Q2 2020 Atlas Technical Consultants Inc Earnings Call
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Hi, It's Rachel Smith.
Our a C H E L.
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Sure.
In addition.
We will be just got to our.
Certain non-GAAP financial measures.
Including adjusted EBITDA and adjusted EBITDA margins.
Yeah releases violate a reconciliation of these non-GAAP measures to their most directly comparable GAAP measure.
Moving to our agenda on slide bleeding.
I'm joined today by our Chief Executive Officer, Joe Boyer.
Who will walk through a broad business overview and update you update at this point.
I will take the backdrop and what do I have Joe's and update on Quadracci in our M&A program.
And then round out with our reiterated outlook before we open up the copper question.
So at this point I'll turn it over to go to pick up on slide four.
Thanks, David brings shape that a good afternoon to all the on the going there otherwise today.
Well, let me start by extending a sincere. Thank you out to all of our Atlas Associates, who worked so diligently to balance the difficult challenges that over the environment and our own personal lives and then while staying committed and focused to the safety and operational excellence of Atlas.
Your talented and unique team I'm Blessed to have you all my team, but if that eight DAP to compete against just so I want to thank each and everyone here.
Let me please direct you to the slide four.
For an overview of our financials, a summary of the services, we offer and the strategic tenets of our book purpose built business that results in an Atlas being a resilient leader in non discretionary compliance driven infrastructure services.
Moving to Q2 2020 highlights on slide five.
We're very pleased with the resiliency of performance of our business during the unprecedented challenges have been focused pandemic.
It's a quarter that was fully impacted was shelter in place orders throughout the us as well as commercial projects shutdowns.
And we delivered healthy gross revenue of 112.7 million.
While showing positive results in our strategy.
Sell and self perform more services.
Which delivered 91.6 million of net revenue.
Yes.
This key strategy to drive more self performance of our services provide margin enhancement opportunities for our business very important.
As I detailed in the last earnings call.
Our leadership team took quick and decisive actions in moderating cost impact that were driven by the Cobra revenue decline.
We continue to prioritize start safety above all else, while enhancing our operational efficiency and financial flexibility for the benefits of.
Of our collective successes.
The data and time to this but those cost control measures.
But with improved self performance were instrumental in driving strong adjusted EBITDA of 15.4 million for this quarter, which was 16.8% of net revenue.
And as always we continue to maintain our focus on cash management, resulting in $39 million up liquidity at the end of the quarter.
Demand conditions still remains solid in our markets that propelled by regulatory compliance driven essential services as well as the upward trend of municipalities and state agencies outsourcing programmatic AD quality assurance services due to.
Private sector.
In addition, approximately half of our business being government base, we do see stability and predictability in our revenue streams, even through these challenging times.
We continue to take advantage of our strong professional service qualifications are national scale and the in the depth of our technical resource that continue to win more marquee and contract awards.
Which have added to a record backlog of 621 million.
We also continue to execute strategic accretive tuck in acquisitions.
Broaden our footprint and deepen our technical capabilities and expand our client base, while deleveraging our balance sheet.
A recent an acquisition of long engineering February's gives deployment nicely.
At our budget and also helping us to expand our transportation services into Alabama, and additional services in Georgia as well.
We are pleased to announce the signing of a definitive agreements to acquire two solid regionally firms in all to Vista, and West test, which further strengthens our transportation and infrastructure services and our west Central in northeast region.
Now turning to the current market landscape I refer you to slide six please.
The nature of our mission critical services as well as our end market mix has allowed atlas to respond well to the cobot 19 challenges without material impacts.
Our government based business delivered solid volume in Q2 with slight improvement over Q1, while our transportation volumes showed growth over the quarter.
No in contrast, the shelter in place orders, most notably in the northeast and Northern California did result in work delays in our commercial sector.
However, I think it's important to note, we've not experienced material project or.
Contract cancellations.
Our business has a highly variable cost structure, which allows us to align our resources with these projected project delays to counteract the revenue shortage during the quarter.
And our prompt planning did result in cost savings in the area of $68 million by year end 2020.
Moving to backlog and key wins on slide seven.
We remain confident that the underlying earnings power of this company remained unchanged from our initial public offerings.
We are aggressively continuing our strategy of growing the business organically and through deleveraging acquisitions that expand our technical service offerings and our geographical footprint with a focus on the states likely to benefit from increased government infrastructure spending.
We've had another solid quarter of winning our share projects and contracts throughout all of our regions.
We provide a summary of a few of those select wins here over the quarter, which include the cost in alternatives and environmental assessment study for the Mississippi River Bridge crossing in Baton Rouge, as well as of $4 million construction engineering and inspection contract with the Odessa District of Texas Apart.
But of transportation just to name a couple.
The strength of our existing client mix as well as these and additional wins have led the company to report record backlog was 621 million at the end of Q2, which is more than 130% of our guided gross revenue range for 2020.
Today, let me turn it back to you.
Thanks, John.
So again were very pleased with the solid second quarter results that are businesses delivered particularly given the top colgate related impact in the marketplace.
And your ability to scalability of our business improved this quarter.
With us delivering sequential improvements over last quarter.
Aiming at the high end of our updated guidance and growing backlog to another new record high $621 million.
While Q2 room and improved from Q1.
As a step with volume was down marginally.
From the prior year quarter with growth in net revenues.
And 112.7 million in 91.6 million.
Respectively.
The Colgate and shopper employee related headwinds, we experienced during the quarter.
Were marginally in our private sector work.
In certain geographies, notably in Greater New York City in Northern California.
While our government related business continued to remain strong.
April represented the low point for us in.
Hi, My business has improved.
Certainly through the balance of Q2.
And into Q3.
In that by going deeper into our Q2 driver, which we were able to optimize our performance and our profitability.
We continue to increase.
In stock performance of work.
Which at this point in the quarter was up to 81.3%.
Which is a whole on improvement from where we were just one year ago.
This along with our who staff utilization than the quick implementation of overhead control we discussed.
Allowed us to record.
1 million as adjusted EBITDA.
And in near 17% margin.
We also produced positive Q2 net income of 2.2 million, which included approximately 1.4 million of onetime expense items.
I'll also note a quick point of clarity where under our current capital structure.
Yes, it class a shareholders.
Calculated by GAAP net income.
In non controlling class E shareholders.
As well as preferred stock dividends.
In post these adjustments resulted in diluted net loss per class a share for the quarter.
Looking quickly at our half yields dollars 2020 compared to 20 IP.
We delivered comparable revenue at 220 plus million.
With adjusted EBITDA at 28 plus million.
Ascend margin.
It's really the underlying resilient in momentum of our business in the pace of clearly challenging business conditions.
I'll now.
Well look on slide nine.
As I indicated at the onset of can give you took quick immediate steps to optimize our working capital and liquidity.
Which helped us during the quarter well positioned us for a strong Q3.
Excluding one time cash expenses related to our public company for a nation.
As indicated.
Generated substantial operating cash flow during the last 12 months.
This is providing significant capacity.
The key about capital allocation priorities.
While near term in Q2, we did temporarily focus on cash preservation and liquidity as appropriate.
Given our strong performance coming out in the back the border, including economic prospects will soon.
We have now Chris has begun.
Back to our more balanced and montel approach.
And this includes investing in our growth through acquisitions.
Enhancing our balance sheet strength.
And providing that among financial flexibility.
Optimize shareholder returns.
And this is additive.
Our two recently signed acquisitions of all that and Wes.
Which weapons and great additions to our platform.
Along with several other targeted M&A proceeds, which will also grew it'd be quickly accretive and de leveraging.
Right in line with our strategy.
While we continue to fund our accretive acquisitions through a combination of cash and stock.
Which is de leveraging.
With high net debt to trailing 12 month, adjusted EBITDA of 3.6 times, including acquisitions.
In our weighted average maturity that five years.
We are in a good envisioned it continue investing in growth with our expectation to generate additional free cash flow.
Since year end.
Turning to our strategic growth trajectory on slide 10.
Our company is rapidly scaled up in recent years through both organic growth and accretive acquisitions.
And we've proven that strong rapid to execute on strategy.
Got it based on the growth achieved roots in years and from 2016 through 2019.
We grew sales at a compound annualized growth rate of about 30%.
Without strong backlog coverage.
Moving end market fundamentals.
M&A pipeline.
We are on track to continue driving above market growth.
Our business as we move into 2021.
Well, let me provide a real time update more specifically, where we are without them.
And as Joe and I discussed.
We have a well developed labor to identify and integrate complement the low risk technical services funds, particularly with infrastructure exposure.
We've been able to accelerate growth.
On our platform through cross selling.
And self performing more work.
Through our expanded capabilities and geographic reach.
Our focus is down.
Who used to be on revenue growth building relationships retaining Alan.
And expanding our client base.
And all of these dynamics playing out the acquisition of one engineering.
Completed in February of this year, which it really outperformed our expectations.
One will be a highly global base, even during this challenging year.
Positively contributing to our results driving one revenue synergies and increasing costs down.
And they've also reviewed some nice key project wins.
The integration activities also ahead of schedule and as I mentioned previously we delivered a two point improvement in soft performance over 81%.
And that's in part.
Yes, the bone.
More recently on the path to me.
We have announced two additional acquisition agreement, which fit squarely within our strategy again playbook, Jeff we did with long.
Last week, we announce it will acquire off the desktop which operates in California.
In New York.
Earlier today, we were pleased to announce our agreement to acquire wet.
Which operates mainly in Colorado.
Both of these acquisitions and transportation focus with a wide range of highly technical service offerings.
On the news and will further strengthen our ability to support our client.
If you take on larger and more or less platform.
In the core potential five trillion.
Infrastructure investments that are required to 2025.
Both up and down mid west cells in wells brands with recurring high margin revenue.
Where we can glide outside adjusted EBITDA growth on a scale platform, while de leveraging our business in the process.
Beyond me.
Yes, I see a tremendous amount of runway.
And following in technical services loan.
In this highly fragmented regional market.
But before I turn it back Doug let me touch on.
Full year outlook on slide 12.
So based on our performance if they all optimistic about around.
The trajectory of our end markets, we would stop.
And moving into right direction with government based work expected to be positive year over year.
And then the private sector.
And stabilization, which is improving our confidence.
As mentioned.
In July and August.
Continued improvement in our labor utilization.
We've adjusted our expected cost saving.
Yes.
Yes.
The year to reflect the steady improvement utilization was our ability to bring back employees.
Based on our design.
Your work and stay in automotive.
We continue to be lifted.
The Afirma all your guidance provided in July.
We expect revenue to be in the range of $453 million to $458 million.
We have adjusted EBITDA range.
Yes.
$4 million.
With improving delivery operating efficiency and utilization, allowing a scale our resources and local upon his brother group.
We have very confident in the underlying earnings power of this company as we look ahead.
We expect 80 watt strategy is growing interest organically deal.
Cleveland and de leveraging acquisition, especially those likely the benefit or move crude gathering infrastructure spending.
We are confident our ability to deliver another 2020 objective.
Turning point toward the solid moment.
Thank you.
Ill now turn back to John.
For closing remarks on slide deck.
Thanks, Dave.
Please allow me to wrap up with a summary on slide 13.
We have a proven resilient business model that resulted continuing strong margin performance and record company backlog, even through the overnight and it.
Our second quarter results demonstrate.
So this industry seasoned leadership team knowledgeable in this highly variable cost environment and also demonstrates the reliability of recurring non discretionary technical services throughout our diverse end markets fixed.
The continued forward momentum of our business has allowed us to be a disciplined wire voice.
Advancing our growth strategy through organic cross selling as well as accretive de leveraging acquisitions in driving improved returns.
The near term, we'll continue to focus on keeping our people say.
Optimized and on our capital structure and liquidity.
While maintaining and developing key client relationships as we looked at substantially benefited from improved economies.
And any possible government infrastructure stimulus spending as we move into 2021.
So thank you for joining us today.
Operator, we'd now like to open applied for today.
Thank you.
This time will be conducting the question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we pull for questions.
The first question today comes from Rob Brown with Lake Street Capital markets. Please proceed with your question.
Good afternoon, and sticking my question.
One of 11.
Elaborate a little demand trends you're seeing today.
Into Q3 here are you seeing.
Project activity are you seeing more business starting to flow again.
Further color on how that's starting to ramp backup.
Sure Rob Thanks for the question, Rob I think what the mix of both actually I think we're seeing projects that were pushed to the right.
Scaling back up and beginning to get back in the flow.
We see that for sure.
Obviously, our transportation business hasn't much.
Fall burden that continues to be strong.
We are still impacted in some of the private sector were particularly the northeast where the shelter in place orders haven't completely.
The way out and I think some projects that we have on board or.
Our soon to get.
Picking up over the next several weeks as well with that so that's what we see them on both the private sector in the commercial side of our business.
Okay. Good.
For the acquisitions you did.
To the size of businesses and then maybe elaborate.
One more year, what areas, you're kind of looking at.
We expect here.
Yeah, Hi, David.
So.
No we're not going to provide a lot of information currently low convinced about the where he will.
Is that.
Yes.
Got to be consistent with our disclosures.
And in many cases at the outset salaries or prospective sellers are sensitive to the financial information that we'd be disclosing so we're trying to be respectful along.
What I will say however that this timing on that we do believe this significant revenue synergy.
And cross sell potential with both of these acquisitions.
At the same currently are providing headcounts.
And I would mention that the revenue and profitability expectations for the acquired businesses will be could accretive but also.
Consistent with the driver at this business.
Okay perfect.
So of course, so thank you for that.
And then just just in terms of what you're looking in terms.
Area areas of focus for acquisitions.
To transportation, but are there.
That sort of your proprietary progress.
For the rest here.
Rob Good question I think not happened.
And made a seek in regards to our transportation.
Focus we like that business, particularly in the in the states that are really being proactive and and finding ways creative ways to you know really.
Rich the funding gap, so transportation, we like it performed well during downturns.
So we still have focused there I would say our other targets are going to be.
Around specialty services that.
Our currently increase our service capabilities.
As well as.
Maybe some geographies, where we don't have a.
A solid revenue I'm, sorry service mix.
In a geography, so we may be added a.
Service capability into regions and provide a better mix of our services so that.
That's an in general some areas that we're looking at.
And I hope that answers that question there.
So thank you for better or.
The next question comes from Kathryn Thompson of Thompson Research Group. Please proceed with your question.
Thank you can think he actually today.
In summary here.
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Our need to issue between that move.
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In place.
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Agent business.
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Yes, exactly that's really team uncertainty 20 performance teacher E hypothetically lashing down addressing.
Hey, good environment.
Hi.
Well thank you.
Sure Catherine Thank you for that.
Yes, some areas that we obviously have a fuel were nicely.
Positions border guards, they're having technical resources is in that industrial hygiene.
That's created.
From this is the challenges of the coated pandemic so.
Industrial hygiene services as I mentioned last quarter.
In helping businesses to maintain a continuity of their businesses ensure were safe work environment.
You know, we see some trends opening up where I.
I think project site construction site.
Regard to how crews worked.
We'll change overtime will and given to have an expertise around how to.
Aid project sites to ensure that.
The safety is Paramount and that you have either sort of this is independent view of the.
The workforce there to ensure that.
There's no.
Expansion of everything M&A to no idea to better.
Project site.
That's clearly we've seen a growth and our business and in that area obviously.
I mentioned the last quarter.
It seems that the that get into the Q2 lose a lot though.
Confusion around.
Really based services that you provided for industrial hydrogen environmental services in the space I think that we see that as a a continuing growth area in the business to be able to help businesses in enabled to keep the businesses driving and efficient so that.
That's what we were implied in that.
Absolutely there yes.
Okay.
And then on Decatherm network.
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How did that trend.
He and media.
And you issued a maturity capuchins team.
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On the construction, including taxes in Georgia.
Are there any exchange and intangible assets.
For sure a gap as you mentioned, Texas has been a.
Really strong performer of ours in a in that.
State and governmental agency I think obviously with.
With the state receiving.
The labor full allocation of prop seven funding.
As well as you know fair share in their oil and gas production up was so both of those.
I think yet have helped us along.
In that space I think I'm, obviously like a lot of areas they reduced traffic flow.
Was a push for us as projects were.
Well, the or accelerated along as well and.
And we see that that same pickup and it's another new beauty areas like Tennessee.
Washington, and Alabama so.
Nice transportation Indio TV.
Services.
During this time.
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And is from Brent human of D.A. Davidson. Please proceed with your question.
Great. Thank you good afternoon, congratulations working through a tough quarter.
Thanks, very much appreciate that.
Yes, I guess my first question.
In the backlog continues to build year 621 million imagine that.
The movie notwithstanding recent transactions.
Talk about what level, though.
Yeah.
Yeah, obviously in the second half and year that but also thinking into 2021 as well.
Yeah, So I'll I'll start off right.
Again based on the fact that we are pretty conservative relative to the backlog that we carry anything were reported backlog is authorized and funded.
So this effectively not not any speculation in the backlog down we're carrying.
So part of the reason that Joe myself, the board made the decision to.
Re institute guidance on the back Ehrenfeld I'm pulling back guidance like many other firms.
Is squarely, though is out of the visibility that we have in our backlog and for the balance in here.
Ultimately our backlog performed very well in the second quarter, we saw particular resilience in the government side of our business and ongoing execution of that work and acceleration in certain cases.
That based on you know sequential improvement month over month loses second quarter now in the third quarter.
Relative to executing on our backlog it put us in a comfortable position offered in position.
Two were from full year guidance, and and likely position us going into 2021 person.
Okay.
Okay. That's helpful. David Thank you.
I guess and thinking about all of its happening in New York, California, and you guys kind of gone through there.
And who knows what time still within energy.
At this stage.
Is that shift with sort of medium term long term acquisition strategy at all I heard a lot it out in the emphasis on infrastructure that geographically and the change of views about where you want to build some scale.
Yeah, Let me say bread that I think that's it adds so I'm just a more information into where our near term targets are I think we've we've been working on number of targets for a long period of time in some areas that.
We really.
Felt were critical for us to get into and improve our transportation services in California that with the idea behind also this then also getting to expand into Colorado.
Which is why west tests was so important to us so we still have some very.
The key targets that are in our pipeline.
And I can't I.
I guess I can't say.
That.
What what particular geographic region there in.
But we still like the northeast. Despite you know the they shelter in place orders and the impact that it's still a a really nice infrastructure market. There. It's a market that we have some strong environmental services to and and ER and feel the need and opportunity to it.
Our material step in this exercise in as well so.
I think we're continuing on with our strategy.
You are getting smarter about what weve larger the corporate environment as well.
All in all I think they really comfortable with what we have in front of us and where we're going.
Okay. Okay. That's helpful. Joe maybe one more just on the App.
It sounds like the private side, it's starting to kind of slowly open back up for you. It doesn't really sound like a demand issue I.
And just try to get a sense how disruptive. It then or it is today just trying to get your people and to access got German facility that their way, we can kind of think about how your some of the region that have been really disrupted are operating at a portion of capacity I'm just trying to get a sense.
Well, what overhang left there.
Great Yeah, Brett you know, we have seen a really the us seven to eight weeks steady increase and bringing our resources back onto projects. So the projects. It definitely been opened it up in the private sector, so getting more of our resources onto the projects that's pretty steady.
And inclining week to week out so you note that we haven't.
But everybody back we're not acted to pre cobot levels in regards to our our dedicated resources, yet, but it's less of an issue around you know the work around the co with environment. It's just.
Working more in line with those projects getting geared backed up a bit of high end the projects and getting them out that have shifted to the right. So I'm not seeing a tremendous more impact on you know these increasing cases really haven't changed our business much over this the second wave if you have.
Okay, well it sounds like you're United Guaranty more momentum in the fourth quarter expenses.
Act.
Yeah, I believe we feel stronger mouth wherever produce and now in.
End of this third quarter, obviously, where our projections are looking like we'd be back to you somewhere new year pre cobot levels when acting in the fourth quarter.
It looks towards right now.
And all signs are sort of leading to that.
Okay. That's great. Thank you guys are taking the questions.
Certainly thank you bye.
Excellent.
The next question is controls view of Macquarie. Please proceed with your question.
Hi, Good evening Gen David.
I just wanted to dig a bit further into the margin.
Based on your guidance build back after the year at the midpoint I'm. It's in soon bye.
Margins expand by point relative to Q2 levels or maybe slightly more with an increase in net revenue mix.
Most of the other puts and takes around or EBITDA margin outlook and admits that.
Improvements and labor utilization.
Some other incremental cost that you expect the back half relative to the player as an offset.
Yeah. Thanks Charles.
Appreciate that question. So what it is a few things one.
The proactive approach to get in front of.
The cost curve at the onset of cold and he's going to help us in the back half the year. So.
This point, we've adjusted our expected overhead savings for the full year 258 million.
And this is the result of.
Our ability to bring resources back online to support increased volume. So that's one thing we're going to benefit from cost reductions.
Secondarily.
As the business scales back stop it's very much our volume issue. So.
Third quarter is traditionally our strongest quarter, we expected to be our strongest quarter. This year not quite at the level that we would have been out in 2019.
But at the same time I'm still a much improved quarter from the second quarter itself. So additional volume additional gross margin.
And then we're going to continue to optimize our self performance. Perfect example is.
Introduction to long engineering to the business. It was a contributor to our improved stock performance in Q2 were Rob as I mentioned two points the 81.3%.
And on it we.
Look to introduce either the business optimistic for the business in them that.
We expect that only to further compound that data that and then lastly, as you rightly mentioned.
Improved utilization, we've seen substantial gains in our utilization even in the face.
The coal did challenge will operating currently at some of the high levels of utilization.
Now in the past so we're going to continue to build on now so not just some economies of scale ability that's going to happen in the back here.
With.
Good color there.
And then just as a quick follow up let me see the.
But at that point out there.
And one and what are some of the most important factor.
About 30 state and local budgets of the next year.
Yes, so so called I think.
You know there's there's.
A little bit of reservation on these bugs that there's quite a bit of.
You know concern around those budgets at the at the state in this value level I also think though with what we are seeing is that you know the state there are realizing that the anticipated impact has been Dennis.
As impactful as they want spot you know.
GAAP tax revenues in such a are increasing as as more driving.
Is it was currently occurring less less flights going on.
Obviously, the sales sales tax revenues or.
Maybe not as a is visible loads as you know the first on that happened. So we're watching the obviously you're watching the state budgets, we feel good about the fact that our work is is funded in way of projects that are cited on did I think what's important to note is wells that are works not engine on a new build yet we do it the mill.
Just amount of maintenance work is done on existing structures for the past App regulatory driven in nature services driven in nature. So.
We feel comfortable that we face these kind of challenges in the path and economic downturns than ever our company's performed quite well with our service mix as well. Those are ahead market next so you know we're watching carefully but.
The comparable going forward.
Okay, great. Thank you guys.
No there's no.
There are no additional questions at this time other than on the call back over to drill Boyer for closing remarks.
Thank you very much appreciate that so we want to thank everyone for joining the call today. We appreciate your support of Atlas and.
Look forward to updating you on the progress over the next quarters. Thank you very much to have a great day.
This concludes todays conference you may now disconnect your lines. Thank you for your participation.
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