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Edited Transcript of IEA.OQ earnings conference call or presentation 12-Nov-19 4:00pm GMT

Q3 2019 Infrastructure and Energy Alternatives Inc Earnings Call

NEW YORK Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Infrastructure and Energy Alternatives Inc earnings conference call or presentation Tuesday, November 12, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* JP Roehm

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

* Andy Layman

Infrastructure and Energy Alternatives, Inc. - CFO

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Conference Call Participants

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* Brent Thielman

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

* Larry Clark

Financial Profiles, Inc. - SVP

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Presentation

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Operator [1]

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Good morning, and welcome to Infrastructure and Energy Alternatives Third Quarter 2019 Conference Call. I'd like to note that all participants on today's call are in a listen-only mode. And with that, I'll turn the call over to Larry Clark, Investor Relations for IEA. Larry, please go ahead.

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Larry Clark, Financial Profiles, Inc. - SVP [2]

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Thank you for joining us today to discuss IEA's third quarter financial results. With us today from management are JP Roehm, Chief Executive Officer; and Andy Layman, Chief Financial Officer. By now you should have received the copy of today's press release. If not, it's available on the company's website. In addition, we have prepared an earnings presentation that you can refer to during the call. You can also access this presentation in the Investors Relations section of the website.

Before turning the call over to management, I would like to direct you to the safe harbor statement. Today's discussion contains forward-looking statements about future growth and financial expectations. Any forward-looking statements should be considered in conjunction with the cautionary statements in today'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.

Since management will be presenting some non-GAAP financial measurements as references, including adjusted EBITDA, the appropriate GAAP financial reconciliations can be found in the earnings presentation as well as in today's press release, both of which can be found in the Investors Relations section of the company's website.

And with that, I'll now turn the call over to JP Roehm. Please go ahead, JP.

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

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Thanks, Larry. Good morning, and thank you for joining our call today to discuss our third quarter results. We are pleased with our financial and operational performance and are particularly encouraged by the significant contract awards that we continue to secure. Furthermore, our pipeline remains healthy across all of our businesses, providing us strong visibility into 2020 and beyond, and supporting our expectations for continued solid momentum. With the integration of our 2018 acquisitions essentially complete, we are now capitalizing on the scale and business line diversity that we gained with these important transactions.

Our operations now provide diverse services spanning wind, solar, civil and rail construction, as well as environmental remediation. We're getting the word out to the marketplace about our expanded capabilities and as a result, we are seeing opportunities to cross-sell among all our business development teams.

We also have benefited from cost savings through improved operational synergies among our businesses as we are self performing work in additional areas, thereby reducing the need to subcontract and thus improving efficiency and margins. For example, we are deploying our civil crews that handle road and bridge work on our renewable energy projects. We also are tapping our crews with electrical expertise to manage electrical infrastructure work on our renewable projects. This work is proving more cost-effective to our customers when we self perform most of the project scope.

During the quarter, we generated $422 million in revenue and we won several new and important contracts across our end markets, keeping our backlog at near-record levels. We were awarded $350 million across all segments. This new business supported continued robust backlog of $2.6 billion, up from $2.1 billion at the beginning of the year.

Let me step back for a moment and give you some recent examples of the contract awards we've landed. In our renewables segment, we have won several large wind projects awards across a number of states, including Texas, Nebraska and Iowa. In total, these projects are valued over approximately $200 million. Construction on majority of these projects got underway in the third quarter and are expected to be completed in 2020.

We also see new business opportunities on wind energy repower projects, which involve work that we perform on legacy wind power projects that need newly installed turbines as well as upgrades to the existing infrastructure. While these projects aren't as large as the new wind project, there is a very large installed base that, over time, represents a meaningful market opportunity. We currently have a repower project in construction, which is expected to be completed in early 2020. These are among a number of significant projects and are indicative of the strong demand we are seeing for clean energy. The shift to renewable energy across North America is an enduring movement, and we believe it will drive demand for construction projects for many years to come.

Our specialty civil segment, which consists of both our civil and infrastructure and our power and industrial groups, was also quite active during the quarter, winning over $160 million of new business across business lines. We believe that our larger, more diverse platform, combined with our strong reputation in a number of key end markets is helping to win business. The U.S. economy remains healthy and a pent-up need to replace or repair infrastructure across the country bodes well for IEA.

In addition, as environmental regulations continue to tighten across the country, organizations are turning their focus towards implementing responsible and sustainable practices regarding the upkeep of their facilities. We address this demand through Saiia, our operating unit that has an excellent track record in this niche end market as they provide environmental services to over 40 different customers across the Southeastern United States.

Saiia recently was awarded a major long-term contract to provide coal ash management services to a large utility company in the southeast. This contract is valued at approximately [$100 million] (corrected by company after the call) in total and is expected to span over 7 years.

As you know, we also have taken important steps to fortify our balance sheet and improve our liquidity, all with the goal of positioning the company to fully capitalize on the growing new business opportunities before us. Andy will discuss this in more detail. We are pleased that the additional funding we recently announced from Ares Management and Oaktree Capital are votes of confidence in our potential and the strength of our platform.

Again, in summary, the successful integration of our 2018 acquisitions gave us important diversity and scale and are helping us pursue new types of businesses. Both our renewable and specialty civil segments are performing well, and we continue to recognize both cost and revenue synergies as we broaden our service offerings to our customers. We are effectively executing on all of our priorities: driving organic growth, operational excellence and collaboration across our newly scaled and diversified platform, positioning us well for 2020 and beyond.

I'll now turn the call over to Andy to discuss our quarterly results in further detail.

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Andy Layman, Infrastructure and Energy Alternatives, Inc. - CFO [4]

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Thanks, JP, and thank you all again for joining our third quarter 2019 call. As JP mentioned, for the third quarter, we reported revenues of $422 million, up 51% year-over-year. We are very encouraged by our performance for the quarter. This represents the highest revenue that we have realized for a third quarter, demonstrating the strength of our expanded business lines.

On a pro forma basis, taking into account our 2018 acquisitions, revenues were down modestly from the third quarter of 2018. This was primarily the result of a moderate year-over-year decline in our renewables operations due to the timing of project construction activities. That being said, business across both our renewables and specialty civil segments remains strong and we expect revenues in the fourth quarter to be strong as well and exhibit growth overall from the prior year's fourth quarter.

Gross profit was strong with $52.9 million for the quarter, representing a historical high gross margin in Q3, and very importantly, our gross profit margin increased to 12.5%, up from 9.7% in the year ago quarter.

Margins were higher in our renewables business this year as we benefited from self-performing electric work on renewable projects and overall performance on projects. On a pro forma basis, gross margins were also higher on our specialty civil business and showed marked improvement over the last year's Q3.

Our SG&A expenses were in line with our expectations both in dollars and as a percentage of revenues, as we now have a larger operating platform. SG&A expenses for the quarter totaled $31.3 million, and as a percentage of revenue, were 7.4% compared to 6.1% in the year ago quarter.

Very importantly, adjusted EBITDA margin was strong at 9.2% in the quarter, up from 8.5% on a pro forma basis. The increase was primarily the result of higher overall gross margins. Adjusted EBITDA totaled $38.7 million for the quarter, representing a historical high adjusted EBITDA margin in Q3 and was up 2.1% on a pro forma basis from third quarter of 2018.

Interest expense was $14 million for the quarter, up from $1.6 million in the third quarter of 2018 as a result of increased borrowings on our credit facility coupled with interest on our Series B preferred stock.

Third quarter 2019 net income was also strong at $12.6 million, more than doubling the year ago level of $5.7 million. Cash from operations was $5.3 million during the quarter, up from $3.4 million in the year ago quarter. Cash from operations is generally higher in fourth quarter of every year due to the seasonal nature of our business, combined with cash generated from working capital.

Capital expenditures, which include capital lease payments, were $21.6 million year-to-date. This is in line with our expectations that capital expenditures will be around 2% of total revenues over the long term.

Backlog as of September 30 totaled $2.6 billion, comparable with the June 30 level, but up approximately $500 million from the beginning of the year.

We were awarded over $350 million in new business in the quarter, which replaced almost all of the revenue booked in our strong quarter.

As JP mentioned, our strong backlog and healthy pipeline demonstrate the strong tailwinds across our business and give us great visibility into 2020 and support our expectations of continued solid growth.

In the past few weeks, we have been able to start work that we had not planned to start until 2020. And as a result, we are increasing our revenue guidance for 2019. We now anticipate full year 2019 revenues to be in a range of $1.3 billion to $1.4 billion. The increase in our 2019 forecasted revenues does not include any meaningful margin contribution, given that the work is early in the project cycle. Therefore, our guidance for full year adjusted EBITDA remains unchanged and is expected to be in the range of $90 million to $110 million.

Now turning to the balance sheet. As of September 30, we had $43 million in cash and cash equivalents, and $386 million of debt, excluding $74 million of capital leases. Included in the $386 million of debt was $278 million of term loan and $104 million of Series B preferred stock, which we are required to classify as debt. During the quarter, we paid down our revolver to a zero balance, leaving us with $29 million of availability.

Let me spend a few minutes discussing our recent equity financing transactions. We filed a very detailed presentation outlining these transactions and their benefits in an 8-K on October 30, so I won't go into the details here on the call. That said, we believe that these were very important transactions for us for a number of reasons. Earlier in the year, we began a series of balance sheet initiatives intended to reduce our outstanding debt under our credit facility, significantly improve our liquidity and put us on solid footing to execute our business plan for 2019 and beyond. In May, we received a $50 million Series B preferred equity investment from Ares Management and Oaktree Capital. This was followed by an additional $50 million investment in August. These two investments enabled us to pay down our credit facility, which significantly increased our liquidity.

Two weeks ago, we announced the final phase of our equity financing initiative with a further commitment from Ares and Oaktree in the initial amount of $80 million with an additional commitment to receive up to $30 million if we need the capital in order to meet our targeted debt reduction levels. We also plan to conduct a rights offering whereby our existing public shareholders would be able to participate in the Series B preferred offering in an amount of up to $15 million in aggregate.

And finally, we reached an agreement with Oaktree, whereby they would exchange half of their Series A preferred shares for new Series B preferred shares, which will significantly reduce the amount of potential dilution that would result in the conversion of their Series A shares into common stock.

We will significantly reduce our senior secured debt under our credit facility taking senior leverage down to a level that triggers step-downs in interest rates on our credit facility and on the distribution rate on our Series B preferred stock. We are also going to prepay a significant amount of our scheduled term debt amortization, eliminating the need for future required pay-downs. In addition, our liquidity will significantly increase and it should give us improved access to bonding, which will enhance our ability to continue to secure the type of large contracts that we are winning.

The transaction will also eliminate half of the dilution to common shareholders from the potential conversion of the Series A preferred stock. And lastly, it gives our public shareholders the right to participate in the Series B preferred stock if they so choose.

We are pleased to have reached these agreements and to solidify our relationship with Ares, Oaktree and our lenders. We appreciate their ongoing support and commitment.

That concludes my portion of the call. I will now turn the call back to JP for closing remarks.

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

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Thanks, Andy. I'd like to reiterate that we are well positioned for a strong close of 2019 and start to 2020. Backlog is at a near-record level, liquidity has meaningfully improved, and we are poised for further advances. Our operations are spread across multiple segments, all of which are growing and generating demand for our services, and our pipelines are solid. As will always be the case, we work hard every day to deliver projects safely, on time and on budget, building on our long legacy of industry-leading performance. Our people, clients and commitment to integrity compose the foundation for our success. We know there is plenty of work ahead, but we are confident we can meet and potentially exceed our goals and deliver stronger financial performance for the full year of 2019 and over the long term.

I'd like to thank you for all participating in our call today.

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Larry Clark, Financial Profiles, Inc. - SVP [6]

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Thank you, JP. At this time, we will open the call up for your questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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

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

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JP, I guess the complications you encountered with weather this year on some of the wind projects. Are there things you've done to approach these contracts differently that kind of help protect your margins going forward?

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

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Yes. I appreciate that, Brent. To the extent that we can, after last year's series of events, we certainly have taken a step back and looked at several things from a lessons learned perspective. We certainly have done several things differently in 2019 and going forward. We have significantly bolstered our operational team with resources, mostly people. And that includes both direct operational resources in our renewable operations group as well as back-office resources such as project controls among many. So I think we certainly have bolstered our resources from our ability to respond to those types of conditions and respond to our customers quickly and consequently, they have been more responsive to us.

The second thing is, we've been in a competitive market but we -- to the best of our ability, we continue to negotiate better terms. The ability to do that is incremental, certainly because of the competitiveness in the market. But to the extent we have, we've certainly taken advantage. And then thirdly, just working with our clients, they certainly -- I don't think any of our competitors in the industry were indifferent last year with what they saw as far as weather impacts in the third and fourth quarter last year. Certainly, we're more public than our competitors. But nevertheless, I think our clients have been willing to work with us. They have understood not only how we were impacted but our competitors were impacted. And so far, our plan has worked out very well and I appreciate our clients' response to the few effects that we've seen in 2019.

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

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Okay. I appreciate that, JP. And then I guess just on the outlook for the year, maybe help me understand the factors that get you to the lower end versus the upper end of the EBITDA guidance range? And then what kind of free cash flow would you expect to generate with that EBITDA outlook?

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Andy Layman, Infrastructure and Energy Alternatives, Inc. - CFO [5]

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Yes. This is Andy. Thanks for the question. So our -- the range is pretty wide from an EBITDA perspective because our business is lumpy. As you know, our projects are primarily large, and it's rather difficult to predict EBITDA as the biggest part of our earnings and cash generation is through the back half of the year, particularly in Q4. We are encouraged by the strength of Q3, so the projects are performing well. They are progressing well. They are on plan, or better than planned in most cases. So we do have expectations to finalize well through Q4 and to be within the range of our guidance.

From a free cash flow perspective, we don't provide guidance on cash flow. However, I will say that like I mentioned, our business is strong from a cash perspective and stronger than other industry type average from a margin and cash dynamic perspective. And Q4 is a very strong historical cash-generation period for us and we expect that to be the same or even stronger this year.

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

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Okay. And then maybe back on wind. Can you talk about what you're seeing sort of a post-PTC environment? How many jobs sort of now slated kind of beyond 2020 and then into 2021 that you are actively going out bidding or quoting?

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

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Yes, I'll take that one, Brent. This is JP. We think for quite some time, going back several calls, you've heard us being very bullish about the post-PTC wind industry as well as through the ramp down of PTC. We continue to be more and more encouraged, of course, on a daily basis. One thing I'll draw you to is Wood Mackenzie has recently -- one of the analysts that follow the wind industry, they have recently raised their forecast by over 6 gigawatts for 2021 construction. Basically, 2021 is currently as predicted by analysts, I think our backlog and activities that we see, we would concur that 2021 is basically going to be a very similar year to what 2019 and 2020 are. So -- and quite frankly, there's -- industry dynamics in play that, that trend may continue. We sat here and talked a lot about the -- in the past about the transformation of technology in the wind industry. I mean the OEMs certainly know that the tax credits are expiring. They certainly are -- they want to sell product. How can they sell product, they have to be cost-effective, right? So they certainly have -- there's been a tremendous drive in R&D and technological investments in these turbines pretty simply. It is -- they're getting taller. The rotors are getting -- are expanding -- the rotor diameters are expanding. So outputs and efficiencies are increasing, which increases the competitiveness of wind each and every increment. So all that being said, 2021 by all analyst predictions is supposed to be a great year, and the dynamics that we've seen and kind of talked about, as I said in previous calls, going forward '22 and beyond, continues to play out as far as efficiency in turbines and such. So we expect the wind industry to be very substantive and stable industry going forward -- steady-state industry going forward.

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Andy Layman, Infrastructure and Energy Alternatives, Inc. - CFO [8]

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Yes. And just to add just one point on that also. It just adds reference for our backlog. In 2021, we've already got over $600 million of backlog booked and our pipeline of projects continues to just grow and be very, very strong for us.

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Brent Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [9]

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Okay. I appreciate that. And couple quick ones if I could. One, I guess just can you talk about how this sort of recapitalization has impacted business? How is the dialogue with customers as you're going through the bidding processes? What -- do you think you've done enough gives them comfort around your path forward?

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Andy Layman, Infrastructure and Energy Alternatives, Inc. - CFO [10]

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Yes. I'll take that first. This is Andy. I think, certainly, we have strong tailwinds across our business areas. And that -- as I noted our backlog is strong for -- we've got tremendous visibility for 2020 and then 2021 is also where we're gaining visibility. We've got a great backlog in place already and we expect to continue to grow that. Certainly, the business needed some changes from a balance sheet perspective to be able to support the growth and strengthen the ongoing business. So we've done that. We've made some significant changes in the structure of the balance sheet this year, and we have positioned it to really be able to meet all our needs with customers and sureties and others.

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Brent Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Okay. Just quickly, the leverage covenants as you get into the end of 2020 and 2021, are those any different?

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Andy Layman, Infrastructure and Energy Alternatives, Inc. - CFO [12]

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Yes. For the -- one of the critical covenants, the only real covenant that we measure against is the leverage covenant. So what we are targeting as we go forward and we expect to be kind of at this level at 1.5x senior debt leverage to adjusted EBITDA. And the reason that we're focused on that is because there are some meaningful rate reductions on the Series B preferred that we are looking to achieve. So our forecasts have us projected to kind of getting to that level as we continue to progress.

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Operator [13]

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(Operator Instructions) As there are no further questions at this time. I would like to turn the floor over to management for closing remarks.

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JP Roehm, Infrastructure and Energy Alternatives, Inc. - CEO, President & Director [14]

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Well, I appreciate everybody joining us today for Q3 earnings call. We look forward to your continued interest in IEA and we hope you have a good day. Thank you for joining us.

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Operator [15]

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This concludes today's conference. You may now disconnect your lines at this time.