NV5 Global Inc (NVEE) 2017 Q2 法說會逐字稿

Good afternoon, everyone and thank you for participating in today's conference call to discuss NV5's Financial Results for the Second Quarter and 6 Months ended July 1, 2017.

Joining us today are Dickerson Wright, Chairman and CEO of NV5; Michael Rama, CFO of NV5; and Lauren Wright, Director of Investor Relations for NV5.

I would now like to turn the call over to Lauren Wright.

Thank you, operator.

Before we proceed, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements concerning future events and future financial performance.

The company cautions that these statements are qualified by important factors that could cause actual results to differ materially from those reflected by the forward-looking statements contained herein.

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 like to remind everyone that a webcast replay of this call will also be available via the link provided in today's news release and the presentation section of the company's website.

Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of NV5 Global, Inc.

is strictly prohibited.

We will begin the call with comments from Dickerson Wright, Chairman and CEO of NV5, before turning the call over to Michael Rama, Chief Financial Officer, for a review of the second quarter 2017 and year-to-date financial results and outlook for the rest of the year.

We will then open the call for your questions.

Dickerson, please go ahead sir.

Thank you, Lauren, and thank you to everyone joining us for NV5's Second Quarter 2017 Conference Call.

After the close of the market today, we issued a news release announcing our financial results for the second quarter and 6 months ended July 1, 2017.

We are very pleased with the progress we made in the second quarter and year-to-date.

In the second quarter, total revenues increased 49%, EBITDA increased 68% and net income increased 51%.

Adjusted earnings per share for the quarter increased 47% to $0.56 over 10.7 million shares compared to $0.38 per share over 9.2 million shares in the second quarter of 2016.

We increased profit margins among all of our service lines in the second quarter, increased our backlog, and minimized some consultant fees.

Today, I want to start by speaking about 3 functional aspects of NV5 and the progress we have made regarding each: Our geographic footprint, our service line and the strength of our platforms through acquisitions and integration.

After that, I will discuss our aggressive strategy to enter cutting-edge technical markets that have high barriers of entry, have strong organic growth trends and have higher EBITDA.

First, let's discuss the health of our infrastructure and construction quality assurance markets in the west.

As we all know, the strategy of NV5 is to integrate our service offerings to better facilitate organic growth and profitability.

This model is working quite well.

Our recent acquisition of Holdrege & Kull has given us the opportunity to offer geotechnical design capabilities to our Northern California infrastructure service arm.

Infrastructure in the West is experiencing excellent growth and profitability, and the macro economic wins remain at our back.

You may have also seen our announcement of a $7 million contract for a major bridge replacement product in Yuba City, California.

In the Southeast, our CQA service line has been strengthened by a number of significant awards, including a very large private project, expected to deliver approximately $3 million in fees over the next 14 months.

Our infrastructure service line in Florida has been significantly densified by the Lochrane acquisition, which supports our transportation design and add surveying services that we did not previously have.

And as you saw earlier this week, we won 2 contracts in Florida and California, totaling $7 million in fees for critical infrastructure initiatives in each state.

Both projects represent reoccurring revenue streams for NV5.

In Pasco County, Florida, we are designing 7.6 miles of new arterial roadway, a stretch that includes 19 bridges and will service a much needed additional evacuation route, should a hurricane hit the county.

In California, we are providing training and assessment services to the State Water Resources Control Board.

Infrastructure in the Northeast has had a slower than anticipated first half of the year, which has impacted their overall organic growth of the company.

However, we are looking forward to a much stronger second half of the year, supported by 30 project wins, totaling $11.8 million in revenues.

CQA, on the other hand, in Northeast has benefited from our infrastructure presence and is meeting all expectations.

Some comments now on our MVP and technology platform.

As you know with the acquisition of Sebesta in the Midwest, JBA in the West and our recent acquisition of RDK in the East, NV5 has become one of the top 5 firms in the U.S. offering these capabilities of mechanical, electrical and plumbing design work and high-end, high-barrier technology.

We now operate a wide range of engineering and technology services to both the public and private sectors.

We are a known entity in the health care, science and technology engineering market space.

As we will detail more in the weeks ahead, we are winning exciting work in this sector.

For example, we recently provided services on 2 new facilities for Toyota in Michigan and Kentucky totaling 100,000 square feet of building.

Now a few words about our national program management and environmental service lines.

Our program management group is growing in the health care, hospitality and retail markets.

Our program management group has been strengthened by our recent acquisitions in mechanical, electrical and plumbing and technology.

For example, our Ohio program management office is doing work for a major retail provider, who was a longtime JBA client.

As you know, cross-selling is central to our growth strategy and since 2015, we've won approximately $23 million in fees from cross-selling that would have otherwise gone to subcontractors.

Our environmental platform consists of 2 distinct services: Our mining and real estate services are transactional offerings.

We also have health physics and a fast response groups within our environmental practice.

The Bock & Clark acquisition in April has made NV5 a national provider of transaction, real estate, environmental and surveying services.

NV5's strategy for entering cutting-edge, high-growth and high-profit markets is focused on a greater emphasis on technology.

To better facilitate this, we have developed an emerging markets group that is empowered to find these type of opportunities and support our well-developed merger-and-acquisition process.

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 6 months ended July 2017, as well as our outlook for the remainder of the year.

Michael?

Thank you, Dickerson, and good afternoon, everyone.

First, I will review the results of the company's second quarter and 6 months ended July 1, 2017 results, and then I'll provide an updated outlook for the remainder of 2017.

Gross revenues in the second quarter of 2017 were $84 million, a 50% increase, compared to gross revenues of $56 million in the second quarter of 2016.

Net revenues for the second quarter of 2017 were $67 million, an increase of 51% from the second quarter of 2016.

These increases were due to organic growth from our existing platform, as well as the contribution from acquisitions closed during 2017.

Gross margins for the second quarter of 2017 was 49%, compared to 47% for the second quarter of 2016, which is the result of the increased use of our billable professional employees.

EBITDA for the second quarter of 2017 was $10 million or 15% of net revenues, an increase of 68% from $6 million or 14% of net revenues in the second quarter of last year.

Net income in the second quarter of 2017 was $4.3 million, an increase of 51%, compared to net income of $2.9 million in the second quarter of 2016.

Second quarter 2016 adjusted earnings per share, that is excluding the impact of amortization of intangible assets, from acquisitions, was $0.56 versus $0.38 in the second quarter of 2016.

Second quarter 2017 GAAP earnings per share was $0.40 versus $0.31 in the second quarter of 2016.

Our second quarter 2017 adjusted and GAAP earnings per share reflects the weighted average shares outstanding of 10.7 million shares, for the 3 months ended July 1, 2017, compared to the weighted average shares outstanding of 9.2 million shares for the 3 months ended June 30, 2016.

Now, we'll review the year-to-date results for the 6 months ended July 1, 2017.

Gross revenues in the 6 months ended July 1, 2017, were $148 million, an increase of 47%, when compared to the same period in 2016.

Net revenues year-to-date in 2017 were $120 million, an increase of 46% from the same period in 2016.

These increases were due to organic growth as well as the contribution from acquisitions closed during 2017.

Gross margin for the 6 months ended July 1, 2017, was 49.4%, compared to 48.6% for the 6 months ended June 30, 2016, which is the result of the increased use of our billable professional employees and decreased use of subconsultants.

EBITDA for the 6 months ended July 1, 2017, was $15 million or 13% of net revenues, an increase of 43% from the 6 months ended June 30, 2016.

Net income for the 6 months ended July 1, 2017, was $6.6 million, an increase of 34%, compared to net income of $4.9 million for the 6 months ended June 30, 2016.

Adjusted earnings per share for the 6 months ended July 1, 2017, was $0.92 versus $0.71 for the same period in 2016.

GAAP earnings per share for the 6 months ended July 1, 2017, was $0.61 versus $0.57 for the 6 months ended June 30, 2016.

Our year-to-date 2017 adjusted and GAAP earnings per share reflects the weighted average shares outstanding of 10.7 million shares for the 6 months ended July 1, 2017, compared to the weighted average shares outstanding of 8.6 million shares for the 6 months ended June 30, 2016.

As of July 1, 2017, our cash and cash equivalents was $19.5 million.

At July 1, 2017, the company reported backlog of $261.1 million, an increase of 16% from $225.2 million as of April 1, 2017, and 18% from $220.8 million as of December 31, 2016.

Our backlog is an estimate of our revenues to be recognized over a rolling 12-month period.

Now we'll move on to our outlook for 2017.

The company is raising its guidance, previously issued for full year 2017 total revenues and earnings.

The company expects full year of 2017 total revenues, including the impact of acquisitions closed through July 1, 2017, to range from $340 million to $358 million, representing an increase of 49% to 57% from total revenues in 2016 of $228 million.

The company further expects that full year 2017 adjusted earnings per share will range from $2.22 to $2.36 per diluted share.

Furthermore, the company expects that full year 2017 GAAP earnings per share will range from $1.62 per share to $1.76 per diluted share.

This guidance excludes any anticipated acquisitions for the remainder of 2017.

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

(Operator Instructions) Our first question comes from Jeff Martin with Roth Capital Partners.

Dick, I missed what you said about the Northern California market.

Was that the CQA was a little bit, something impacted there?

Was -- in other words, I'm just wondering what affected the organic growth rate in the quarter versus your expectation.

Yes.

Well the -- our organic growth for the quarter was 4%.

What we had was significant delays in drop in revenue in our infrastructure in the Northeast.

And if this was not accounted for, our normal organic growth would have been 7%.

So that was where the impact.

But as far as Northern California, why we like the Holdrege & Kull acquisition so much is that we now have geotechnical design and material testing capabilities for all of those remote projects in Northern California that prior to the acquisition, we were using subconsultants for this service.

So this will support our organic growth and really densify our infrastructure platform as well as the CQA.

So that was the reference I made in the narrative to Northern California.

Okay.

And then could you give us a sense of how public funding for projects is -- the environment for it is out there and on top of that, what the mix of public versus private sector was in the quarter or year-to-date?

Yes.

Year-to-date, our public and private sector, our private sector work has gone up slightly.

It's about -- now 70% of our work is public, 30% private, and that was mainly due to the Bock & Clark acquisition, which really is 100% private.

That really works on transactional real estate work in both surveying and engineering and environmental services.

So as their mix goes up, and their revenue is -- we're projecting their gross revenue to be around $36 million to $40 million for the year, that will impact the overall mix of our private and public sector.

As far as the public funding, we're really starting to see now, we're coming through the FAST Act.

We're starting to see it in the local municipalities, and we're starting to see some of that funding.

The -- but as anything in public, it's subject to political wins and much higher level of approval.

So we had -- and I mentioned in the narrative, in the Northeast, we've had 30 projects that we've won that have not started and most of their work is 100% public work.

So we think that we're going to have a stronger second half of the year in the public sector because a lot of this work is funding.

Some of the things, though, that we were interested for the State Department we just won 2 international design projects, I can't mention the locations, but -- for embassy work.

And so we're really starting to see now a stepped-up increase in the public market.

But it's a slower process, Jeff.

Okay.

And then could you speak to the win rate versus -- today versus maybe what it was a couple of years ago, now that you're much larger and have a lot more geographic footprint and then also service capability?

The theory, of course, of NV5 is to really give the resources and densify those 5 service lines or platforms and then -- and we do that by adding services that will give us, we think, a competitive advantage.

So let me say this, on the public infrastructure design side, where we use a lot of our engineers and for putting proposal together, we have what we call a "go, no-go" projects.

And we usually don't go after anything unless we have a good assurance, 65% to 70%, that we are going to be win, or we're going to be selected for that project.

On the commercial side, we have to be, it's not quite as selective, and we have to just look at the number of opportunities that are out there.

And I can say this, it could be because of our bigger national footprint, it could be because of the strengths that we see in the economy right now, but we're getting much more opportunities on both the public and the private sector.

Our win rate is going up slightly in the public side and remaining about the same in the private side, but with much more opportunity.

I would -- now I can mention, I was -- this is how this moves, Jeff, so quickly, the large private project that we won in the Southeast was -- we weren't allowed to name the name, we just had a clearing but that is a huge construction project for Amazon, and we're really looking forward to that because there's $3 million of fees that we're going to be generating over the next 14 months.

And that is just getting to be baked into the outlook of the second half.

And that is solely from -- for the private sector.

Okay, sounds great.

And then if I can end on a balance sheet question for Mike perhaps.

Curious what the large increase in accounts receivable might be related to relative to the increase in revenue on a sequential basis?

And what your expectations for operating cash flow might be for the year?

Yes, Jeff.

Good question.

The increase in the AR in balance sheet compared to 12/31/16, $21 million of the increase is related to acquisitions that we acquired during the year.

So we acquire -- and that represented about, I call it, $80 million of revenue.

So that -- so we don't see any issues.

Collectability is still good on -- our receivables are aging is still in light of what our expectations are and cash flow for most operations are turning for the quarter.

We generated almost $4.5 million of positive cash flow.

So cash flow we expect that to continue to improve as well during the year.

And just a comment, if I can.

I know it's a balance sheet question, but in the summer months, our revenue tends to go up and our AR tends to increase.

So it's kind of a barometer that we look at as a good sign.

We're in a very, very busy time now.

Cash flow tends to go down a little bit and AR tends to go up because we're paying people every 2 weeks.

We're building in our net terms of 30 or more.

So you will see a rise in the cash flow in -- again, in the third quarter, and I mean in the AR.

And it's good to see that the cash flow is remaining steady.

(Operator Instructions) Our next question comes from Rob Brown with Lake Street Capital.

Just wanted to clarify on your MEP platform.

I guess, do you feel it's sort of complete now?

And where you want to be in the market?

Or are there other areas that you can build out on that platform?

Thanks, Rob.

Good to hear from you.

Great question.

We really feel like we have 3 solid national players in our mechanical, electrical, plumbing area.

What we will now look for is what gets us into specific markets.

You'll see our increase in health care, you see our increase in university work, you see our increase in hospitality work and private sector.

But in that, what we're really focusing on is the technology aspect of it.

We want to really work in the analytics area.

We own a company called Energenz, that was part of us, that is really part of that technology in analytics.

And I think we're ahead of the game.

We know some competitors are enter -- trying to enter this market as acquisitions.

But we really want to expand on the platform that the mechanical, electrical, plumbing leads us to technology.

We have -- we just won a very large project, that private project, for $7 million that we can't announce the name, but it's really for upgraded MEP acoustic high-level technology.

And so as we grow our MEP, we're really going to be focused on the technology sector.

And I think in my narrative, we have been in emerging markets committee that will just identify these type of technology high-barrier energy companies with higher margins.

So we think this MEP platform now, national platform, allows us to expand into the tech -- more into the technology sector.

Great.

That's a good overview.

And then second, just wanted to clarify the Northeast delays there.

How much of delays did you say there was in the quarter?

And I guess, what's the hurdle to getting that going forward?

Well, there was at least $2.5 million in delays because our organic growth would have been $7 million.

And so just on -- if you take the $85 million that we reported, and the increase of organic growth at $3 million of pure organic growth, that would be about $2.5 million of delay.

I think we have done a number of things now that we have these projects really in the queue and ready to go.

So we like to report the reasons why we think 4% organic growth is okay.

But certainly, 7% would be much better.

So I would look for a lot of the public projects and it's particularly in our Northeast -- New York, New Jersey -- market where we've seen the projects, we've won them, ready to go and they've just been delayed.

So it's about a $2.5 million of impact in gross revenue.

(Operator Instructions) Our next question comes from Will Hamilton with Manatuck Hill.

Just wanted to touch on the margins, which were a nice improvement year-over-year and certainly since Q1.

If I look at just the gross revenues, net revenues and then the gross margins, you subcontracted out more work this quarter relative to Q1, but the gross margins were actually similar.

So obviously, there's some improvement in terms of the costs of sales.

Can you just speak to what you did there to get that improvement?

Or what's driving that?

Is it mix or some other?

Very good astute question.

And I really like the question because it's -- where that is coming from is an improvement.

You know -- realize we bought the company called Bock & Clark, they are mostly private, they're a very, very scalable operation.

They have a much higher percentage of subcontracted work than we normally have, but the margins on their subcontract work is at least 35% that they're going to get.

So you would see slight increase, I think we went from 19% to about 20% and that was very observant of you, 19% to 20%, in the difference between gross and net fees.

But we saw a increase in the margin because of the Bock & Clark having a higher markup on their subconsultant.

So that is where you -- where we saw some improvement in the efficiencies.

Okay, great, that's helpful.

And then to moving down, just in terms of OpEx to salaries and benefits, actually flat and then as I look at the operating expenses, as a whole about 400 basis points better than Q1.

So do you also do some things there?

Or is that just the seasonality of the business with Q2 having more top line?

I'll start and then I'll let -- Mike may have some specificity.

I think as you know, seasonality is there but if our platform and our strategy really works, we have to continue to be scalable.

So what you're starting to see is the real scalability that we have.

As far as direct labor in the second quarter, we had higher utilization rates because we were busier.

And as far as the support services, as a percentage and as revenue goes up, as a percentage, that goes down so that just adds to the bottom line.

I think you'll see the -- more efficiency in the direct labor is because of the utilization rate.

But Mike may want to mention.

Let me also add in just going against the improvements a little bit, we have both ways going.

We have also the increase in intangible expenses.

For the quarter, we expensed $2.6 million versus -- in Q2 '17 versus $1 million last year.

So that increase, obviously, negatively impacted our, what appears to be the OpEx expenses.

So -- but as Dick mentioned, the improvement in the efficiencies and the scalability is also the determining factors.

Okay, great.

And one last question just on Bock & Clark.

You said new platform, obviously, for you, it gives you some scale immediately.

But can you just talk further about the opportunities just to sort of add other offices, acquired, tuck-ins, and some other offices in different regions to scale it up even further?

Well, Bock & Clark is a true national provider of these services.

It may be the largest.

But what we're experiencing, and well, as I said that many times, and I use that word strengthen or densify the platform.

What we're seeing in Bock & Clark, which is a wonderful thing, is they have -- because they're a national company, they have -- they utilize national surveyors, licensed surveyors in each state.

We at NV5 now, we at Bock & Clark also, but NV5, we do some very high-tech surveying work through our drone systems.

And in order to do that work nationally, which we're now starting to do all over the country, we obviously need national surveying, licensed surveyors in each of the states and Bock & Clark has been able to provide that for us.

So we can offer high-end integrated services on surveying on a national basis, and we get that visibility and the access to do that through Bock & Clark's network.

So the things that we look for, that we really think are going to be a help for us is in the environmental transactional, real estate area, that Bock & Clark gives us entry to many clients that we didn't have before.

And in the surveying bases that we now can offer the high-level light R systems, so the drone system in surveying in many, many locations that we were not able to do if we wasn't -- had Bock & Clark as part of the network.

At this time, this concludes the question-and-answer session.

I would now like to turn the call back over to Mr. Wright for closing remarks.

If there are no more questions, great.

I want to thank everyone.

We are very pleased to report our second quarter results, and we do this on behalf of all of the hard work of our employees and reporting to our investors, I can tell you that this is a tremendous team effort from all of our employees.

I think our plan and strategy of continuing with a flat organization that puts our best people in front of the clients is something that we adhere to.

So we are pleased to report this results.

It seems our strategy continues to work, and I can tell you on behalf of all of our employees and to all our investors, we will continue to stay focused and hopefully, report -- continue to report a growing company with better and improving results.

So thank you, everyone.

We appreciate.

We'll talk to you again and speak with everything -- everyone on the -- in quarter 3. Thank you.

Ladies and gentlemen, this concludes today's conference.

Thanks for your participation.

Have a wonderful day.