Infrastructure and Energy Alternatives, Inc.
Q3 2018 Earnings Call Transcript

Published: 10 Nov 2018

[Operator:]

Good morning, and welcome to the Infrastructure and Energy Alternatives Third Quarter 2018 Conference Call. [Operator Instructions] And with that, I will turn the call over to Kimberly Esterkin of Investor Relations. Kimberly, please go ahead.

[Kimberly Esterkin:]

Thank you for joining us today to discuss IEA’s third quarter 2018 financial results. A presentation associated with today’s call can be found on the Investors section of IEA’s website at ir.iea.net. 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 takes no obligation to update its forward-looking statements. In addition, since management will be presenting some non-GAAP financial measurements as references, the appropriate GAAP financial reconciliations can be found on the Investors section of IEA’s website as well as in today’s press release. And with that, I’ll now turn the call over to JP Roehm. Please go ahead, JP.

[JP Roehm:]

Thank you, Kim. Good morning, and thank you for joining us today for our Third Quarter 2018 Earnings Conference Call. 2018 has been a truly transformational year for IEA. In a very short period of time, we have taken many steps towards achieving our long-term growth and diversification plans and have met great success. First, in March, we began our journey as a publicly traded company and listed on the NASDAQ, gaining access to additional financing as well as the ability to expand and strengthen our business to generate long-term shareholder returns. Then over the course of the next two quarters, we nearly doubled the size of our business with strong growth in our renewable business and two significant acquisitions, bringing consolidated construction services, or CCS for short, which includes Saiia and ACC and the William Charles Construction Group including Ragnar Benson under our owning. Both acquisitions fit our strategy of acquiring businesses with complementary cultures, niche-market capabilities, excellent relationships with blue-chip customers and strong, proven management teams that are retained post acquisition. These acquisitions have resulted in a stronger IEA with well-performing business lines and world-class customers. We have also completely transformed our business mix with wind energy revenues reduced from 88% to 42% of our revenue portfolio. With both acquisitions now complete, as a combined entity, or backlog is approximately $1.8 billion. We have over 2,600 employees and a fleet topping over 4,000 pieces of equipment, eightfold from when we started in 2018. We have licenses to operate across all 50 states and can offer full, turnkey services to our long-standing base of blue-chip customers, including some of the best customers in the world, the largest utility and renewable energy developers as well as Class I rail companies. And even as we diversify and acquire additional companies, we maintain highly attractive markets and robust cash flows. In the past nine months alone, not including the acquired entities, cash flow from operations topped $30 million. We’ve also remained fairly under-levered with a very conservative leverage ratio of roughly three times pro forma 2018 estimated adjusted EBITDA, further adjusted to give effect to certain cost savings and synergies. Although we have a robust M&A pipeline, our strategy is to be laser focused on using free cash flow to – begin to de-lever our balance sheet even further over the coming quarters as well as to take advantage of the significant synergy opportunities that our large, diversified E&C platform provides. IEA has become a dramatically stronger company than we were when we first went public. In less than a year, we’ve built a scaled, highly diversified engineering and construction services platform with market-leading positions in the attractive rail industry, broadened our exposure in heavy and light civil infrastructure and environmental remediation and an extended geographic footprint in the less seasonal southern, western and southwestern regions of the United States. With entry into additional growing in-markets, we are diversifying our revenues and positioning our company to succeed throughout market cycles. Today, IEA is solidly built for long-term growth and shareholder returns. We have a thoughtful, strategic plan in place to accomplish our goal to become the premier provider of engineering services in each and every one of our end markets. There has never been a more exciting time to be a part of IEA, whether as an employee, customer or shareholder. But before we speak about the future, let me share a few highlights of our third quarter results. We are very pleased with the growth we achieved in the third quarter. Revenues improved totaling $279.3 million, an increase over 57% year-over-year. We also now have the strongest visibility we’ve ever had in the history of the company. Backlog reached a record $1.3 billion at September 30, 2018, as compared to $1 billion at the end of third quarter 2017. Additionally, the number of utility scale wind energy projects that are included in our pipeline of opportunities continue to be at the highest levels in company history. I’ll speak more on our long-term growth plans, but before doing so, I’ll turn the call over to Andy Layman, our CFO, to discuss the quarterly results in more detail. Andy?

[Andy Layman:]

Thanks, JP. And thank you all again for joining our third quarter 2018 call. As JP mentioned, for the third quarter, we reported strong revenues at $279.3 million, up 57% year-over-year. This increase was primarily driven by the overall strength of the renewable energy sector during the quarter and to a lesser extent a number of renewable energy project starts postponed in the first half of the year due to delays caused by uncertainty related to federal tax credits in late 2017. We expect revenues to remain in high levels in the fourth quarter. Following the recent acquisitions, our revenue, as JP mentioned, has transitioned to become much more balanced. We have gone from nearly 88% wind energy at the start of 2018 to 42% wind energy, 39% rail and transportation civil construction and 19% environmental remediation and other civil construction. Clearly, our business has become significantly more diversified. Adjusted EBITDA totaled $21.2 million for the quarter, an increase of 6.4% year-over-year. In the third quarter of 2017, adjusted EBITDA benefited from the higher margin on a larger number of projects nearing completion as compared to the third quarter of 2018, when we saw a larger number of projects in earlier phases of construction. Projects tend to accrete in margin over their life cycle. So projects in the beginning of their construction have lower EBITDA margin than those approaching completion. Gross profit totaled $27 million or 9.7% of revenues, which on a dollar basis increased 11.1% year-over-year due to the higher volume of work. As a percentage of revenue, gross profit decreased 400 basis points compared to the third quarter of 2017. The decrease in margin was primarily due to a higher number of projects in earlier phases of construction. As we continue to broaden our capabilities and enter additional growing niche end markets, we believe we will maintain strong gross margins. SG&A in the – for the quarter totaled $17 million as it compared to $9.5 million in the prior year period. SG&A included $6.8 million related to acquisition activities and $0.5 million related to our merger with M III. Third quarter 2018 net income totaled $5.7 million or $0.17 per diluted share compared to $9.2 million or $0.42 per diluted share in the third quarter of 2017. Diluted share count totaled 31.4 million compared to 21.5 million in the prior year period. Interest expense was $1.6 million for the quarter, up from $0.7 million in the third quarter of 2017 as a result of increased borrowings on our new credit facility. As of quarter end, our weighted average interest rate was 7.5% based on the interest rate on our term loan of LIBOR plus 625 basis points and the interest rate on our revolver of LIBOR plus 425 basis points. Provision for income taxes was $0.9 million, down from $5.4 million in the prior year period. The effective tax rate for the quarter was 13.2% compared to 36.9% in the third quarter of 2017. The decrease in effective rate in the third quarter of 2018 when compared to the third quarter of 2017 was due primarily to the reduction in federal corporate tax rates effective January 1, 2018. We expect our effective tax rate for 2018 to be in the range of 28% to 30%, with the actual annual effective rate varying depending on the mix of taxable income by state. Capital expenditures were $14.5 million in the third quarter or roughly 5% of revenue. CapEx as a percentage of revenue was slightly higher this past quarter due to additional capital leases and cash purchases related to our recent acquisitions. We continue to expect capital expenditures will be around 2% of revenues over a long term. Backlog as of September 30, 2018, including contributions from CCS, totaled $1.3 billion, up from $1 billion in September 30, 2017. Including acquisition of William Charles, our backlog is now $1.8 billion, which is providing terrific visibility for 2019. For reference, we define backlog as the sum of three components including

[JP Roehm:]

Thank you, Andy. The new IEA, or IEA 2.0, is much improved. We have come a long way since the initial days over 70 years ago, when White Construction, our unionized arm, was founded. We’re now a leading provider of wind energy construction in the United States, have a growing presence in environmental remediation and a top position with Class I rail customers. We have put in place the strong foundation needed to continue to grow and diversify our business, and our broadened scale and coverage area create significant barriers to entry. We will continue to build from our highly specialized EPC platform to generate growth for IEA. IEA’s success combined with our demonstrated commitment to meeting our clients’ evolving needs positions us well to capitalize on future opportunities. And we are in the right industries to propel our business forward with strong tailwinds in each of our end markets and a vastly expanding total addressable market. Renewable energy remains the fastest-growing segment in the U.S. power industry today, with wind and solar installed capacity projected to grow substantially as projects are fast-tracked to take advantage federal tax presence. It is projected that demand for incremental wind power capacity will double by 2023 while the demand for utility scale solar capacity is projected to grow by nearly 400% over the next 15 years. With an ability to operate in all 50 states, IEA’s well positioned to leverage this growing market opportunity. We will continue to support IEA’s expansion into growing niche markets. We will focus on end markets, such as renewable energy, environmental remediation, specialty heavy civil infrastructure and rail construction, where we have long-standing customer relationships and can generate strong margins. The environmental remediation market in the United States is anticipated to reach over $30 billion in the next five years, while highway and road construction put in place domestically is expected to reach $98 billion by 2021. The rail construction industry, though smaller in overall scale, is growing significantly and is expected to reach $6 billion in size by 2025, with more than $150 billion in infrastructure improvement needed to modernize and expand rail capacity in our country. There are certainly a vast number of opportunities to continue to expand our business, and we have the right team and the right capabilities in place to make the most of this industry development. We look forward to continuing to share our progress on future earnings calls. This concludes our prepared remarks. Thank you, again, for your time today. We’d now like to open up the call to your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from Paul Penney of Northland Capital. Please go ahead.

[Paul Penney:]

Thank you. Thanks taking my question. Good morning Andy and JP.

[JP Roehm:]

Good morning Paul.

[Paul Penney:]

Good morning. Given your robust opportunity funnel and strong demand backdrop, are you seeing more pricing power on some of the new projects versus – today and what you saw 12 to 18 months ago?

[JP Roehm:]

Yes, we’re seeing a little bit. It’s certainly is indicative of the activity in the market. We hope to – as we move further into 2018 – 2019, I’m sorry, and then into 2020 accumulating more backlog, we obviously look for opportunistic ways to take advantage of the market. But – yes, obviously, we see that dynamic play out.

[Paul Penney:]

Okay, great. And then maybe, Andy, a question for you. When you look at operating expenses, can you maybe just give us more granularity on – a feel for the onetime kind of integration-related expenses for the acquisition during the last couple of quarters? And if you back those out, and looking into 2019, should we expect better operating leverage and margins?

[Andy Layman:]

Definitely, we do, we’ve incurred quite a significant amount of incremental expenses as a result of the acquisition. So there’s an EBITDA walk forward in the appendix of the presentation. So certainly, as we go forward, we won’t have – those are nonrecurring expenses, and we have significant synergy opportunities that we are very focused on achieving.

[Paul Penney:]

Okay, great. And then you talked briefly JP about cleaning up the capital structure. Would that also potentially include looking into retiring your warrants?

[JP Roehm:]

It’s obviously one of the options on the table. We – certainly something that as we go forward and de-lever the business, clean up our capital structure as they – as we talked about in today’s call a little bit, is certainly a priority for the board and management team.

[Paul Penney:]

Okay, great. Last question. Obviously, we know the wind exposure and now the new railroad exposure. It seems like solar has been deemphasized. Maybe that’s just a – maybe just give more granularity on what you’re seeing in the solar market and in solar – in terms of opportunities, and maybe some of the acquisition opportunities you’re seeing out there in solar?

[JP Roehm:]

We certainly are as focused on that as we talked about in previous calls. We see that market continuing to evolve as we discussed previously. We’re certainly working towards some good opportunities that – for 2019 in that space. We also – from an M&A perspective, we also are still targeting way to further our participation in that industry from an M&A perspective. And we’ll – we continue to look and evaluate those opportunities. That been said, we’re cautious about that – coming out of these two transactions, we want stay laser focused on de-leveraging the business and producing operating results and cash flow but at the same time, balance that with our – continuing to cultivate our M&A opportunities to continue to grow the business forward. And specifically, yes, solar is a – it continues to be an area of interest for us, Paul.

[Paul Penney:]

Great. Last question. You touched on the back – in terms of your self-performing focus. Maybe, just give an update there verbally in terms of – we get the margin enhancement, but is this – these efforts enhanced with some of your current – your new acquisitions? And just where you see the opportunities in the – over next coming quarters on the self-performing side?

[JP Roehm:]

The great thing about these acquisitions is they match up on a self-performing capability standpoint. They synced up with IEA very well. They are all self-performing, whether it’s the CCS transaction or William Charles transaction. They both are self-performing contractors. So by far, they self-perform the majority of their revenues. So we are at – we actually look at – as we move forward, certainly, one synergy is the ability to – the companies to cooperate and add additional self-perform capabilities across our spectrum of end markets. Certainly, there’s ways that some of the acquisitions could help our end market. And vice versa, IEA core could help our acquisitions. So we look – they’re great, well-performing businesses that have self-performed for years and meet kind of the criteria that folks who have been around IEA for a long time are used to.

[Andy Layman:]

Maybe – This is Andy. I’ll just add a couple of comments to that. We’ve undertaken the initiative to self-perform our electrical work this year. We’ve successfully completed two or three projects this year. And next year, we have a much more robust plan to self-perform that work.

[Paul Penney:]

Great, thank guys.

[JP Roehm:]

Thank you Paul.

[Operator:]

Thank you. Our next question is coming from Brent Thielman of D.A. Davidson. Please go ahead.

[Brent Thielman:]

Great, thank you. Good morning. JP, I was – I guess, thinking about the timing of these projects you’re ramping up in the core IEA business and the impact to margins, is this a situation where you see a gradual kind of ramp into next year back to that, call it, low double-digit EBITDA range, again, exclusive of any of the deals you’ve done. I guess, I’m trying to think about how long or how much further through jobs before we start to see a return to kind of levels of profitability you might have seen a year ago?

[Andy Layman:]

So this is Andy. I’ll take that question. So I think that’s a good summary. I mean, these are very well-performing companies that we’ve acquired. They have very robust backlogs, incremental to our wind and civil work backlogs that are also significant. So as we kind of bridge through this year and into next year, next year, we’re going to have tremendous amount of opportunity, be it really what we think are great utilization levels from a overhead and equipment perspective. And I expect that we’ll get back to those kind of margin levels fairly quickly as we go into next year.

[Brent Thielman:]

Okay. And Andy, I guess, on those wind jobs though, in particular, is there a threshold through that job, call it 25%, 50% completion where you tend to see the margins kind of pop?

[Andy Layman:]

Yes, typically, our projects do accrete. From start to the final completion, we’ll typically get a couple of points of margin on a overall portfolio basis through the term of the projects. We’re starting to see some of that come through in Q3. We’ll see how the rest of the year plays out here. We’ve put together a range of EBITDA, which kind of puts a high-end, low-end range on that. But normally, our projects do accrete through the terms of the project.

[Brent Thielman:]

Okay. And then with transportation a much bigger piece of the portfolio now, can you talk about the environment within that? Maybe, even from the perspective of the acquisitions themselves, what they see developing from a bid pipeline standpoint maybe relative to what they’ve seen?

[JP Roehm:]

Sure. The transportation scene, I think, in all of the different geographies that IEA operates in, whether the Midwest, the Rocky Mountain on West Coast or even on a nationwide basis, when you include the specialty paving offering that ACC has, what we’re seeing is kind of an all-time – well, at least, the biggest spin that we’ve seen in the last decade that – I know that’s kind of undergoing here and not only the Midwest but in other – the other geographic areas I mentioned. So for 2019 and 2020, we feel very strongly about the ability to continue to grow that business segment, and we think that the infrastructure space and infrastructure build in America is kind of a – the place to be. And we look for many of the governments to invest in infrastructure over the next several years.

[Brent Thielman:]

Okay, thanks, JP. And then I want to clarify. In the slide deck, it shows you have a $408 million in backlog. It’s like it’s scheduled to burn in 4Q. I guess just borrowing, any delays or weather. Is $400 million a good baseline revenue level for us to think about for the fourth quarter for the company?

[Andy Layman:]

We’ve provided guidance, or an outlook, in – for the entire year. So you can kind of do the math there, but that’s effectively what you’re looking at.

[Brent Thielman:]

Okay. And then, JP, are you seeing a bigger influx of repowering projects to bid? Or – I think in some of your commentary, it sounds very active in the wind market in general. Is it still more of a steady inflow of new wind construction projects?

[JP Roehm:]

Yes, there’s a steady inflow of new wind construction projects. Definitely, we’ve not seen any change in that than what we previously reported. Repowering, we continue to see repowering opportunities. I think as I spoke in previous calls, we look at from a wind perspective, IEA focuses on the new, greenfield-type projects. Basically, a repowering or a greenfield project takes the same level of effort, same management team. However, the revenue opportunities from repowering are much less than a greenfield project. So the best use of our resources are our greenfield projects. Not – That’s not to say that we don’t pursue repowering. But we use repowering opportunity to fill in our gaps in resources if we have a team of two that have gaps between projects, we pursue repowering projects to deploy them to as a kind of additional upside to our plan. But just kind of close that out, we’re totally focused on the greenfield wind farm market, and we’ll be selective about repowering opportunities on a case-by-case basis.

[Brent Thielman:]

Okay guys, thank you.

[JP Roehm:]

Thanks Brent.

[Operator:]

Thank you. Our next question is coming from Alex Rygiel of B. Riley FBR. Please go ahead.

[Alex Rygiel:]

Thank you JP and Andy congratulations on the transaction this quarter.

[JP Roehm:]

Alright, thank you.

[Alex Rygiel:]

Couple of questions. You referenced kind of quickly a little bit about internalizing some of the work in the wind business. In any of your other businesses, do you see an opportunity to internalize more activities to enhance the margin profile, kind of, over the next handful of years?

[JP Roehm:]

Well, in the – in acquired businesses, they pretty well self-perform most of all the revenue base. So other than specialty-type work, that – which we’re not contemplating entering into at this time, they pretty – the acquired companies pretty well already self-perform most of their work. So I take this – I think it’s accurate to say that this electrical initiative mostly geared at the renewable side of our business that could be expanded in other areas in the future. That’s our biggest focus from an organic self-perform addition standpoint.

[Alex Rygiel:]

And thank you for the pro forma guidance on revenue and EBITDA and thanks for the backlog, tremendous backlog there. But how should we think about sort of backlog on this pro forma basis a year ago versus today? I’m assuming it’s been positive. But how should we think about that growth in backlog versus sort of what that pro forma organic revenue growth could look like over the next 12 months?

[Andy Layman:]

Yes, we have not provided next year outlook at this stage or guidance. So – but we do – our backlog continues to grow. I mean, we got $1.8 billion on a combined basis. Our pipeline is bigger than it’s ever been in the history of the company, both in the – on wind side as well as from an – the two acquisitions. So we’re very optimistic about the opportunities to come.

[Alex Rygiel:]

And the EBITDA figure guidance sort of on a pro forma annual basis. I’m assuming the high end of the range of that incorporates a number of the synergies that you’re contemplating. Is that fair?

[Andy Layman:]

Yes, we’ve – it does, kind of, conservatively, include some of the synergies that we’re contemplating. So – and there’s a walk forward on that in the presentation. And that – there’s – we still got work to be done this year. I mean, the projects are well underway. We’ve a lot of resources in the field. So we still got quite a lot of game to be played. So we’ll see how we close out the year, a lot of it depends on how those projects perform throughout the rest of the year.

[Alex Rygiel:]

And lastly, in a more broader sense, how should we think about the margin profile inside backlog sort of versus the margin profile of your pro forma guidance? I suspect it’s fairly similar. But has there been any change in the margin profile of recent work that you’ve been bidding on? Do you see any ability to raise price in an environment where there is some labor inflation and whatnot?

[Andy Layman:]

We’re certainly aware of that, and we’re taking the opportunity where we can to look to achieve that. So as we’re going into a terrific market here, we’ve got an enormous amount of backlog. We’ve got great visibility into next year. So as we fill up our organization, we start to look for opportunities to – that could impact the results.

[Alex Rygiel:]

Very helpful. Thank you.

[JP Roehm:]

Thank you Alex.

[Operator:]

Thank you. We have run out of time for today’s question-and-answer session. We would like to thank you for your interest in IEA. You may disconnect your lines at this time, and have a wonderful day.