Infrastructure and Energy Alternatives Inc (IEA) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Infrastructure and Energy Alternatives' 2018 Second Quarter Conference Call. At this time, I would like to inform you that this conference is being recorded. (Operator Instructions)

Before turning the call over to JP Roehm, Infrastructure and Energy Alternatives' President and Chief Operating 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.

Now I will turn the call over to JP Roehm.

Thank you, operator. Good morning, welcome, and thank you all for joining us for IEA's Second Quarter 2018 Earnings Conference Call. Having closed our transaction with M III Corp. in late March, we have now completed our first full quarter as a publicly traded company, and appreciate this opportunity today to discuss our dynamic business model and growth strategy with you.

In addition to covering our quarterly results, we will also provide you with an update on the progress we are making towards achieving our long-term growth plans. I especially look forward to sharing the details of the acquisition of Saiia and the ACC Companies that we just announced this morning. We welcome Saiia and the ACC Company employees who are listening to our call today, and look forward to welcoming you soon to the IEA family.

Saiia and the ACC Companies are our first acquisition as a public entity and is an important step in the realization of our long-term growth strategy. We are tremendously excited about their strategic fit with IEA. The boards of both companies recognized the complementary potential of the combination and unanimously approved this transaction. I will tell you shortly why we think it is a big win for our company and our shareholders, but let's first turn to the quarter.

We delivered strong revenue for the second quarter and saw a 64.2% increase in our top line when compared to the same quarter last year, and a 247.2% increase compared to Q1 of this year. The year-over-year increase demonstrates our leadership position in a growth industry, and the increase over last quarter reflects a strong version of our customary seasonal ramp-up of construction activity in the second quarter.

That said, our revenue growth did not fully translate into similar year-over-year growth in our adjusted EBITDA for several reasons. The primary constraint was that Q2 of last year, we had a higher number of projects in the late phase of construction than we had this year. As a general rule, the majority of our projects begin in Q2 as the winter weather subsides, and reach completion by the end of the year. As you might expect, margins for our projects generally improve over time as projects get closer to completion and execution risk diminishes.

Last year, we had a situation where 2 projects ramped counter to our normal cycle in that they began in late 2016 and finished construction in Q2 of 2017, thereby providing higher margins for Q2 2017. This year, our construction pattern has followed our normal trend, with most of our projects being in the initial stages of construction during Q2, and thus, we do not expect to realize the additional margin until projects near completion over the remainder of the year.

In addition, our adjusted EBITDA for the quarter was adversely impacted by extreme weather, particularly in Iowa, Nebraska and South Texas, which made it unsafe to operate our cranes to lift turbines into place. This forced us to suspend work for short periods at a number of our job sites during Q2, which reduced working days and negatively impacted adjusted EBITDA. While we expect that these stoppages will be partially offset through contractually entitled change orders with customers that are now being negotiated on a case-by-case basis, these payments have not been finalized, and thus, are not reflected in our margin for Q2.

Finally, I should note that the strong growth we are seeing in construction demand is creating -- is starting to create inflationary pressure on costs, primarily labor, as skilled craft labor are in very high demand. To be clear, this is not materially impacting our ability to staff our jobs, and our constant focus on safety and being an employer of choice helps us here, but the same strong demand for our services that is driving growth in our revenue is, to a lesser extent, creating modest pressure on margins.

Separate from Q2, we expect that our full year results for 2018 also will be constrained by the delay in construction starts in the early part of this year that were caused by the new federal tax laws and tariffs. As we discussed last quarter, we saw a large number of project starts pushed out in early 2018 as customers looked for more clarity on the status of federal tax credits and solar import tariffs. That trend continued at a slower pace in Q2 as 2 of our large wind projects originally slated for late 2018 construction have been pushed out a few months. So they will now begin in construction in early 2019. To be clear, this is just a timing issue because we will be building these projects and the revenue and margin will be realized by us, but just a little later than we had initially planned.

Taking into account these short-term headwinds, we think it is appropriate to reduce our 2018 guidance for revenue, adjusted EBITDA and adjusted free cash flow expectations. While we expect the gross margins will improve over the year as more projects near completion, we do not expect sufficient improvement to overcome the factors that I described a few moments ago.

We do, however, have solid visibility into 2019 as our backlog, which is currently $1 billion, is expected to grow from 2019 and '20 by the end of the year. We also expect our pipeline of high-probability wind and solar projects, currently sitting at over $1.2 billion, to continue to grow.

So overall, we do not expect the headwinds that we faced earlier this year to carry over into 2019, and we remain very optimistic about our long-term outlook and our ability to create value for our shareholders.

As our strong year-over-year revenue growth shows, we are successful growing IEA through organic initiatives. We are taking advantage of the strength of the renewables market to increase our wind construction revenue, and we are leveraging our existing relationships and skills to grow our share of the utility-scale solar construction market. These organic growth initiatives are starting to bear fruit, and we expect that they will continue to contribute to our financial performance in the coming quarters and years.

On the solar front, we are currently working on one project with an existing wind customer and are also in discussions to begin 4 additional solar projects in the near future. While none of these potential projects are included in our backlog, we believe we're in a good position to organically grow our solar market share in 2019 and beyond. We are, however, actively looking to accelerate this growth through the acquisition of companies in the solar end market that fit with our overall business strategy.

In addition to growing revenue, we are focused on increasing margins at our current business lines by expanding our ability to self-perform our projects. In simple terms, we are planning to do more of the work on our projects with our own staff rather than subcontracting that work out. We currently self-perform all aspects of our work, other than medium- and high-voltage electrical work. As the installation of high-voltage electrical is a very specialized skill set, we have made strategic hires in this space to expand our expertise. This new expertise is supplemented by our current workforce, and we are also looking to acquire companies that will enhance our ability to self-perform this type of work. This should lead to increased revenue, improved profitability, and greater control over the successful execution of each job. We expect that this initiative will contribute up to $10 million in incremental adjusted EBITDA in 2019, even without any M&A.

Separate from our organic growth initiatives, we have previously announced our plans to execute a long-term strategy to expect -- to expand our heavy civil and solar construction market share through strategic acquisitions that add to our specialized engineering capabilities. Specifically, we are looking for companies that have the following key attributes: Growth in markets that deepen and diversify our core capabilities and service offerings; additional expertise that are synergistic with our current skill set; expansion of our geographic footprint; proven management teams; and finally, in the perfect world, reoccurring revenue streams. I am therefore very pleased today that our proposed acquisition of Saiia and the ACC Companies offers each of these attributes and that our agreement to purchase Saiia and the ACC Companies comes at an attractive valuation.

By way of background, Saiia operates in the Southeast region of the United States. It provides industrial maintenance and environmental services for commercial and industrial customers in the power generation, mineral and aggregate mining, manufacturing and pulp and paper markets. These services are performed for a private customer base, with a significant portion of the revenue derived from 3- to 5-year exclusive recurring contracts or projects.

The ACC Companies is a leading full-service civil contractor for some of our nation's most challenging infrastructure and industrial projects. The ACC Companies focus on the Mountain West, the West Coast and the Southwest, providing high-altitude road and bridge construction, complex bridge rehabilitation and specialty paving for state and local government clients.

Saiia's long-term revenue base from private clients, combined with the ACC Companies' focus on publicly funded projects adds predictable, stable, and most importantly, recurring revenue streams to our company. In addition, IEA does not currently perform environmental remediation services, and we believe that the addition of Saiia will help us enter this new and valuable market.

We're excited about both the near and the long-term opportunities this acquisition will provide, and are confident that it will result in enhanced value for our stockholders without compromising our balance sheet stability or the quality of our work. In addition, the overlap in labor, skills and equivalent between Saiia, the ACC Companies and IEA will improve our ability to efficiently deliver full turnkey solutions to solve some of the most complex and critical infrastructure and environmental projects for clients across the country. We expect this acquisition to close on or about the end of the third quarter, and we are working closely with Saiia and the ACC Companies' corporate team to ensure a smooth transition.

I want to emphasize that this acquisition is just the first step towards achieving our long-term goal and diversification goals of the business. It enhances our core heavy and light civil infrastructure capabilities, adds new end markets and capabilities in industrial and environmental services and extends our geographic footprints in the Western and Southeastern United States. It is a great example of how we can use M&A to diversify and expand our business and to create shareholder value. And we continue to actively look for additional companies that meet our acquisition criteria.

I'm excited about the future for IEA. We are already a leading builder of wind energy projects in the United States and have a growing presence in utility-scale solar construction at a time when renewable energy accounts for more than half of all new energy capacity additions in the country.

We have a strong track record for delivering projects on-budget and on time. We will continue to deliver top-notch engineering and construction services to each of our customers. We also have the opportunity to reach new customers and to more effectively utilize our resources through the proposed acquisition of Saiia and the ACC Companies.

So in summary, despite some short-term headwinds in the first half of the year, we remain very confident in our business plan, and believe that we have the right team and the right resources in place to deliver long-term value to our shareholders.

Thank you for your time. I will now turn this call over to Andy Layman, our CFO, to discuss our second quarter results and acquisition financials in further detail. Andy?

Thanks -- thanks, JP. Before I discuss the quarterly results, I'd like to provide additional detail on our anticipated acquisition of Saiia and the ACC Companies. This will be an all-cash transaction for approximately $145 million. The purchase price will be financed through a new credit facility, and we have a commitment letter in hand for the full amount of this facility. And as JP said, the transaction is expected to close on or about the end of the third quarter, subject to customary closing conditions.

Upon closing, Saiia and ACC Companies are expected to add approximately $265 million to our backlog, with the majority of this being in environmental remediation projects and heavy and civil -- light civil infrastructure construction. And this would be incremental to our current IEA backlog of approximately $1 billion.

If the transaction had closed on January 1 of this year, and based on IEA's new guidance for 2018, we would have a combined revenue of approximately $1 billion with adjusted EBITDA of approximately $100 million, and greater opportunity than ever before for continued growth and further diversification of our end markets, customers and geographic reach, while creating significant value for our shareholders. We expect this -- that this acquisition will contribute revenue of approximately $295 million to $315 million, and adjusted EBITDA of $32 million to $36 million during its first full year as part of IEA.

With a purchase price of approximately $145 million and projected annual adjusted EBITDA of approximately $34 million, the acquisition is being made in a 4.3x multiple of adjusted EBITDA. This multiple does not include at least $5 million of annual cost savings that we expect within 18 months after close of the transaction coming from improved utilization, longer-term financing of equipment, integrated insurance programs and integrated financial and IT systems.

As a combined entity with nearly $1 billion in revenues, we also expect to have an improved access to additional bonding and letter of credit capacity to support further organic and acquisitive growth. We believe that this acquisition is an important step forward in executing our long-term growth and diversification strategy and demonstrates our commitment to implementing this strategy in a manner that enhances shareholder value over both near term and long term.

I will now turn to the second quarter. As JP noted, we reported strong revenue for the second quarter, totaling $174.1 million, an improvement of 64.2% over the second quarter 2017. Our strong revenue for the quarter was driven primarily by general growth in our industry, but was also helped by the spillover of projects that were originally slated to begin construction in the first quarter and then were delayed by the developer to the second quarter because of uncertainties surrounding the new tax code and tariff legislation.

With concerns about federal tax credits and solar tariffs behind us, and the harsh -- and as the harsh weather that JP described began to subside as Q2 progressed, we and our customers worked hard to make up for lost time, and we saw projects ramp up strongly in the second quarter.

As JP mentioned, strong year-over-year revenue growth did not translate into comparable profitability with prior year, but was still -- but we still saw 28.4% growth, as our adjusted EBITDA grew to $15.5 million, including an add-back of approximately $3.4 million on account of the settlement of customer dispute that we disclosed last quarter.

JP has already outlined the factors that made Q2 2017 unusually strong and the specific factors that adversely impacted adjusted EBITDA for Q2 of this year, so I won't repeat them now, other than say, that we do expect to see margin improvement as the year progresses.

Second quarter gross profit was $16.8 million or 9.7% of revenues, which on a dollar basis, increased 18.3% year-over-year due to the higher volume of work that, as a percentage of revenue, decreased by 370 basis points compared to the second quarter of 2017. As I mentioned a moment ago, we expect gross margins to increase over the course of the second half as we traditionally benefit from project closedowns and change orders in the third and fourth quarters. And we are targeting gross margins in the range of 11% for the full year. Although this is lower than in prior year, it is the result of the factors that JP previously described and the customer settlement that we announced in Q1.

SG&A for the quarter totaled $9.2 million, including approximately $800,000 of costs related to our merger with M III Acquisition Corp. Excluding these transaction-related costs, SG&A was consistent with SG&A in the prior period. We anticipate SG&A of between $8 million and $9 million per quarter for the remainder of the year, not including any incremental SG&A that will be associated with the current acquisition or other acquisition-related activities.

Net income for the quarter was $4.9 million or $0.14 per diluted share compared to $3.6 million or $0.17 per diluted share in the prior period. Weighted average shares outstanding increased to 34.4 million from 21.6 million during the second quarter due to the completion of the merger with M III Acquisition Corp.

Interest expense totaled $1.5 million for the quarter, up $352,000 in the second quarter of 2017. This increase was the result of higher interest rates due to increases in LIBOR and average -- and higher average borrowings on our $50 million revolver and our $50 million delayed-draw term loan. Our interest rate for the quarter, which is based on LIBOR plus 300, is approximately 5.8%.

Provision for income taxes was $1.2 million, down from $2 million in the second quarter of 2017. The effective tax rate for the quarter was 19% compared to 36% in the prior year's quarter. The decrease in effective tax rate in the quarter of 2018 when compared to the second quarter of 2017 was due to the reduction in the federal corporate tax rate effective January 1, 2018. We expect our effective tax rate for 2018 will be in the range of 26% to 28%. The actual annual effective tax rate will vary depending on the mix of our taxable income by state.

Cash flow from operations for the quarter was $13.3 million compared to $12.3 million in the prior year period. The year-over-year improvement in cash flow was due to the higher net income and strong cash management practices.

Capital expenditures for the second quarter were $1.5 million. We expect CapEx for the year to be approximately 2% of our revenues.

Now turning to the balance sheet. As of June 30, we had $23.8 million in cash and equivalents and total debt of $57.2 million, including $34 million outstanding on the revolving credit facility and $23.2 million on our delayed-draw term loan. In addition, we have capital leases of approximately $21 million, which predominantly relate to equipment we use on job sites.

The total available under our credit facility at June 30 was $36 million, plus a $25 million accordion feature on the credit facility. And when combined with our cash on hand, leaves us with approximately $85 million of dry powder to invest in both our organic and M&A growth opportunities. I should note, however, that our existing credit facilities will be replaced with a new credit facility in connection with the closing of the Saiia and the ACC Companies transaction.

Backlog as of June 30, 2018, totaled $1 billion, up significantly from our $348 million as of June 30, 2017, due to a number of significant contract awards that we have received over the last 12 months. For reference, we define backlog as the sum of 3 things: One, the amount of revenue expected to be realized on uncompleted portions of existing awards and contracts, including contracts for which work had not yet begun; second, awarded contracts for which the project documentation is being prepared; and third, expected revenue from change orders and renewal options. Our current backlog, or backlog we expect to convert to revenue this year, totals $428 million, and along with the revenue through Q2, covers 92% of our expected full year revenue, based on the midpoint of our guidance range.

I'd now like to provide an update on our guidance for the year. Please note that unless otherwise noted, our guidance estimates do not take into account the impact of Saiia and the ACC Companies or any additional acquisitions that we may incur -- occur in the second half of 2018. For full 2018, and excluding Saiia and the ACC Companies, we now anticipate revenue of approximately $685 million to $730 million. At the midpoint of the new range, our revenue guidance is an increase of 56% year-over-year. Including Saiia and ACC Companies' expected contribution in the fourth quarter, we expect revenue in the range of $740 million to $795 million for the year.

We anticipate that adjusted EBITDA, without including acquisition, will be in the range of $64 million to $70 million for the year or 27.6% year-over-year growth at the midpoint of the range. Assuming that the acquisition closes at the end of the third quarter as planned, Saiia and the ACC Companies are expected to add approximately $5 million to $7 million of adjusted EBITDA to the fourth quarter, bringing adjusted EBITDA guidance, on a combined basis, to $69 million to $77 million.

Regarding adjusted free cash flow. We calculate adjusted free cash flow as adjusted EBITDA, less CapEx, capital lease payments, interest and taxes. We are targeting approximately $40 million to $45 million for 2018, not taking into account the Saiia and the ACC Companies acquisition.

The result of all this is the combination of IEA, Saiia and the ACC Companies creates a business with approximately $100 million of combined adjusted EBITDA calculated as described previously. It also creates a more diversified revenue base, creates better scale for us and firmly sets us on a path for continued growth.

We promised in March, when we became public, that we would work quickly to diversify and grow our company. And the combination of IEA, the ACC Companies and Saiia shows that we are well on our way to doing that.

I'd like to thank you for your time today. And that concludes our prepared remarks. We Will now open the call for questions from sell-side analysts. Operator?

(Operator Instructions) Our first question comes from Paul Penney of Northland Capital.

Congrats on the acquisitions. Just a few follow-ups there. In terms of the -- it looks like there's an implied EBITDA margin of 11% to 12% on the numbers that you provided. Maybe give us more color in terms of where do you expect cost and revenue synergies from the deal as you progress. And also maybe touch on the interest rate on the new credit facility.

Yes. So this is Andy. I'll take that question to start, and then JP can help. There's quite a lot of opportunities for synergies from the transaction, especially around the equipment area. Saiia and ACC have very strong overlap from an equipment perspective with IEA, so -- and they also have strategic locations in -- across the United States that will help us to better utilize our equipment. Also besides equipment, there's some significant synergies that we expect to derive from integration of our financial and IT systems. So those are the primary synergies. I mean, they are both companies that have very strong management teams in place and perform very well, as you indicated, from a margin perspective. The new credit facility is expected to have interest rates in LIBOR plus 5% type range.

Okay, great. And in terms of future acquisition opportunities, are you seeing them around the same -- similar multiple that you paid here?

Yes. Our philosophy on multiples haven't changed since any previous guidance we've provided, Paul. So we would expect future acquisitions, near term, to be in a similar multiple range.

Okay, great. And then maybe you can just talk about the core business in terms of -- maybe crew dynamics, in terms of how you've ramped your crews and your capacity. And maybe a sneak preview into Q3, which should be your biggest quarter. And then, are there any -- can you transfer some of your crews between your wind and solar projects?

Yes. Wind and solar crews are fairly interchangeable. We've done that in the past. Currently, the one project that we mentioned previously that we're in the field right now is entirely made up a crew that came from a wind project. So yes, they're very interchangeable. And as the market continues to accelerate into 2019 and '20, whether it's wind or solar, we'll look to transfer those, the resources, whether they be management resources or craft labor resources, back-and-forth between both disciplines.

And then, just from a -- kind of sneak peek into the next quarter or so, I would just say that as we commented, Q2, we began to really ramp on our projects at the very end of the quarter, kind of mid to the end of the quarter. And at this stage, we are at full ramp on, basically, all the projects that we're building this year. And potentially, we'll have some additional projects that will start at the back end of the year. But the ones that are in construction, they are at full efficiency.

Great. And then one follow-up on the acquisition. Does it have a similar-type CapEx profile versus your existing base business?

Yes, we expected to have a similar kind of maintenance CapEx profile. As we noted, one of the core synergies is our ability to take the equipment and utilize them across the organization in a more efficient way and as well to have the ability to secure equipment on longer-term basis. But certainly, on an ongoing basis, we expect it to be a similar profile.

Great. And then last one from me. You've seen corporates and big corporates, like Google and Microsoft and others, become their own independent power producers. Are you seeing that -- do you think that trend will continue? And is there any way for you to get a piece of that business going forward?

Yes. They just -- that's literally on fire right now, that the corporate's sustainability power purchase agreements are -- it seems like they increase incrementally by the quarter. We -- I think they will -- we're waiting on some information that we could release publicly. But the trends that we're seeing in the industry is a continued increase in that -- in corporate sustainability. And the way that we take advantage of that is those folks, the Googles, the Microsofts, the Apples, they're contracting with our end customers, the developers that we work for. And yes, that's driving quite a bit of our backlog and certainly is attributing to the activity that we're seeing in 2019 and '20, in addition to traditional utilities entering into renewable power purchase agreements.

Ladies and gentlemen, we have reached the end of our question-and-answer session. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.