Infrastructure and Energy Alternatives Inc (IEA) 2019 Q4 法說會逐字稿

Good morning, and welcome to Infrastructure and Energy Alternatives' Fourth Quarter and Full Year 2019 Conference Call. (Operator Instructions) And with that, I will turn the call over to Kimberly Esterkin, Investor Relations for IEA. Kimberly, please go ahead.

Hello, and thank you for joining us today to discuss IEA's fourth quarter and full year 2019 financial results. With us from management are JP Roehm, Chief Executive Officer; Pete Moerbeek, Chief Financial Officer; and Michael Stoecker, Chief Operating Officer.

Before turning the call over to management, I would like to note that today's discussion contains forward-looking statements about IEA's future growth and financial expectations. Any forward-looking statements should be considered in conjunction with the cautionary statements in yesterday's press release and the risk factors included in the company's SEC filings. Except as required by law, IEA undertakes no obligation to update its forward-looking statements after today's call.

Since management will be presenting some non-GAAP financial measurements as references, including adjusted EBITDA, the appropriate GAAP financial reconciliations can be found on the Investors section of the IEA's website as well as in yesterday's press release.

And with that, I'll now turn the call over to IEA's Chief Executive Officer, JP Roehm. Please go ahead, JP.

Thanks, Kimberly. Good morning, and thank you for joining our fourth quarter and full year 2019 earnings conference call. We appreciate your continued support of IEA. As we announced yesterday, we are pleased that Matthew Underwood of Ares Private Equity Group has been added to our Board of Directors. Ares has been a great financial partner of IEA, and we welcome Matt to our board. His experience will be a strong asset as we continue to grow IEA. I also want to thank the work of 2 directors who have recently stepped down from our board, Mo Meghji and Ian Schapiro. Their advice and guidance have been evaluable. I'd also like to welcome Pete Moerbeek to the IEA executive team. Pete joined IEA with over 3 decades of experience in executive, financial and operational leadership positions across the engineering, construction and utility industries, most recently serving as Executive Vice President, Chief Financial Officer and Director at Primoris Services Corporation. Pete has been an adviser to our Board of Directors since February 2019. So we are expecting a seamless transition. I look forward to working with Pete as we begin the search for our permanent CFO. You will have an opportunity to hear Pete later in this call.

Let me now turn to a summary of our results. 2019 was a year of progress for IEA. Full year revenues of approximately $1.5 billion were a record, improving 89% year-over-year as we almost doubled in size. Even excluding the impact of our 2018 acquisitions, revenues improved 16% year-over-year. As a result, IEA is entering 2020 on solid footing with the ability to generate continued growth across both the renewable and specialty civil end markets.

To take advantage of the growing business opportunities ahead of us, it was essential that we improve our liquidity, and we have done so. Over the past 8 months, we executed a recapitalization effort, which included the issuance of Series B preferred stock, warrants and a public rights offering. In total, we have raised $180 million.

The funds received from our financing efforts have been used to improve liquidity and reduce our debt by approximately $164 million.

I will leave it to Pete to speak further to this topic. Over the past 17 months, we've diversified our service offerings. Today, IEA can provide clients with EPC capabilities across the wind, solar, civil, rail construction, power delivery and environmental end markets. Our qualified and experienced teams could still perform virtually the entire project -- scope for projects in our end markets. We are starting to see some of the benefits of our diverse capabilities. New awards during the fourth quarter translated into a very healthy backlog of $2.2 billion at the end of December, providing us great visibility as we enter 2020.

Since the end of the third quarter, we received over $220 million of new business unrelated to wind construction. One of the key benefits of our diversified platform has been the significant overlap in labor, skills and equipment across each of our businesses. With the integration of our 2018 acquisitions now basically complete, we can capitalize on the scale and capabilities that we gained from these strategic transactions by deploying resources efficiently throughout the entire organization. This synergy is one of the reasons that we can still perform work on a much greater portion of our projects, thereby reducing the need to subcontract and ultimately, improving our margins.

Finally, in 2019, we were very fortunate to make a number of key hires that strengthens the management team at IEA, one of those hires was Michael Stoecker, who is our first Chief Operating Officer. Mike's a 35-year construction veteran. He has made an immediate impact. And operationally, our teams have improved the performance and predictability of our projects.

I'm turning the call over to Mike, so that he could discuss some of these operational improvements. Mike?

Thanks, JP. It's great to have the opportunity to speak with everyone today. Since joining IEA last April, I've worked to implement systems and control mechanisms to efficiently manage our projects and ensure more predictable, reliable results and execution for all of our stakeholders.

During the year, we embarked upon the process of consolidating our 5,000-piece equipment fleet into one common tracking and maintenance system. We are improving fleet management with a goal of maximizing utilization. At the same time, we organized our fleets, we began the initial stages of managing the workforces, both craft and supervision throughout our operating companies to reduce downtime and improve utilization by redirecting our teams to different parts of the company as needed.

We implemented real-time project control software tools designed to help our project teams better forecast labor production, manage changing project conditions, such as weather or other delays and ultimately, better forecast project profitability.

We are taking a much more proactive stance in addressing and resolving project change orders and claims. We believe that this focus on change order management will help improve cash flow going forward.

In terms of risk management, we centralized our insurance claims and risk management functions into a single group for both cost efficiency and enhanced performance. We reviewed our insurance contracts to ensure that IEA is properly prepared to address the risks of our market, while still staying competitive with our peers. One other risk we are currently tracking very closely is the COVID-19 virus. While we've received a few notices on projects where the materials and equipment are being sourced out of China, there have been no delays at this time. If manufacturers in China return to work in the near term, we do not expect to experience any significant slowdown in project work. Nevertheless, we are actively monitoring the situation and will deploy necessary actions, should factories in China remain closed.

Last but certainly not least, we remain focused on ensuring the safety of all of our employees. Over the past year, we have seen a marked improvement in our Total Recordable Incident Rate, or TRIR, and our Lost Time Incident Rate, or LTIR. Not only has this had a positive impact on IEA's ability to win future work, it means that our employees are returning home from work safe and sound each day.

JP mentioned that we have been able to generate operating leverage across our segments. So let me provide a few examples. First, our power delivery groups outperformed over $90 million of power delivery collection work on over 10 of our wind farm projects in 2019. This notable change allows IEA to better control the flow of our projects and react to changes more efficiently.

Next, our William Charles Heavy Civil group has provided resources to our wind group in the Midwest to perform road building services on our wind farm projects, thereby maximizing our overall equipment and craft utilization.

Lastly, in our transportation space, American Civil Constructors began railroad siding work for a Texas rail project that is a collaboration with William Charles and our full-service general contractor in light and heavy rail construction, Ragnar Benson. The South Texas rail project is expected to be completed in April and ranges over 200 miles from end-to-end, including extension siding in each location of approximately 8,500 lineal feet.

Normal weather patterns across nearly all of our project sites in the fourth quarter of 2019, and thus far, in the first quarter of 2020, have enabled us to continue to operate at a steady pace and begin work on a number of wind, energy and civil projects earlier in the season than in prior years.

It is clear that the sum of our parts can offer even more to our clients than their individual pieces. By leveraging our expertise across the entire IEA platform, we can achieve much greater returns for our clients and our stakeholders.

With that said, I will now turn the call over to our CFO, Pete Moerbeek. Pete?

Thanks, Mike, and thanks to everyone listening to this call. Let me begin by providing an overall perspective. IEA has been a publicly traded company for less than 2 years. In that time, we have grown rapidly. And in the fourth quarter of 2019, our annual revenue exceeded the limits that allowed us to report as an emerging growth company.

I am pleased to say that when we file our Form 10-K later today, we will have successfully adopted the revenue recognition and lease accounting standards. This result requires the hard work of many of our financial and operations teams.

Additionally, I guess it's true that old CFOs don't just fade away and don't ever say never when retiring. IEA begins 2020 with improved liquidity including nearly $150 million in cash on hand with significantly less first lien debt than at the start of last year and with a strong team focused on profitable operations. We also have the momentum of ending 2019 with a strong fourth quarter. As JP mentioned earlier, both fourth quarter and 2019 full year revenues increased significantly. The primary reason for the increase in revenue for the quarter was what didn't happen. We did not have the bad weather that affected us in the last 4 months in 2018. The better weather allowed us to complete more projects at the end of the year, which has also allowed us to hit the ground running at the start of 2020.

Gross profit totaled $67 million for the quarter compared to a loss of $9.2 million in the fourth quarter of 2018. Gross profit margins also improved to 12.9% for the fourth quarter as compared to negative 3.3% in the prior year period.

The improvement in gross profit margin was primarily due to higher margins in our renewables segment as compared to 2018, when our margins were hampered by major weather delays on 6 of our wind projects. The fourth quarter also showed that when we complete projects, we can benefit from the release of any remaining contingency estimates.

Finally, the fourth quarter also included $2.7 million, the benefit from a resolution of dispute for one of the 2018 weather affected projects.

SG&A expenses totaled $35.2 million for the fourth quarter or 6.8% of revenues as compared to $29 million or 10.6% of revenues in the year-ago period.

For the full year, SG&A expenses were $120 million or 8.2% of revenue. For the quarter, operating income was $31.7 million compared to a loss of $38.3 million in the prior year's quarter.

Interest expense for the quarter totaled $15.4 million, up from $8.1 million in the fourth quarter of 2018 primarily as a result of increased interest accrued on our Series B stock.

At the time that IEA became a publicly traded company in March 2018, we accrued approximately $70 million for the estimated cost of 2018 and 2019 EBITDA earn-outs. Those earn-outs were not achieved in either year. That resulted in a reduction of the accrual and a gain of $46.3 million in 2018 and $23.1 million in 2019. No further accruals remain at the end of 2019.

During the quarter, we recorded tax expense of $1.1 million. The interest payments made to the Series B preferred shares are considered a dividend for income tax purposes, thus, they are not deductible from taxable income.

Fourth quarter 2019 net income was $11 million or $0.31 per diluted share compared to $11 million or a loss of $1.63 per diluted share in the year-ago period.

For 2019, net income totaled $6.2 million or a loss of $0.97 per diluted share compared to $4.2 million or a loss of $2.01 per diluted share in the year-ago period.

The counterintuitive loss per share with positive income is the result of not including the reduction of the contingent consideration for the EBITDA earn-out amount as income when calculating earnings per share.

For the fourth quarter, adjusted EBITDA was $47.1 million or 9.1% of revenues compared to a loss of $18.8 million or negative 6.8% of revenues in the fourth quarter of 2018.

For the full year, adjusted EBITDA was $100.7 million or 6.9% of revenues compared to $14 million or 1.8% of revenues in 2018. Both the earnings release and slides posted on our website show the calculation of our adjusted EBITDA.

On a going-forward basis, I anticipate that the adjustments from EBITDA will be limited to the 2 expenses, which are related to the market value of our shares, stock compensation expense and the Series B preferred warrants, fair market value.

We generated cash flow from operations of $79.8 million for 2019. That is an improvement of $32.8 million from 2018. As of December 31, we had $147.3 million in cash and cash equivalents, $64.2 million of finance leases and $367.1 million of debt.

The debt consisted of $182.7 million in term loans, $180 million in Series B preferred stock, which we are required to classify as debt since it has a mandatory redemption feature and $4.4 million in commercial equipment loans.

We had 0 drawn on our $50 million credit facility at year-end. We did have outstanding letters of credit of $21 million, so that we had $29 million of available drop.

Capital expenditures totaled $29.7 million, of which $22.9 million was financed through financing leases. This total is in line with our expectation that capital expenditures would be approximately 2% of annual revenues.

In the last 8 months of the year, IEA completed a number of capital raises that increased financial flexibility and resulted in a step down of interest and distribution rates on our term loan and outstanding Series B preferred stock. Due to these initiatives, we saw an improvement in our Moody's credit rating and improved availability of bonding to support our growing business pipeline.

After raising $100 million capital through August with the help of our financing partners, Ares and Oaktree, in November, we closed on another $80 million funded by Ares. That $80 million was used to reduce borrowings on our term loan, lowering our fixed charge by approximately 47%.

The loan payment also triggered a step down in our term loan interest rates and reduced interest rates on our Series B preferred stock. It also lowered our leverage ratio at year-end.

Our term loan net senior leverage ratio was less than 1, a very significant reduction of where we were at the end of the third quarter. We are on a path toward financial stability.

Backlog as of December 31, 2019, totaled $2.2 billion, a decrease from $2.6 billion in the third quarter. This sequential decrease in backlog is consistent with the seasonality of our business as we burn off revenue and complete final project closeouts at the end of the calendar year. While we may no longer be an emerging growth company, we do expect to continue to be a growth company. We are seeing opportunity for contract wins in 2020 in all of our business lines.

It is our policy to give annual guidance, and we are reiterating our full year 2020 guidance, which anticipates growing revenues to between $1.5 billion to $1.65 billion, with adjusted EBITDA of $105 million to $125 million.

With regard to our seasonality, we have started construction earlier on some 2020 renewable projects. As a result, we expect that there will be a shift toward increased revenues in second and third quarter rather than just in the fourth quarter.

We expect to deliver profitable growth in 2020. And as we get greater visibility to future results, we will adjust our guidance accordingly. Thank you, and I will now turn the call back to JP for his closing remarks.

Thanks, Pete. As you can tell from our guidance, we expect solid performance in 2020. In addition to the projects we've already booked in the backlog, we see robust opportunities for future growth in each of our end markets.

Beginning with renewables, the U.S. market for wind construction remains strong with industry experts now predicting that 2021 will be a strong year for wind construction.

Technological improvements, such as larger wind turbines of power storage scalability, combined with the push towards reducing or eliminating fossil fuel usage, are making wind and solar an economically sound and environmentally friendly choice.

The recent extension of the 60% federal production tax credit into 2021 for wind projects initiated in 2020 should increase demand for our renewable work more than originally anticipated.

On the environmental side, IEA's acquisition of Saiia provides opportunities in coal ash management. More than 1,000 coal ash landfills and ponds currently harbor the waste resulting from the production of over 100 million tons of coal still produced in the United States each year.

As regulation of the disposal of coal ash residuals becomes increasingly stringent, Saiia is uniquely positioned to safely remove coal contaminants and pollutants for our clients. Over time, our team of civil contractors and power engineers are ready to help our clients replace coal plants with much more efficient sources of energy.

Lastly, in the transportation space, solid growth is expected in 2020, fueled by investments at the federal, state and local levels. The American Road & Transportation Builders Association is estimating that total domestic transportation construction will reach over $300 billion in 2020, with highway construction spend increasing 6%, bridge and tunnel construction spend increasing 3% and rail construction spend increasing 5% over 2019 levels.

We expect to benefit from these end market opportunities. With improvements to our balance sheet and liquidity, we will focus our efforts on doing what we do best, which is delivering innovative engineering and construction services to meet our clients' essential infrastructure needs.

Thank you, again, for joining us on IEA's fourth quarter and full year 2019 earnings call. We look forward to continuing to share our progress over the coming quarters. We will now open the call to your questions. Operator?

(Operator Instructions) Our first question comes from the line of Brent Thielman with D.A. Davidson.

JP, maybe you could talk a little bit about the backlog. Is there a way you can quantify, at least talk a bit about how much civil work versus wind and other work is now included in that backlog? As we go into 2020, how much of that revenue is going to be driven by areas outside of wind?

Yes. I think as you look at our backlog today, a little over half of our backlog is renewable work, wind and solar, mostly wind. But you should think of it as the numbers we reported, about half or a little over half is renewables, and the balance will be our other end markets.

Okay. And then, I guess, with the extension of the PTCs, are these going to have a big impact on the market or bookings for you guys?

Well, what that's going to -- I think that just increases our thoughts of the longevity of this market and what we've continued to share time and time again over the -- over several calls. As you know, we're -- we believe that we're in the entrance of a super cycle of a massive pivot around the world, and particularly the United States in the renewables. So we're very long on renewals and always have been. We think the extension just continues to reinforce that. But I'd also continue to point you to other items in the industry that we talked about before, the continued growth and scale of wind turbines, both from a height and rotor diameter, which, things get bigger, they get more efficient, output gets -- is greater. I think turbines that we're going to install here in 2020, we're getting close to the 4.5 megawatt range, which, just a few short years ago, would have been offshore type technology. So we're continuing to see massive improvements in technology. We're continuing to see a diverse interest in renewable energy, not just utilities, but the entrance of the commercial and industrial customers, which is -- are over 50% of all renewable energy purchases this year, renewable PPAs.

And then lastly, pick -- spans any federal policy, the state policies across the country continue to be expanded almost on a continuous basis. So that's kind of a refresh of what we talked about before, but we think the 60% extension just kind of enhances all of that.

Okay. And JP, I think it would be helpful -- I mean, obviously, the equity markets are telling us we might be entering a new world here. But can you talk about what you're hearing from your customers over the last 1.5 months? I mean, anything granular there that kind of can help us get comfortable with the outlook for the next couple of years, just given everything we're seeing these days?

Well, I think you're probably speaking to the short-term volatility that we're seeing across all markets because of the virus. I actually am going to let Mike Stoecker speak to that for just a second, and then maybe I'll circle back on that questions that were (inaudible).

Yes, Brent. So several of our wind clients have given us some preliminary notices that should any delays occur, they will kind of follow-up on some -- I'll say, some more definitive kind of delays. But as of today, we have not actually had any firm delay notices from any of our clients. So we're a little bit hopeful that with China, kind of, getting back up to a 70% production at their factories in the recent weeks, we aren't really going to anticipate too much of an impact, but should we come up with -- or should we have any more significant impacts, we'll obviously communicate that. But so far so good.

And as far as -- I think the belief of ourselves and all our clients is this is kind of a short-term solution. We don't see any kind of like long-term impact to the business or our clients. And quite frankly, just the opposite. We continue to hear from our clients that they're investing heavily in their development pipeline several years down the road yet. So that continues just to make us all, all the more certain that we have a tremendous opportunity for years on in.

Okay. And Pete, if I could bother you, I guess, maybe a bit curious, maybe some of the things you're looking to do or implement in your new role here. I know it's been relatively recent. And then quite frankly, kind of the opportunity you see here.

So in the past 3.5 weeks, obviously, we're making sure that we get all the filings out. But I think we want to take a long, hard look at our capital structure and see what we can do, what our opportunities are, what the opportunities are for IEA to be a good platform company and work both renewables and in our other diverse businesses.

So from our standpoint, the first thing is to make sure that we make 2020 and going on beyond that profitable and that we obviously manage our cash, look at opportunities, look at the balance sheet and maintain our liquidity and then use that platform to grow the business and figure out how to make this a bigger, more profitable company.

Ladies and gentlemen, at this time, there are no further questions. I would like to turn it back to JP Roehm for closing comments.

Well, we appreciate you all joining us today for our fourth quarter 2019 and full year results. We wish you all the best, and we look forward to sharing our further exciting 2020 results in the calls ahead. Thank you all for joining us today.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.