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Edited Transcript of IEA.OQ earnings conference call or presentation 8-May-20 3:00pm GMT

Q1 2020 Infrastructure and Energy Alternatives Inc Earnings Call

NEW YORK May 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Infrastructure and Energy Alternatives Inc earnings conference call or presentation Friday, May 8, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Paul Roehm

Infrastructure and Energy Alternatives, Inc. - CEO, President & Director

* Peter J. Moerbeek

Infrastructure and Energy Alternatives, Inc. - Interim Executive VP, CFO & Treasurer

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Conference Call Participants

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* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Kimberly Esterkin

ADDO Investor Relations - Director

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Presentation

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Operator [1]

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Good morning. Welcome to Infrastructure and Energy Alternatives First Quarter 2020 Conference Call. (Operator Instructions)

With that, I will turn the call over to Kimberly Esterkin, Investor Relations for IEA. Kimberly, please go ahead.

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Kimberly Esterkin, ADDO Investor Relations - Director [2]

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Hello and thank you for joining us today to discuss IEA's First Quarter 2020 Financial Results. With us from management are JP Roehm, President and Chief Executive Officer; and Pete Moerbeek, Chief Financial 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 IEA's website as well as in yesterday's press release.

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

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John Paul Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [3]

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Thanks, Kimberly, and good morning. We appreciate you joining our first quarter 2020 earnings conference call and hope that everyone listening in today is staying safe and healthy.

Before I comment on the quarter, which saw significantly increased revenues and profitability as compared to the first quarter of 2019, I want to talk about a top of mind subject, the impact of the COVID-19 pandemic on IEA. Let me start, as I should, with the safety of our employees and the communities in which we work. In mid-March, at the onset of COVID-19, we deployed the protocol set in place by our Chief Operating Officer, Michael Stoecker, who also leads our crisis management team. These protocols have enabled our construction teams to stay focused on their work in hand without any delay in service to our customers. We enhanced our already extensive sanitation procedures, procuring protective masks and other personal protection equipment for our crews, and placed hand washing stations and 55-gallon drums of sanitizer at our project sites. Daily temperature checks are conducted. And if anyone feels sick or showing symptoms of COVID-19, a strict stay-at-home policy is followed. We are offering all our employees 5 days' paid leave to obtain the necessary testing if they believe they have been exposed to COVID-19.

In addition, crews are being kept at a minimum of 6 feet apart in compliance with social distancing guidelines. While keeping our crews safe, we are also ensuring that our employees abide by all of our customers' own safety and security protocols.

As of today, we are not aware that any of our construction crew members or our customer employees who work closely with us have contracted the virus.

That said, should there be any instance where one of our project sites is exposed to COVID-19, we have contingency plans ready to ensure the safety and well-being of all of our employees and customers. Of course, it is not just about the strength of the leadership at the top in deploying the crisis plans, it's also about employees who perform the work day-in and day-out. Even in the midst of a global health crisis, our employees remain dedicated to one another in service of our customers, a true testament to IEA's strong work ethic. One positive light in all of this darkness is that for the first quarter of 2020, we obtained one of the best safety records in the history of our company.

Now let me turn to the impact of the pandemic on our business. While much of the economy is at a halt as a result of the pandemic, as of today, IEA has not experienced any material negative impact from COVID-19. If this continues for the rest of the year, we are well on our track to meet the full year 2020 guidance we initially provided on our Q4 2019 call. Pete Moerbeek, our CFO, will speak further to guidance later on today's call.

The momentum we experienced in the fourth quarter of 2019 continued into the first quarter of 2020. Revenues for the first quarter totaled $358.2 million, up 88.7% year-over-year. Our Renewables and Specialty Civil segments accounted for 69.5% and 30.5% of revenues, respectively. The Renewables segment generated revenues of $248.7 million an increase of 236.1% over the first quarter of 2019. The strong growth in our Renewables revenue was primarily driven by more favorable weather conditions than in the prior year, an earlier start to 2020 projects and an increase in a number of projects constructed in Q1 2020 as compared to the first quarter of 2019.

The Specialty Civil segment reported revenues of $109.4 million, which was roughly flat with the prior year. While we saw a decline in heavy civil construction in the first quarter of 2020 as compared to Q1 of 2019, this decline was offset by improvements in our rail division.

Even with the onset of the pandemic in mid-March, we have not seen a slowdown in our work, and the revenue growth that we saw in Q1 continued into April. Almost all of the work IEA performs, including maintaining roads, highways, bridges, railroads and power systems throughout the United States is considered critical infrastructure. This means that our work sites have an exemption from the state and local shelter at home orders. Although we've received and also sent some force majeure letters to customers related to their supply chains, we have not experienced any significant delays in projects. In fact, the timing, scheduling and resource management of all of our projects during COVID-19 is fairly consistent with what we've experienced before the impact of the pandemic took hold, although there are some inherent slowdowns associated with the enforcement of COVID-19 safety procedures.

Most of our project time lines have some cushion built into the schedule so that even a few weeks delay caused by the COVID-19 virus would not result in a material disruption in the final completion date. We remain in close contact with each of our customers to confirm that our projects remain on schedule and to gain insight into their pipeline of work.

To date, we are pleased to report that we have not had any layoffs. And in fact, we hired over 500 craft labor in the month of April alone. With unemployment, unfortunately, at record highs, we are seeing an influx of talent available. We've received job applications from oil and gas engineers, for example, who have extensive energy construction experience and are now available to support our wind and solar projects.

Bidding also remains quite active, particularly in the wind and rail markets, where some of the requests for proposal are for projects that go into 2021 and even into 2022. The majority of our estimators have always worked remotely, so it was a seamless transition to remote working status for our bidding teams. Estimates are also typically reviewed and approved online. So in-person reviews of RFPs are not needed for us to proceed with our bidding.

Speaking of winning new work over the past quarter, we secured a number of key solar contracts, bringing our solar backlog to $270 million at the end of Q1 2020 compared to $99 million at the end of Q4 2019.

White Construction, a subsidiary of IEA, was awarded a 20-megawatt solar contract to build a 60,000 module solar farm in Northern Indiana this past quarter. Once construction is complete, the South Bend, Indiana Farm will more than double the region's electricity from solar energy resources.

In Georgia, our subsidiary, IEA Constructors, was selected as the engineer, procure and construct contractor for the Appling Solar Farm project in the southeast region of the state. This solar farm will include 95,000 solar modules to track the sun from east to west. IEA will be hiring 200 craft workers to support this project, the majority of which will be recruited from Georgia and specifically, from the military veteran community.

Turning to wind. White Construction, our subsidiary that manages utility-scale, renewable energy and heavy civil infrastructure projects, was awarded a $65 million wind contract for 150-megawatt farm in the northern portion of Iowa. Once completed, this farm will produce enough energy to power approximately 70,000 homes. $56 million of this contract was booked into our backlog as of the end of the fourth quarter of 2019.

It's clear that even with the price of oil and gas at historic low levels, there is still a push for greener, more renewable sources of energy. With the impending phase out of the full production tax credit, or PTC, for wind by the end of 2020, owners are pushing for us to complete their projects this year. Importantly, the economics of renewable wind projects remain strong even without the full tax credit. In a recent report by the energy research arm of Bloomberg, the global unit cost of wind and solar energy has fallen significantly as the technology for extracting and storing renewable resources improves and project sizes expand.

Ultimately, even with the challenges posed by COVID-19, IEA continues to make great progress for -- in the first quarter. Our backlog provides a strong visibility into the remainder of the year, and we are confident in our long-term growth strategy.

With that said, I will now turn the call over to Pete Moerbeek, our Chief Financial Officer, to discuss our first quarter results in further detail. Pete?

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Peter J. Moerbeek, Infrastructure and Energy Alternatives, Inc. - Interim Executive VP, CFO & Treasurer [4]

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Thanks, JP, and thanks to everyone listening. Welcome to our first virtual earnings call, which follows our first virtual closing of our books and auditor review.

Currently, over 90% of our back office is working remotely, and I applaud everyone on our team for completing this quarter end process as smoothly as possible. We filed our first quarter Form 10-Q yesterday, which means that I can limit my discussion to some of the financial highlights.

Our first quarter revenues and gross margin benefited from projects that kicked off in December last year. That meant that we had crews and equipment in place to take advantage of milder winter weather at some of our job site locations. As JP mentioned, our revenue has continued to improve in the month of April. There may, of course, be some shifting of revenue from quarter-to-quarter, but at this time, we still expect to meet our full year revenue target. This assumes that the impact of COVID-19 on IEA and our customer does not worsen from what we are experiencing today.

At this time of uncertainty, we don't know what we don't know. During the first quarter, we created contingencies for increased potential future pandemic costs at our larger projects. The total contingency amount is approximately $10 million. Because of the percentage of completion calculations, these COVID-19 contingencies reduced our gross margin in the first quarter by $5.4 million. We expect the remaining $4.6 million left in the contingency will reduce gross margin over the rest of 2020. Like any contingency, if we do not incur the costs, we will increase margins as the projects are completed.

Unfortunately, this is not the first economic downturn in my career, and we're going back to the standard playbook list of things we need to do to conserve cash. That list includes hunkering down borrowing on your lines of credit and staying focused on your business. We have eliminated all nonessential employee travel and acted a hiring freeze for new corporate employees, deferred our 401(k) matching and paid our Series B and Series A dividends in kind rather than in cash for the first quarter. Through the end of April, our costs and expenses associated with the pandemic totaled $600,000, of which $250,000 was for sanitation supplies and $100,000 for onetime IT department expenses. We also incurred around $80,000 in providing a thermometer allowance so that every IEA employee can self-test each morning.

Our liquidity at the end of the first quarter consisted of $58.1 million in cash and $26.3 million remaining on our revolving credit facility. We have since fully drawn down on the revolver post the end of the quarter. We fully expect to meet our cash needs over the next 12 months. It also helps that we do not have any required term loan amortization payments due until June 2022. Our term loan net senior leverage ratio is under 1.5x, which is a significant reduction from where we were just 3 quarters ago. Last year, IEA raised $180 million by issuing Series B preferred stock, and we used a portion of those proceeds to deleverage our balance sheet by paying down our term note from $300 million at the beginning of 2019 to approximately $173 million today. That effort to improve our liquidity has put us on a much more stable path for growth.

A few other comments about the first quarter. Interest expense for the quarter totaled $16.1 million, up from $10.4 million in the first quarter of 2019 primarily as a result of increased interest on our Series B preferred stock, partially offset by decreased borrowings under our line of credit and term loan in the first quarter. We recorded an income tax benefit of $0.9 million compared to a benefit of $8.9 million for the same period in 2019. At our levels of pretax income, the Series B preferred stock dividends have a significant impact on tax rates as they are an interest expense for income statement purposes, but are not a deductible expense for federal or state income taxes.

For the first quarter, net loss totaled $12.7 million or a loss of $0.66 per diluted share. While a significant improvement as compared to a loss of $23.6 million or $1.09 per diluted share in the prior year period, our goal is to continue improving and to attain net income.

Adjusted EBITDA totaled $16.5 billion for the first quarter or 4.6% of revenues as compared to a loss of $5.7 million or minus 3% of revenues in the first quarter of 2019. Our earnings release, which we issued yesterday evening, shows the calculation of adjusted EBITDA.

Cash used in operations for the first quarter totaled $74.2 million compared to $37.5 million in cash used in operations in the same period a year ago. We generally have negative cash flow from operations in the first quarter of each year resulting from the lower level of first quarter operations compared to the fourth quarter of the previous year.

Capital expenditures for the first quarter totaled $8 million, of which $5.8 million was financed through financing leases. This is in line with our expectation that capital expenditures will be approximately 2% of our revenues for 2020. Our total debt at the end of the quarter totaled $366 million, which included $173.3 million outstanding under our revolving credit facility and term loan, $3.9 million of equipment loans and $188.8 million of Series B preferred stock. Our preferred stock is considered debt because it is mandatorily repayable in 2025.

During the quarter, we added approximately $200 million in new projects to our backlog, which helped to partially offset the $358.2 million revenue burn in the quarter. Our backlog total of approximately $2 billion provides us with solid visibility for the rest of the year. As JP mentioned, our bidding teams are very active as we are looking to add to backlog.

So far in 2020, we have not experienced any significant disruptions to our business from COVID-19. In an uncertain world, we recognize the potential for significant business disruptions beyond our control if the spread of the pandemic increases. We cannot predict the results of our operations, liquidity and cash flows if there were future government-mandated quarantines that prevent our crews from being on-site, that prevent delivery of equipment or that cause customers to cancel or delay construction projects. If we were to see significant changes in our operating environment, we would reconsider our guidance at that time. However, based on what we know and have control of today, we are reiterating our full year 2020 guidance, which anticipates full year revenues of between $1.5 billion and $1.65 billion and full year adjusted EBITDA of between $105 million to $125 million.

I hope that everyone is staying safe and healthy. Now we will end the CFO remarks of what will hopefully be our last virtual earnings call and turn the call over to JP, our CEO, for his closing remarks.

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John Paul Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [5]

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Thanks, Pete.

While we expect that COVID-19 will have a significant impact on how all companies manage their businesses longer term, IEA was in a solid financial and operational position going into the pandemic. And we are poised to be even stronger when we return to more stable macro conditions.

As I mentioned, bidding activity at this time remains very strong, and we are seeing robust opportunities for additional growth across each of our end markets. Even with the impact of COVID-19, the global engineering and construction market is only predicted to be down 0.5 percentage point compared to last year.

In the U.S., spending on transportation, including rail, is forecast to improve 4% year-over-year. Power, including natural gas and renewable energy, along with highway and street construction are all expected to report revenue increases of 2% to 3% on average this year. We hope that history repeats itself in reemerging from the downturn. We see pent-up demand in government and public authority spending for critical infrastructure to reinvigorate the industry and our economy. The U.S. market for wind construction remains very strong. Wind now supplies more than 7% of the nation's electricity according to the American Wind Energy Association. And another 44 gigawatts of wind project capacity or $62 billion in investments is either in construction or in advanced stages of development across the U.S. today.

With the price of oil and gas continuing to drop and even reaching negative territory, renewable energy sources are still booming. Renewables are expected to account for 21% of all electricity in the United States in 2020, up from 18% in 2019 and only 10% in 2010. In some cases, wind and solar panels now produce electricity even cheaper than that of natural gas or coal. And since April of 2019, renewable energy generation has routinely eclipsed coal-fired generation on a national basis.

Today, over 40 states in the U.S. have adopted renewable portfolio standards. These standards require that utilities continue to increase their generation mix of renewables, creating a need for wind construction well beyond the expiration of the PTC. IEA expects to benefit from these renewable energy and specialty civil market opportunities. With the enhancements to our capital and operational structure over the past year that Pete just spoke to, we can now take advantage of the many prospects for growth across each of our end markets. As we look to add new contracts to our growing backlog, we will remain acutely focused on maintaining our employees' safety, providing excellent service to our customers and driving significant value for our shareholders.

We wish all listening in today, along with each of your families, health and safety during these difficult times, knowing that we will emerge from the current situation even stronger than before. Thank you all again for joining our first quarter 2020 earnings call. We look forward to continuing to share our progress over the coming quarters and hope that the next time we speak, the world will be back to business as usual.

Operator, let's now open up the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Brent Thielman with D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Congratulations on the quarter and thanks for still providing an outlook in these times. JP, with the onset of COVID now and so much uncertainty out there, I guess it'd be helpful for me and maybe the listeners just to kind of hear what the strategic priorities are for you now. I mean on the one hand, you've got pretty healthy markets it seems. On the other hand, you kind of want to play a bit of defense right now. So it'd just be helpful for an update to kind of hear from you there.

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John Paul Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [3]

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Yes. Certainly. Thanks for that, Brent. Pete, in his comments, went through several strategic initiatives that we're executing right now during COVID, obviously, to conserve liquidity and cash, probably like every peer of ours and really every industry in the world right now. But luckily, that's on the backs of great performance in the business as I think witnessed in this quarter. And as we've continued to kind of reiterate in this call, absent something that we don't know, it appears the year is going to continue to play out as we thought, and we remain optimistic about that.

On kind of a go-forward basis, we remain very fixated on continuing to replace our burn off each and every month with good and quality backlog for 2021 and even 2022, so recently have done that, and we will continue to concentrate on that this quarter and successive quarters throughout the year. We have a tremendous pipeline of opportunities in front of us in all of our end segments. But in particular, I just -- I think the company is well positioned. Whether you look at the renewable side of our business or especially civil, these are end markets that are continuing to perform well through this COVID situation. And from every indicator that we're seeing so far, they're going to perform well in a post-COVID environment. To kind of dissect that just a little bit.

On the renewable side, there's just -- we're certainly in the middle -- and I don't think anybody would disagree, in the middle of a megatrend of super pivot, if you will, of our country and our world into a carbonless environment. And certainly, our backlog is a great representation of that. The -- we see no shortage of capital investment from our customers and the folks that invest in our projects on a go-forward basis even in a COVID environment. At least that's what we're hearing now, and we don't see anything that really changes that outlook.

On the Specialty Civil standpoint, whether you think about our transportation side, our rail work or -- it's continuing to be -- we're continuing to see robust opportunities throughout our geographic markets, throughout the country. And we expect -- while I know there is some concern, especially on the transportation side of specifically states that have consumption-based gas taxes, the feedback that we're getting from our representation, trade representation in Washington is that well, at a minimum, with the next stimulus, we should at least see a plug for the gas tax hole that's being created by the lacking consumption. But we expect Congress to act on that. We're pretty bullish on that. So overall, we just -- to kind of sum that up, obviously, we've been out on what -- we're out on what we think 2020 is, but the opportunities that we see for the business kind of on a go-forward basis continue to be strong coming through COVID, and we're pretty excited that we're in that position.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay. And the comments on rail kind of surprised me just because it seems like the freight guys are struggling a little bit. But what do you see in there?

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John Paul Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [5]

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For us, in particular, we're seeing CapEx spend with our customers to be quite strong. The rail industry is in a period of change with their efficiency upgrades and such. And that seems to be pushing right through COVID. We haven't had -- we haven't seen any changes in that whatsoever. So like I said, we continue to be in a very good spot from a strategic point of view just across all end markets. We're not seeing really any disruption.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Okay. And then I heard from a lot of companies here this quarter about solar and kind of utility scale solar I mean really perking up a lot of activity out there. I don't imagine it can be as big as your wind business. But I guess two questions. Can you use capacity from your wind business to kind of support that growth? Because I imagine it's moving faster than wind. And two, I guess the question is kind of how big the piece of the pie can this be for you?

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John Paul Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [7]

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Yes. Good question. Well, certainly, there are a lot of skill sets and a lot of resources that could be transferred back and forth between those 2 markets. So yes, from the very day that I think we built our first solar project in 2010, Brent, from the very first day that we built a solar project, we have routinely transferred crews and resources back and forth. They are transferable. Obviously, on a solar farm, you're not installing turbines 100 meters in the air, but there's still a lot of skill set similarities. And also our construction and project management resources are directly transferable, whether we assign those folks to a wind or a solar project. So that is beneficial. The one thing that you have resulting right now is you have both markets in kind of an all-time unprecedented build-out. So whether it's IEA or any of our peers or competitors in the market, we're all -- resources are critical for continuing to scale that business.

I think as far as the growth, I think it's a tremendous opportunity. I'd be careful about putting exact numbers on that coming out of this call. What I would say is that we manage that growth with discipline as we would with any growth area of the business. We're only going to -- the opportunity is certainly there. And we're going to grow it as we can add on to our resources in a systematic manner. We don't -- the old term, we don't want to get out over our skis, and we're not going to. So -- but the key is our customers in wind, most of them are pivoting into solar. So we're able to cross-sell those opportunities. And we look forward in -- as we go down the road, '21, '22, '23, that solar will become more of a mix of that renewable segment and we'll be building more of an equal mix for our key customers.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Okay. I appreciate that. I guess maybe one more. Can you kind of help me understand, maybe Pete, what kind of liquidity do you think you need to maintain to kind of run the business to soon kind of get comfortable? I mean, obviously, you've got a big backlog, a lot to execute on, but imagine you need to keep some liquidity there. So what's kind of the minimum level comfort level for you?

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Peter J. Moerbeek, Infrastructure and Energy Alternatives, Inc. - Interim Executive VP, CFO & Treasurer [9]

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Well, I think we're pretty much at that level right now, Brent. I think we have obviously done a series of models to kind of stress test where we are and what would happen if we were shut down for a month or two. I think right about now is hopefully toward the lower end of where we will be and we see that, at this point, we should be able to increase liquidity through the end of the year. Interestingly enough, for a company like us, one of the biggest challenges is to make sure we don't ramp up too quickly. So when we look at where we are right now, we think we should be fine. And at this level, we are comfortable and while there may be day-to-day fluctuations, we -- it's probably a good level for us to stay at.

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Operator [10]

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We have reached the end of our question-and-answer session. I would like to turn the call back over to JP Roehm for closing remarks.

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John Paul Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [11]

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Well, we thank each and every one of you for joining us today for our Q1 2020 earnings call. Most importantly, all of you in this uncertain environment, please stay safe and stay healthy. And we look forward to reporting our Q2 earnings in August. Thank you. Have a good day.

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Operator [12]

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Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.