Infrastructure and Energy Alternatives, Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good morning, and welcome to Infrastructure and Energy Alternatives First Quarter and Full Year 2021 Conference Call. I'd like to note that all participants on today's call are in a listen-only mode. And with that, I'll turn the call over to Kimberly Esterkin, Investor Relations for IEA. Kimberly, please go ahead.

[Kimberly Esterkin:]

Hello, and thank you for joining us today to discuss IEA's first quarter 2021 financial results. With us from management are JP Roehm, President and Chief Executive Officer; and Pete Moerbeek, Executive Vice President and Chief Financial Officer.

[JP Roehm:]

Well thank you, Kimberly, and good morning to everyone. We appreciate you joining our first quarter earnings conference call. IEA's performance for the first quarter was in line with our expectations. Consolidated revenues were $276 million and adjusted EBITDA was $3.4 million. While both revenue and adjusted EBITDA saw declines from last year's first quarter, as we had indicated would be the case on our fourth quarter call, our underlying business remains strong, as demonstrated by our backlog increase of $606 million to a record total of $2.7 billion at the end of the first quarter. Unlike last year, when revenue and profitability were front-loaded, we are expecting a more traditional seasonality period in 2021 with our financial performance ramping through the year. IEA remains on track to meet our full year guidance numbers. And in fact, we raised the bottom end of our revenue guidance for the year to $1.8 billion. As the economy gradually reopens across the country, we are getting to go ahead to start jobs previously delayed by the pandemic challenges such as slower permitting. Such project starts have resulted in the onboarding of over 450 employees already in the second quarter and we expect that ramp in employees to continue well into the third quarter. We are continuing to abide by all health and safety requirements at our project sites, but we are seeing some states relax their protocols as more people including IEA's crews become vaccinated. One of the main challenges to our renewable work this year will be ensuring that the scheduled delivery of wind turbines meets our high demand given the surge in renewables work. The delays in starting projects mean that construction time lines have become less flexible. While we may experience some equipment delays due to COVID-19 and other supply chain issues, we believe that our contractual protections with our clients will minimize our exposure to those delays.

[Pete Moerbeek:]

Thanks JP, and good morning to everyone listening. Last night we issued our 2021 first quarter earnings press release and filed our Form 10-Q. Let me start by noting that from a financial perspective the first quarter was quiet and in line with our expectations. As we have communicated in the past few calls, we expected that the 2021 first quarter would be challenging, especially when compared to the 2020 first quarter. JP has talked about the decrease in revenue, so I will speak briefly about the gross margin. The primary driver for the reduced margin was unabsorbed or idle equipment costs. For the quarter, that amount was approximately $10 million in total, $5 million in each of our operating segments. Monthly depreciation and operating lease expenses continue, even when equipment is not assigned to projects. If IEA were only a $270 million a quarter or $1.1 billion annual revenue company, we would have way too much equipment. But we are, a more than $1.8 billion revenue construction company and we will need all of our equipment to achieve that level of revenue in 2021. The unused equipment did not sit idle during the quarter, as we were able to accomplish some preventative maintenance. Similarly, we incurred labor inefficiencies during the quarter, as some of our key craft and project management employees were not assigned to projects. They used the time, for safety and job-related training, as they will be very busy building wind and solar farms for the rest of the year.

[JP Roehm:]

Well, thank you, Pete. As IEA's business continues to grow our focus on environmental, social and governance issues has only increased. And I am particularly proud to announce that IEA will be releasing our first-ever ESG report later this week. As a key player in the renewable energy space, we committed ourselves to building a greener future from the very start. And we now look forward to sharing our progress in a formalized report. The results of our study will serve as a baseline, from which we can continue to improve in years to come. Mike Stoecker, our Chief Operating Officer, leads our ESG initiatives, spearheading the ESG team that tracks internal data, evaluates our efforts and maintains best practices for our company. Mike and his team have done an exceptional job in increasing IEA's transparency and fostering a dialogue around our ESG policies and metrics. Our Board of Directors has reviewed and endorsed our efforts as well.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. Thank you. And our first question is coming from the line of Noelle Dilts with Stifel. Please proceed with your question.

[Noelle Dilts:]

Hi, guys. Good morning. Thanks for taking my question.

[JP Roehm:]

Good morning, Noelle.

[Noelle Dilts:]

I was hoping you could just maybe expand a little bit on how we should all be thinking about the trajectory of wind versus solar? I know you said slower bidding activity is strong, but I think on the last call there was some discussion about solar potentially doubling. Can you give us any sense of what the backlog is looking like maybe so we can think about kind of how to think about the directional changes for those businesses?

[JP Roehm:]

Yeah. Great question, Noelle. Well, certainly, we're seeing the biggest growth opportunity in our Renewables segment in the solar industry. It certainly had a growth trajectory that's exceeding that of wind. Now that being said, we're all-time record kind of backlog for wind as well, and an all-time kind of record build-out from an industry standpoint. But as we kind of look at the road in front of us, we think solar has an opportunity to continue to grow, and we have an opportunity to make that much more a part of the revenue mix in our Renewables segment.

[Noelle Dilts:]

Okay. Great. And then just in terms of this slowdown and some of the transit and Specialty Civil work ahead of an anticipated infrastructure bill and we've certainly witnessed that in the past. But could you again maybe talk us through how you're thinking about, I mean, really when we think about the funding going into these markets sometimes it's a 12 months, 18 months delay post the passage of a build. So are we looking at kind of a two-year slowdown in those businesses ahead of the bill or maybe kind of this year and then things start to pick up next year? Just, kind of, curious how you're thinking about that timing.

[JP Roehm:]

Well, good question. Ultimately, really the only material slowdown we're seeing so far is mostly in our rail portion of our Specialty Civil segment. And we directly attribute that to our freight rail business and the car counts being lower during the COVID pandemic. We believe that's a couple of quarter type of situation. In fact, we think that is starting to recover right now with the recovery and the opening up of the nation. As far as kind of the other areas of Specialty Civil both either our environmental or transportation offerings, we're -- believe it or not we're seeing the opportunities kind of maintaining par with -- prior to the pandemic. I know we've talked in past calls -- quarterly calls about our concerns about the revenue shortfall particularly in the transportation funding side. But right now at least in the end markets that IEA participates, the bidding activity seems to be at pre-pandemic levels. So we're hoping for a post-infrastructure build just to see further upside in those areas.

[Noelle Dilts:]

Okay. Great. That’s really helpful. Thank you.

[Operator:]

Our next question is coming from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question.

[Adam Thalhimer:]

Hi. Good morning, guys. Congrats on the backlog growth.

[JP Roehm:]

Hi, Adam. Good morning.

[Pete Moerbeek:]

Hi, Adam.

[Adam Thalhimer:]

I was hoping you guys can help a little bit on the cadence of EBITDA as we go through the year curious if we see more year-over-year declines in Q2 and then followed by strength in the second half?

[Pete Moerbeek:]

Well Adam, we're not going to give guidance at quite that level, definitely not quarterly guidance. I think you are going to see a very strong second half maybe even stronger because we started so slowly. We may very well see 60% of our revenue and somewhat corresponding EBITDA in the second half, but those stronger than normal in the back end.

[Adam Thalhimer:]

Okay. That makes sense. And then you briefly touched on the equipment delays, I think, that's mostly on the wind side. How is that tracking versus your expectations earlier this year?

[JP Roehm:]

Well, so far we really haven't seen many delays materialize. But we're sitting here, its May and those deliveries will, kind of, follow our revenue trends. So it is early to tell about what deliveries will look like in Q2, Q3 and even Q4. But we haven't been advised by any of our customers any of major delays. But we've certainly cognizant that we're at an all-time buildout for the industry. COVID-19 is still in areas of the world and the supply chain still existent. So we remain vigilant and cautious and we'll handle those as they come.

[Adam Thalhimer:]

Okay. And then just one more. I'm curious how you're thinking about backlog and backlog growth from here. I mean have you told your sales guys almost -- to pull back a little bit? I'm just curious the $2.7 billion backlog, I mean, does that strike is kind of sold out for the near term, or do you continue to grow backlog?

[JP Roehm:]

Come on Adam I never slow down.

[Adam Thalhimer:]

Slow down guys. We can't do all this work.

[JP Roehm:]

Well, good question. I think you ought to -- I think we ought to think about that in context of our segments. We have pretty much brought in the backlog what we will build in 2021. We are in a sales cycle now for 2022 and beyond in our Renewables segment quite frankly. And our Specialty Civil segment is more of a book-to-burn type of business. So we still have the opportunity in that side of the business to bring projects into backlog and execute them and run them off before the end of the year. But there's still a possibility of picking up some renewable work that may start at the end of the year and really trail into 2022. But the real big renewable opportunity is going to be 2022 and beyond. And -- but as I said, we're still concentrating on bringing 2021 Specialty Civil work in the door.

[Adam Thalhimer:]

Got it. Okay. Thanks guys.

[Operator:]

Our next question is coming from the line of Zane Karimi with D.A. Davidson. Please proceed with your question.

[Zane Karimi:]

Hey. Thank you for the time and question, guys.

[Pete Moerbeek:]

No problem, Zane.

[JP Roehm:]

Good morning, Zane.

[Zane Karimi:]

So first off, people have talked about backlog. Actually one more time on it. So, backlog numbers in the quarter were significantly ahead of our expectations on prior year numbers. I was just wondering if you could provide some more background on it in particular backlog composition. And if you have seen any changes in the margins of those backlogs or the average project length or a different type of growing work in that backlog?

[JP Roehm:]

Probably our -- I think our biggest growth is -- I talked about earlier here in the questions about our biggest opportunities. Well we're seeing the biggest growth in solar. Our year-over-year growth in backlog, I think the biggest area in growth is certainly solar. We're seeing margins remain consistent. But I would certainly attribute a good portion of that growth in backlog to our solar efforts at growth.

[Zane Karimi:]

Okay. And then, I think in your prepared remarks, you guys mentioned that there needs to be about 15 gigawatts of nuclear energy coming online a year to meet the 2035 goals around clean energy. And on a more normalized basis, how much of that work do you think you could get done on the current platform? And how large of a market opportunity could that be? I understood that the years out? I'm just trying to get my head wrapped around that opportunity.

[JP Roehm:]

So to meet the administration's goals, it's about 70 gigawatts a year of clean energy that has to be constructed to meet those goals. And just to level set that's about two to three times the amount of wind and solar, that's being -- that was built between 2019 and 2021. So, tremendous opportunity for companies, like ourselves. And back to my comments in the earnings call, any kind of -- the current administration's plan, it's certainly transformational as is. But even a percentage of that plan, half of that plan, a quarter to that plan, is still going to be tremendous growth from what the market has been the last three years. So, we're extremely excited ourselves, and I'm sure companies like ourselves, are starting to applaud about strategies of how you get the resources and how you grow to meet that demand. And we'll certainly hopefully be talking to that about in many calls here in the future.

[Zane Karimi:]

Okay. Thank you for the time and questions.

[Operator:]

Thank you. Our next question is from the line of Shar Pourreza with Guggenheim Partners. Please proceed with your questions.

[Constantine Lednev:]

Hi. Good morning. This is actually Constantine Lednev in for Shar. Thanks for taking our questions.

[JP Roehm:]

Thank you.

[Constantine Lednev:]

And congratulations on a solid quarter, especially with the backlog adds. And just curious to kind of get some of your thoughts on the increase of workflow in backlog and how will that impact kind of utilization and the margin profile going forward? And understanding that there was kind of some margin compression unusual and with the seasonality that you mentioned. But just kind of how do you see that trending on an annual basis? And is there room to kind of improve not even in 2021 but going forward kind of as you grow into a bigger backlog in terms of utilization?

[Pete Moerbeek:]

The first part of your answer is we expect by the end of this year that we will be back to much more normal traditional margins and a margin profile. So, it's probably going to be a little bit better for the last three quarters since we were somewhat challenged in the first quarter. I think that the utilization that we're expecting and that we're staffed for and that -- for which we have equipment is really intended to be able to get to the top end of our revenue range. As we look going forward, some of the challenges we have is that, there are kind of generic markers where most of our customers expect that we're going to represent somewhere around 30% of their capital spend on a project. And so, we don't quite have the ability to change margins dramatically. Where we noticed the benefit of the market right now is in the contractual terms. So we end-up with much better terms, than we do, when we're in a position -- or when they're in a position whether the way too many EPC contractors and not enough work. So, right now as we look forward, we expect to see margins on an annual basis to be consistent with where we've been or perhaps slight improvements. And we expect to see better contractual terms for the next -- certainly in the next few quarters.

[Constantine Lednev:]

And maybe a quick kind of operational follow-up to that, just kind of as you expand the product offerings and backlog, kind of maybe in terms of an order of magnitude, do you need kind of incremental CapEx or staffing to kind of to grow the backlog. Let's call it, if you double your backlog in 2022 kind of what sort of incremental costs or CapEx would you anticipate? Is it still kind of within that 2% of revenue that was allocated that you announced previously, or how should we think about that?

[Pete Moerbeek:]

Yeah. It somewhat depends, where the increase is. For example, if we ended-up with significant CCR or coal ash contract, we may have to spend -- that tends to be very hard on equipment. So we may need to spend, slightly more than 2%. Again, if we are in the renewables, you're probably going to see us stay a lot closer to the 2%. So it really is a function of where the increase comes. And so I think as you look forward, that's going to be the determinant. Obviously, if you're talking about doubling our challenge, we'll probably be much more on finding craftsman and craft labor, than it is on the equipment. I think we're kind of seeing that all over, everybody is saying pretty much where we are today, yes, we can meet our commitments. If you were to try to change us dramatically we double our revenue, those are some of the challenges we're going to have to deal with.

[Constantine Lednev:]

Okay. And then, the last follow-up that I have, if I may, it's just on kind of the financial strategy. And I appreciate that, there's still some analysis that kind of goes into your decision-making. But just directionally, as you kind of get more visibility with the backlog and into future revenues, how does that change your trajectory and your thoughts on kind of the capital structure?

[Pete Moerbeek:]

Yeah. I'm not sure that those are the drivers of the capital structure. We have obviously, as I mentioned in my prepared remarks, we are focused on improving the structure. We recognize that, in today's market there are some potential opportunities that we would certainly like to look at, and understand and consider. I think the real driver for us is, making it a cleaner, more understandable capital structure. And making sure, we have something that is a sureties, desire tangible net worth. So, I think we are headed in that direction. We just don't know yet, the precise path or how quickly we get there. But I don't think the driver is necessarily, the backlog, the driver is really more our ability to produce profitably and generate cash flow.

[Constantine Lednev:]

Perfect. That’s very helpful update. Thank you. Thanks so much.

[Pete Moerbeek:]

Thank you.

[Operator:]

Thank you. We have reached the end of a question-and-answer session. I'll now turn the call back over to, JP Roehm, CEO for closing remarks.

[JP Roehm:]

Well, thank you, operator. And we certainly appreciate each and every one of you showing your interest in joining us today and learning about our Q1 2021 results. Stay safe, stay healthy. And we'll see everybody in early August, as we look forward to announcing our Q2 results. We'll talk to you all then. Thank you.

[Operator:]

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.