Q3 2021 Infrastructure and Energy Alternatives Inc Earnings Call
Good morning, well done to infrastructure and energy alternatives third quarter 2021 conference call I'd like to note that all participants on today's call are in a listen only mode and with that I will turn the call over to Kimberly S Chicken Investor Relations.
For I E. Kimberly. Please go ahead.
Hello, and thank you for joining us today to discuss Iea's third quarter 2021 financial results with US from management are J P. Ryan President and Chief Executive Officer, and Pete <unk> Executive Vice President and Chief Financial Officer before turning the call over to management I would like to note that today's discussion contains forward looking.
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 todays call.
<unk>.
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 press release issued on November eight 2021, and with that I'll turn the call over to J P. Reed Chief Executive Officer. Please go ahead JP.
Well, thank you Kimberly and good morning to everyone. We appreciate you joining our third quarter 2021.
Conference call.
One exciting time to host our earnings call just following the passage of a federal infrastructure Bill Furman.
Certainly suffering we've all been waiting for and I look forward to discussing what this mean for IEA later in today's call.
As those who have been falling I know, we've had a busy start to the third quarter and which we completed a series of financial transactions that significantly reduced our annual interest expense increased our liquidity and improved and simplified our capital structure today I'm pleased to announce that in addition to this.
Progress previously made our board of Directors has now approved a $25 million of warrant repurchase program, which we believe will be a strong benefit to our shareholders by reducing any potential further dilution from the conversion of our public warrants.
Yes.
Turning to the third quarter results for the second quarter in a row.
<unk> has achieved record revenues, we followed a $560 million revenue quarter in Q2, 'twenty, one with a $698 million revenue quarter in Q3 2021.
An increase of 34% compared to last year's third quarter.
$517 million or renewable segment revenue increased by 58% year over year and accounted for 74% of our total revenue.
Our solar Division revenues grew by 35 million from $65 million in Q3 of 2020 to 100 million in Q3 of this year.
We started building our solar capabilities at the end of 2019 and are now seeing the results of those efforts.
In the quarter, we won multiple solar projects, including a 70 megawatt solar EPC project to install approximately 150000 solar modules across our 520 acre site in Pike County, Kentucky.
Our work scope includes all engineering and installation of a civil mechanical and electrical works on the project.
We also won two solar projects in Oregon totaling 200 megawatts construction on these two farms began in September with completion anticipated in November of 2022.
<unk> scope of work includes the full EPC is a solar field as well as the conversion and collection of power to the substation.
And lastly, just before quarter end, we were awarded a 150 megawatt solar farm that will provide clean affordable energy to Georgia Clay County residents, we hope to begin construction next month.
We also saw progress in our wind business during the third quarter as previously announced IEA secured a 110 megawatts $49 million of utility scale wind construction contract in Huron County, Michigan.
Struction of the Deerfield, two wind farm will start in Q4 2021, and our team is so performing the entire EPC scope of the project.
Clinton the construction of a 41 mile collection system <unk>.
The installation of five and a half miles a private access roads and the erection and installation of 21 wind turbine generators.
At the end of the quarter, our renewable segment backlog was at almost $1 8 billion, that's a 24% increase from one year ago.
Let me now comment on the results of our specialty civil segment, which accounted for 26% of the quarter's revenue.
At $181 million.
Especially so revenue decreased by 8% compared to last year.
While our environmental business revenue almost doubled revenue in both our heavy civil and rail markets decreased year over year due to fewer construction projects and a lower average value of projects.
Railcar counts have been down this year, primarily because of the pandemic and our freight rail customers have limited their spending as a result.
I am pleased to note however that bidding for rail projects did pick up at the end of the third quarter. As this activity has continued into the fourth quarter.
With the passage of the very large infrastructure Bill. This past weekend, we expect an improved bidding environment for our heavy civil business.
Even with the new infrastructure Bill there are still challenges facing the construction industry.
These include that of labor material and equipment of inflation as well as supply chain delays.
Before turning the call over to Pete I wanted to discuss these challenges.
He does have some contractual protections.
To reduce our financial exposure to project delays and cost Escalations.
For example in almost all renewable projects the owner directly procure as the wind turbines or solar panels.
So the owners responsible for those price escalation and delays.
Some owners also directly procure other components, such as solar trackers high voltage equipment or cabling.
In general our contracts keep inflation risk at the owner's account until we receive a full notice to proceed.
So it's most renewable projects include mobilization or advance payments, we generally use these payments to fund material or equipment purchases made immediately at the time, we received the notice.
We also have contractual protections in our large long term environmental project as the contract includes periodic adjustments based on a local cost of living index and we are paid for actual fuel costs incurred.
In other instances, we help produce the risk for our other projects by ordering or purchasing materials at the time of the contract award.
While these contractual protections help mitigate much of the material and equipment inflation risks they are not a perfect hedge and we have incurred some cost escalation.
Similarly, we have also had instances of labor cost inflation. However to date that cost has not been material and we have been able to employ the craft labor that we need to staff our projects.
In addition to labor and equipment inflation construction companies are naturally subject to the impacts of adverse weather conditions and the impact of supply chain delays. These delays makes it difficult to properly sequence, our construction jobs, creating inefficiencies and eventually increasing cost.
These inefficiencies that reduced our renewable segment margins during the third quarter and unfortunately based on our discussions with clients and review of the.
Overall market they are expected to provide challenges for the near future.
We are proactively taking measures to mitigate these headwinds whenever possible and we will continue to do so I can assure you that we are fully focused on these challenges and the efforts needed to improve our margins.
As you will know when peak gives our adjusted EBITDA guidance, we are lowering the top end to reflect the challenges, but we are remaining within our original range.
Even with these challenges however, I would reemphasize, we achieved two record revenue quarters.
So Pete will also note that we are increasing our revenue guidance range for the year.
I'll now turn the call over to Pete to speak about our third quarter financial results Pete.
Thanks, J P and good morning, everyone last night, we issued our 2021 third quarter earnings press release and filed our Form 10-Q.
The earnings release, and a November 2021, Investor Slide presentation that we posted on our website yesterday include a separate table to show the impact of the balance sheet recapitalization transactions that we completed in August including details on our share count.
For the quarter IEA recorded a net loss of $100 million compared to net income of $11 million for the third quarter of 2020.
This quarter included a $123 million of expenses associated with our recapitalization and anti dilution warrants.
I will talk about those expenses in a few moments, but I believe that operating income provides a better comparison of the financial results of the two quarters.
This year, our quarterly operating income increased by 21, 9% from $29 $2 million to $35 $6 million compared to last year.
The supply chain inefficiencies mentioned by J P and the hurricane and tropical storm related rainfall in Texas, and Georgia were the primary reasons for the reduction in our operating income margin percentage from five 6% of revenue to five 1% of revenue.
Our gross margin showed a similar trend this third quarter gross margin increased by 22, 6% from $58 9 million to $72 $2 million, but as a percentage of revenue margin declined from 11 three in the prior year period to 10, 3% this year.
The decline was concentrated in the renewables segment.
Yeah.
For the quarter SG&A expenses increased by $6 $9 million compared to last years third quarter, primarily from higher overall compensation expenses travel expenses and information technology expenses as a percentage of revenue SG&A expenses declined to five two.
2% compared to five 7% in the prior year period.
Some other financial highlights.
Interest expense for the quarter totaled $9 $4 million down from $15 million in the third quarter of 2020, primarily from the benefit of the recapitalization transactions we.
We expect the transactions will provide an annual reduction of $22 million in interest expense.
Adjusted EBITDA for the quarter totaled $49 8 million or seven 1% of revenues as compared to $43 1 million or eight 2% of revenues in the third quarter of 2020.
In the third quarter, our cash flow from operations totaled $12 $6 million compared to $5 $8 million in the same period a year ago.
At September 32021, our balance sheet showed cash of $158 $3 million and our debt included $300 million of unsecured notes with semiannual interest only payments at a fixed rate of six and five eighths percent.
Other debt consisted of $4 $2 million of equipment loans, and $52 $9 million of finance lease obligations for construction equipment.
In August we entered a new $150 million credit.
<unk> at the end of the quarter, we had outstanding letters of credit of $33 $7 million, leaving a $116 3 million of availability.
When we measure capital expenditures, we take the net of cash purchases and proceeds and then add the acquisition of assets through finance leases using that definition capital expenditures for the third quarter were $15 $8 million.
We ended the quarter with a total backlog of $2 $7 billion compared to $1 9 billion at September 32020.
Please note that even after reporting record revenue for two successive quarters. Our backlog has not decreased as we brought in an equal amount of new business.
We expect to recognize approximately $1 7 billion of that backlog amount in the next 12 months.
Before turning to guidance I want to comment briefly about the $123 million charge from the refinancing transactions and anti dilution warrants.
Included in that amount are cash payments of $47 $3 million as a make whole premium for the series B preferred stock and $5 $1 million for transaction expenses the <unk>.
Make whole amount is significantly less than the dividend payments that we would have had to make had we not redeem the series B preferred almost four years early.
The 123 million dollar amount also includes a noncash $53 $7 million charge to write off the deferred fees and discounts related to both the series B preferred and the previous term loan.
These expenses would have been recognized over the next few years.
The last part of the total expenses, a noncash charge for the fair value of the potential $2 6 million anti dilution shares that may be issued at the time the publicly traded merger warrants are exercised.
To determine a fair value of these anti dilution shares we engaged a third party valuation firm, which determined that the fair value of the warrants.
And shares at the end of the quarter was $7 27 per share.
More detail about the calculations as found in footnote five of the Form 10-Q that we filed yesterday evening.
We recorded a fair value charge of $18 5 million to record the liability for.
For the next five quarters, we will need to adjust that liability and record the change in our income statement to reflect the changes in the fair value of these anti dilution warrants.
As J P mentioned, our board of directors has authorized us to spend up to $25 million to buy back the public warrants, which trade under the symbol IEA Ww.
Two warrants are needed to purchase share of IEA common stock for $11 50 per share at any time prior to the expiration of the warrants on March 26 2023.
Buyback program will begin on November 11th 2021, and will expire on March 26 2023.
Finally to guidance.
After two record revenue quarters, we are increasing our 2021 full year revenue range to 2.0 to $2 1 billion up from $1 8 billion to $1 $95 billion that we guided previously.
We're also narrowing our full year 2021 guidance for adjusted EBITDA to range from $130 million to a $135 million as compared to the previous $130 million to $140 million as J P mentioned this changes as a direct result of the supply chain challenges that we face.
<unk> in the third quarter and.
And are facing in the fourth quarter.
Thank you for all your time and I hope that junior family have a wonderful holiday season.
I'll now turn the call back to J P.
Well, thank you very much for that Pete.
The North American energy transition is on the cusp of accelerating from already high levels, providing ample room Friday to grow substantially in the future.
While current conditions, particularly supply chain issues remain top of mind, our bidding activity continues at very high levels in the long term prospects for renewable construction continues to improve.
We didnt solar or other preferred source of all new generation here in the United States and currently are the lowest cost forms of new power generation.
While the November 2021, Investor presentation posted on our website provides a more detailed explanation of our growth prospects I want to briefly highlight some of our opportunities during my remarks today.
Beginning with wind wood Mackenzie ranks, the United States second for new wind capacity among the top 20 wind power markets globally and third for the top Repowering market from now through 2030 with a federal goal of a 100% clean energy production domestically.
The department of energy, along with state and local governments are doubling down on their efforts to deploy wind energy.
Solar is on an upward trend and is expected to see a 20% year over year revenue growth in 2021, the largest annual growth for the industry. Since 2016, when the industry was substantially smaller importantly, utility PV market where.
<unk> is building a leading position is anticipated to add 132 gigawatts over the next five years.
The solar Energy Industries Association CEA is advocating that 30% of U S. Electricity generation should be provided by solar farms in 2030 up from prior goals of 20% of electricity generation.
Drivers of the increased expectations include the competitive economics of solar versus non renewable forms of energy a significant increase in corporate off takers to meet ESG goals as well as state renewable portfolio standards, some of which call for more stringent clean energy and emissions reduction goals than that.
The federal government.
At present, 28 states and Washington, D C have renewable or clean energy requirements.
The EPC services that IAA provides represents between 28 and 32% on average of the cost of utility scale wind and solar project that means IEA will be one of the larger recipients of the billions of dollars that will be invested in new renewables energy generation.
As the project owners typically procure wind turbines and solar panels for the projects. We do not have any of the technological risk nor significant capex in any projects, while we were able to benefit from the growth of the renewables industry.
Of course owners and independent power producers will only contract for the construction of a renewable project if they have some certainty of the overall cost of the project.
In addition to the inflation and supply chain issues that we have discussed there are two other near term uncertainties that may affect the start date of renewable projects.
The first is that regulatory and tariff issues may result in a slowdown in the owner's ability to procure solar panels while.
While the current tariffs on solar panels are set to expire on February six 2022. The binding administration has said that it will announce a decision by the end of November as to whether it will extend these tariffs.
In addition, the department of Commerce is also scheduled to announce at the end of this month a decision on an anti dumping and countervailing petition that was severely limit the import of Chinese solar panels coming from southeast Asian countries.
The second uncertainty has the potential for the extended PTC and ITC credits.
The currently proposed build back better legislation extends the ITC, which applies to solar projects through 2032, and the PTC, which applies the wind projects through 2031.
With these extensions wood Mackenzie is increasing their expectations for wind production capacity from its original base outlook by 44% between now and 2030.
There are expectations for utility scale solar or even better up by 52%.
The wood Mackenzie forecast for overall utility scale solar installations expects that the currently proposed build back better legislation were adopted in 2030 installations will be four times larger than they were in 2020.
While the legislation status has not yet decided there is broad support for the additional tax benefits for renewable projects.
Beyond renewables, especially civil side of our business, including environmental work continues to provide growth opportunities, particularly in the southeastern United States Federal and state requirements to cleanup unwind coal ash ponds to mitigate environmental risks will require significant investment over there.
Next 10 to 15 years.
Over the last decade, the U S was shut down or announced plans to retire more than 65% of its coal power plants.
There remains about 241 existing coal fired power plants in the United States and the expectation is that many will be decommissioned or demolished over the next 20 to 30 years.
Last year nearly nine two gigawatts of coal were retired with expectations of additional retirement of three two gigawatts this year.
The coal ash opportunity is in its early stages with less than 20% of existing impoundments of landfills Remediated the date.
We are in discussions with several clients or potential coal ash pond remediation projects, our expertise in coal ash removal will certainly be a benefit to our business.
I will end this discussion where we began.
Passage of the bipartisan infrastructure Bill.
In areas relevant to I E over the next five years. This legislation provides for more than 110 billion and increased highway funding $66 billion in passenger and freight rail upgrades 73 billion, an electrical grid upgrades and billions of dollars dedicated to many other areas.
Public infrastructure.
We'll support at the federal government and across state and local communities. We see a very strong runway ahead of our business. While it will certainly take some time before the federal infrastructure Bill season impact.
On our revenues, we look forward to continuing to share our progress along the way.
This concludes our prepared remarks for today. Thank you for joining US this morning for our third quarter call. Operator would you. Please open the call up to questions.
If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys.
First question is from Adam.
<unk> with Thompson Davis. Please proceed.
I wanted to start actually on the <unk>.
S. Three that you guys filed last night I had some questions from clients related to the timing of that can you give us some details there.
Sure Adam this is Pete.
We filed the S. Three because it was a requirement when we did the transactions that we file an S. Three within 90 days.
Three basically registered all the shares.
That.
Ares procured at the time of the transactions.
The way that some of the transactions were structured is that Ares would not own more than 32% of the active outstanding shares which is exactly what they do they own right at 15 3 million shares. They also own about $4 $3 million of warrants those warrants take their total ownership.
Two real close to 36%, but the 4% difference our shares that they cannot vote, except in certain cases.
So areas is restricted from selling any shares for 12 months from the transactions and this was just part of the original transaction. So there is nothing unique and why we filed the S. Three at this point.
Okay. Thanks.
Thanks for clearing that up and then JP I wanted to press you a little bit on the bidding in renewables and your thoughts on where the backlog might end up at the end of this year.
Well, obviously I mean, we're very very happy with backlogs at currently.
Our.
Our bidding environment.
It's very strong you know every week.
Personally get a list of our big calendar and I can tell you that it's kind of a return to kind of pre pandemic levels.
So the bidding bidding is strong we're already have a strong backlog.
But we're continuing to see strong opportunities.
Out in the 'twenty two and beyond.
Okay and then.
The supply chain issues.
They're pretty well advertised for solar I'm, just curious if youre seeing supply chain issues on the wind side.
I'd say, we're seeing supply chain issues and almost area almost other almost every area of the business and or in resource portions of the business for instance, just trying to find parts for construction equipment trying to find construction equipment period rental equipment.
Or just plain old construction material.
Finding many.
Many different materials from Pi to other pretty common construction materials that were once.
On on hand are pretty Ratably on hand, we're having to send.
Literally trucks across the country to pick up what was once a local order.
Before.
We're also another thing that we're seeing is the.
The tremendous escalation and shipping costs.
Both.
Both domestic and foreign.
And one area one area of our business, we're seeing shipping costs across the ocean.
Four to five times greater than what they were six to 12 months ago.
I mean nobody.
Nobody has a crystal ball, but do you see that dying down for the 2022 construction seasons some of these channels.
Everybody who sits in these seats like Pete nine and everybody's doing these calls in the E&C industry are sitting here thinking the same thing and we're getting our crystal ball out we're trying to.
What is going to be transitory out of these inflationary and supply chain.
And what is going to be a new normal.
We hope that most of it will return to normal but.
Obviously.
Some of the Escalations, particularly in labor will continue so.
As we are and just to get ahead of the question. If it comes out where obviously, we didnt release anything on <unk> 22 in this call and don't.
And in our prepared to.
I think like like all like all of our peers in the industry, we're sitting here and trying to gauge what 22 looks like given this environment that we're in.
Okay. Thanks for the color I'll turn it over.
Our next question is from Noelle Dilts with Stifel. Please proceed.
Hi, guys good morning.
Good morning Julien.
<unk>.
Of course, I am going to ask.
About 2000.
Plenty to sort.
Sort of.
You know when I look at your fourth quarter margins. They are implied in guidance, there's still pretty good maybe 80 to 100 basis points below what we were looking for.
And kind of staying with the third quarter, some impacts, but not tremendous I mean, when we look into 2022 should we kind of think about that same type of level impacts you know.
Relative to some of the longer term margin targets, you've looked at or you've talked about for renewables.
I guess the bigger picture question or the broader question is just how should we think about quantifying that.
That the drag that you're seeing from some of the sequencing delays and the impact on productivity and how should we think about that persisting into 2022 things well.
Well I think it's going to persist for the near term.
Here again back to the previous question I wish we had a crystal ball.
I think we hope by by mid 'twenty, two that some of those effects.
Start to subside.
But they are sitting here today, there is still they are still very well alive in our parent and <unk>.
So it's it would be difficult for me to say, otherwise and things are going to change.
The immediate near term.
And then I guess the other question is when you look at some of the new contracts that are coming up for the new projects forbid are you seeing improved pricing to account for higher labor costs then.
Just to maybe some of these inefficiencies or is the market not quite there yet.
Well, we do the best to.
Get this question a lot right what can you perhaps on how do you revise your your pricing.
I can tell you what our processes are every month as part of our monthly and quarterly close process.
Not only his operations heavily involved in that but all our pre construction and bidding in estimating teams are involved in that process.
The effects that we're seeing in the escalation that we're seeing is where all of that data is coming in real time to our estimating department and and I think as we've talked about before in previous calls we tried to.
As we go forward try to bid to the current environment. So.
What I'm trying to say is that where we're.
We're passing that information, along certainly internally and trying to propose with kind of the latest market data on the on our newest bid opportunities.
Okay that makes sense. Thank you.
Thank you Don.
Our next question is from Zane Karimi with D. A Davidson. Please proceed.
J P and good morning, and thank you for taking my questions.
Hey, good morning.
Well first off can you provide an update on the wind maintenance business.
<unk> for the team you've added from GE and how that's performing to date.
Yes, good question.
I would I would just reiterate my previous remarks from previous calls about their first year performance is that expectations.
We've not come out with anything publicly.
For that business unit.
So.
Stop short of releasing any kind of data.
But I'll tell you from management's perspective.
They are certainly.
They've certainly met their expectations of management and in 2021.
And we certainly continue to believe in the plan that we put together for that business in 'twenty two and forward. So we're very happy with the progress.
I think we're still continuing.
Some are between 115 200 technicians in that group now so it's scaling scaling up quite nicely.
Okay. Thank you for that I know you've talked about it a little bit today, but along the coal ash remediation side of things is unique it's a growing opportunity for you.
And I think we kind of understand the long term implications, but how can we think about the trajectory of the business in the next few years.
Well I think there I think from what we see in our pipeline of opportunities are there is there is a.
There is certainly a plethora of opportunities over the next couple of years.
I think the I think that the issue that ourself or anybody else in that business always has the balances.
Many of these states you don't you don't get regulatory.
Assistance in these kind of costs. So obviously in those kind of even though this is a federal policy driven.
Its not revenue its not a revenue producer for the utility so many of those.
Unfortunately delay or kick the can down the road more.
More than I think any of us in this industry would like but that being said I think.
I think there is plenty of opportunity for us and those in the industry and we continue to grow our business manage really over the next couple of years.
Okay that makes sense. Thank you.
Thank you Zane.
That's the end of our question and answer session I would like to turn the conference back over to J P for closing comments.
Well, thank you operator, and we thank each and every one of US has joined US for our Q3 quarterly call. We look forward to having all of you join US again in early March as we report on.
Q4 and year end. So thank you all have a very safe and joyous holiday season, and we'll see all going remarks. Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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