Infrastructure and Energy Alternatives, Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Good morning, and welcome to Infrastructure and Energy Alternatives Second Quarter 2020 Conference Call. I would like to note, all participants on today's call are in a listen-only mode. And with that, I will 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 second quarter 2020 financial results. With us from management are JP Roehm, President and Chief Executive Officer; and Pete Moerbeek, Executive Vice President and Chief Financial Officer. Before turning the call over to management, I would like to note that today's discussion contains forward-looking statements about IEA's future growth and financial expectations. Any forward-looking statements should be considered in conjunction with the cautionary statements in yesterday's press release, and the risk factors included in the company's SEC filings. Except as required by law, IEA undertakes no obligation to update its forward-looking statements after today's call. Since management will be presenting some non-GAAP financial measurements as references, including adjusted EBITDA and the appropriate GAAP financial reconciliations can be found in yesterday's press release. And with that, I'll now turn the call over to JP Roehm. Please go ahead JP.

[JP Roehm:]

Well, thanks Kimberly, and good morning to everyone. We appreciate you joining our second quarter 2020 earnings conference call, and hope that everyone listening today is safe and healthy. Similar to Q1, IEA has not experienced a significant negative impact from the COVID-19 pandemic as shown by our financial results for the second quarter. We are reporting double-digit top line growth, as well as solid bottom line profitability. As a result of our performance to-date and our current book of business, we are raising our revenue and adjusted EBITDA guidance for the year. Pete Moerbeek will discuss the increased 2020 guidance later during this call. We could not continue to grow revenues and drive profitability in the current environment without making the safety and well-being of our employees a top priority. In mid-March, with the onset of COVID-19, we deployed the protocols set in place by our Chief Operating Officer, Mike Stoecker. Under his guidance, we enhanced our sanitation procedures, purchased personal protection equipment for our crews and placed hand washing stations and sanitizers at all of our project sites. These protocols have enabled our construction teams to stay focused on their work, without delays in service to our customers. In general, the timing, scheduling and resource management on of all our projects remains consistent with what we experienced prior to the pandemic. We are also fortunate that most of the work we performed is considered critical infrastructure. So our work sites have been exempted from state and local shelter-at-home orders. During the second quarter, we did receive and sent several force majeure letters to customers, primarily related to their supply chains, so we did not experience any significant delays in projects. Unfortunately, we have seen a slight uptick in COVID-19 cases among our work crews in July, echoing the experience of most of the rest of the country. Any crews exposed to COVID-19 were immediately quarantined. And at this time, we expect only minor impact to our workforce and do not believe that these cases will hinder our margins or prevent us from meeting our contractual obligations to our customers. I'm also pleased to report that, we continue to hire craft labor to support our growing level of work. Since the beginning of the year, we have added over 1,200 craft laborers to our payroll. We continue to receive a growing number of experienced professionals applying for our open positions. And similar to last quarter, we continue to receive interest from oil and gas engineers with extensive energy construction experience to support our growing pipeline. Let me now turn to our performance in the second quarter. Revenues totaled approximately $481 million, up 46.5% year-over-year. Our Renewables segment, which generated $324 million of revenues accounted for 68% of total revenues and increased 81% over the second quarter of 2019. The growth in our revenues was primarily driven by almost perfect weather conditions at job sites, an earlier start for several wind projects and an increase in the number of projects we are constructing compared to Q2 of 2019. In April, IEA Constructors broke ground on a 25-megawatt solar farm in Southeast Georgia. The Baxley solar farm is an EPC contract for which we are hiring approximately 200 craft labors, skilled in tracker assembly, wire harnessing and module installation. This project is expected to be completed in December and leverages high precision, high production solar panels. IEA Constructors also began work on a solar facility in Texas which we announced just last week. The $77 million EPC contract is expected to be completed in June of 2021. Texas ranked fifth in the nation for total solar capacity installed and the Solar Energy Industries Association expects an additional four gigawatts of solar energy to be installed in Texas over the next five years. Continuing with solar awards White Construction broke ground on a 20-megawatt facility in South Bend Indiana this past June. The University of Notre Dame has committed to support 40% of the solar facilities, renewable attributes. And all of the equipment used in this EPC project including the panels themselves is manufactured in the United States. We also began several wind repowering projects in the second quarter. These projects are in South Dakota, Minnesota and Texas and include mechanical overhauls of existing turbines replacements of major components of turbines and increase in the amount of power currently provided by each wind farm to the respective geographic region. Once the repowering is completed the four wind farms will together generate over 300 megawatts of energy. In the second quarter our Specialty Civil segment revenues totaled approximately $156 million up approximately 5% compared to Q2 of 2019. The Specialty Civil segment revenues represented 32% of our total 2020 Q2 revenues. Our William Charles and Ragnar Benson divisions have been bidding on several new infrastructure and transportation projects. And in Q2, Ragnar Benson was selected as part of a joint venture for the construction of the West Lake Corridor commuter rail extension of Chicago's South shore line. We expect to receive a notice to proceed for construction of this eight-mile rail extension this fall with project depletion expected in 2024. The project would add over $140 million to our backlog in the second half of this year. Also during the quarter, our Specialty Civil crews began work on several infrastructure projects in our home state of Indiana. These include a contract to redevelop the east section of market street in downtown Indianapolis, contracts to renovate several roads there in Indiana's western border with Illinois and a contract to develop a state-of-the-art training campus and residential center for the U.S. education center in Indianapolis, at the old Indianapolis airport terminal. Before I turn the call over to Pete to discuss our second quarter financial results and increased 2020 guidance. I am pleased to announce that Pete has officially agreed to drop the interim part of his title and has become IEA's Chief Financial Officer. Congratulations Pete.

[Pete Moerbeek:]

Thanks JP and thanks to everyone listening. Obviously, the word retirement is not part of my vocabulary. I am looking forward to working with the rest of the IEA team as we focus on profitable growth both in the near-term and for the long-term. Last night, we filed our second quarter Form 10-Q and issued our earnings release, so I can address some of the highlights of our successful quarter. Let me start with the impact of the pandemic. While COVID-19 has not been materially negative it has had an impact on our financial performance. Starting in March and through last week we had incurred approximately $1.6 million in pandemic costs and expenses. About 50% are SG&A expenses and the other half are indirect costs associated with our operations. Additionally, in the first quarter, we created job level contingencies for potential pandemic costs at our larger projects. These contingencies totaled $10 million and reduced our gross margin in the first six months of 2020 by $7.5 million or 0.9%. To-date, we've used about $300,000 of the contingency amount. Like any contingency if we do not incur the costs, we will be able to increase margins as the projects are completed. Even with the impact of COVID-19 contingency our gross margin for both the second quarter and the first half of the year improved significantly compared with the same periods in 2019. Overall gross margin for the quarter was 11.3% of revenues as both of our operating segments' gross margins exceeded 11%. The increased revenues allowed us to show operating leverage and our SG&A expenses as a percent of revenue were 5.8% for the second quarter and 6.9% for the first half of the year. Interest expense for the quarter totaled $16.2 million up from $11.5 million in the second quarter of 2019 primarily as a result of $6.5 million of dividends paid on our Series B preferred stock which are recorded as interest expense. We did receive some benefit from a lower principal balance and a lower interest rate on our term loan. Other expense was $1.6 million for the quarter compared to other income of $18.3 million in the second quarter of 2019. For 2020 the other expense results from valuing the warrants associated with our Series B preferred stock. In 2019 the other income resulted primarily from an $18.8 million reduction in an earn-out liability. We recorded an income tax expense of $4.7 million for the quarter compared to an expense of $6.1 million for the same period in 2019. The effective tax rate for the current quarter was 56.8%. The unusually high effective tax rate was primarily attributable to the non-deductibility for federal and state income taxes of our Series B preferred stock dividends. As JP noted, we were profitable for the second quarter. Net income was $3.6 million or $0.09 per diluted share. Adjusted EBITDA totaled $39.3 million for the second quarter or 8.2% of revenues as compared to $20.5 million or 6.3% of revenues in the second quarter of 2019. A reconciliation of net income to adjusted EBITDA is shown in our earnings release. At June 30, 2020 we had $59.4 million in cash on the balance sheet. While we had no cash drawn on our $50 million revolving credit facility we did have outstanding letters of credit of $23.5 million leaving $26.5 million available. Our term loan balance was $173.3 million. We have no amortization payments due until June 2022. Our term loan net senior leverage ratio remains under 1.5x which is a significant reduction from where we were just three quarters ago. Cash provided by operations for the second quarter totaled $9.5 million compared to $23.3 million in cash used in operations in the same period a year ago. Our expectation is that we will generate positive cash flow in the second half of the year. Of course as we continue to grow our revenues, we will need to spend cash to fund our working capital. Capital expenditures for the second quarter totaled $17.7 million of which $12.5 million was financed through financing leases. We continue to expect that capital expenditures will be approximately 2% of our revenues for 2020 and 2021. During the quarter, we added a net of approximately $226 million in new projects to our backlog which helped to partially offset the $481 million revenue burn in the quarter. Our backlog total of approximately $1.8 billion provides us with solid visibility for the rest of the year. The decrease in backlog was not unexpected as one of the effects of the pandemic is a delay in the number of project aspects. Both the funding process and the permitting process for many projects have been extended with governmental authorities working from remote locations and public hearings having reverted to virtual meetings project development timelines are naturally longer. As our bidding activity is very active, we fully anticipate increased awards in the second half of this year. With our strong financial performance in the first half of the year and the projects currently in backlog, we are confident in our ability to raise guidance expectations for the year. We now expect full year revenues of between $1.6 billion and $1.7 billion, up from $1.5 billion to $1.65 billion previously and full year adjusted EBITDA of between $110 million to $125 million, up from $105 million to $125 million in our previous guidance. Our guidance assumes no additional major disruption to our business from COVID-19. Future government-mandated quarantines that prevent our crews from being on-site that inhibit delivery of equipment or that caused customers to cancel or delay construction projects could adversely impact our operations. Let me conclude by expressing my hope that everyone is safe and healthy, as we navigate these very unusual times. JP, the microphone is yours.

[JP Roehm:]

Well, thank you, Pete. I want to take a few minutes to discuss our markets and new business opportunities both for the remainder of this year and beyond. We are seeing robust opportunities for growth across most of our end markets and our bidding activity and bidding opportunities are at an all-time high. In the near term, we are seeing additional opportunities in our Renewables segment as owners and developers take advantage of internal revenue services the 1-year extension of the continuity safe harbor provisions associated with the production tax credit. The safe harbor extends the full PTC through 2021 for wind that began construction or were otherwise qualified under the safe harbor in 2016 and 2017. The extension means that owners of wind projects who are initially looking to complete their projects by this coming October, now can leverage the full PTC for 2021 projects. As a result, the current expectation is that renewables construction in 2021 may well exceed that level of 2020. Interestingly, renewable energy installations are expected to generate more energy than coal in 2020 for the first time in the United States history and the trend is expected to continue for at least two reasons

[Brent Thielman:]

Great. Thank you. Good morning. Congrats on a strong quarter.

[JP Roehm:]

Thanks, Brent.

[Pete Moerbeek:]

Thanks, Brent.

[Brent Thielman:]

Maybe first question might be for Pete. Just wondering if the guidance assumes any of these contingency costs that you guys have been absorbing, ultimately sort of unlocks as you wrap these projects up into the second half?

[Pete Moerbeek:]

Not at the bottom end. I think at the top end of the guidance, we could see some of that flowing through, but at the bottom end definitely not.

[Brent Thielman:]

Okay. And then JP, I guess thanks for all the commentary. I mean it sounds like you're really active in terms of bidding new work. And I guess I just want to gauge your confidence in your ability to rebuild the backlog from here as we work our way into the second half of the year and start thinking about 2021.

[JP Roehm:]

Yes. Appreciate that Brent and good to hear from you. Very confident. Obviously going forward, we don't know what we don't know. We're obviously cautiously optimistic in this new normal that we're in. But the barometer for me always has been, but certainly as CEO is to look at certainly our pipeline, but for me our bidding opportunities. And really for at least the last 90-plus days, the opportunities in front of us have been unprecedented. And we talked in the commentary earlier about certainly, things are moving a little slower, whether it's on the owner side from permittings or just the old process because nobody's in the office, but the fact of the matter is, our opportunities in front of us are extremely strong. I'm very confident and excited about what we got in front of us moving forward.

[Brent Thielman:]

Okay. And JP, I mean there isn't so much talk about just the momentum between wind and solar from you guys and others in the space. I'm curious, there's so much going on right now, is that those cards are helping you from just a bid margin perspective right now?

[JP Roehm:]

Yes. I mean it's -- I mean both industries are an all-time buildout -- a record build-out. So not only ourselves, but our key competitors we're all building kind of at max capacity. We're fortunate to be leaders in an industry that's seen really kind of a multi-generational type of pivot we're -- we've been a carbon-based society for 100-plus years. And it's very exciting for this company to be one of the leaders in that transformation, which is truly global, but we're doing our part here in North America for sure.

[Brent Thielman:]

Okay. I mean, I guess maybe my last question and I'll leave it there, it's just thinking about the business has been generating solid levels of profitability now for a few -- more than a few quarters. How are you thinking about strategic priorities, the balance sheet capital structure going forward? I'd just be curious to hear your guidance thoughts there?

[Pete Moerbeek:]

Well Brent, we are trying to make sure that we continue the trend of the positive results. We are also looking to make sure that whatever structure-wise we do that our sureties are comfortable with what we're looking at. And we're looking at obviously what can we do to start paying off some of the long-term debt and/or Series B. It's a process that we expect will take a while. It's a process that is not something we can do quickly, but it is something that we are very focused on and creating longer-term value for the common shareholders. So, I'm not sure that this has been something we could say we are going to be done by the end of this year, but it is certainly a process or a path that we're working toward.

[Brent Thielman:]

Okay. Well, thank you for taking the questions. Best of luck here.

[JP Roehm:]

Thank you.

[Pete Moerbeek:]

Thanks, Brent. Have a good one.

[Operator:]

There are no other questions in the queue. I'd like to hand the call back to Mr. Roehm for closing remarks.

[JP Roehm:]

Well, thank you operator and thank you all for joining us for our Q2, 2020 call. We look forward to visiting with you here in a few months as we discuss our Q3 results. So, thank you all for joining and have a great day and stay safe. Thank you.