Infrastructure and Energy Alternatives Inc (IEA) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Infrastructure and Energy Alternatives 2018 first-quarter conference call. At this time I would like to inform you that this conference is being recorded and that all participants are currently in a listen only mode. Before turning the call over to J.P. Roehm, Infrastructure and Energy Alternatives' President and Chief Executive Officer, I will read the Safe Harbor statement.

Before the presentation and the comments begin, Infrastructure and Energy Alternatives would like to remind you that some of the statements and responses to your questions in this conference call today may include forward-looking statements. As such, they are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.

Any forward-looking statement should be considered in conjunction with the cautionary statements in our press release and the risk factors included in our filings with the SEC, which Infrastructure and Energy Alternatives encourages you to read.

In addition, please refer to the Investors section of Infrastructure and Energy Alternatives' website to find additional disclosures and reconciliations of non-GAAP financial measures that will be used on today's call. And now I'd like to turn the call over to J.P. Roehm.

Thank you. Good morning, welcome to all of you joining us for our first-quarter 2018 earnings call. Again, my name is J.P. Roehm and I am the CEO of Infrastructure and Energy Alternatives, or IEA.

As many of you know, we've recently completed a merger with M III Acquisition Corp., a special-purpose acquisition corporation, and we are excited to now be a publicly traded company on the NASDAQ. Since this is our first public conference call I'd like to provide some background on who we are, what we do and where we are going for the benefit of those listeners and those of you who may be unfamiliar with IEA.

First let me start with who are we and what do we do. IEA's history dates back more than 70 years to the founding of one of our business units, White Construction, a heavy civil construction operation. White was a leading regional heavy civil contractor which expanded into the construction of renewable energy projects in 2004.

Since that time, IEA has built on that legacy to become the number one constructor of wind energy projects in the United States with an estimated market share of roughly 30%. We have built more than 7,200 wind turbines across 35 states over the past 14 years.

We also have strong experience in the utility scale solar market and have completed 700 megawatts of solar installations since 2010. And we continue to operate our legacy civil construction business, which I will discuss a bit more in a minute. At this time, our revenue breakout by end market is approximately 95% wind, 2% solar and 3% civil.

In both wind and solar, we build utility scale projects and our customers are primarily large Tier 1 renewable energy developers, investment grade investor owned utilities, and other project owners. We have a very strong track record for delivering projects on budget and on time.

We also bring experience with a broad base of project requirements, nationwide coverage, a proven ability to recruit, develop and retain skilled labor; an exceptional safety record and increasingly broad construction trade self performance capabilities. This has helped us to build strong relationships with our key customers and drive recurring business. In fact more than 80% of our revenue over the past year came from repeat customers.

Our position in renewables is bolstered by high barriers to entry, particularly in the wind markets. Constructing wind turbines and the related infrastructure is a specialized expertise and there are only a handful of companies in the United States with the equipment and trained personnel to do this work. This translates to a predictable high percentage market share for IEA because developers are unwilling to put a project at risk by using a less experienced EPC -- to say what will only be a small percentage of the overall project cost.

I know that you are probably more interested in the future of IEA than in our past, so I want to take a moment to explain our long-term strategy.

As you're probably aware, renewable energy is the fastest-growing segment in the United States power industry. In 2017 wind and solar accounted for approximately 50% of all new capacity additions and this trend is expected to continue for the foreseeable future. Given this trend we expect to maintain a strong emphasis on the renewables industry and it is likely to be our largest business segment for many years to come.

At the same time, however, we want to build a more diverse revenue stream for IEA through a number of initiatives that we are working on. I mentioned earlier that approximately 95% of our revenues in 2017 came from our roughly 30% market share in wind energy construction.

Although we expect to preserve and even grow our revenue stream from wind, we also see a significant growth opportunity for IEA in solar where strong sectorial growth is projected for the coming years and where we are starting with a much smaller market share. We believe that we are well-positioned to grow our solar business because many of our long-term customers on the wind side of the business also develop solar and many of them are asking for our support for them in both sectors.

In order to do this we have expanded our solar team over the past year. We are currently working on a solar project with an existing wind customer and we are also in discussions for four solar projects with our existing wind customers -- and are looking at a number of other potential solar projects in the future.

While none of the potential projects is included in our backlog, we believe that we are in a strong position to significantly grow our solar market share during 2018 and beyond.

Although our emphasis in recent years has been on renewable energy, we have a long history in the civil, industrial and power markets and we will be working to drive growth in these areas going forward. Project opportunities in these sectors abound throughout our operating footprint and our team has significant experience and impressive resume in all of these markets.

As I previously mentioned, we held more than 70 years of relationships and work experience in these sectors. And our efforts to capitalize on opportunities in the heavy civil, industrial and traditional power markets using our broad range of engineering and construction capabilities have met with encouraging success.

We believe this work represents a significant growth opportunity for us and we expect it to become a more significant percentage of our overall revenue mix over the next several years.

In addition to top-line revenue growth, we are also focused on increasing margins in our current business lines by expanding our ability to self perform a greater portion of our projects. In simple English this means we are building our internal capacity to do more work on our projects ourselves, rather than subcontracting that work out to others. This should create a greater revenue and profitability opportunity for us on each project and give us greater control over the successful execution of a job.

Although we currently self perform in many construction trade specialties, our initial focus for expansion of our capabilities is in the medium and high voltage electrical work and we are ramping up this effort over the next two years to ensure that we get it right for our customers. We expect this effort will contribute approximately $5 [million] to $8 [million] of incremental adjusted EBITDA during 2018 before we expand the program further in 2019.

Finally, I want to note that strategic M&A is a critical component of our growth plan. We are actively seeking M&A opportunities for our existing business lines in adjacent sectors that will be accretive growth to our results by 2019 if not sooner.

We will be disciplined in our efforts and we have identified multiple attractive targets spanning all of our markets and believe that we have several opportunities to increase our share of the renewable E&C market and gain critical mass in the adjacent markets that we have discussed. Although no assurance can be given as to timing, we are optimistic we will complete a transaction during 2018.

Andy Layman, our CFO, will give more detail about our financial performance in a minute, but I first wanted to say a few words about Q1 and our expectations for the remainder of 2018.

The first quarter of the year is always seasonally low and development activity through the industry slowed at the start of this year as developers and others tried to figure out impact to their businesses of the new federal tax legislation at the end of 2017, and the new solar import tariffs that were enacted at the start of 2018.

From all that we are seeing, however, the slowdown in the wind industry caused by these changes is now over and we are expecting a robust business development activity for the remainder of the year and for 2019.

Our Q1 revenue of $50.1 million was in line with our expectations and we expect revenue to accelerate dramatically as we move into our traditional busier quarters. We continue to believe our 2018 revenue and adjusted EBITDA will be in the range of $775 million to $835 million in revenue and $75 million to $85 million of adjusted EBITDA.

We are conducting this call from the America Wind Energy Association wind power conference here in Chicago Illinois, which is the largest wind energy conference in the world. This is an event where IEA showcases its capabilities and where many new project deals originate. So we have had many customer meetings over the past few days.

I can tell you that our excitement over the increasingly attractive economic opportunity that wind power represents is mirrored by everyone we have spoken with here and demand for our services in the wind industry remains very strong. With record levels of backlog for 2018 and 2019, and with a pipeline that is growing rapidly, all indications are that we will have a very busy 2018 and 2019 -- is likely to become even busier.

Our current backlog of 2018 of approximately $670 million already covers nearly 85% of our expected full-year revenue of $775 million to $835 million. And our total backlog is over $1.1 billion. We have had a stable but growing market share in the wind business over the past few years and, if we just win our current market share of the business that is in our pipeline, then the next couple years is going to be very busy for us.

Fortunately we have a spectacular team here at IEA that knows how to scale up quickly when business accelerates. So, I am confident that we can handle this business and that we will continue to deliver projects for our customers on time and on budget.

I visit our job sites regularly and I meet frequently with IEA staff at all levels. And I can assure you that the entire IEA team is excited and delivering great results for our customers and for our new shareholders.

Now I'd like to pass this call to our CFO, Andrew Layman, who will review our first-quarter 2018 results and discuss our guidance in more detail. Andy?

Thanks, J.P., and thank you all for joining our call. First of all, our business is characterized by very pronounced seasonality with the least project activity taking place in the first quarter due to winter weather conditions throughout much of our operating footprint. The second quarter is usually our next slowest and with the third and fourth quarters our busiest and highest revenue periods.

Beyond seasonality revenue in the first quarter of 2018 was impacted by project timing headwinds brought about by federal legislation in the form of a new tax code and solar import tariffs, which J.P. discussed.

I am pleased to report that our revenue for Q1 of 2018 was $50.1 million despite the impact of the new tax code and tariffs. Although this represents a decrease of 4.1% or $2.1 million when compared to the same period in 2017, it was an increase of $2.6 million if you exclude the impact of a $4.7 million settlement with a key customer.

Although we believe that the amount that we settled was contractually owed to us and that we could have collected the full amount, we decided that it would be better for us in the long term to keep this customer happy and settle the dispute. Doing so both preserved the relationship with this important customer and enabled us to win another project from them that otherwise would likely have been lost.

As J.P. noted, our revenue for the quarter was in line with management's expectations for what is always the lowest revenue quarter. More importantly, as we sit now in the middle of the second quarter, we are seeing revenues grow strongly in the wind business as our customers make up lost time and we expect this trend to continue for the remainder of the year.

Our gross profit was negative $3.1 million in the first quarter of 2018, reflecting the effect of the customer settlement that I described a moment ago. If you exclude this settlement, first-quarter gross profit would have been $1.6 million, or a gross margin of around 3%, which reflects the lower volume in 2018 first quarter resulting from the pause in the wind and solar activities that we saw as a result of the tax and tariff legislation.

Additionally, the first quarter 2017 benefited from favorable project closeouts which created unusually high gross margin in 2017 as we realized roughly an incremental $6 million when compared to our normalized gross margin rate -- because our first-quarter gross margin is typically significantly below our annual rate, and we continue to target a gross margin of 12% to 14% for the full year as we benefit from project closeout and change orders that traditionally accelerate as we move into Q3 and Q4.

Before moving on to other financial results for Q1 of 2018, I want to note that our gross profit for Q1 also was adversely impacted by unabsorbed equipment costs relating to the capital lease program for heavy equipment that we implemented at the end of last year. This is expected to be a recurring item in the first quarter of the coming years when revenue is low and equipment utilization is down. But the program should offer substantial benefit to us on an annual basis.

Moving back to our first-quarter 2018 financial results, SG&A was $17 million, which included approximately $7.6 million of costs related to our merger transaction. Excluding the transaction-related costs, SG&A was approximately $9.4 million, which is a good run rate to consider when thinking about our quarterly SG&A for the balance of the year.

Although this is above our $6.1 million run rate in Q1 2017, the increase is attributable to the investment we have made in personnel over the last year to jumpstart our solar business and high voltage self perform capabilities, and we are already seeing the return on those investments in 2018.

Interest expense of $851,000 relates to our borrowings of approximately $36 million on our $50 million revolver, which is part of our new credit facility along with a $50 million delayed draw term loan on which we have a balance of approximately $24 million. Our interest rate for the quarter, which is based on LIBOR plus 3 point spread, was approximately 5.8%.

In addition to the more than $34 million of committed undrawn availability under our credit facility, we also closed the quarter with nearly $20 million of cash and cash equivalents, leaving us with approximately $55 million of dry powder.

In terms of cash flow, we generated nearly $15 million of operating cash flow in the first quarter, which is largely the result of payments we receive from customers in preparation for the startup of projects. Our capital expenditures in the first quarter were minimal at about $200,000. We expect the CapEx for the year to be approximately 2% of our revenues. We also have capital leases of approximately $19 million which predominantly relate to equipment that we use on job sites. In all, expectations for 2018 remain unchanged.

As we disclosed in our earnings release this morning and J.P. told you earlier, we continue to estimate that our revenue will be in the range of $775 million to $835 million, which represents approximately 80% year-over-year growth at the midpoint of the range, despite the project commencement delays that J.P. and I previously discussed.

We also anticipate that our adjusted EBITDA for 2018 will be in the range of $75 million to $85 million, representing year-over-year growth of approximately 52% at the midpoint of the range.

Regarding pretax free cash flow, which we calculate as adjusted EBITDA less CapEx and capital lease payments, we are targeting approximately $50 million to $60 million for the year. We expect our effective tax rate for the year to be roughly 27%.

In all we are looking forward to a strong 2018 and early indicators are that we should have even a stronger 2019. I now turn the call over to the operator for Q&A portion of the call.

(Operator Instructions). Paul Penney, Northland Capital.

Great job on your first call. I fully understand the seasonality in Q1 and the tax reform push outs, but your sizable year-end revenue guidance at the midpoint assumes Q1 revenues will essentially quadruple on a run rate basis. So can you just give us a better feel for -- and comfort in terms of having the right teams in place to handle this ramp? How many approximate projects this represents? And maybe an early read into Q2 with the activity in April and early May.

So this is Andy, I will take that call. That's a good question. So we are a business that is positioned to ramp very significantly and we are currently ramping our business to the levels that will allow us to hit our revenue guidance. So, that represents about 13 to 14 projects and that's what we do. We will ramp to those levels. We've done it in the past and we'll do it again this year and we expect to continue to grow going forward.

And I would just add that the ramp up on a quarterly basis is very traditional for the business and the ramp up that we are witnessing here in 2018 is something we've similarly witnessed in the past, most recently in 2016.

And just to get to the other part of your question, so Q2 is our second lowest quarter and then we'll ramp to the top volumes in Q3 and Q4.

Okay, great. Thanks. And then you have national scale and obviously you are the market share leader in utility scale wind. Can you give us a feel for how much of this is leveragable into solar both in terms of winning RFPs and from your specialized employee base?

First of all, from a winning RFP stage I think I talked a little bit in my comments; our strategy in the solar space is to identify our key wind clients that are entering solar and there's many of them. And we don't have to duplicate this development effort. We don't have to create all new relationships; they are already intact. And simultaneously those customers are also coming to us because they don't want to have to develop new relationships.

So, from that standpoint, although we expect to participate in the industry as a whole, we are certainly concentrating on our existing wind customers as a priority.

Second to that -- both from a project management standpoint and from a craft labor standpoint, skill sets between wind and solar are very, very interchangeable. So, you'll find many of our field project management staff is -- not only do they have a lot of wind experience, they have a lot of solar experience that they've gained either here internally at IEA or previously in their career.

So, we will interchange project management staff from wind and solar and levelize our resources. We'll certainly staff up solar so we have the adequate resources and not take away from the wind side of our business. But we do have the capability of running resources back and forth to both sides of the house, if you will.

From a craft labor standpoint, the actual workers in the field, we also -- we find many of our wind experience to iron workers and laborers and such also have -- their skill set transcends to solar as well. And already here on the solar project that we've staffed up here in Q1, we've staffed it with many of our wind crews that otherwise would have been idle here in Q1 2018. So, that works out very well for us from a resource levelization standpoint.

Okay, great. And switching gears, in terms of your external growth plans in solar and civil, can you give some general ranges in terms of expected EBITDA multiples you're looking to pay? And over time do you believe having a public currency is an advantage to prospective sellers?

Yes, our plan is to target companies that we can acquire in the 4X to 5X multiple range. Certainly we believe and our plan is our first few acquisitions are definitely going to be cash type acquisitions. Certainly over time the ability to develop the [use of] public currency we expect to do that and expect to use that. But certainly here in the near-term our first handful of acquisitions are going to be cash acquisitions.

Okay, great. And the last one for Andy, touching back on the low capital intensity nature of your business, can you give us more color in terms of the EBITDA, the free cash flow flow-through or ratio? And how do you expect that to come about on a go-forward basis?

Yes, thanks, Paul. That's a good question. Our business is a very cash favorable business. We receive a 5% to 10% cash payment at the front end of our contracts. So, once we sign a contract we'll get a down payment and then milestone payments along the terms of the contract.

So, our projects generate cash flow from beginning to end. We are able to run the business at a negative net working capital which allows us to generate 70% to 75% of our -- flow 70% to 75% of our EBITDA to free cash. So, it's a terrific cash flow model and provides a great return on investment.

Thanks a lot. That's all I had. Thanks, Andy. Thanks J.P.

Ladies and gentlemen, that is all the time we have for Q&A today. I would now like to turn the floor back over to management for closing.

Thank you. Once again thank you for your interest in IEA. We are confident in IEA's business platform and believe the Company has the team, resources and strategy to drive shareholder value. We look forward to keeping you apprised of the Company's developments.

As a final note, I'm proud to say that IEA will be participating in the Stifel Cross Sector Insight Conference for Consumer, Industrial, Media and Technology located in Boston in June. And we hope that any of you who are attending will stop by to introduce yourselves. Thank you and have a good day.