MasTec Inc
NYSE:MTZ
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
54.59
149.6
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
MasTec Inc
You don't have any saved screeners yet
Good day and welcome to MasTec's 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 conference over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc, please go ahead.
Thanks, Ann, and good morning, everyone. Welcome to MasTec's second quarter 2018 earnings conference call. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. In these Communications, we 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 the conference call 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, actual results may differ significantly from results expressed or implied in these Communications.
In today's remarks by management, we will 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 measure can be found in our earnings release, press release, our 10-Q and 10-K or in the posted PowerPoint presentation located in 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 Q&A 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 today. So I'll now turn it over to José to get it started. José?
Good morning, and welcome to MasTec's 2018 second quarter call. Today, I will be reviewing our second quarter results as well as providing my outlook for the markets we serve.
First, some second quarter highlights. Revenue for the quarter was $1.618 billion. Adjusted EBITDA was $191 million, adjusted earnings per share were $1.04 and backlog at quarter end was $7 billion, a $ 168 million increase from the first quarter.
In summary, we had another very good quarter, but it could have been better. Revenue came in about $150 million shy of our expectations, primarily driven by a slower start to the Mountain Valley Pipeline project. Despite the lower revenues, margins were better-than-expected.
Our Oil and Gas segment delivered 16% EBITDA margins for the quarter, a solid sequential increase. This increase in margin came despite the slow start to the Mountain Valley Pipeline project and the negative impact from the Rover project for the quarter. Our portfolio of pipeline projects is performing very well and we are seeing significant opportunities in this segment, which we'll discuss in detail later.
Our Communications segment also performed well during the quarter. Despite the sequential decrease in both revenues and margins due to the Puerto Rico storm restoration impact in the first quarter, our results in the second quarter were better than what we had originally expected. More importantly, in addition to our financial results, we are seeing accelerating opportunities across all of our business segments. Our Communications segment is well positioned to benefit from the increasing investment in both fiber-related expansion, as well as 5G rollouts, as demonstrated by T-Mobile's recent announcement of significant equipment (4:06) in 5G equipment.
Our Oil and Gas business continues to see strong demand. There has been a lot of press about the Permian takeaway capacity issues and the cost differential impact created by the lack of takeaway capacity. Permian takeaway capacity today is estimated at 2.8 million barrels per day with production expected to exceed 3.6 million barrels per day by the end of 2018.
Over the next five years, production in the Permian is expected to reach 5.3 million barrels per day, further exasperating the takeaway issues. We expect significant long-term demand for our services.
During the second quarter, we announced a $500 million contract award with PREPA, the Puerto Rican electric company. This contract is to both complete the restoration efforts as well as to begin the grid modernizations, which by PREPA's own accounts are estimated to require a roughly $5 billion to $8 billion investment. We expect mobilization of this contract to begin either late in the third quarter or early in the fourth quarter.
In our Transmission segment, we continue to build backlog. We have also been verbally awarded two large projects, which we hope to discuss on future calls. We focus on making 2018 a year of backlog growth in this segment. With our anticipated contract signings, we expect a significant amount of further backlog growth through year end. We are well-positioned to exceed historical revenue levels in this segment over the coming years. Again, 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're expecting 2018 to be another record year for MasTec, and with our first half performance, we think, we're well on our way to achieving that.
Now I'd like to cover some industry specifics. Our Communications revenue for the quarter was $619 million versus $592 million last year. This increase in revenue was driven by strong growth in our wireline business, slight growth in wireless and a decline in our installation business, which declined over 20% year-over-year.
For the second half of this year, we would expect both wireline and wireless revenues to grow double digits versus last year, offset by a year-over-year decline in our installation business. In our installation business, we've recently been awarded a contract with LifeShield to be their nationwide professional installation company. LifeShield is a home security company previously owned by DIRECTV and re-launched under its original founder.
Wireline revenues for the quarter were up 40% year-over-year and we continue to see strong demand. Nationwide fiber deployment projects continue to expand and we expect demand for those services to continue to increase over the coming years. We are aggressively working on engineering and permitting on several markets we have been awarded over the last year. We expect construction activity to ramp, as these permits are approved, and expect significant growth leading into 2019.
In our wireless business, we're seeing incremental growth in order activity. Wireless backlog has grown and we expect that trend to continue. While we're expecting revenues in the second half of 2018 to be up double digits, we expect a more aggressive ramp into 2019 and beyond. We expect deployment of FirstNet and 5G to be back-end loaded in 2018 and very strong for years to come. T-Mobile's recent announcement on plans to spend $40 billion over three years if their deal with Sprint goes through is a considerable increase in spend compared to recent spend levels by both companies. We saw their first large order of 5G equipment just this week in a deal valued at $3.5 billion with the OEM.
Moving to our Power Generation and Industrial segment, revenue was $146 million for the second quarter versus $61 million in the prior year. We're expecting strong growth in this segment as demonstrated by our backlog of over $600 million. We expect second half revenues to more than double over last year's second half. 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. Thousands of megawatts of previously installed wind turbines are now being repowered to more efficient turbines, as technology has drastically improved since the inception of wind power.
Revenue in our Electrical Transmission business was $85 million versus $97 million in last year's second quarter. Backlog in Transmission was up sequentially. And while 2018 should be a good year, we expect 2018 to be a year of backlog growth. As I said earlier, we have been verbally awarded two large Transmission projects that will significantly increase backlog going into 2019.
Our Oil and Gas pipeline segment had revenues of $769 million for the second quarter compared to revenues of $1.1 billion in last year's second quarter. Revenue in the quarter were impacted by delays in the ramp-up of our work associated with the Mountain Valley Pipeline. We expected more revenues in the second quarter. We now expect third quarter revenues to be slightly lower on this project than we had originally planned with fourth quarter revenue significantly higher than we originally planned.
We also expect activity to continue into the first part of 2019 and expect the contract value to increase because of the delays. We currently have approximately 4,000 team members working the job and expect to maintain that level until completion.
EBITDA margins in our Oil and Gas segment improved both year-over-year and sequentially to 16%. This margin was achieved despite a drag from the Rover project. At a macro level, our pipeline business today is very healthy and projects are performing very well and above the margins we originally estimated. For purposes of guidance, we continue to use our estimated margins and hope to outperform as we work through these projects.
The pipeline market is very strong. We have excellent visibility and expect the market to remain strong for years to come. To recap, we've had an excellent start to 2018. We expect acceleration of our business in the second half and have again increased full-year guidance for EBITDA and EPS.
I would 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 second quarter financial results including cash flow, liquidity and capital structure, as well as our increased guidance expectation for 2018. In summary, we had a strong second quarter 2018 with significant adjusted EBITDA margin rate expansion, and are pleased to increase our 2018 full-year guidance expectation for diluted earnings per share, adjusted EBITDA, and adjusted diluted earnings per share.
More importantly, we remain bullish that several multi-year infrastructure programs that our customers have initiated in 2018 coupled with the cash flow benefits to our customers of the Tax Cuts and Jobs Act should generate sizable growth opportunities in 2019 and beyond. 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.
Here are a few summary comments regarding our second quarter 2018 performance. Second quarter 2018 revenue of $1.62 billion decreased 14% from last year primarily due to expected lower levels of Oil and Gas project activity. Second quarter 2018 revenue levels were also approximately 9% below our quarterly expectation, primarily caused by lower-than-expected levels of quarterly project production due to scheduled delays in our Oil and Gas and Power Generation and Industrial segments, effectively pushing more project activity towards the back half of 2018. We continued our strong booking activity trend during the second quarter, sequentially increasing our backlog to approximately $7.7 billion. This marks the third consecutive quarter of record total backlog and we believe this signals evidence of the significant strength of demand in our end markets for 2018, 2019 and beyond. Second quarter 2018 adjusted EBITDA was approximately $191 million or 11.8% of revenue, reflecting a significant margin rate improvement of 410 basis points over first quarter 2018 levels and 110 basis points over second quarter 2017.
Second quarter adjusted EBITDA margin rate performance exceeded our quarterly expectation due to better-than-expected Oil and Gas and Communications segment performance. Second quarter 2018 adjusted diluted earnings were $1.04 per share, $0.01 per share above our quarterly guidance expectation. Simply stated, the improvement in adjusted EBITDA margin rate offset slightly lower quarterly revenue levels, allowing us to exceed our quarterly profit expectations for the quarter. We ended the quarter, as expected with, continued higher-than-normal working capital in certain large Oil and Gas projects. In mid-July, we achieved substantial completion on a large 2017 Oil and Gas project. Since this project's completion, we have made significant progress in finalizing this project's closeouts with our customer. We expect dramatic cash flow improvement during the 2018 third quarter, driven by the resolution and payment of amounts associated with this project. We also continue to expect that we will generate a record 2018 full-year level of cash flow from operations exceeding $500 million.
Lastly, we repurchased approximately 664,000 shares during the second quarter of 2018 under an authorized share repurchase program at a cost of approximately $30 million, leaving us with approximately $70 million in remaining share repurchase authorization from our board of directors.
Now, let me get into some detail regarding second quarter segment results. Second quarter 2018 Oil and Gas segment revenue decreased approximately 33% compared to the same period last year to approximately $769 million. As indicated earlier, while we expected a year-over-year Oil and Gas segment revenue decline, it was greater-than-anticipated, as second quarter 2018 large project activity was slowed by permitting and other delays.
These delays are expected to cause an increase in the overall contract value of selected project activity and we expect second quarter production shortfalls to be made up in the second half of 2018 with additional project activity into the first quarter of 2019.
Accordingly, our view of full-year 2018 Oil and Gas segment revenue levels remains essentially unchanged, although we expect some production to move out of the third quarter and into the fourth quarter. Second quarter Oil and Gas segment adjusted EBITDA margin rate was stronger-than-expected at 15.9% of revenue, a 240 basis point improvement over the second quarter of 2017.
This improvement was driven by the combination of the initiation of 2018 large project activity, coupled with lower second quarter activity levels on a recently-completed 2017 large project with cost reimbursable elements that has pressured prior period margins.
Second quarter 2018 Communications segment revenue increased approximately 4% compared to the same period last year to approximately $619 million. Second quarter 2018 Communications segment adjusted EBITDA margin rate was strong at 11.9% of revenue, a 180 basis point improvement over second quarter of 2017.
Second quarter 2018 Electrical Transmission segment revenue decreased approximately 13% compared to the same period last year to approximately $85 million, generally in line with our quarterly expectation. Adjusted EBITDA was a loss of approximately $3 million, primarily due to inefficiencies on a project that was substantially completed during the quarter.
On the positive side, second quarter 2018 backlog for this segment grew 73% sequentially to $633 million, a record level. And as José mentioned, this backlog level will not include two awarded large Transmission projects for which definitive agreements are in process, and that it will segment backlog even further.
We continue to experience very active large Transmission project bidding activity that should lead to significant increased future growth in 2019 and beyond. Second quarter 2018 Power Generation and Industrial segment revenue increased approximately 141% with approximately 65% of this growth occurring organically. While this represents a strong growth rate, second quarter segment revenue was slightly below our quarterly expectation, due to some delayed project start-up activity. Second quarter 2018 adjusted EBITDA margin rate was generally in line with expectation at 6.7% of revenue.
Second quarter 2018 Other segment equity and earnings from our equity interest ownership in Waha pipeline operations was approximately $6 million, and we currently anticipate that this investment will generate approximately $24 million to $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 second quarter 2018 period as a percentage of revenue. AT&T revenue derived from wireless and wireline fiber services was approximately 18% and install-to-home services were approximately 7%. On a combined basis, these three separate service offerings totaled approximately 25% of our total revenue.
It is important to note that these offerings while falling under one AT&T corporate umbrella are managed and budgeted independently within their organization, giving us diversification within that corporate universe. EQT Corporation was 19%, reflecting the initiation of 2018 large Oil and Gas project activity. Energy Transfer affiliates was 15%, consisting of multiple projects, and this reduced level reflects lower activity on a recently-completed large 2017 Oil and Gas project. Comcast Corporation, Georgia Renewable Power, EPIC Pipeline, and Millennium Pipeline were each at 3% and Southern Company, Verizon Communications and Duke Energy were each at 2% of revenue. Individual construction projects comprised 63% of our second quarter 2018 revenue with master service agreements comprising 37% and this mix reflects the trend over the past year or so of higher levels of large project activity.
At second quarter 2018, our 18-month backlog was approximately $7.7 billion, a 47% increase compared to the same period last year. Remember, as we've indicated for years, quarterly backlog amounts tend to be lumpy as large projects burn off each quarter and new large contract awards only come into backlog at a single point in time.
That said there are certain items of note related to our 2018 second quarter backlog. This marks the third consecutive quarter of record total company backlog. In summary, our backlog trend serves as a testament to both the breadth and strength of our end market opportunities.
Communications segment backlog was once again at a record level and exceeded $4 billion for the first time in history, sequentially growing $419 million during the second quarter of 2018. Electrical Transmission segment backlog was also at a record level at $632 million with significant additional awarded large project backlog in the process of being signed, which should increase backlog further during the balance of 2018. In summary, our backlog trends support our optimism regarding the strength of our end markets with sizable multiyear growth opportunities.
Now, I'll cover our cash flow, liquidity, and capital structure. As we have previously noted, our long-term capital structure is solid with low rates and no significant near-term maturities. We ended our second quarter with net debt defined as total debt less cash of $1.6 billion, a quarter-end book leverage ratio of 2.6 times and liquidity of approximately $350 million. As we indicated earlier, during the first half of 2018, we have had higher-than-normal levels of working capital invested in certain 2017 large Oil and Gas projects that expanded in size and with delays extended into 2018 activity and completion. This has caused a temporary increase in our 2018 DSOs or accounts receivable days sales outstanding, which now stand at 103 days, well above our stated DSO target range of mid-to-high 70s.
During the second quarter, we made progress in this area as evidenced by $90 million in changeover approvals and we expect the second quarter approvals will convert into cash collections during the third quarter. With the recent substantial completion of a large 2017 Oil and Gas project, we have made significant progress with our customer on finalizing contract close-outs and remaining change orders. While we understand shareholder frustration on why this process has taken so long, this has been a complex project with many delays and regulatory hurdles. Final project closeout has been time consuming and required preparation review of significant amounts of cost detail only fully available after substantial completion was achieved. We expect third quarter cash flow performance to significantly improve and we also continue to expect that 2018 full-year cash flow from operations will reach record levels and exceed $500 million, with significant book leverage improvement during the second quarter of 2018.
Given our expectations on strong cash flow generation during the second half of 2018, I would like to reiterate our views on capital usage priorities. Mainly, we continue to evaluate the expected investment return associated with acquisitions and other strategic initiatives to grow our operations as well as share repurchase opportunities and the use of funds for debt reduction. We repurchased about 664,000 shares in the second quarter and during the first half of 2018, we repurchased approximately 2.7 million shares or about 3% of our total share base.
As a reminder, we currently have approximately $70 million remaining in open share repurchase authorization. Regarding our spending on equipment, during the second quarter of 2018, we purchased approximately $57 million in net cash CapEx, defined as cash CapEx net of equipment disposals, and we incurred an additional $14 million in equipment under capital leases.
We expect that for the full-year 2018 period, we will require approximately $100 million in net cash CapEx and also expect to incur approximately $110 million to $130 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 2018 adjusted EBITDA to $708 million and raising adjusted diluted earnings per share to $3.67. We currently estimate third quarter 2018 revenue at $2 billion with adjusted EBITDA of $220 million or 11% of revenue, and adjusted diluted earnings of $1.26 per share.
In summary, our guidance expectation for the second half of 2018 incorporates the impact of known 2018 large Oil and Gas project delays that will increase project scope and extend expected completion into the first quarter of 2019. Our guidance expectation also includes the impact of expected second half 2018 Communications segment ramp up costs related to wireless and wireline fiber initiatives and the expectation that recently-awarded Puerto Rican restoration and reconstruction efforts are not likely to initiate until late 2018 with the vast majority of services under this contract to be provided in 2019.
Relative to some additional details for modeling purposes of our guidance, we expect second half 2018 share count to approximate 80 million shares with the full-year 2018 weighted average share count approximating 80.6 million shares. We estimate third quarter interest expense will approximate second quarter levels with full-year 2018 interest expense anticipated at $76 million, and this reflects the impact of year-to-date share repurchases, higher-than-normal working capital investments, and rising interest rates.
We anticipate full-year 2018 depreciation and amortization expense will approximate 3.1% of annual revenue with the $1 increase over 2018, primarily due to the annualization of expanded 2017 levels of capital expenditures and M&A activity.
And lastly, we anticipate that our full-year 2018 adjusted income tax rate will approximate 29.5%, with this lower level due to the benefit of the Tax Cuts and Jobs Act.
In summary, we had a strong first half of 2018 and are pleased to be in the position to raise our 2018 full-year guidance expectation. As importantly, we strongly believe in the future growth opportunities our markets afford us, as multi-year infrastructure initiatives expand and accelerate in 2019 and beyond. And that concludes our prepared remarks and now we'll turn the call over to the operator.
Thank you. We're going to take our first question today from Noelle Dilts from Stifel, Nicolaus. Please go ahead.
Hi, good morning.
Good Morning, Noelle.
For the Communications division, you mentioned ramp up costs in the back half of the year as really these are – as FirstNet and some of the bigger fiber programs get underway. Given the significant growth we're expecting in the industry, one of the things we often hear about is, is that folks are worried about the availability of labor, particularly tower climbers. So, a couple of questions. One, are these ramp up costs looking like they'll be a little bit elevated relative to what you were initially expecting? And second, how are you kind of addressing that potential tightness in labor?
Sure, Noelle. I think if you go back to the last couple of quarters, we've been talking about 2018 and 2019; our view around Communications really hasn't changed. We expected activity to begin increasing in 2018. We've always been saying for a long time that we think we really start to see it move in 2019, just based on how these projects are planned out and the things that have to happen to actually put these projects in construction. We feel really good about where we are from a labor perspective and I'll cover both sides, I think they're both important on the fiber side. Activity in 2018 is a lot about preparation, it's a lot about engineering and permitting, which is where the whole industry's focus is today in terms of pushing those projects forward.
Construction is going to ramp as the year goes on. Construction will begin in 2018, but it's going to ramp in a huge way in 2019. We've done a lot over the course of the last year in preparing ourselves to be ready for that. So, we think we're in a great position relative to the construction labor associated with the fiber builds going into 2019. Wireless is similar, if you look at 2018, FirstNet is more active than we probably originally anticipated, which I think has brought some of the labor opportunities to the forefront a little bit faster in 2018. Again, we think we're the largest wireless construction contractor in the country. And we think we're very well-positioned for it. But quite frankly the business is going to really start to boom in 2019. Aside from FirstNet in 2018, 5G is really a 2019 story, so as we think about it, as we think about what the carriers are doing around it, when handsets become available for 5G, there is some tightness in the market today, but quite frankly, it's going to get a lot worse and we're in a great position and we think that really helps us and helps how we sell ourselves into the market for that.
Thanks. And then shifting over to Oil and Gas, I mean the almost 16% margin was really impressive in light of also considering the Rover drag. So is there any sense – can you give us any sense of maybe how much of a drag that was in the quarter? And then anything notable in terms of closeouts that you'd want to call out on that margin?
One of the things we're proudest of in the quarter is, when you look at that margin, it truly came from operational strength. We didn't have any significant closeouts in the quarter. We called our Rover just to kind of – we wanted to make sure people understood that this wasn't a margin driven by close-ups, this was a margin driven by performance. Again, as we look forward into the balance of the year, we've take a conservative view or kind of modeling out what our estimated bid margins are at and that's kind of how we build guidance. We've been exceeding those margins on projects. We're working on dozens of projects across the country. Right now, our total portfolio is performing extremely well. It's a very tight market. It's getting better in terms, it's getting even tighter as we look forward with more opportunities. So we think we're in a great position. We're not guiding to those margins for the balance of the year. But quite frankly, if we continue to perform at the level we've been performing, we're confident we'll be able to beat what we've got built into our guidance on a go-forward basis.
Thank you.
Thank you. Our next question today comes from Alex Rygiel from B. Riley FBR. Please go ahead.
Thank you. Nice quarter, José.
Thanks, Alex.
José, it looks like, your backlog is up 47% year-over-year. Would you characterize your visibility at this time looking into the out year of being 2019 better than your visibility sort of in August of last year looking out into 2018?
No question, this is probably the highest level of visibility that we've ever had as a business. And even if you take some of our underperforming units, right, if you look at our Transmission business, last year at this time we were sitting on $295 million of backlog, today it's $632 million, with further wins it's going to take that number a lot higher. Part of the problem as people think about our story whether it's Transmission or to a lesser extent Communications, we're booking a lot of work today that's much more EPC like than what historically has been in our backlog, which means work is going to take longer for it to actually materialize in terms of our revenue in our P&L.
In Transmission the work that we're winning and we're winning a lot of it and it's going to be a great market and I'm so bullish about that market, right, I'm as bullish about that market as it relates to MasTec that I've ever been, but the reality is the projects that we're winning today we're not going to see significant construction activity until the second half of 2019.
We've kind of been saying the same thing with Communications for the last year, although there's so much out there that it's hard for that message to get through, a lot of the work that we've been doing is preparing ourselves for what we think are going to be very active construction cycles over a long period of time. But backlog is backlog, right, and at some point it's going to burn off and we're very excited about it, we're at extremely high levels and I think it bodes extremely well for the future of this company.
And, George, obviously accounts receivables kind of walked its way up a little bit higher here, DSOs have walked their way up, you talked about near-term improvement on that front, can you sort of – if we think about maybe year-end 2019, and I know you don't have 2019 guidance out there yet, but if we think about year-end 2019, how much in receivables between now and then do you think you can convert sort of into cash and therefore at year-end 2019, what do you think is an appropriate kind of run rate DSO target that we can have?
We've always said that the DSO target range for us is in the mid-to-high 70s. And that really hasn't changed. I mean the elevation we've experienced so far in the first half of 2018 is related to a specific project, which we've talked about and that we expect to resolve itself now in Q3. So really from a structure perspective, a DSO range is in that mid-to-high 70s, reflects the mix of our business and the mix of our projects, and is a good view of the kind of working capital that we would expect on a normalized basis going forward.
Thank you very much.
Thanks, Alex.
Thank you. Our next question today comes from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.
Thank you very much. So José, given you've seen some timeline push-outs, which seems to be kind of the norm in this environment on the pipe side especially. But if you look at some of the push-outs, does it add a little more juice to the early part of your year as a consequence? Was this really takeaway and replace some of the other work that you have on the pipe side?
Well, a couple of things are happening. One, we're seeing a lot more activity even in 2018 than I think we originally anticipated. A lot of that has to do with the Permian takeaway issues. So, there's a lot of projects that are coming to fruition today that we wouldn't have been talking about or wouldn't have been thinking about, especially at this time last year. So there is more activity coming into the second half of 2018. With that said, there's some – some of the other stuff is getting pushed into the beginning of 2019. So whatever is getting pushed, there's more than enough work to backfill. Quite frankly the market is extremely active, it's extremely healthy. I don't think getting work is an issue today. It shouldn't be for anybody. It's about keeping your utilization levels high, trying to pick the right projects that you can work on and continue your higher utilization rates. We think we're doing that.
Even on our Mountain Valley project, we're actually very pleased with the direction that it's gone. We took a little bit longer to ramp the project in the second quarter than we had anticipated. But quite frankly, today, we're at full ramped up levels. We expect that to continue, is it going to be a little bit – are these projects a little more difficult, you have more move arounds, are they a little bit more complex than probably what they used to be, the answer is, yes.
But, again we also think that that's a benefit for us because we've done enough of these. We probably worked on some of the most difficult jobs over the last three years that the pipeline industry has ever seen. We've been the primary contractor on almost all of them. So I don't think there's anybody in the country that has as much experience with the regulatory hurdles that are happening today as we do as a contractor. I think and I hope our customers know that and I think that's given us a great competitive advantage. So if you're a pipeline owner out there who's trying to build the pipeline, you know MasTec has the experience in managing it, you know we've done a good job at it, and I think that, that bodes well for us. So I do think activity levels in the first half of 2019 are going to be better than we probably originally anticipated. But, again, we've been very bullish about 2019 and 2020 and 2021. So I don't think anything has changed relative to that for us.
Okay. And José my second question is a little trickier, you are very bullish on your stock and rightly so I guess when it was in the mid-50s, high-50s. It seems you have the strong, the language yourself and George have used much more confidence around the timing of that Rover receivable and really the free cash flow in the second half of the year. So why would buybacks not be your priority at these levels from all the three that options you have that George highlighted?
So let me say a couple things Tahira. First, obviously, over the last few weeks we've been inundated with phone calls around short reports that are out there, making all kinds of accusations around the quality of our earnings and the receivables collection issues. I don't know how clear we can state other than what we've done today around how we feel about the collection of those receivables, right? We're talking about – we've been saying for a long time, we expected 2018 to be a record cash flow year, we're now saying that we expect it to exceed $500 million, our previous best year ever was $367 million in 2015.
So we're going to generate dramatically more cash flow this year than we've ever had. We are extremely bullish about it. We're not backing down from that. We've made significant inroads in terms of closing that out. The issues and why it's taking so long quite frankly have a lot to do with just getting to the point where we were substantially complete. It has been an extremely complex and difficult project. It was a contract structure that required cost reimbursable, which unfortunately forced us to wait somewhat to the end to have all that data done before we could get the final resolution. We think we're there. So we're moving forward. We believe that our stock is very undervalued if you look at what we bought during the second quarter. The shares that we bought were just under $45 a share. You can expect us to be very active especially within that range, quite frankly our stock recovered somewhat during the quarter, only here shortly that it begin to dip again. We've always said, we're going to be opportunistic around our buybacks, but we're very supportive and with – as the cash comes in and obviously we're going to be in a very different position from a cash flow perspective, it will absolutely be on the top of our list of things to consider to deploy the capital with.
Okay. That is very helpful. Thank you.
Thank you, Tahira.
Thank you. Our next question today comes from Jamie Cook from Credit Suisse. Please go ahead.
Hi, good morning. I guess a couple of questions. One, sorry José or George back to the cash flow the $500 million in 2019, which is a pretty big number. George, can you just walk me around the assumptions on the $500 million just so we can get comfortable like what sort of onetime versus, I mean do we see net income more – net income as a percentage of free cash flow. And then, I guess my second question is I just think longer term about free cash flow with the Oil and Gas market picking up, I mean should we expect over time cash flow to just be more lumpy just because of the complexities of these big pipeline jobs. So I guess I'll start there?
Well, let's go back, I mean we said we expect 2018 cash flow from operations to exceed $500 million...
Sorry.
...and we talked about – yeah, 2018 $500 million.
Yeah.
And we talked about the guidance range of $6.9 billion to $708 million et cetera. We've been talking all year long about the fact that our DSOs are elevated. And if you simply apply a more normal level of DSO to the year end – to our year end guidance and our view, which is in a mid-to-high 70s you're going to come to a number that gets you to approximately $500 million plus or north of $500 million in cash flow from operations. So there's nothing that mysterious about getting to that number. The reality is, our cash flow from operations and our working capital has been higher than normal with this project, and we expect that resolution to occur in the third quarter. And by the time year-end, we're going to have a significant cash flow generation, we're going to significantly delever from where we are today.
Relative to the structure, I would not surmise that because of larger Oil and Gas projects that a working capital, larger usage is the norm. And if you go back, we had our largest cash flow generation ever, when we had $367 million back in 2015, when we were doing Dakota Access. So, the issues that are associated with working capital really to me are unique to this project. And we're moving past that now and expect that to be behind us and now we're going into a more normalized process where future Oil and Gas contracts don't have the same cost reimbursable element, and therefore, should be really – we should fit into what we call the normal DSO range of that mid-to-high-70s. That's really our view and that's been our view since the beginning of the year and at this point we're pleased to be where we are, which is we're moving on to the 2018 activity.
Okay. And then I guess the second question José just back on the Oil and Gas margins, you talked a little bit about it. But before I think you said think about normalized margins in sort of the 12% to 13% range. So I'm just wondering given the push with Mountain Valley, is that still sort of the right way to think about it? And then given the fact that some of Mountain Valley is moving into 2019, does that prevent you from – does that hurt your ability to win incremental work on the pipeline side or constrain your capacity in any way? Thanks, and then I'll get back in queue.
Sure. So a couple of things. Again, as we look at the balance of the year, we've talked about being in that 13% range from a margin perspective as the kind of estimated margins that we look at when we kind of bid these projects from an EBITDA perspective. We're outperforming that today, we're hopeful that we'll continue to do that.
When you think about Mountain Valley specifically, it's all about utilization and ramp, so at this point, we've gotten to the ramp levels that we need to be at. So utilization, we expect to continue to be at very high levels from now until project completion. We do not expect that to impact our ability to win any future work whatsoever. Again, we've been in discussions on 19 projects for a long time, we have now won a significant amount of projects that are 19 projects and we're planning those out as we start looking at 2019 and where they fit. So all in all – again I can – I hope it comes across, but it's an incredibly attractive market to be in today. We're extremely bullish about the long-term potential of the market and what it means for us specifically as a company, and we've – I think these issues that we're having at least as it relates to the second quarter were temporary, as we ramp this one project. But again, these are more complicated projects, which require more planning as we look forward and we think we're very well equipped to do that.
Okay. Thank you. I'll get back in queue.
Thanks.
Thank you. Our next question comes from Andy Kaplowitz from Citigroup. Please go ahead.
Hey, good morning, guys.
Hey, good morning, Andy.
José, you mentioned last quarter that after Oil and Gas backlog likely goes down in Q2, it'll start to rise again in Q3 and Q4, and it should get back to at least Q4 2017 levels. I assume that's still what you're thinking, but do the congestion issues in the Permian actually mean higher potential for you to grow backlog here in the near-term, given all the larger pipeline arguably midstream work that needs to be done in that basin.
So I think it's an excellent question, Andy, and I think we have to look at it historically to kind of think about how we answer that looking forward, right? So if you look at 2017, we ended the first quarter at $2.3 billion in backlog, the second quarter went down to a $1.5 billion, the third quarter went to $900 million, and then the fourth quarter shot back up to $2.5 billion. And then obviously this year at the end of Q1 we were at $2.6 billion and at the end of Q2 we're at $2.2 billion. So, we have had dramatically less of a negative impact from Q1 to Q2 than what we saw in 2017. Obviously, some of that is because Mountain Valley has started – had a little bit less activity than we anticipated, but you saw a much less decline in Q2 over Q1 in 2018 versus 2017. I do think the number is going to go down in Q3, just because it's obviously a quarter where we'll have a significant amount of activity across a number of projects.
We do expect some pretty significant wins that may come into Q3 backlog and thus kind of play out to what you're saying. But quite frankly, whether it happens in Q3 or it happens early in Q4, our expectation is we will end the year at or exceeding levels that we ended last year at, which we think is a very bullish signal. And with all of the activity that's happening, I think we're feeling more and more comfortable that that will be an exceed rather than a meet.
Great. And then just shifting gears, we know you've said that Communications related growth will be back end loaded this year. So, the growth in 2Q is not really a surprise. But it does seem a little low in the context of the very strong Communications backlog growth, the 26%. You mentioned the 20% decline in your installation business, but could DIRECTV continue to decelerate here and does it mean that it could be difficult to grow Communications at a double-digit rate for this year, or does Puerto Rico help you with the end of the year, so ultimately you still can grow double-digits this year?
So, a couple of things, right? If you look at the installed business, it probably had a negative 7% total growth rate number for the quarter, for the business, so it's pretty significant. We think in our installation business, we've gotten to a level now that's going to be somewhat sustainable, the type of work that we're doing today is much more maintenance driven, not so much customer activation, which is obviously lower revenues. But at the end of the day, I think it will be more stable over time. We'll still have a tough comp as we look at Q3 and Q4 because the current levels today are significantly lower than what they were in Q2 and quite frankly, it was pretty steady last year. So that trend is going to somewhat continue. We expect double-digit growth in wireline, double-digit growth in wireless in the second half of the year, that's going to be very strong. For guidance purposes, we've taken a very conservative view. As to Puerto Rico, Puerto Rico, which is something we're incredibly excited about. It's all about funding. So FEMA is funding that project, but FEMA has a bunch of requirements to fund and then those requirements again require a lot of planning and upfront approvals which is something new, which is something that's taking time and we expect the beginning of that to really start hitting at the end of Q3 and Q4.
So, we've taken a pretty soft estimate of what we'll actually deliver in 2018 relative to that project, it could get a lot better, but I think we've taken a very conservative view. That project is going to ramp pretty heavily into 2019, which is going to have very solid comp. If we start thinking about Q1 of 2019, comps there are going to be pretty solid because of the amount of work that we're going to be doing there and our expectations. So, time will tell, I think there's a chance that Puerto Rico offset some of the softness in DIRECTV, I don't think we have all of that baked into our guidance, but it could definitely happen.
So maybe similar growth rates for the second half of the year and then ramping up again as we go into the first half of 2019?
Yes.
Thanks.
Thank you. Our next question today comes from Brent Thielman from D.A. Davidson. Please go ahead.
Thanks. Good morning.
Good morning, Brent.
José, on Mountain Valley, I mean in the bigger ramp into the fourth quarter just given some of the delays and noise around the project, how solidified is that schedule, kind of what's the risk of that expectation, the confidence around that that fourth quarter acceleration just based on discussions with the customer?
So, let me be clear, it is not a fourth quarter acceleration. We anticipated that project to start in Q2, to peak towards the end of Q2 going into Q3, and then begin to soften in Q4 as we were completing the project. Since it's moved to the right, we've now ramped at the levels that we expect to maintain through Q2 or right at the end of Q2 into Q3 all the way until we end that project which is going to be into Q4 and Q1. So there is no ramp requirements for us to hit what we're saying on MVP. We're at that level, we don't expect that level to decrease until the job is closer to completion. So there is no risk of ramp because we're already at the levels that we need to be at.
Perfect. That's what I was hoping to hear. And then on the Permian opportunities, I mean it seems like the projects are starting to move forward pretty quickly, it doesn't seem like they run into the same sort of issues that maybe the larger jobs do in other parts of the country. I guess I want to get a little more view from you, is this really a multi-year cycle, which is considering the ability to get these jobs moving faster kind of what gives you the confidence around that?
Well, I think if you kind of just look at the numbers of what's happening in the basin and what the expectations are, I think it drives not only what we think we're going to see over the course of the next year, but what we think we're going to see over the course of the next few years relative to production. So, currently by the end of 2018 and I think today they're probably somewhere in the low 3 million barrels per day type of activity. That's expected to grow to 3.6 million barrels by the end of 2018. The problem is takeaway capacity today is significantly lower than that, right? So they can't meet the takeaway capacity of what's currently being produced, which creates all kinds of other issues in that basin. If that was the only issue and you build takeaway capacity to build that roughly 1 million barrel a day gap that exists, then you can say this is going to get fixed in a short period of time and we're going to have some project time and it'll be over. The problem is that the expectation through 2022 is that production is going to increase to 5.3 million barrels per day, which is 60% growth over what the expectation is at the end of 2018.
Pipelines are going to have to be built to keep up with that growth over that five-year period. This is not in our estimation a one-year opportunity, this is a long-term issue that's going to create significant opportunities for companies like ours in that basin for a long period of time.
That's great color. Thank you.
Thank you. Our next question today comes from Adam Thalhimer from Thompson Davis.
Thanks. Good morning, guys.
Good morning, Adam.
José, how much is this 2019 wireless, wireline opportunity. I'm curious how much of that do you think was kind of in your Q2 backlog. And can you give us any thoughts about how Communications backlog will trend in the back half.
Yeah. Remember, we're only including 18 months of backlog in our backlog numbers, so total backlog is actually higher than the 18 months that we're putting out. So, we're estimating what's going to actually be completed in that 18-month period. When you think about, FirstNet is kind of baked in, a lot of the fiber stuff that's already been awarded is somewhat baked in, you've got a lot more fiber awards that I think are going to happen over the course of the next year on other markets that haven't been awarded. But I think the big driver of future backlog growth is going to be what happens with 5G, I mean today the carriers are doing very little around 5G. Everybody's got tests, there's some activity happening, but that activity is going to considerably increase as we look in 2019 and beyond. And when you think about wireless spend over the course of the next few years, it's going to be driven by that, right? I mean I think FirstNet is an example in and of its own because it's particular project, but the future of all of these companies is going to be about what they spend in 5G.
Again we're seeing the very early part of that now. But that's going to ramp in a big way across all carriers, and again something we're extremely excited about is we think we're going to because of our sheer size in the market and our competitive position, we think we're going to be a huge beneficiary of that.
Okay. And then can you give a little more color on that LifeShield award and maybe how that could help to offset the DTV decline?
Sure. So we've been talking a long time about we've got this asset base across the country. We think we're the largest third-party installation resource in the country. We think there's a lot of value to having a workforce that can go to peoples' homes to do work. And as we think about how the retail markets change, we think long-term about a lot of opportunities that arise from that. Security is an area that we focused on. LifeShield was a security product that kind of got created within the DIRECTV world, DIRECTV bought LifeShield years ago. It was going to be their security deployment as they began that, AT&T bought DIRECTV, which included LifeShield. AT&T then sold LifeShield back to its original founders and leaders. They've re-launched it. We've signed a nationwide agreement to be their installation partner. That's obviously a security company among a number of others, but for us it's a pretty important win. We think we're going to be able to service them well, we think they've got a good plan as they go forward with a lot of growth opportunities and potential, and we're excited to be a part of it with them. I think what you're also going to see from us is other announcements like these, we are working extremely hard to continue to diversify our installation resources and we're in a number of discussions with other customers of similar types of agreements that I think we'll be able to roll out over the coming quarters.
Perfect. Thanks, José.
Thank you.
Thank you. We have a question now from Chad Dillard from Deutsche Bank.
Hi. Good morning, guys.
Good morning, Chad.
So you mentioned that you're going to see contract value increase for Mountain Valley. I'm just curious whether you're going to see a margin associated with that and if you can discuss this how big of an increase over the original contract value. And then secondly, you mentioned that you saw some pressure from Rover in the quarter. Is there any way you can quantify how much you saw?
Yeah. So, a couple of things, when we think about MVP, we're kind of parroting what our customers said, so if you track what our customer's been saying about MVP, they're expecting the project to be somewhat delayed and cost them a little bit of more money because of the move arounds and delays that directly from the scripts of their earnings calls here recently. Our contract is different there than I think as people think about this, Rover was a very different contract, because it was a cost reimbursable contract where we made certain concessions.
That's not the norm we've said that, that's not the type of contracts that we have on a go forward basis. So as we look at – we obviously want to work with our customers, we want these jobs to be done as expeditiously and efficiently as possible on behalf of our customers, that's what we're working towards. And quite frankly, we're going to try to finish this project as quickly as we can and if there's any way that we could possibly get it done by the end of the year with the regulatory issues that they have then we will try to do that as well. So I think that's all still a work in progress, we'll see as time goes on. But if their expectation, which is the projects now going to move into the first part of next year, if that actually comes to fruition then obviously the contract value will go up and I think they've said that publicly.
On the Rover side, it wasn't a big number. I think we called it out more than for anything else other than just say our margin wasn't driven by any single closeout issue or benefit. Margin was driven by operational performance, which I think was important to kind of lay out.
Got it. And then against the backdrop of, I mean it seems like higher uncertainty in permitting on fiber and 5G. How should we think about the pace of your backlog run rate relative to where it is right now? I'm just asking because we're starting to see some uptick in telecom, and I just want to make sure we're on the same page about the pace of execution going forward?
Yes, let me be clear, when we talk about permitting issues, this is not like you know pipeline. This is not you know permitting regulatory issues. This is you have to do the engineering work. You got to get in front of the municipalities to go through their public works departments and their water departments. This happens every day, has been happening, forever, right, so this is not something that's particularly difficult. It's just there's from a sheer volume of what's happening in the country, there's a lot of it going on. And there should be an expectation of how long it takes. We've – we're right on plan relative to where our fiber business is and what we're delivering. It's not like these delays have caused dramatic shifts to our financial expectations as the year goes on. We've always said we expected this to be a significant ramp in 2019.
With that said, there's a lot of work out there. There are labor constraints around that portion of the business and we're working as diligently as we can to get construction in the ground. So becoming more difficult, a lot of activity out there. And again, it plays into the hands of the bigger players in the industry and those that have the resources to be able to put on these projects to execute them and perform.
Thanks. I'll hop back in queue.
Thanks.
Thank you. We have a question now Andy Wittmann from Baird. Please go ahead.
Great. Thanks. I wanted to build a little bit on the last question, José, just on MVP, if it's not reimbursable and you get these periodic delays that started a little bit late, does that mean that you're going to require change orders and could this have an impact on the way you collect your cash on this project?
So two issues, one, reimbursable is a different term, so when we talk about cost reimbursable, we kind of talk about a cost plus contract, where you're actually generating costs, sharing those costs with the customer and have a whatever markup you've agreed to have with that customer. Our contracts on most pipelines are different, right, they're more fixed price or unit price in nature where you have protections relative to issues that may arise, and in today's world because of the issues that we've had, contractors are protected from delays, from move arounds and things like that. Sometimes in the case of unit adders and sometimes in the case of whatever you contractually agreed to. So this is a very different circumstance than what we saw over the course of the last year. We've been very active with our customer and working through that. So I don't expect what we saw with Rover again to re-manifest itself on this project.
Okay. Great. I'm going to move to the Communications segment next. I don't know if I heard, necessarily you guys address the very strong margins here in the segment for the quarter and the sustainability of those margins. It was the mix favorable this quarter or just weather or something else? If you could just talk about how you're viewing this 11.9% margin in the context of the balance of the year. It seems this is a little bit above your historical level.
What we've been saying for a long time that we were targeting getting back to these levels based on just the sheer utilization of what's happening in the market. With that said, there's a lot of growth to come. So, I think there's solid potential on a go-forward basis. When we look at the second half of the year, we're going to continue to ramp. There might be some slight pressure from a ramp perspective, but I think that the range that we're currently in is the range that we should expect to be in for the balance of the year.
And then my final question is just on the contract, in your Communications segment for the Transmission work in Puerto Rico, and just the contractual nature of that one, given the credit quality of PREPA, I think you've got some credit enhancements on that one. I'd like to understand that and really just understand the margin profile. This is kind of storm recovery work in a sense, but it also isn't. Should we be thinking of the margin in that work as a storm restoration work or more typical of normal Transmission work? Thanks.
Yeah. So, first part of it. It isn't really Transmission work. It's a mix predominantly of distribution work with some Transmission work. So it's a combination of both. And how exactly that plays out, time will tell. The PREPA contract is ultimately funded by FEMA. So, FEMA is the one that's actually paying or providing the money for them to pay. This is not PREPA on their balance sheet contracting us to do this work. This is FEMA funded. FEMA has certain requirements on how they expect to see things on a work order by work order basis prior to them paying and I think that's what's currently happening to get these projects in line, but the money is that that had been allocated to the different contractors that were awarded this work, that money has been approved by FEMA, that money is currently available, approved by Congress to fund this project, and I think that's very important, right? And we're only going to do that work once we've gotten assurances that every work order that we're working on, FEMA has approved and will pay. And that's how we expect to be paid. When we think about pricing, obviously Puerto Rico is still in a situation where costs are high, there's a lot of activity happening there, there's a lot of money flowing through that island from both insurance companies and a lot of other industries that are trying to rebuild. I wouldn't say that this is your typical storm restoration margins that are usually pretty high, but these are good margins probably generally above where we've historically performed in our business and as we do more work down there, it'll either be at or accretive to our current margin situation. Again, as we look at our guidance for 2018, we have very little built-in for this contract.
Thank you. Have a nice day.
Thank you.
Thank you. We have a follow-up question now from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.
Thanks for taking my follow-up. Just quickly, just in – I had a question as a follow-up to what Chad asked in regards to Rover. You mentioned José that it's not still a gain, you've had any closeouts from Rover really helping the second quarter out, if anything, it is the other way around. But I guess that makes the question, as you resolve and square away on the Rover receivables, is there a chance that some of the change orders you've talked about in the past could have some benefit that's not in your guidance?
Yes.
Okay. Thanks again. That's all I have.
Thank you.
Thank you. That will conclude today's question-and-answer session. I'd now like to turn the conference back over to José Mas for any additional or closing remarks.
I'd just like to thank everybody for participating on today's call, and we look forward to updating everybody on our third quarter call in a couple of months. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.