NV5 Global Inc (NVEE) 2015 Q2 法說會逐字稿

Greetings. Good afternoon, everyone, and thank you for participating in today's conference call to discuss NV5's financial results for the second quarter ended June 30, 2015. Joining us today are Mr. Dickerson Wright, Chairman and CEO of NV5 Holdings; Mr. Michael Rama, CFO of NV5 Holdings; and Dr. Lauren Wright, Director of Investor Relations for NV5 Holdings.

I would now like to turn the conference over to Lauren Wright. Thank you. You may begin.

Thank you, operator. Before we proceed, I would like to remind everyone that this call contains forward-looking statements within the meaning of the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995, including, among others, statements with respect to our abilities related to driving business development, achieving operational efficiencies, completing strategic acquisitions, expanding our backlog, and achieving our 2015 guidance related to gross revenues and diluted earnings per share.

The Company cautions that these statements are qualified by important factors that could cause the actual results to differ materially from those reflected by the forward-looking statements contained herein. Such factors include but are not limited to: changes in demand from the local and state government and private clients that we serve; general economic conditions nationally and globally, and their effect on the market for our services; competitive pressures and trends in our industry and our ability to successfully compete with our competitors; changes in laws, regulations, or policies; our ability to successfully execute our mergers and acquisition strategy, including the integration of new companies into the Company's business; backlog, cancellations, and adjustments; and the risk factors set forth in the Company's most recent SEC filings.

All forward-looking statements are based on information available to the Company on the date hereof, and the Company assumes no obligation to update such statements except as required by law. I would also like to remind everyone that this call will be available for replay through August 20, 2015, starting at 7:30 PM Eastern tonight.

A webcast replay will also be available via the link provided in today's press release and the Company's website at nv5.com. Any redistribution, retransmission, or rebroadcast of this call in any way without the express written consent of NV5 Holdings, Inc., is strictly prohibited.

We will begin the call with commentary from Dickerson Wright, Chairman and CEO of NV5, before turning the call over to Michael Rama, Chief Financial Officer, for a review of the financial results for the second quarter and six months ended June 30, 2015, and outlook for the rest of the year.

We will then open the call for your questions. Dickerson, please go ahead.

Thank you, Lauren, and good afternoon, everyone. Thank you for joining us for the NV5 second-quarter 2015 conference call.

As you saw after the close of the market today, we issued a press release announcing our financial results for the second quarter and six months ended June 30, 2015. We reported very solid second-quarter results, with revenues increasing 18%, EBITDA increasing 56%, and net income increasing 64% year-over-year.

Diluted earnings per share for the quarter increased 32% to $0.25 per share over 6.8 million shares compared to $0.19 per share over 5.6 million shares in the second quarter of 2014. We saw growth among all of our service lines in the second quarter, increases in requests for our services, and an increased backlog.

I know a lot of you joining us today are already familiar with NV5's story. You may know, for example, that NV5 is comprised of five business verticals headed by experienced entrepreneurial leaders for each of the verticals: construction quality assurance, infrastructure, program management, environmental and energy. This vertically structured business model serves to help us not become overly dependent on any single industry or economy. And the mix of our clients remains roughly 70% public and 30% private clients.

We continue to build a strong nationwide infrastructure with our acquisition of the RBA Group. Also contract wins in our infrastructure vertical feed our service lines and position NV5 for further increased organic growth through what we call cross-selling. I would like to continue my remarks today with more information about the acquisitions we completed since the first quarter, including Mendoza & Associates, Allwyn Environmental, and the RBA Group; some details about our plan going forward to maximize shareholder value; and, also, some recent contract wins.

As I touched on briefly before, companies that become part of the NV5 family through our M&A process must absolutely add value to our existing operations, or we will not go through with the acquisition. You may have noticed that we completed a successful secondary offering at the end of May that generated $29.4 million in net proceeds. This offering happened to be 4 times oversold.

We have already put these funds to use by continuing to do what we assured our shareholders we would do: grow the business strategically through accretive acquisitions -- like RBA and Allwyn -- and grow the business organically through operational improvement. We are on track to reach $300 million in revenue by the end of 2016. And we believe we can maintain that same flat, vertically structured organization, with room for significant growth beyond $300 million in revenue.

As I previously mentioned, we acquired Mendoza & Associates and Allwyn associates; and, more recently, we acquired the RBA Group. A little bit about RBA: it is a storied, Northwest-based infrastructure engineering firm with 250 employees; seven offices in New York, New Jersey, Pennsylvania, Connecticut and Maryland; and roughly $40 million in revenue.

You would recognize many of RBA's clients and projects -- agencies like the New York Port Authority, the New York and New York/New Jersey Department of Transportation, and also the New Jersey Turnpike Authority. RBA was our largest acquisition since becoming a public company.

RBA is an integral part of our plan to become a nationally dominant player in urban transportation engineering/design-in planning and is the key to our ability to fully leverage the opportunity for synergy when this infrastructure vertical funnels services into our CQA, CMT, CM, and environmental work, and also into our other service lines. RBA's practice also includes strong architecture and environmental service groups that we know will create positive cross-selling opportunities for our other Northeastern acquisitions, which include AK Environmental and Joslin, Lesser & Associates.

We also required Allwyn Environmental in June. Allwyn is an environmental and energy services firm, with offices in the Southwest and Northwest. An exciting opportunity was created for NV5 through this acquisition to reenter the nuclear quality assurance business, where NV5's CQA team has been quite successful in the past.

As you may know, considerable barriers of entree restrict firms that can provide safety support services on nuclear plants to just a handful of companies in the US. That will require the NQ1 (sic - NQA-1) certification.

We have found nuclear safety to be one of the most profitable businesses within the engineering industry, and we are looking forward to making a return to this space at the request of some of our largest clients. We feel confident that RBA and Allwyn will immediately be accretive to NV5's earnings.

I thought I would also mention some notable new contracts we won in the second quarter and in recent weeks. Public sector awards include a $2.5 million contract with a client that we have had a 40-year relationship with: the San Diego Unified School District. On this contract we are supplying as-needed geotechnical engineering and construction material services.

We won another contract for $5 million with San Diego County to provide an on-call construction management services for FAA-funded improvements on eight county-owned airports in San Diego. Both of these contracts arrived on the heels of a $23 million contract our civil program management team won with Caltrans in March.

NV5 also finished engineering work on the largest desalination plant in the Western Hemisphere -- the Poseidon Desalination Plant located in Carlsbad, California, a project that resulted in over $2 million in fees for NV5. With the help of our infrastructure engineers, the plant will provide 50 million gallons of desalinated seawater per day to 300,000 San Diego residents and will do so in the most energy efficient manner possible.

In addition, we are pleased that in this quarter we have booked over $40 million of ongoing business with private clients -- clients in infrastructure, construction quality assurance, program management, environmental, and energy services nationwide. Finally, one the most interesting projects NV5 recently completed was a comprehensive survey of the great Giza Pyramid, the largest of the ancient Egyptian pyramids and the last remaining of the b

Seven Wonders of the World.

Our archaeologist, Joel Paulson, worked with private foundations and the Egyptian Ministry of Antiquities using cutting-edge technology and mathematical projections to conduct the most accurate assessment of the Great Pyramid's original size and shape performed to date.

We continue to complete acquisitions that expand our operating margins, increase synergy, and further solidify our reputation in highly profitable markets. I would now like to turn the call over to our Chief Financial Officer, Michael Rama, for a more detailed overview of the financial results for the second quarter and six months ended June 30, 2015, and also our outlook for the remainder of 2015. Michael?

Thank you, Dickerson, and good afternoon, everyone. First, I will review the results of the Company's second and six months ended June 30, 2015; and then I will provide an outlook for the remainder of 2015.

Total gross revenues in the second quarter of 2015 were $34.5 million, an 18% increase compared to gross revenues of $29.2 million in the second quarter of 2014. Net revenues for the second quarter of 2015 was $27.7 million, an increase of 27% from the second quarter of 2014.

This increase was due to organic growth of 13% from our existing platform as well as the contribution from acquisitions closed during 2015. EBITDA for the second quarter of 2015 was $3.5 million or 10.2% of gross revenues, an increase of 56% from the second quarter of last year. Total operating expenses were $12.6 million in the second quarter of 2015 compared to $10.2 million in the same period last year.

The increase in operating expenses was due to integration costs from businesses acquired after June 30, 2014, and an increase in utilization compared to the same period last year. We continue to focus on internal performance optimization and the scalability of operations as we integrate new acquisitions.

Net income for the second quarter of 2015 was $1.7 million, an increase of 64% compared to net income of $1.1 million in the second quarter of 2014. Second-quarter 2015 diluted earnings per share was $0.25 versus $0.19 in the second quarter of 2014.

It is important to note that our second-quarter 2015 earnings per share reflects the weighted average shares outstanding of 6.8 million shares for the three months ended June 30, 2015, compared to the weighted average shares outstanding of 5.6 million shares for the three months ended June 30, 2014. Included in the weighted average shares outstanding for the second quarter of 2015 is the impact of 1.6 million shares issued from our secondary offering on May 28, 2015.

Now we will review the year-to-date results for the six months ended June 30, 2015. Total gross revenues in the six months ended June 30, 2015, was $63.4 million, increasing by $15.4 million or 32% when compared to the same period and 2014.

Net revenues year-to-date 2015 was $50.5 million, an increase of 37% from the same period in 2014. The increase was due to organic growth of 12% from our existing platform as well as the contribution from acquisitions closed during 2015. EBITDA for the six months ended June 30, 2015, was $5.9 million or 9.3% of gross revenues, an increase of 56% from the six months ended June 30, 2014.

Total operating expenses were $23.7 million for the first six months ended in 2015 compared to $18.4 million in the same period last year. Net income for the six months ended June 30, 2015, was $2.8 million, an increase of 60% compared to net income of $1.8 million for the six months ended June 30, 2014.

Diluted earnings per share for the six months ended June 30, 2015, was $0.44 versus $0.32 for the same period in 2014. Our year-to-date 2015 earnings per share reflects the weighted average shares outstanding of 6.4 million shares for the six months ended June 30, 2015, compared to weighted average shares outstanding of 5.5 million shares for the six months ended June 30, 2014. Included in the weighted average shares outstanding for the six months ended 2015 is the impact of 1.6 million shares issued from our secondary offering in May.

Cash flow from operating activities increased $3.4 million for the six months ended June 30, 2015, compared to the six months ended June 30, 2014. Our cash flow from operating activities was $1 million for the six months ended June 30, 2015, compared to cash flow used in operating activities of $2.4 million for the six months ended June 30, 2014. As of June 30, 2015, our cash and cash equivalents were $33.8 million.

And June 30, 2015, the Company reported backlog of $116.8 million, an increase of 22% from $95.7 million as of March 31, 2015; and 42% from $82.1 million as of December 31, 2014. However, including the backlog acquired on July 1, 2015, from the RBA Group, the Company's backlog is $146.8 million. Our backlog is an estimate of revenues to be recognized over a rolling 12-month period.

Now, moving on to our outlook for 2015: during our last earnings conference call we initiated 2015 guidance for full-year gross revenues in the range of $127 million to $137 million and diluted earnings per share in the range of $1.05 per share to $1.15 per share. We are raising our guidance for full-year 2015 gross revenues, recognizing the impact of acquisitions closed through July 31, 2015, which includes Allwyn and RBA. We now expect full-year 2015 gross revenues to range from $155 million to $160 million, which represents an increase up to 48% from 2014 gross revenues of $108.4 million.

We further expect that full-year 2015 diluted earnings per share will range from $1.07 per share to $1.17 per share, representing an increase up to 34% over diluted earnings per share of $0.87 for the full-year 2014. Also important to note: included in the guidance for diluted earnings per share is the impact of 1.6 million shares issued from our secondary offering in May 2015. Furthermore, this guidance for gross revenues and diluted earnings per share excludes anticipated acquisitions for the remainder of 2015.

This completes our prepared remarks. And now we would like to open the call for your questions.

(Operator Instructions) Jeff Martin, ROTH Capital Partners.

Could you go over your underlying strategy to leveraging the cross-selling efforts across the businesses, things like that, becoming a more impactful part of the business? And then could you give some examples of successful efforts in doing that?

Sure. Let's talk about first, Jeff, the strategy. As you know, we made an internal announcement that we accelerated the cross-selling synergy office with a person, Scott Kvandal, with a tremendous amount of industry experience, licensed engineer, and really known in various markets.

And what I said, perhaps, in the last call, I know I have said to others, is that cross-selling or synergy -- if you assign something to everyone, you have really assigned it to no one. So Scott's specific role is to spend time to know what we're doing in every office, and as offices join us, how indeed we can use those offices as a foundation of support for the new offices for other offices to introduce service lines, introduce opportunities that we have going forward.

So a call is every two weeks. We have an internal documentation that speaks to every office, mentions every service line. And the leaders of those offices join a call. And we measure that, the synergy -- and I think I said this before, and it is dropping. We measure the amount of cross-selling or synergy we do by the drop in the amount of subcontracted services we have had.

And I think I mentioned this before, but at the very beginning, when we went public and we were just doing $68 million, about a third of our work was outsourced to others. Now on the run rate that you heard Mike give, that we are anticipating $160 million with no further acquisitions, we think that will be below 20% in subcontracted work. So, that gap, though not linear, completely linear, can be measured by the cross-synergies.

Some specific examples, and let me tell you some of the things that we are excited about: we are very strong in geotechnical services in the Southeast and Northeast; and RBA, for example, gave close to $1 million in geotechnical service to others last year that we already have been receiving assignments in our office in New Jersey -- our NV5 office that specializes in geotechnical work. And specific questions for our expertise in South Florida for geotechnical work -- we see that coming. So our strategy, of course, is to enter that client at the highest level, enter that client at a design level, and that automatically we look to feed our other service lines.

Specific with RBA, too, is an expansion of environmental services. They have -- they do a tremendous amount of environmental work, and a good portion of this has been subconsulted or subcontracted to others that we expect to see further work internally.

In the West, our program management group, very active. You have seen the announcement we have had. We have established an entire CQA office supporting just our program management group -- services that, prior to our being involved, was subcontracted to others.

So we think two things happen. We think the margins are greater. The utilization is greater when we work internally. And we also think that it creates more opportunities for the entire network. So a bit of a long-winded answer, Jeff. But we're excited about the opportunities we have in cross-selling, but you have to work at it. You certainly have to work at it.

That's helpful. That's good to know specific areas where you're getting that cross-selling impact. And then, Dick, you characterized the NQ1 opportunity. I know that's something that you had been looking to get for quite a while. It took some extra time, something you had to be patient for. But how would you characterize that opportunity from a revenue perspective or an impact to the overall business point of view?

Well, we are very excited about it. The nuclear -- as you know, there is maybe one or two new nuclear plants being built in the US. But the work that we see is the ongoing requirements for inspection on existing nuclear power plants and then on plants that are being decommissioned, like San Onofre.

So where is the specific opportunity? The certification of this is a specific commitment to quality assurance over and above the private sector or commercial sector. There is redundancies of calibration, redundancies of certification that is required. And so many companies -- it is very difficult to set aside an organization to do that.

When we acquired Allwyn, that led to the tuck-in of the -- getting the NQ-1 certification. And right now, through the Allwyn acquisition, we have six full-time people working at the Hanford facility. Bechtel happens to be our client, and ongoing in the decommissioning of the WIPP stations and the ongoing work that is being done there.

So this makes an entree that we never had before. I can remember two years ago, one of our key clients -- and that was what was mentioned -- I mentioned in my opening comments -- they said to us, if we could get this certification, it would really open the doors to many things that we have. So now we have it.

And I think the margins are just phenomenal, because when you're on that project -- because you have that certification, and the requirements are so much more strenuous -- the margins tend to be higher. The utilization rates are higher, because it's 100% dedicated people. And, so -- the third thing is the barrier of entree is very exclusive.

So it's a very exciting thing. And we think we're going to really experience some organic growth in that area.

Okay. And then last question, Dick. In terms of an acquisition roadmap, are there specific pieces to the puzzle that you see you still are looking for at this point? Obviously, with RBA you have got a bigger infrastructure platform, particularly in the Northeast. But are there other pieces that you are looking to continue to add to build out the complete network, so to speak?

Yes. Well, I will tell you what we really like and the areas we like, because obviously we like the organic growth and the margins. We want to continue to emphasize the program management piece. And that is both in -- what we are seeing done very well is in our civil program management, in the horizontal work as well as the vertical roadmap.

That is entering the client at a very high level, managing the program with higher margins. So we specifically have some acquisitions in our pipeline targeted for that. Second is the forensic work. Our forensic engineering work -- very much higher margins, and that's, of course, where our engineers are deposed and we are brought in on litigation. And we have decided that since we know in the US it's a very litigious society, we tend to want to support the defense area in the litigation work, and insurance agencies, and long-time, larger clients tend to be our clients that we have a good relationship with.

So forensic, program management -- and we still -- and I have said this before, Jeff -- we really like the area of environmental occupational health/safety by the business envelope. And one of the other things that we are looking for is cost in scheduling and the specific opportunities which dovetail very nicely with our infrastructure group and our program management group.

So those are the areas. And, so, hopefully, I can't get too forward, but we certainly are looking for those areas. And they all have much higher margins than the industry standard.

Great, that's helpful, Dick. Thank you and, again, I apologize for the background noise.

That's quite all right. Thanks, Jeff.

(Operator Instructions) Mike Shlisky, Global Hunter Securities.

So you have had some pretty good organic growth this past quarter and for the overall year so far. I just want to get a quick update: do you still expect to see double-digit growth for the rest of the year and for the full 2015 here?

Well, Mike, as you know -- and Mike can certainly comment on this also -- but in absolute organic growth I would certainly anticipate improvement. And that means in the absolute revenue organic growth, we certainly are looking for great opportunities.

We think our model -- that we put our technical leader as the face to the client. We don't believe in a very centralized sales organization or a marketing organization. It is really a practice, and we want to have our leader. So to answer your question, I think the absolute organic growth is going to increase. But as a percentage -- as you know, percentages on higher numbers are more and more difficult.

So we are pleased that even on a higher number, we had double-digit organic growth. And we're anticipating at least above the industry standard for the remainder of the year. And when measured as a percentage of the total, I don't know if it's going to be double-digit, but I know it is going to be much higher than the industry standard.

Okay, great. And with this high volume of work and your highly specialized workforce, do you have enough people to get all this work done for the rest of the year? Or are there areas where there are certain skills that you might be in need of right now?

I think attrition -- the first thing is keeping the great people you have. And so we work very closely. We are very touch -- touchy, in direct contact with our people. And our attrition rate is significantly under -- and I keep mentioning industry standard -- but our attrition rate is, like, 6%. And we know a good number in industry is 10%.

So, we're not -- and we are trying our best not to lose good people. We have an active organization internally for recruiting. We have very, very senior people full-time looking to staff positions.

And so it's a challenge. I think I can tell you that we see a report and -- weekly -- on open positions. We don't like to see open positions, because those are revenue-generating positions normally. And it's a challenge, but it's something that I think -- I haven't seen it be a significant problem yet.

Okay, great. Wanted to also follow up on the Poseidon project. It's very much in the headlines, obviously, the drought out in California. Are you getting the sense that there other projects coming down the pipe here, either similar or -- that you can get your hands on, let's say, over the next 12 to 18 months to help alleviate the drought in California?

You were referencing on the Poseidon project, the desalinization plant?

I guess now that's kind of done or kind of going forward. Are there similar projects that you have -- might see on the horizon here that are similar to that?

I am not aware of a desalinization project, but I can tell you this: we have had significant opportunities on -- and for the first time I think California is starting to look closer at dams. I think in Southern California we have an opportunity that we are working closely with on a retention dam.

I think -- Mike, I wish -- and I don't want to lament this. I wish I could say that California is so forward-thinking and there is a number of dams on horizon, but I just don't see that as it relates to water. And I always think this issue -- it will always be -- in the West it is always going to be water quantity. In the East it is going to be water quality.

We are in that position. I can't tell you that -- of any specific things. I can tell you we are very active in Sacramento. We know there is a delta -- in San Joaquin Delta project there is ongoing work now. And it is at a crisis stage. And we are doing some engineering work on that, but I don't know of any -- I don't see how California is getting in front of the problem.

Okay, great. And maybe if I can just add one more last question here about some of your road and highway work that you have done and infrastructure work in transportation sector -- what is your view on the federal highway funding bill? We just got another patch for a few more months here.

Do you have a sense that your customers are talking about a lot of pent-up demand for projects once they can get some certainty around long-term federal funding? Could this perhaps maybe impact you hopefully in 2015 or maybe even 2017?

I think it -- Mike, obviously, I am an optimist. The glass is half-full. I think it can only get better. I think we haven't had a long-term highway bill, but yet there is a tremendous demand for infrastructure transportation improvement.

We think that -- if you would have asked me this question three or four years ago, I would have been much less optimistic. But I see now funding going. I know the positioning we have, particularly in California, and with speaking and spending time recently with our RBA folks, I see significant opportunities happening with pre-funded projects in the Northeast.

And obviously, we always like to have announcements out, so hopefully we will have some announcement on some new expanded projects in the Northeast with the transportation authorities. But it is only better. I am glad to see they have a patchwork/temporary path. I would love to see a significant bill, a long-lasting bill pass, but the funding is certainly better than it was 3 to 4 years ago.

Perfect. Thanks so much. I will leave it there.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Wright for closing remarks.

Thank you, operator -- Danielle. Thanks, everyone, for participating in our second-quarter conference call. We really appreciate the support of the shareholders. We appreciate those investors in the Company that believe in our strategy, and we are very enthusiastic and optimistic about the opportunities for the balance of the year.

It is one foot in front of the other. It is staying focused. And I think the main thing that we would want to say to our shareholders is: we want to do what we say we're going to do. We now have some significant funding to do more acquisitions. We have a robust organization that is constantly working on process improvement. And I just want to say that without the support of our key employees -- and all our employees, our clients, and our shareholders, this wouldn't be possible.

So I really appreciate the support you have given NV5. And I look forward to speaking to everyone again next quarter. Thank you.

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