NV5 Global Inc (NVEE) 2017 Q4 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 fourth quarter and full year ended December 31, 2017.

Joining us today are Dickerson Wright, Chairman and CEO of NV5; Michael Rama, CFO of NV5; and Richard Tong, Executive Vice President and General Counsel for NV5.

I would now like to turn the call over to Richard Tong.

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 United States Private Securities Litigation Reform Act of 1995, including the -- 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 also like to remind everyone that a webcast replay of this call will also be available via the link provided by today's news release and the Investors 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 is strictly prohibited.

We will begin the call with comments from Dickerson Wright, Chairman and CEO of NV5, before returning the call over to Michael Rama, Chief Financial Officer, for a review of the fourth quarter 2017 and full year financial results and outlook for 2018.

We will then open the call for your questions.

Dickerson, please go ahead.

Thank you, Richard, and thank you to everyone joining us for NV5's fourth quarter and full year 2017 conference call.

After the close of the market today, we issued a news release announcing our financial results for the fourth quarter and full year ended December 30, 2017.

We are pleased to announce that the fourth quarter of 2017 has been the highest revenue-generating quarter so far, despite quarter 4 historically being our second slowest revenue quarter.

Profit margins increased among all of our service lines in the fourth quarter and our backlog increased, and we continued to minimize our consulting fees.

In the fourth quarter, total revenues increased 48%, EBITDA increased 70% and net income increased 250%.

Adjusted earnings per share for the quarter increased 207% to $1.26 per share compared to $0.41 per share in the fourth quarter of 2016.

We are also pleased to report record results for the full year ended December 30, 2017, a revenue increase year-over-year of 48% and EBITDA increase of 61% and a net income increase of 107%.

2017 has been truly a phenomenal year.

We have experienced significant wins resulting in organic growth of each of our 5 verticals.

Let me recap some of the highlights.

Our environmental team has seen tremendous growth.

We've announced our work on 2 major pipeline projects with TransCanada, providing environmental compliance and inspection on over 200 miles of gas pipelines in Virginia and West Virginia.

We also acquired Marron and Associates in September, which will strengthen our footprint in the Southwest states, so we expect to see even more growth to come from this group.

I would also like to highlight our energy teams' continued work on Sabal Trail transmission, a 515-mile natural gas pipeline, which has added $14 million in revenue in contracted fees, which we feel will lead to more energy transition projects.

From our energy power group, we've announced $51 million in new contracts from national utility companies.

We also announced in January, our acquisition of Butsko Utility Design.

Butsko densifies our platform, providing additional leadership and technical resources that will allow us to further grow our national energy platform.

Earlier in 2017, we announced the award of -- for work on the Hong Kong Convention and Exhibition Center.

This is a good example of subscription-based recurring revenue engagement.

Our most recent acquisition of CSA Building Services in 2018 strengthens our commitment to Hong Kong and densifies our international footprint.

Concerning infrastructure, work is now underway on almost $2 million of fees with the city of New York, which had been moving through the city's contract and registration process.

Contract registration is underway on additional $15 million in various projects, that we hope to see begin within the next 6 months.

In our construction and quality assurance protocol, we've seen some great examples of cross-selling.

Our acquisition of Holdrege & Kull has teamed with our PM and infrastructure group to provide material testing for projects in the Bay Area and Central California and will be providing project experience and expertise in groundwater management to our infrastructure team.

Our project management vertical has previously announced a $14 million project with Merced County, California, to provide full construction administration and construction management on a County's Campus Parkway project.

We continue to expand our relationship with Caltrans in all districts, evidenced by increased backlog and revenue in both 2017 and in 2018.

Our M&A pipeline remains solid.

We continue to be active but selective with targets that will add value to all of our service verticals.

I feel confident that our organic growth and growth through acquisitions have us on schedule to achieve our goal of $600 million in the run rate revenues by the end of 2020.

Now I'd like to take a moment to discuss the positive effect of the Tax Cuts and Jobs Act of 2017, and NV5's plans to capitalize on this opportunity.

As you've heard me saying many times, our real strength is our people.

We not only want to use the positive tax cuts to reward our shareholders, but also to share our success with all of our employees.

In this regard, NV5 has doubled its contribution to the profit-sharing plan for 2017 for our employees.

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 fourth quarter and full year ended December 30, 2017, and our outlook for 2018.

Michael?

Thank you, Dickerson, and good afternoon, everyone.

First, I will review the results for the company's fourth quarter and full year 2017, and then I will provide an outlook for 2018.

Gross revenues in the fourth quarter of 2017 were $94 million, a 49% increase compared to gross revenues of $63 million in the fourth quarter of 2016.

Net revenues for the fourth quarter of 2017 were $73.2 million, an increase of 43% from the fourth quarter of 2016.

These increases were due to organic growth of approximately 6% as well as the contribution from acquisitions closed during 2017.

EBITDA for the fourth quarter of 2017 was $11.8 million or 16% of net revenues compared to $7 million or 14% of net revenues in the fourth quarter of last year.

During the fourth quarter of 2017, net income and earnings per share reflect a onetime tax benefit of $5.9 million from the enactment on December 22, 2017, of the Tax Cuts and Jobs Act of 2017, known as the 2017 Tax Reform.

Thus, net income in the fourth quarter of 2017 was $11.5 million, an increase of 250% compared to net income of $3.3 million in the fourth quarter of 2016.

Excluding the impact of the Tax Reform Act of 2017, net income would have been $5.6 million, an increase of 71% compared to the fourth quarter of 2016.

Fourth quarter 2017 adjusted earnings per share, which excludes the impact of amortization of intangible assets from acquisitions, was $1.26 per share versus $0.41 per share in the fourth quarter of 2016, an increase of 207%.

Excluding the impact of the 2017 Tax Reform, adjusted earnings per share would have been $0.71 per share, an increase of 73% compared to the fourth quarter of 2016.

Fourth quarter 2017 GAAP earnings per share was $1.06 per share versus $0.31 per share in the fourth quarter of 2016.

Excluding the impact of the 2017 Tax Reform, GAAP earnings per share would have been $0.51 per share, an increase of 65% compared to the fourth quarter of 2016.

Our fourth quarter 2017 adjusted and GAAP earnings per share reflects the weighted average shares outstanding of 10.9 million shares for the full year ended December 30, 2017, compared to weighted average shares outstanding of 10.5 million shares for the full year ended December 31, 2016.

Now we'll review the results for the full year ended 2017.

Gross revenues for the full year 2017 were $333 million, an increase of 49% when compared to the full year 2016 of $224 million.

Net revenues for the full year 2017 were $268 million, an increase of 48% when compared to the full year 2016 of $182 million.

These increases were due to organic growth as well as contributions from our acquisitions closed during 2017.

EBITDA for the full year 2017 was $39.7 million or 15% of net revenues, an increase of 71% for 2016.

Full year 2017 net income and earnings per share was impacted by $5.9 million of onetime tax benefit from the 2017 tax reform.

Net income for the full year 2017 was $24 million, an increase of 107% compared to net income of $11.6 million for 2016.

Excluding the impact of the 2017 Tax Reform, net income would have been $18.1 million, an increase of 56% compared to the full year 2016.

Adjusted earnings per share for the full year 2017 was $2.93 per share, an increase of 92% from $1.53 per share for the full year 2016.

Excluding the impact of 2017 Tax Reform, adjusted earnings per share would have been $2.38 per share, an increase of 56% compared to the full year 2016.

GAAP earnings per share for the full year 2017 was $2.23 over 10.8 million shares, an increase of 83% compared to $1.22 per share for the full year 2016.

Excluding the impact of 2017 Tax Reform, GAAP earnings per share would have been $1.68 per share, an increase of 38% compared to the full year of 2016.

As of December 30, 2017, our cash and cash equivalents were $18.8 million compared to $35.7 million as of December 31, 2016.

At December 30, 2017, the company reported backlog of $296 million, an increase of 34% from $221 million as of December 31, 2016.

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

Now moving on to our outlook for 2018.

We are initiating 2018 guidance for revenues and earnings per share, which we will refine as the year progresses.

We expect full year 2018 revenues to range from $370 million to $405 million, which represents an increase of 11% to 22% from 2017 gross revenues of $333 million.

Net revenues is expected to range from $296 million to $324 million, which represents an increase of 10% to 21% from 2017 net revenues of $268 million.

We expect full year 2018 adjusted earnings per share will range from $2.92 to $3.21 per share, an increase of 23% to 35%.

We expect full year 2018 GAAP earnings per share will range from $2.20 per share to $2.47 per share compared to $2.19 per share for the full year 2017.

This guidance excludes anticipated acquisitions for the remainder of 2018.

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

(Operator Instructions) And our first question will come from Jeff Martin with Roth Capital Partners.

Dick, I was wondering if you could give us an update on what you're hearing in terms of federal infrastructure bill.

And how various state and local government agencies are acting accordingly right now?

Yes.

Jeff, most of my answers, of course, will be -- answer of the question will be more macro.

We have the wind at our back.

There's a tremendous amount of not only discussion of infrastructure but there's a real need for it.

So I think it's being addressed.

I think it's a matter of funding.

And what we have seen right now, we haven't seen any significant bill since the $605 billion FAST Act and a number of bills that we are benefiting from, and I can mention how we are benefiting from them, but I think the funding now, as I see, has been from states increase in the gasoline tax, so we've seen it in a number of different states, and I think that's the first thing.

But I think there will also be other state means of taxation to fund this.

So this is what we're seeing.

How we approach it, how NV5 approaches capturing this market?

As you know, we focus on working with the local municipalities, and we're in with over 300 municipalities around the country.

So we try to be a resource for them that a big state transportation agencies that will benefit from the infrastructure also have those resources.

So there's a lot of federal funding for local municipalities for infrastructure, and we'd like to position NV5 to capitalize on that.

Okay.

That's helpful.

And then could you give us a sense of timing of revenues in Q4?

Sounds like New York was delayed yet again versus your expectations.

Were there any -- besides -- and then in conjunction with that, were there other larger contracts, where there was some noise in the quarter in terms of timing?

I would say, not specifically.

We always have when we do backlog, we record the backlog with expectation of what we're going to bill on a rolling quarter, but sometimes projects are delayed.

And thanks, Jeff, for recognizing New York, because New York went through a tremendous process from the award to the agency approval process to doing the work.

So we did expect some delays there.

But even more importantly, we had a lot of weather issues in the quarter.

And as you know, we didn't quite recover and -- but we're right there as far as the guidance on the revenue.

But rather than being on the higher end of the guidance, we were -- for 2017, we were on the lower end of the guidance.

But -- and this is just really because of project delays, but business is really strong.

And in fact, our backlog is so robust, and I don't want to say this because I like to be -- I'm a little bit superstitious at times, but we -- I have never seen our business to be stronger than it is on all areas of the country.

So the delays that we did see in the fourth quarter were just mostly local.

A tremendous amount of that is associated in the Northeast and particularly with the city of New York.

Okay.

And then a couple of quick items for Mike.

What's the assumed tax rate in your guidance for 2018?

And then secondly, what was the intangibles amortization in dollars for the Q4?

The -- in our guidance, the effective tax rate we're using is 25%.

Obviously, it's reflecting the reduction from the 2017 Tax Reform.

And the amortization expense for Q4 intangibles is $3 million.

And our next question will come from Rob Brown with Lake Street Capital.

Could you characterize some of the things driving the backlog revenue?

You said, sort of, general strength across the board.

But is it certain verticals, is it certain geographies?

Or, maybe, just some color on the backlog and the growth drivers?

Well, a significant amount of our revenue, Rob, of course, comes from California.

So we see a tremendous -- we see some great growth, double-digit growth in the backlog in California.

But we're really seeing it across the country and by certain disciplines.

We are very happy and pleased to see the natural gas pipeline business improving and additional work being, because as you know that was an area because of the price of gas, natural gas was certainly hampered.

So we see some growth in our pipeline transmission business.

And then also, we're seeing an awful lot of growth in our power generation business and our energy generation business.

And -- but this is the first time that I've seen solid growth in almost every geography in the country.

So -- but the disciplines -- we're expecting and seeing significant growth in our energy transmission and energy production generation businesses.

We are seeing some pent-up backlog and growth in the Northeast because of delayed contracts.

And then also, in the overall macro picture, we're seeing there, although, we don't depend a lot on the real estate private sector, we are seeing some positive impact in growth in the land development area also.

And that is mainly in areas in California and in Florida.

Okay.

And then sort of stepping back, your organic growth rate, kind of, discussion to get to your goals in 2020, where are you at your thinking in terms of organic growth rates?

And then I guess, the acquisition component of that goal.

Well, in our budget guidance, we've given about -- we're looking at 8% or so organic growth, a little less than that in 2017.

But a tremendous amount of that is also -- of course, it takes us some time to have our process improvement with our acquisitions and really drive their marketing programs.

So as we have acquisitions join us, we only count the organic growth on that piece of business as to when they joined us.

So it is little -- it's not as precise on the pure organic growth, on the macro picture, that is very accurate.

So I think we can expect 8%, and we're anticipating 8% this year in our budgeting process.

Our next question comes from Mike Shlisky with Seaport Global.

So I wanted to start off with your subconsultants line, it looks like your use of subconsultants was the highest it has been in a number of years, both in dollars and as a percent of revenues.

Can you give us some more color as to what's going on there?

When that might change in 2018?

Yes, we anticipate '18 still running around 20 -- 19%, 20%.

The fourth quarter, it did spike up a little bit.

We have some work that actually got -- that on some projects in New York that utilized more subconsultants.

Just the mix of those projects in the quarter was to that ramp.

But overall, from a 2018 macro perspective, we're looking at around, still I think, less than 20% on a subconsultant basis.

Yes.

Just to add to what Mike Rama said, Mike.

Our mix is about 70% public.

And to the extent that any quarter is impacted by more public work then our subconsultants may up a little, because most of the DBE requirements are a minimum 17%, and we've seen even higher than that.

So as the mix of public work is impacted in any one quarter, you may see a swing.

But as you've heard me say many times, we -- you can't really -- you have to measure something to know if there's real progress.

And so we've come down from a high of almost 1/3 or over 30% subconsultants.

And now we're targeting -- and I know in the budget process, we're targeting about 19%.

Okay.

Can you give us a sense as to the regulatory pipeline and environment surrounding health and safety or instructional integrity with the new presidential administration?

I mean, have things changed greatly in that environment, have they actually gotten less stringent?

Or can you give us any sense as to kind of where the trends are going in that area?

Well, obviously, our business is based on regulatory requirements and supporting regulations.

So I can just give you the -- a general view of our position.

There are -- projects are being released quicker, there are more projects and more targets to go after.

So we are not affected, if anything, we are benefiting by the gross number of projects with the total number of projects that have been released.

And I have not seen any really -- anything yet that has lowered the environmental or health safety requirements on any projects.

And many of the projects that get approved already have the standards in them or they wouldn't be approved.

So if anything, it's not going to be as retroactive.

But in -- as we move forward with this administration, we may see a lesser of regulatory requirements.

But the alternate to that is, we're seeing many more projects coming online that were delayed in the permitting process.

Okay.

Okay.

And just a quick model question, as I try to get the margins figured out here.

And given what you just purchased the last few months, can you give us a sense as to what you think the run rate is going to be for the D&A and for the facility-related expenses going forward?

D&A, depreciation.

For depreciation and amortization, they continue to stay the same.

We bought this year, if you're speaking of this year, in 2018 and entering into 2018, we made a small acquisition, which is a drone aerial surveying and mapping, which we really like, cutting-edge and with our LiDAR services.

The depreciation is pretty much built into that, and it's not much higher than what our standard depreciation is.

We acquired in -- last month, we acquired a mechanical, electrical, plumbing design firm that in our -- in Hong Kong that really, we've had a long legacy history with this firm.

And we don't see a tremendous increase in amortization or depreciation as that is.

As far as the price and goodwill amortization, I'll leave that to Mike.

Yes.

Mike, our -- for the quarter, our depreciation and amortization was around $3.5 million.

And as I mentioned earlier, that $3 million was just on the amortization side of the intangibles.

So that mix is still expected to go forward with that -- with those expenses, if you will, given the acquisitions we've had to date.

And so that expectation should be pretty much going forward.

And then on the other question, where on the facility-related expenses, does that ramp up with the acquisitions in '18?

Our facilities costs have been running around 3.5% to 4%, and we look at that as we go through our due diligence, we see that continuing.

If anything, it could be decreasing as we integrate other offices together.

So we look at that metric very carefully within our groups as we go through the acquisition and due diligence.

And we're running under 4% on facility expense to revenue.

And the industry standard middle -- mean in the industry has been almost 6%.

The next question comes from Jayant Ishwar with Singular Research.

This is Robert Maltbie.

I'm sitting in for Jayant.

A few quick questions and my phone went silent, so I'm not sure if this has been asked yet.

Do you have a number on your backlog year-over-year growth?

Yes.

Our growth within -- we acquired -- we did acquisitions during the year that brought in backlog.

But our organic growth on our backlog was 10% year-over-year, so and that feels (inaudible) obviously, our budgets build in around 8% organic growth.

So it's consistent with our growth in our backlog.

And total backlog as you see was about $295 million or $296 million.

And last year it was to $221 million.

So if it's total growth in backlog, it's...

34% on the....

34%.

Wow.

And as you say, the environment solid, solid growth across the country and in mostly your verticals, never really seen anything quite like that.

So is there a vertical that is showing a better margin pickup or is it pretty consistent?

That's a very good question.

Overall, our margin -- gross margin has improved almost 50%.

There are some inherent businesses that have a higher gross margin, which -- that is our environmental sciences business that tend to have a higher gross margin, our program management business, particularly in the building and vertical side tends to have a higher gross margin.

When I say higher, these are gross margins above 50%.

And then in our forensic group, which is part of our CQA group, their gross margin is significantly higher than 50%, 55%.

So those are the areas that have the higher gross margin.

And then the areas where we look for scalability is in the overall platform, which includes infrastructure and it includes all of those.

And so what increases to our gross margin is obviously, the main number one thing is utilization of our employees and the optimization of utilization.

And then, Robert, what we're trying to do is go to subscription-based revenue on many of our projects like the Hong Kong Convention Center, where we have a reoccurring revenue stream, where that tends to have a higher gross margin, because many of the fixed costs are -- have been paid for.

Whether you're doing the work, it's not labor-driven as much.

Terrific.

And did you mention the -- anything or give any color or guidance for the acquisition pipeline for 2018?

Yes.

That's a great, great question.

Let me give the end of the movie first.

We feel very comfortable that we will hit our goal of $600 million by 2020.

The mix in that to get there, we have said, and this is ground up from our people, is about 50% through acquisition, 50% through organic growth.

We think actually, the acquisition will be adding much more than that.

We had to have tremendous opportunities that really spiked that revenue, Robert, with larger acquisitions.

But we are very selective, we tend to operate at a higher margin in the industry, and represented by growth, by EBITDA, by gross margin.

So we want to be -- we have the opportunity now as we keep building our platform to densify it and be very selective.

We do have -- had opportunities for much larger acquisitions.

And the key thing that we drive on is we don't want anything that internalizes our process.

We want acquisitions, and we're looking at very large ones, and we have opportunities and we continue to have opportunities.

But we want to make sure that it's not going to be something that internalizes our organization or makes us duplicate processes and services where we already have geographies and we already have service lines.

So acquisition pipeline is -- we say no much, much more than we say yes.

We are very, very active.

I don't want to get too much in forward thinking, but I can tell you, we have a very robust due diligence process going right -- on right now.

And we have a significant amount of opportunities.

But the main thing is, we want to continue the process that we have now, which is delivering high returns for our shareholders and growing the company.

And final question and I'll get back in the queue.

So with this -- this is really more theoretical than substantive, with this burgeoning brouhaha between the Fed and the state of California and California being, maybe, your largest state, do you -- are you thinking about any possible exposure in funding there?

Well, I think we can't really address things that we can't control.

But I think -- I'd just like to say some of the overall pictures.

California is the seventh or eighth largest economy in the world.

It is.

And so it's going to take a tremendous amount to stop what's going right now.

Right now, the California economy is extremely strong.

And so if there is any penalties or holdbacks or -- this thing is -- before it even has any immediate effect, it's going to go through the judicial process, to the Supreme Court and many of those things before anything is enacted.

So what I like to say, Robert, is many of us and many of the investors and people that have been with us since we started this company in 2010 and at the end of 2009, when it was still within the rate recession, California was going to fall off the end of the cliff.

Now I mean, the budget is so strong, we have continuing ongoing work.

And just -- if I would just say, fasten your seatbelt because there is some significant opportunities and wins that are for us going forward that are in our Sun belt states, one of California, Florida and the Southwest.

(Operator Instructions) We have a follow-up question from the line of Jeff Martin with Roth Capital Partners.

Dick, I was just curious if you -- if we could look back just the last 2 years, you brought about $125 million of revenue in 2016, by my tally, close to $85 million, $90 million in 2017.

Should we expect that range to continue in 2018?

And do you have any specific areas that you're more excited about in energy, environmental, then 2 major areas of focus more recently?

I was just curious if you could kind of help us categorically and then some...

Yes.

Sure.

Obviously, having my prophetic vision is I see as the blind man.

But I would like to say, I think that we are going to be -- I would look for the acquisition to be more strategic, and one place that will really support our platforms or that will introduce us to new service lines with clients, like we mentioned Butsko, which has done very well for us, what CFA is doing for us in Hong Kong, which gets us to the level 2, which is the government-mandated size that you need to be for many other projects.

So we will continue to look for those strategic acquisitions.

However, we're having the opportunities now for much larger acquisitions.

And when I say larger, it's usually $50 million to $150 million.

So Jeff, we feel that we will -- we should easily do what we've been doing (inaudible) several new acquisitions, but maybe those -- we have a wonderful blessing of being more selective.

And so we were selective in the acquisitions that densify our platform, and we have opportunities at large.

So I don't know the number, but the revenue is very conservative that you've indicated, if you're penciling in $80 million to $100 million in acquisition revenue per year, that's a very fair conservative number.

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

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

Well, thank you, everyone.

We appreciate your interest and I'm proud to say and feel humbled by having another great year for NV5.

And it's just important that we continue to build something for our shareholders and build something for our employees.

So we've had a good year, but we will continue our process.

And our process is what we know, the companies we know.

And I think the benefit that our shareholders and our employees are seeing is that, we continue to have more and more opportunities to grow the company, both in geographies, service lines and through acquisitions.

We expect to see continued improvement in our bottom line.

We think as we -- as our integrations are able to capture more and more synergies through acquisitions.

And as we really -- we feel we can grow the company by supporting our people and having an organization, you've heard me say this many times, look for NV5 to be a flat organization.

An organization that puts our best people in front of the client.

So as long as we can do that and as long as we stay focused on what we know and what we do, we hope that we will continue to have a great year.

We feel very upbeat about 2018.

So once again, I want to thank our employees that have made this happen and our investors that believe in NV5.

So thank you again.

Thanks for listening.

And we look forward to speaking to you again with the first quarter's results.

Thank you, everyone.