for 2019, but it's absolutely a story for 2020 and 2021. I would expect to reach record levels of revenues in those years based on the bookings that we have and the opportunities in front of us, and our ability to be able to, if not hit historical high margin levels, get close to them.

So again, it's, I think it's going to be a great part of our story in the coming years. We're very excited about it and it obviously has to play out, but we're super encouraged about where it's headed..

Thanks a lot and congrats again, José..

Thank you, Tahira..

Thank you. Our next question comes from Noelle Dilts from Stifel. Please go ahead. Your line is open..

Thanks. Good morning and congratulations..

Thanks, Noelle..

I just wanted to start with, going back again to communications, but you mentioned demand is stronger than anticipated, than you had anticipated. So, I'm just curious if that's coming more from AT&T or other customers? And historically, most of your work, more, the majority of your work on the communications side has been tied to AT&T.

So, are you seeing more opportunity emerge with other customers? And then the last question there is really, you're talking about a slower ramp in 2019 now more back half weighted. Is there kind of a reason why? Is it the regulatory side? Or is something else going on there? Thanks..

Sure. So, a couple things. First, I'd start with saying our view on 2019 has not changed. So, I don't....

Okay..

...want the implication to be we're changing our view on 2019. We've always said 2019, we've always said in 2018, I think we're almost hitting the numbers we predicted a year ago as we looked at 2018. I think there was a lot of excitement around 2018. We were somewhat tempered in how quick that revenue would hit.

And I think we were correct in making those assumptions and in being a little bit more conservative as we looked at 2018. So, our view on 2019 has always been, it was going to start better than where 2018 was, but it was going to ramp throughout the year, and exit 2019 much better than the start in 2019.

That's still our expectation in both the wireline business and the wireless business. I would say that our opportunities today are much more broad based than they have historically been. So, aside from just AT&T, we've got tremendous opportunities today.

With Verizon, we've got tremendous opportunities with Comcast, we've booked a lot of work with both of them. As you can see from the, they're obviously both in our top 10 customers today. And the opportunities and business with them is growing.

I also think it's important to note, as you think about communications, right, the underlying base business there, the work that we've won, the fiber business, the wireline business, the wireless business, really solid growth. We do have some tough comps going into Q4 and Q1 relative to storm work.

We did a lot of storm work in Puerto Rico both in the fourth quarter and the first quarter. We expect to do similar levels once we can get mobilized and start there but we haven't yet. And then, there was significant damage in Florida last year and the storm in the fourth quarter which generated a lot of revenue for us which isn't there.

So, even though we may not see huge growth numbers in communications in those quarters, the underlying base business is growing significantly, it's just being offset by one-time incidents..

Okay. That makes sense. Thanks. Second question shifting over to oil and gas, is there any way that you can give us a sense of how much the scope on MVP has expanded given some of these delays. I know you were initially thinking it would be about a $1.5 billion contract.

And then, how we should think about the amount of work you're performing in 2018 versus what you're expecting in 2019? And then, could you give us some thoughts on just your capacity utilization within oil and gas given the shift of MVP work? I'm curious how you're thinking about managing resources in terms of the delays associated with MVP and then the work you've been awarded for next year..

Sure. So, we're thinking that, obviously the contract value in MVP is going to grow significantly. I think that tracks to exactly what their public commentary has been on the project.

We would probably expect half of the revenue to come in, maybe just over half the revenue to be in 2019 and just under half, or 2018, and under half the revenue to be in 2019. We've had to juggle around the opportunities that we have in 2019 and really trying to fit our ability to finish the job for our customer which we've committed to.

I think we're doing a really good job there. Again, there are a significant number of opportunities in 2019. So, I think we feel good about it. We're working hard on schedules and making sures that projects fit within our schedule. But again, the opportunity for 2019 today is a lot better than the opportunities we had coming into 2018.

So, and by the way, 2020 looks like another great year because we're already in tons of discussions with customers around projects for 2020. So, we haven't seen any slowdown whatsoever in the pace of opportunities, the size of opportunities, so we're very encouraged.

As we win projects, I think, we'll be able to talk more clearly about 2019, but I think there's a good chance that we do a lot better than what we originally thought in 2019..

Great. Thank you..

Thanks, Noelle..

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead. Your line is open..

Hi. Good morning. And nice quarter. Good job on the cash flow.

I guess the one question I get from investors with the Oil and Gas business being so robust and sort of working capital needs, George, is there any way you can help us on how to think about normalized cash flow for this business over the next couple of years or should we continue to expect volatility just given the working capital needs associated with the Oil and Gas business? And then my second question, José, if you could just talk about sort of terms and conditions, what you're seeing in the oil and gas market, in particular, pricing dynamics, just given the capacity constraints and the fact that the market is so robust.

Thank you..

Hey, Jamie, I'll take the first piece. This is George. As far as working capital is concerned, we don't expect it to be volatile going forward.

I mean, we've had a couple different instances in terms of contract specifics that have led to some increased usage over time, but the fact that we're in a large project cycle doesn't necessarily change our profile on working capital.

We continue to expect our normalized working capital to be in that mid to high 70s in terms of DSOs; that's with large project activity. If you go back, when we were doing Dakota Access, you would see that we were in those numbers and didn't have any issues.

The experiences that we had the first part of this year that have now been collected were really related to specific contracts items and those have been pushed behind us.

So, from a working capital perspective, we really expect ourselves to be back in a normal range again, that's in that mid to high 70s, and don't see that changing with this cycle of large project activity that's now continuing into 2020 plus..

So, Jamie, I'd add a couple things. One, I do think it's important to note that I think the issues that we did have over the course of the last three quarters or so were very project specific, as George said, and not customary of the overall industry.

When we think about terms, conditions and pricing, which was the second part of your question, I think customers today more than ever realize the importance of having contractors that have the ability to complete these jobs, that have the financial wherewithal to complete these jobs, that have experience dealing with the regulatory and environmental issues that are showing up on these jobs.

I think we've proven that over the last few years. We've worked on some of the most, if not the most difficult, projects in the U.S. And, I think it's played very well for us. I think customers understand that. I think, from a pricing perspective and terms and conditions, things are very different than they were historically.

I think they're definitely become more favorable for the contracting community and things that we can live with.

So, when you look at all the issues that we've had on specific projects over the last year and our ability to get through them and negotiate through them and have our customers treat us the way they have, I think is a testament to the partnership that we have with our customers and the importance that they have in what we do for them every single day..

Okay. Thank you. Nice job. I'll get back in queue..

Thanks, Jamie..

Our next question comes from Alex Rygiel from B. Riley FBR. Please go ahead. Your line is open..

José, George and team, great quarter. Congratulations..

Hey, Alex..

Couple quick questions. José, you talked about doubling the, increasing the tower climbing staff by about 50%.

Can you talk about the timeline and the effort that's required in order to do that? When those additional tower climbers might come on stream? And how should we think about the revenue opportunity of those additional tower climbers in your model?.

Yeah. So, the reality, Alex, is it's probably going to take us through midyear next year. I think this is a multi-year conversation, as we think about the needs of our customers. The reality is that if we had it today, we could probably put them to work today, which is, I think, unbelievable to be able to say that.

But I think that's the demand that's starting to exist in the industry today. But it will take us time. We've got schools that we've built across the country, that I think are excellent and are specific to that. So, we're trying to do it as quick as we can, it does take time. So, we'll be building that over the course of the next couple quarters.

I think the revenue growth opportunity is commensurate with that growth, if not greater. Again, we've got a lot more customers, doing a lot more work. The industry in general just has a lot more activity, which is creating positive pricing pressure and significant demand issues relative to the supply that's out there..

And secondly, customer concentration is always been a part of the MasTec story, but you talked a number of times on this call with regards to a broadening of opportunities, whether or not it's telecom with Verizon and Comcast or it's in your power business with two new big projects starting up in 2019 and hopefully 2020 or whether or not it's next year breadth of opportunities within your Oil and Gas business.

So, can you kind of help us to understand maybe what the corporate strategy is and where you think the diversification is going to two years out?.

Yeah. So, I think when you look at it, right, AT&T has been the one constant. It's the one customer that's been a top or top 3 customer for a long time. Part of it is the acquisition of DirecTV. When DirecTV was around you had two customers between them and AT&T that made a significant portion of our business. We've got a great relationship with them.

It's broken out into a bunch of different subsets of work. So, we've got wireless, we've got wireline, we've got the installation business. We've been working with them for over 50 years. We've got a great relationship and we have zero concerns around our customer concentration with AT&T.

When you look at other customer concentration, the reality is we have significant customer rotation. So, those other customers aren't always at the top, right? If Energy Transfer's got a lot of work, they end up being a big customer. Right now, EQT is a big customer but we're, because we're working on a big project.

Next year, our big pipeline projects will probably be with other customers that aren't the same ones that we're working with today. So, they'll pop on our list. So, I think it's very healthy because there's constant rotation depending on who has the work.

And then, what you've seen is the, when you get into the 4 through 10 for us, the customers that are now becoming our 4 through 10 are large customers that can ultimately be a lot larger for us.

So, for Verizon to consistently be on that list now for quarters, for Comcast to consistently be on that list and the opportunities that we have to continue to grow them, I think we've got a great customer base. We're very proud of it. We've got hundreds if not thousands of customers that we work for across the year throughout all of our businesses.

But obviously the big ones are the ones that impact us the most. And we're very comfortable with the customer diversification that we have today and with the improvements that we've made it in over the last couple of years..

Thank you..

Thanks, Alex..

Our next question comes from Adam Thalhimer. Please go ahead. Your line is open..

Hey. Good morning, guys. Great quarter..

Good morning, Adam..

I also wanted to ask about the tower climbers.

José, what's really driving that? Is it all FirstNet or is it more broad than that?.

It's more broad. I think ultimately 5G is going to require every tower to be touched. I think there's been this idea that 5G is only fiber based, it's not, 5G who requires a significant amount of fiber, it's definitely a part of what's going to happen there.

But at the end of the day, towers have to be touched and it's a – it's complex, it's more difficult, it's a smaller workforce base. And, the needs are exponential because all the different carriers are out there trying to do this within a similar time interval.

So, it's going to be a very interesting market for years to come and a very active market for years to come..

Okay. And then secondly, I wanted to ask about Puerto Rico. Can you, I think that was $500 million contract.

I mean does all of that hit in 2019? And what's the margin profile of that work?.

Yeah. We're hopeful. Puerto Rico has got a year's worth of work. In their own estimates they talk about having work to finish over the next five to seven years in the range of $5 billion to $8 billion. The first awards of that came middle of the year this year when the announcements of those projects were made.

Things, unfortunately, are a little bit slower there than what we'd like to see. Again, we expect to mobilize on that project before year-end. And, we have currently a $500 million contract that we do think will be used in 2019, so, and then there's a bunch of other work that's going to be bid in early 2019 that I think we're well-positioned for.

So, I think there's very strong long-term opportunities in Puerto Rico; really not a lot built into our guidance for the balance of 2018, but something we're pretty excited about..

Okay. Thanks..

Thanks, Adam..

Our next question comes from Chad Dillard from Deutsche Bank. Please go ahead. Your line is open..

Hi. Good morning, guys..

Good morning, Chad..

So, can you discuss the ramp-up work for fiber and 5G as we enter 2019, and how should we think about the cost absorption and the margin ramp as we go into next year compared to this year particularly as you guys are hiring more tower climbers? And then secondly, I mean, labor is obviously pretty tight in this market right now.

How do you guys plan to get bodies in the door and to what extent do you have ability to improve pricing and contracts to cover the incremental labor cost?.

So, couple things, right? We're already experiencing growth. We had 30% year-over-year growth in wireline, we had double-digit growth in wireless in the third quarter. So, I think we're already living with some of those challenges that you lay out. We've had to hire more people. We've had to add people on. We've been doing that.

It's been built into the margins we've been able to deliver. And I think it's important when we talk about those margins to see that those margins have increased, right, we expect to finish this year at north of 100-basis point improvement from where we were last year.

That's a significant improvement in our comms business despite some of the growth and growth initiatives that we've had to cover. When you think about people and labor, I think that's one of our strengths. We do a lot around training. We do a lot around building our own resources, training them, and getting them proficient quickly.

So that's one of our strengths. That's where we think you know we can bring a lot of value to our customers. I think a lot of the opportunities that we're seeing today are incremental opportunities which allow them to be priced on the spot market which is increased because of the demand for services. So I think that's a positive.

As I think about margins going into the next couple quarters in communications, we've got two challenges. One is we've got some comps relative to the hurricanes, where the hurricanes had – have strong margins. We had a lot of that work in Q4 and Q1.

And then I think you've got the expenses that we'll have in terms of hiring people which I think we're already doing a lot of that, so some of that is already built into the margins. I think when things normalize and we're at the level of people that we need.

You're going to see our performance be better than the performance that we've been able to deliver over the last couple of quarters. So longer term, mid to longer term, I expect our Communications margins to improve. Over the next couple quarters, we're going to have to manage through the incremental workforce and what we've got to do there.

And I think we've kind of embedded all that in our guidance assumptions that we've put out..

Great. That's helpful. And then also, can you talk about the impact of the FCC's 5G FAST plan? I mean, obviously, it's a pretty big positive.

But, have you actually started to see that impact yet? And, has it given you better timing certainty or allows you to build a more accurate work schedule?.

Every customer is different, right? So every customer has a little bit different set of plans. Obviously when we think about what's currently happening, a lot of our business today is more being driven by FirstNet than it is for 5G. I think a lot of that we're going to start seeing the benefit of in 2019..

Great. Thank you..

Thanks..

Our final question comes from Brent Thielman from D.A. Davidson. Please go ahead. Your line is open..

Thanks. Great quarter..

Good morning, Brent..

Good morning.

José, with all the opportunities in the Permian and as you work through MVP, do you think we could see a material shift in the composition of the backlog, I guess, toward projects addressing that basin?.

So, the short answer is yes. The broader answer is we already have a significant presence in that basin. So, if you look at the work that we're doing today, we're doing a lot of work in that basin today. It's a big driver of revenue for us. It always has been. I think we're as, about as well positioned there is anybody in the country.

When you look at just about every major project of note that's being built there, we are involved. We have won a piece of it. So, we have, I think we already have great diversification both for that basin and within that basin with different customer sets.

There is an enormous amount of work coming out in that basin that will continue to come out over the next couple of years. And I think we're going to be a big beneficiary of that..

Okay.

And then just on transmission, with the timing of some of these large projects, I guess into 2019, late 2019, 2020, is that when we should start to think about that business getting back towards historical profitability levels? Are there some levers you can pull to get there sooner?.

I think that's when we'll get to historical levels. I think profitability will improve from now to then, but not to historical levels. I think we need that kind of volume and utilization of our resources to be able to get back to those levels..

All right. Thank you..

Thanks, Brent..

It appears there are no further questions at this time. I would like to turn the call back over to José Mas for any closing remarks..

All right. I just want to thank everybody for participating today and for your interest in MasTec. And we look forward to updating you on our year-end call. Thank you..

This concludes today's call. Thank you for your participation. You may now disconnect..