Infrastructure and Energy Alternatives, Inc.
Q1 2019 Earnings Call Transcript

Published: 16 May 2019

[Operator:]

Good morning, and welcome to the Infrastructure and Energy Alternatives First Quarter 2019 Conference Call. Before I turn the call over to management, I would like to note that all participants on today's call are in a listen-only mode. We will open up the call to your questions after the prepared remarks. And with that, I will turn the call over to Larry Clark, Investor Relations for IEA. Larry, please go ahead.

[Larry Clark:]

Thank you for joining us today to discuss IEA’s first quarter financial results. With us today from management are JP Roehm, Chief Executive Officer; and Andy Layman, Chief Financial Officer. Before turning the call over to management, I would like to direct you to the Safe Harbor statement. Today’s discussion contains forward-looking statements about future growth and financial expectations. Any forward-looking statements should be considered in conjunction with the cautionary statements in today’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. Since management will be presenting some non-GAAP financial measurements as references, including adjusted EBITDA, the appropriate GAAP financial reconciliations can be found on the Investors section of IEA’s website as well as in today’s press release. In addition, we are including an accompanying slide presentation that you can refer to during the call. You can also access these slides on the Investors section of the website. And with that, I’ll now turn the call over to JP Roehm. Please go ahead, JP.

[JP Roehm:]

Thanks, Larry. Good morning, and thank you all for joining our call today to discuss our first quarter results. Our financial and operational results were generally in line with our expectations. We are building momentum in both backlog and pipeline and we are progressing smoothly with the integrations of consolidated construction services, including Saiia and ACC and the William Charles Construction Group. These transformational acquisitions provided us with important geographic and business line diversity. We are now a prominent name in wind, civil and rail construction and environmental remediation. And with increases in backlog and pipeline in all of our businesses, we are well positioned to drive improved financial results over the course of 2019. We are in the early stages of winning new business due to cross selling efforts among our business development teams, and remain optimistic that these efforts will bear fruit down the road. We also are working diligently to identify efficiencies and expect to produce meaningful cost savings overtime. Earlier this week, we entered into an equity commitment agreement with a fund managed by the private equity group of Ares Management and funds managed by Oaktree Capital Management. These investors have agreed to purchase $50 million of newly created Series B preferred stock, subject to certain terms and conditions including amendments to the Company's credit agreement. The transaction is expected to close on or before May 20th. Ares Management is a leading global alternative investment management firm and we are honored to welcome them as a new investor in IEA. We are also appreciative of Oaktree's ongoing support. The commitment from these premier investment firms underscores the strength of our platform and our long-term growth prospects for IAE. We believe that the new financing is a necessary source of medium-term capital as it further strengthens our balance sheet. It will provide us with adequate liquidity to execute our business plan in 2019 and drive value for our shareholders. During the quarter, we also improved our liquidity by executing a $25 million sale leaseback on some of the equipments that we obtained in the acquisitions. And subsequent to quarter end, we executed on another $5 million sale leaseback property transaction. Turning now to our results. The first quarter is always the seasonally slowest quarter of the year for the construction industry. And it was no different for us this year. We did however, generate year-over-year revenue growth on a pro forma basis, a positive sign that we could reach the high-end of our full year revenue guidance. From a business development perspective, the first quarter was a productive one. We won a number of new contracts across our end markets driving our backlog even higher. We were awarded $232 million across all of our business lines, 40% of that in renewables and the remaining 60% was spread across our other divisions. This new business drove an increase in our backlog to $2.2 billion, up from $2.1 billion at the start of the year. We also strengthened our executive management team, bringing on Mike Stoecker a talented and successful construction industry veteran as our first Chief Operating Officer. Mike brings to IEA nearly 35 years of construction industry leadership and operations experience. His responsibilities include the oversight of ongoing construction opportunities, and the integration of our acquisitions. Given our greater scale and more extensive pipeline of new business opportunities, appointing a COO was a timely strategic next step in executing our growth strategy. Our end markets, meanwhile remain healthy and are projected to expand in 2019 and beyond amid enduring demand for renewable energy, a growing U.S. economy and increased need to refurbish or replace vital infrastructure across the country. All of our business lines stand to benefit from those favorable secular trends. Wind power capacity is set to double by 2023 for example, while demand for utility scale solar capacity is expected to surge nearly fourfold over the next 15 years. Industry projections also call for strong and sustained growth in the rail construction, highway and road construction and environmental remediation markets. For instance, the coal ash management market presents tremendous opportunity. In North Carolina alone regulators this year ordered a major energy company to excavate millions of tons of ash and rebury it in lying landfills. The estimated investment to complete this work exceeds $10 billion. Our pipeline remains strong and continues to grow. Some examples of the type of work we are bidding on our large environmental projects, particularly in the coal ash management market, which, say, it has a great reputation. We are also starting to selectively bid on wind energy repowering projects, which present an interesting and profitable opportunity for us. Essentially, this is work that we perform on legacy wind power projects that reached late stages in their lifecycles when they need newly installed turbines as well as upgrades to the existing infrastructure. These projects are not as large as new construction, but the substantial base of legacy wind project in the market represents a significant opportunity for IEA going forward. Both CCS and William Charles are performing well and continue to recognize anticipated synergies through customer cross-selling opportunities, equipment financing, reduced equipment logistics and improved utilization as well as lower insurance costs and other expenses that come with scale. We entered 2019 as a larger and more diversified company. All of our businesses are performing well, I want to reiterate that we continue to have a record level of backlog and a strong pipeline of new opportunities. Our top priorities for the year remain driving organic growth, operational excellence and collaboration across our newly scaled and diversified platform. We are making progress on all fronts. All of this gives us confidence that we will achieve our 2019 guidance, which calls for revenue in the range of $1 billion to $1.2 billion and adjusted EBITDA in the range of $90 million to $110 million. I'll now turn the call over to Andy to discuss our quarterly results in further detail.

[Andrew Layman:]

Thanks JP and thank you all again for joining us. For the first quarter we reported revenues of $191 million consisting of approximately $81 million from our legacy business and $110 million from our acquired businesses. This represents a 12% increase in revenues on a pro forma basis. Included in this quarter's results was approximately $44 million of revenues from the six major wind projects that we discussed on our previous earnings call. This is in line with our expectations. I would like to point out that we recognized approximately $400,000 in gross profit associated with this revenue as we experienced a small, net positive impact to our year-end cost estimates to complete these projects. The final estimated revenue of $11 million from these six projects is expected to largely run through the second quarter at essentially zero margin. This remaining revenue represents wrap up work such as site cleanup and landscaping. We don't expect further negative impact on these projects as they are all substantially completed. We recorded $184 million as cost of revenue in the quarter, which led to a gross profit of $6.8 million. Excluding both the revenue and nominal gross profit associated with the completion work on the six wind projects, gross profit margin would've been 4.4%. Our SG&A expenses for the quarter were $27.8 million, and included $11.7 million of direct SG&A from our acquired businesses. Adjusted EBITDA for the quarter was a loss of $4.7 million. That marked an improvement from last year's adjusted EBITDA loss of $8.9 million which only included our legacy IEA business. On a pro forma basis, taking into account the 2018 acquisitions, adjusted EBITDA would have been a loss of $5.8 million in the first quarter of 2018. Our first quarter is always seasonally lowest. So generating a negative adjusted EBITDA is consistent with having to incur our fixed overhead over a lower revenue base early in the year. As revenue increases throughout the year, we expect sequentially better adjusted EBITDA margins as our fixed costs are spread across a larger revenue base. Our net loss was $22.9 million for the quarter or $1.06 per diluted share. Free cash flow was negative $1.3 million excluding the sale-leaseback equipment, debt service and the impact of working capital related to the six projects that were impacted by weather in 2018. Our CapEx was $1.9 million for the quarter. Now turning to our balance sheet. At quarter end we had $48 million in cash, $323 million in debt and $84 million in capital leases. Just this week we reached an agreement with our lenders on amending the credit facility, which will become effective upon closing of the Series B preferred stock financing. Terms of the amendments among other things, allows [ph] for an increase in the first lean leverage to adjusted EBITDA ratio for 2019, providing us with additional flexibility. With respect to the equity raise, as JP highlighted we expect to receive $50 million in gross proceeds in the form of preferred shares. Dividends on these shares will be paid quarterly at an annual rate of 15%. We have the option to redeem these shares under certain terms and conditions, and they are mandatorily redeemable at par plus any accrued interest in February of 2025. As part of the transaction, Ares and Oaktree are receiving penny warrants to purchase up to 10% of our common equity on a fully diluted basis, which will consist of approximately 2.2 million shares at the closing of the transaction. The proceeds will be used for working capital and to reduce outstanding borrowings under our revolving credit facility. As JP mentioned, we are confirming our full year guidance for revenue and adjusted EBITDA. We expect approximately $990 million of our March 31 backlog will convert to revenue over the remainder of the year, when combined with our first quarter revenue, it aligns with the high-end of our revenue guidance range. In addition, some of our civil work is expected be booked and billed without ever entering backlog which will also help. Based on historical trends, we expect to generate approximately two thirds of our full year revenue in the second half of 2019 and as such we also expect to generate the bulk of our full year adjusted EBITDA over the third and fourth quarters as margin risk on projects are reduced as we reach completion dates. To amplify JP's message in 2019, we are very focused on operational execution, including integration of our recent acquisitions and realizing significant synergies from our newly scaled and diversified platform. We are pleased with our progress on both fronts. With that I'll turn the call back to JP for closing remarks.

[JP Roehm:]

Thanks, Andy. Before we open the call up for questions I would like to emphasize again that we are off to a great start in 2019. We grew our backlog, strengthened our executive management team and our balance sheet. And we continue to make steady progress on the integration of our 2018 acquisitions. We have a genuine national footprint and our operation span multiple segments poised for strong growth. We have positive momentum across all of them. Our markets are healthy and we have plenty of attractive opportunities in our pipeline. As always, we are laser focused on delivering projects safely, on time and on budget. We are dedicated to maintaining that high achieving engaging work environment that reflects our long legacy of industry leading performance. While there is a lot of work ahead we remain confident that we are on track to meet and potentially exceed our goals and deliver stronger financial performance in 2019 and over the long-term. We have excellent platform and talented teams that will enable us to execute on a great plan. Our people, clients and commitment to integrity are the foundation for our success. I would like to thank all of our analysts and investors for their ongoing support and interest in IEA. I would now like to open the call up to your questions. Operator?

[Operator:]

Thank you. We will now be conducting a question and answer session. [Operator instructions] Our first question comes from the line of Bill Newby with D.A. Davidson. Please proceed with your question.

[Bill Newby:]

Good morning, gentlemen and thanks for taking my questions.

[Andrew Layman:]

Hi Bill.

[JP Roehm:]

Hey, Bill.

[Bill Newby:]

I guess, JP and Andy, first on the guide, it seems like the revenue is kind of in hand, could you just kind of talk us through the moving parts on the margins? I guess what gets you to the low and the high end of the range? And I guess in particular, the type weather contingencies have you guys built in there?

[Andrew Layman:]

Yes. That’s a good question. This is Andy. I'll take that and then JP can add on some additional items. So yes, we do like to be progressing to the high end of our revenue range. As we indicated, adding the revenue from Q1 plus the backlog expectation for 2019, that would get as close to the high end of the range. And then we've got additional civil works that are book and bill that don't actually own the backlog. So we're confident about how we're progressing from a revenue perspective. From a margin perspective, our profile is that, we maintain lower margins in the first half of the year. And as we progress on projects, our margins accrete as the risk of the projects come behind us, gets behind us. So it's early in the year still only we're -- we feel very positive about the progress that we've made today. We do have, three-fourths of the year still to flow.

[Bill Newby:]

Right. And then I guess -- how much of the -- nicely the backlog pick up a little bit more this quarter, how much of that is wind project versus the other areas right now?

[Andrew Layman:]

Yeah. So in the presentation, there's a chart that kind of walks through that. But there's couple of new wind projects that come in. But we also have strong growth in the civil space as well, where we increased our backlog by $139 million for specialty awards.

[Bill Newby:]

Okay. Thank you. And I guess to the wind projects that are currently in the backlog, I guess, differ materially from those that experienced the issues in 2018. Is there anything just I guess, within those projects that get you more or less comfort with executing on them?

[Andrew Layman:]

I would say that we have made some progress at our contract negotiations with customers as one, but in general the projects are very similar in nature. And we don't expect that weather -- type of weather to occur in 2019. But, that being said, we did build quite a lot of contingencies into our guidance in case we do have weather.

[Bill Newby:]

Are the projects located and roughly to the same areas are they kind of spread out all across the country?

[JP Roehm:]

This is JP, Bill. We -- roughly the same. We have a little more geographic diversity this year than we did last year. We do have a project on the West Coast of Washington State that's one of our recurring projects. But kind of a balance of our wind portfolios starts in South Texas, we have some projects in the Kansas and Nebraska area on in the Midwest through Iowa, Illinois, Ohio and concluded and Michigan.

[Bill Newby:]

Okay. Thanks, JP, appreciate that color. And then I guess, just given the guidance Andy, if I assume CapEx runs roughly 2% of sales, I'm getting the free cash flow for the year around $30 million. Does that seem accurate to you, any thoughts there?

[Andrew Layman:]

We will just probably go through that together, but most of our CapEx is financed with leases. So the real CapEx is only about $3 million to $5 million.

[Bill Newby:]

Okay. Okay. And then just on the new preferred, how much of that I mean you know that you should deploy some of it to working capital and some of it to debt, any idea how much you're going to be able to deploy to debt and I guess where would you expect leveraged to be by maybe the end of the year at this time next year, any goals there?

[Andrew Layman:]

Yeah. So most of it will go to pay down the revolver. So, we expect to use the majority of it to do that as well as cash from operations to free up the revolver to use for the rest of the year. And I don't have -- we didn't put out guidance on leverage levels within the year.

[Bill Newby:]

Okay. And then just lastly on the M&A costs. What's left on those and do you expect in the runoff here into 2Q?

[Andrew Layman:]

The majority of it will runoff, the only remaining types of items from an M&A cost perspective are related to the resources that we've deployed for integration. But the majority of that stuff has already been through the P&L.

[Bill Newby:]

Okay. All right. That's it for me. Thanks, guys. I appreciate it.

[JP Roehm:]

Thank you, Bill.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Lance Vitanza with Cowen & Company. Please proceed with your questions.

[Lance Vitanza:]

Hi, guys. Thanks for taking the question and congratulations on the quarter. I know it was seasonally slow, but those are often the hardest quarters to perform well and so. I guess my questions are -- you mentioned the two-thirds of the revenue and most of the EBITDA is recognized in the second half. And I think you answered this, but I was trying to write this down. Is that just a typical seasonality in the business or is that typical seasonality amplified this year due to project specific items and so forth?

[JP Roehm:]

Yes, that's good question. That's a typical seasonality for our business, where the majority of our projects, not all of them, but the majority of our projects will start at the beginning of the calendar year. And as we progress through the calendar year, we'll get to finalization at the end of the calendar year. As we progressed and the risk of the projects subside, we then are able to begin to release contingencies to margins and our volumes are tremendously higher, which also fixed overheads.

[Lance Vitanza:]

Okay. So with respect to the gross margin, nice job there 130 basis points of improvement year-over-year and it looks like it could have been up 220 had it not been for some weather issues. Now I know, it's a little bit apples to oranges, but when we look at the adjusted EBITDA margin target in your guidance of 9% to 9.2%, can you tell -- what was your adjusted EBITDA, pro forma adjusted EBITDA margin last year, for the full year?

[Andrew Layman:]

Yes, for the full year -- nom we didn't -- yes, I don’t -- wanted to go and get back to you on that.

[Lance Vitanza:]

I guess what I'm trying to get out is just. Is the is the EBITDA guidance -- the EBITDA margin guidance consistent with, call it 220 basis points of normalized gross margin growth that you're seeing in the first quarter or how should we sort of think about it related to the actual performance on the margin side that we've seen year to date, which looks pretty good?

[Andrew Layman:]

Yes. Okay. Now I understand the question. So we're actually progressing kind of as we plan for the year. We are -- we did see some growth in margins. We did also have the very low margin that came through on the projects, which were actually impacted last year, but whether they were just running off the remaining revenues on. So once those complete in Q2, then we expect to have a pretty strong step up in margin. And we're progressing towards our guidance. We don't -- it's just too early in the year to really get better visibility on EBITDA margins, other than what we've cut out for our guidance.

[Lance Vitanza:]

Fair enough. No, that's helpful. My last question, I guess is just on the equity raise. Let me play double that wicket. I mean six months ago, the stock was trading at $10 per share, presumably you could have raised equity then now with the stock in the 4 [ph] as you're raising $50 million of equity capital. Could you talk about maybe for those of us that are perhaps a little bit new to the story, what the dynamics were around this and why now versus why not then or why not in six months when you're looking at much better numbers again?

[Andrew Layman:]

Yes. I'll be happy to start that maybe JP can chime in. But really, we -- if you kind of go back in the history we have some issues with six of our nine major wind projects at the end of 2018, which really hurt our performance for 2018. This was very extreme and unusual weather, the projects were just flooded and we incurred a significant amount of additional costs to get those to completion. These are now behind us. We are right now in a different position as we start to ramp our new projects for 2019 which are -- we have really high expectations on performance and we’re very pleased with kind of where we are at the start of 2019. And the equity – as we got into 2019 and reassessed our plan for the year as well as had visibility as with the pipeline of opportunities we felt the need to bringing some additional liquidity into the business. And the Board -- we presented after the Board and they approved us hire a Guggenheim to look for equity opportunities. We had several term sheets to consider and the board has point to explaining to independent directors to ensure the interest of all the shareholders who are considering in the decision. And the independent directors as well as the full Board unanimously agreed that Series B preferred would be the best option for us to provide liquidity and begin the delever the balance sheet as we go forward.

[Lance Vitanza:]

Thanks very much. That’s really helpful. I appreciate it. Good luck guys.

[JP Roehm:]

Thank you, Lance.

[Operator:]

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Roehm for any closing remarks.

[JP Roehm:]

Thank you. I would like to thank all of you for participating in our call today. If you have any additional questions, please feel to reach out. Have a great day. This concludes our call. Thank you.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.