Q1 2022 Atlas Technical Consultants Inc Earnings Call
Hello, and welcome to the Atlas Technical consultants first quarter 2022 conference call.
Currently all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference.
You May press Star zero on your telephone keypad as a reminder, this conference is being recorded I would now like to turn the call over to your host Jonathan Parnell Chief strategy Officer of Atlas. Thank you you may begin.
Good morning, and thank you for joining us we hope that you have seen our earnings release issued after market close yesterday. Please note that we have also posted an updated investor presentation, which can be found in the investors section of our website at IR <unk> com.
Before we begin I'd like to remind you that today's call may include forward looking statements any statements, describing our beliefs goals plans and strategies expectations projections forecasts and assumptions our forward looking statements.
Please note that the company's actual results may differ from those anticipated by such forward looking statements for a variety of reasons many of which are beyond our control.
Please see our recent filings with the Securities and Exchange Commission, which identify the principal risks and uncertainties that could affect our business prospects and future results.
We assume no obligation to update publicly any forward looking statements. In addition, we'll be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA adjusted EBITDA margins adjusted net income and adjusted EPS. Please see our earnings release and filings for a reconciliation of these non-GAAP .
Measures to their most directly comparable GAAP measure.
I will turn the call over to our CEO Joe border.
Thank you Jonathan and I appreciate everyone joining us today.
On today's call I'll provide an overview of our first quarter results and an update on our strategic priorities, including the benefits we're seeing from our recent acquisitions.
David will continue with the discussion of our first quarter financial results.
And our outlook for the remainder of the year and then we'll open up the call for questions.
The first quarter was a strong start to the year for Atlas with 10% revenue growth.
Including an acceleration in organic growth.
13% adjusted EBITDA growth, 24% backlog growth.
And the completion of two strategic acquisitions.
Operating results in the quarter were in line with our expectations given our normal seasonality. We believe we are on pace for continued revenue growth margin expansion and improved cash flows leading to another record year for Atlas in 2022.
In the first quarter, we enjoyed a robust 6% organic revenue growth rate, which was driven through a combination of solid end market fundamentals and a strong backlog growth we generated in 2021.
Additionally, we continue to see benefits from the acquisitions, we completed over the last several years as we offer our customers a broader set of highly technical services across all our key geographic regions.
I'll come back to this strongly with more specific examples of how our acquisitions are contributing to organic growth.
Backlog at the end of the quarter reached another record level at $851 million.
5% from last quarter, and 24% from last year, driven by continued organic backlog growth and contribution from acquisitions.
Our awards continue to be driven by environmental and infrastructure markets from both our public and private sector customers supported by secular trends such as the aging of the nation's infrastructure and an increased focus on environmental sustainability.
Beyond our current backlog, we have approximately $110 million of awards pending contract execution.
This figure is lower than the last several quarters, because we've had some very large outstanding contracts convert into backlog such as the $50 million pit access project, we announced last quarter.
This figure is likely to vary quarter to quarter and this trajectory from one quarter to the next does not change our view of the overall end market environment.
Last quarter I indicated I was as optimistic as ever about the outlook and fundamentals driving our business and I reiterate that statement today construction spending has hit record levels in recent months.
Demand for planning, the permitting engineering project management, and test and inspection services nationwide.
We're seeing strong demand in our state and municipal markets and our customers tax revenues remained healthy and they increased the volume of program management contract that will ultimately allow them to allocate additional funding related to the infrastructure Bill over the next several years.
And on the private sector side of our business with large national clients like Sam's club and 711 were seeing continued demand as they invest in areas such as environmental compliance clean energy and the digital transformation of their assets.
As we grow atlas's scale, broaden and enhance our technical service offerings and strengthen our geographic footprint across the U S. We're seeing more and more potential to provide our services on larger programs and with more national customers.
We recently announced an award with the Los Angeles County Metropolitan Transportation Authority to provide environmental capital construction support services for their major capital projects and property improvement projects over the next three years.
The contract has a maximum value of 86 million and we booked $12 million into backlog with the potential for additional bookings as work is released and awarded by the customer.
But we're excited about the potential magnitude of this project. We're also excited about what it means strategically for Atlas says this was a Prime example.
Cross selling opportunities across our acquired companies.
This is a high profile infrastructure improvement program and another example of atlas's ability to work on some of the nation's largest and most critical infrastructure and environmental projects.
Now, let's turn to our strategic priorities and update on the progress we've made with these initiatives.
As we look to drive organic growth.
Expand margins.
And to improve our capital structure and drive overall value for our stakeholders. These priorities at the foundation of everything we do at Atlas.
First and foremost we will continue to utilize our broad service offerings at a national footprint to capitalize on strong market fundamentals to drive organic growth.
I touched on some examples of how we are executing on our cross selling strategy with major project wins and penetration with larger regional and national customers.
Our strategy helped drive 6% organic growth in the first quarter, we remain encouraged our new business pipeline and the opportunity for continued organic growth momentum throughout the year.
Secondly, we remain committed to our M&A strategy.
In the first quarter, we completed the acquisitions of transport and one alliance genetics.
Each of these acquisitions not only strengthened our footprint in key geographic regions, but also added and enhanced the highly technical services, we can offer toward national customer base.
Importantly, less than two months. After these acquisitions, we're pursuing projects it would not have been able to pursue without their technical expertise.
To provide additional insight into how our M&A strategy contributes to atlas's overall organic growth profile I wanted to take an opportunity to give an update on one of our previous acquisitions.
In August of 2020, we acquired Alta Vista provider of transportation related program management Engineering and inspection services.
Not only as Alta vista's EBITDA more than doubled since the acquisition.
But most importantly, we've.
We've been able to leverage all of his track record in relationships combined with Atlas is natural footprint and technical capabilities.
This has proven to be a key factor in major wins for Atlas such as the pit access project. Alta Vista is also strengthen our position with some of the largest state transportation agencies, such as Cal trends as well as others in key regions.
This is only one example of successes we have enjoyed with our acquisition strategy, but provides good insight into how acquiring smaller companies with a specific technical skill set and or regional footprint drives outsized growth.
Yes.
Third we remain committed to strengthening our capital structure and constantly evaluate all potential options that can help us drive shareholder value.
We continue to expect improvement in this metric throughout the year.
And we remain committed to reducing net leverage through a combination of organic growth cash generation deleveraging M&A.
And other potential options that may become available to us.
And fourth is our commitment to ESG.
Atlas services are aligned with many of our customers ESG goals, and we're committed to providing safe and healthy infrastructure.
And sustainable resilient systems through our comprehensive infrastructure and environmental service offerings.
We recently completed a project to remove a 60 year old Levy, although do Wamus river outside of Seattle.
We restored natural salmon habitat that will allow young fish to mature before moving back into the ocean.
Just like this are increasingly driving our customers' investment decisions and we are well positioned to capitalize here.
Additionally, and internally at Atlas, we're in the process of finalizing the formal ESG reporting metrics and goals and are looking forward to releasing our first annual ESG report in the upcoming months.
We believe these priorities and initiatives are the key factors for Atlas to drive value to all shareholders and we'll continue to update on our progress going forward.
So with that I'll turn the call over to David to provide details on our financial performance and outlook.
Thanks, Joe.
Before I begin the discussion of our quarterly performance and outlook I'd like to point out the new detail, we're providing in our income statement.
As you've likely seen in our press release and 10-Q, we've adjusted the way we report revenue and expenses.
And we believe this breakout provides additional transparency into our business and will help investors understand how growing our scale will ultimately allow us to drive margin performance going forward.
Turning to the quarter.
Gross revenue of $135 2 million in the first quarter 2022 was up nine 7% compared to the prior year quarter, driven by 6% organic growth with strong performance in all of our service areas as well as contributions from acquisitions.
Gross margin was 46, 8% in the quarter down modestly compared to last year due to a greater percentage of subcontractor costs in the quarter.
Excluding sub contractor cost, which would compare to a net revenue metric gross margin increased 20 basis points compared to last year to 57, 9%.
This increase is the result of our disciplined pricing strategy over the last year and improved utilization of our workforce.
Adjusted EBITDA was $16 5 million in the quarter and was up 13, 4% from last year.
And represented 12, 2% of gross revenue and 15, 1% of net revenue both higher than last year.
This was driven by the solid operational performance I mentioned and it fits of growing our scale as well as improved management of overhead costs.
In our new reporting format, you can see the breakout of personnel costs and benefits, which represents the majority of our overhead costs.
This metric declined over 200 basis points as a percent of gross revenue from the prior year quarter and in our view provides insight into how Atlas is benefiting from an efficient cost structure.
And operating leverage as we continue to scale.
For the fourth quarter, we produced adjusted net income of $900000 in adjusted EPS of <unk> versus $4 8 million and 14 cents in the prior year quarter.
The variance in year over year net income in EPS was driven primarily by the conversion of our preferred equity into our unit tranche structure in Q1 of 2021.
In that period, we had $5 9 million preferred dividend that did not impact net income.
Which in this quarter is now reflected in our interest expense.
Okay.
Moving onto our cash flow and balance sheet.
In the quarter, we had a cash used from operations of $16 million.
As Joe mentioned, there's a normal seasonality in our operations with first quarter being the lowest and building throughout the year.
This is also the case for a cadence of cash flows you can expect to continue to see a use in the early part of the year followed by a steady increase towards Q2 and a strong contribution in the second half of the year following our higher volume quarters.
Improving working capital management is a key priority for us, especially as we bring acquired companies onto the Atlas platform.
And based on our outlook, we expect a strong year of cash generation with full year free cash flow exceeding that of 2021.
Net debt at the end of the quarter was 508 million increase from the end of the quarter was primarily related to the debt associated with the acquisitions, we completed in the quarter and working capital needs due to the seasonality of our business.
Our bank Covenant ratio, which includes cost efficiencies and pro forma EBITDA from acquisitions was five seven times up from five four times at the end of the year in 2021 and down a full turn.
From six seven times in the same period last year.
We've demonstrated excellent progress over the last 24 months and simplifying and strengthening our capital structure and we'll continue to drive improvements through the balance of 2022 and into 2020 three.
Moving on to our outlook, we are reaffirming our revenue and adjusted EBITDA guidance for 2022.
We expect 2022 revenue to be in the range of 580 $620 million, an increase of 10% at the midpoint as compared to our 2021 results.
This outlook reflects the continued strength of our backlog and visibility on the timing of work strong market tailwind, we see and contributions from acquisitions.
We anticipate adjusted EBITDA to be in the range of $84 million to $90 million.
At the midpoint this represents growth of 19% or 100 basis points of margin expansion.
As compared to our 2021 results.
We are also keenly focused on driving cash flow throughout the year and as I mentioned expect improved cash flow results over the next several quarters, especially as we get into the latter part of the year.
We are extremely excited by this growth potential for our business moving forward and with that I'll now turn the call back to Joe for closing remarks.
Great. Thank you again, David we had a strong start to 2022 with accelerating organic revenue and adjusted EBITDA growth and another quarter of record backlog.
We're building on the momentum we gained over the last several quarters and are on track for another record year in 2022.
Our focus is capturing the opportunities that are available to Atlas, both organically and inorganically.
Driving efficiencies in the business and improving our capital structure.
I'm extremely proud to represent our many employees who are fully committed to delivering mission critical projects in the U S and a safe and sustainable manner.
Thank you again for joining us.
Operator, we can now open up the lines for Q&A. Please.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
We ask that you please limit to one question and one follow up.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Rob Brown with Lake Street Capital. Please proceed with your question.
Hi, good morning, guys and nice job on the quarter.
Hey, Rob Good morning, Thank you very much thanks, Rob.
For the first question is about some of the nice contract wins, you had in the quarter and I think you've alluded to some cross selling efforts that helped those but maybe you can put what sort of drove some of those contract wins and what were you able to.
To do to help get those over the line.
So Rob.
You know really it's just a continuation of our overall strategy I mean, we built this company on the basis of really adding a platform, bringing on really solid companies onto the platform with additional technical capabilities relationships and they've been able to leverage those relationships and combine them with the <unk>.
Atlas current capabilities to pursue larger opportunities. So rob we've been able to do that and that's really been the key to organic growth and our growth.
In the quarter as well so we've had successes in the cross selling the innovation of really.
Gain in revenue synergies. We are also and that's the case with L. A metro that was the case, Rob with the win at Penn access.
But we've also.
Pursued some really nice opportunities during the quarter that are you know, we're still pursuing haven't hurdle.
Some nice opportunities in the mid Atlantic around transportation.
And then using some of the recent capabilities of Trans Marty Although we just bought them two months ago, we're already pursuing opportunities that we would not have been able to pursue without their capabilities.
California rail opportunities, which we're doing significant no relationship and technical capabilities combination from legacy acquisitions, as well, Georgia transportation opportunities commercial development opportunities the northeast all the way to the West coast. So so that's really what we're doing Rob it's part of the strategy.
And we've been successful at being able to do that.
Okay, great great to see and then in terms of some of the margin trends here and maybe what youre seeing in terms of labor price inflation I think your guidance implies some improvement gross margin, but how do you see that playing out at this point.
Yeah, great Rob So again, Unfortunately, we're at 90% cost Reimbursable business and as we said in the past.
We've been actively increasing our pricing with our clients, which is evident in the margins. We're delivering if you look at our EBITDA margins.
This quarter versus a year ago, if you look at our gross margins on labor.
There also so.
We still look at the labor cost inflation as being transitory.
We've been really effective in building and pricing and driving our margins up.
Okay, great. Thank you I'll turn it over.
Our next question comes from Chris Moore with CJS Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking a couple of questions.
Yeah, Yeah, maybe just a follow up on good morning on that kind of the macro challenges.
Little bit longer term, it's you know does it much higher interest rate environment.
Have an impact on and.
Any specific areas of your business from from a kind of a customer demand standpoint.
Chris That's a good question, let me say that and I think that's important to realize that.
As we built this business. We this business has never been reliant on new construction to drive our growth, we do quite a bit of work maybe two thirds of our work is around.
Work being done on existing assets right, so the maintenance of existing assets.
And the assessment.
Of those various types of assets is a key part of what we do you know our services are really around code compliance and regulatory compliance.
So so I'm not you know what we've done really well.
In the past and in situations, where there's been a.
A reduction I'm sorry in a tighter.
Economic cycles, our business has done fairly well I think.
What you might think about as the commercial space typically might have some.
Some some tightening in the commercial space, but I also we haven't seen it so far I gotta be honest and I think there's there's quite a bit of pent up demand in the commercial space with you know the COVID-19 impacts over the last two years.
That are really driving that continuation in that space as well not to mention just the whole drive in logistics and.
Warehouse space and that stuff so.
I think we're comfortable where we are there and I'd just remind you that we did quite a bit of maintenance work and so I.
I think I you know I think we're comfortable going forward I think the commercial real estate market. Although interest rates are high is still.
From a real estate transaction, there's still a tremendous drive for you know environmental due diligence and property condition assessment services as well so that's contingent on a plot along.
Our private you know our state I'm, sorry, our state and municipal markets are seeing some really nice growth as well.
With tax revenues remain in healthy and really fueling continued investment in the growth of their communities roads and bridges and parks I mean sidewalk improvement programs fire houses and libraries as well so.
We're seeing quite a bit of growth in those areas as well.
Got it extremely helpful I'm looking at your.
At the at the revenue guidance is there any is there any tailwind from infrastructure bills built into the to the.
The high end of the guide.
Chris as we've said before.
We're not anticipating a real uplift in our business until late this year and into 2023 in regards to the infrastructure Bill. So the high end of our guidance really doesn't anticipate.
Any current pick up from the infrastructure Bill.
The Bill is going to fund existing state Dot's maintenance and preliminary engineering and safety programs and those programs that we're currently driving our work so that'll be a continuation of our current work, but the answer the short answer to that is our current numbers don't anticipate any significant revenues.
In 2020 through 2022 from the infrastructure Bill.
Got it it's helpful I'll jump back in line. Thanks, guys.
Thanks, Chris Thanks, guys appreciate it.
Our next question comes from John Romero with D. A Davidson. Please proceed with your question.
Good morning. This is John Ramirez from Brent Thielman.
Hey, John how are you.
Good how are you.
The first question.
Thank you.
Alright, any infrastructure being delayed due to an increase in cost of agency estimates.
Has that impacted the flow of new project.
That's a really great question I think the short answer to that is as we are seeing some moving around and re phasing of some projects because of the.
Current estimates and I know thats happened in Georgia.
They around you know the Georgia 400 project.
<unk> five project as well so that is being.
It's definitely a challenge to state Dot's as they move around and phasing of projects with the increased costs currently.
Being from bid activities, but but I will tell you the activities. It just moves to another project. So that may have moved around but the current opportunities to propose on large projects really hasnt slowed down yet.
Thank you.
Just a follow up on margins.
Margins.
Are there any signals that you're seeing from the private sector any weakness.
You mentioned you said it was pretty strong in that public, but if you can give us more color in regarding the private sector. Thank you.
Yes. So this is David Cohen, it's we haven't seen any real impacts yet in fact, we've we've seen steady if not improving.
Bidding opportunities on commercial work, we've raised our pricing and we've been successful in continuing to win projects.
So all the signs for us are that we're going to continue to be able to drive margins in the business. If you look at the <unk>.
Things were targeting beyond growing revenue and driving pricing increases.
Being aggressive on driving operational efficiencies and this all in the whole will support the almost one five percentage point margin expansion.
We've guided to at 18, 1% for the full year.
So let me just I'll just add onto that as Dave said, we really arent seeing as I said mentioned earlier really arent seeing any slowdown in the commercial sector currently I mean the.
<unk> activity is construction labs are high.
As I mentioned I think that's due a lot of pent up demand there.
We are seeing growth in and really some.
Of our existing customers using and leveraging our relationships and our experience to take us into new geographies, and we're seeing that and really sort of logistics and warehouse developers, taking us to new projects and.
And existing customers like Sam's in.
Clients like 711, who is really driving.
Really our management of the consolidation of their vendors and relying on Atlas.
Two.
Really to manage compliance and environmental issues, an entire new regions.
Great. Thank you so much I appreciate the time I'll jump back in the queue.
Thank you.
Our next question will come from Noelle Dilts with Stifel. Please proceed with your question.
Expand a bit on your acquisition pipeline.
And just sort of how you're how you're thinking about deals right now and specifically when you're looking at deal. How are you assessing if the companies you're targeting how they're dealing with some of these challenges around labor supply chain and things like that.
And if it is kind of changing your assessment process.
Hey, Noelle so a lot of the deals we're looking at.
Are very similar to what I was doing there similar to what I was doing in certain areas of the region. So we're looking to make sure that they've been able to have success in increasing their prices and theyre not getting squeezed on their margins similar to what we've been able to do here at Atlas.
So the pipeline is active we're still finding plenty of opportunities with proprietary deals and.
We will continue to make.
<unk> made progress on our M&A strategy.
Yeah.
Okay, Great and then.
Then when you do also see too you're just sort of the the project opportunity pipeline, obviously, there's been this big shift and.
Your backlog towards larger projects do you expect that to.
Do you expect that to continue to move in that direction as you get additional awards through 2022.
Okay.
Hum.
As you know that's always been a part of our strategy right.
<unk>.
Articulated that since the very beginning right. So I think as we have grown in this platform increased our technical capabilities. It just makes more sense for us to pursue more.
More complex and marquee projects and programs. So we will continue to do that is clearly part of our strategy. We've been extremely successful at doing that we feel are really from the integration and the cross selling from our.
Legacy companies. So it clearly is a continued part of our strategy. There is nice opportunities in front of me. That's also to say, we're not not turning it away from small projects from our existing customers. We were still have are.
A company that's got a tremendous amount of small projects.
I think one thing I would like to note, though that larger projects to us don't mean more risk, but that's really important to understand because it's still time and material work for us for the most part.
And it's still asset light and it's still you know labor intensive work that we have.
Throttles and handles on being able to control our labor and labor cost there. So no additional risk. We're not accept this is not an EPC or not taken firm fixed price work past cost reimbursable time and materials still directly in our lanes of our core service areas that we know and do very well so still.
A large part of our pursuit pipeline Noelle and then we're taking our existing customers and growing into new regions.
New services as well.
Perfect. Thanks, so much.
Yeah.
Our next question comes from Kathryn Thompson with Thompson Research Group. Please proceed with your question.
Hi, Thanks, just following up on the last question as Atlas starts to win these larger projects.
How do we think about subcontractor usage here and.
We can step up in the past two quarters.
So let me.
It's really just managing subcontractors.
But these are just not yet.
Yes, Catherine I think it's a really really good.
For all of these larger projects, we certainly pursue.
There is a minority or a D V component.
Most of our work that stipulates what percentage of work we'd need to subcontract out I think in the last two quarters, what <unk> seen since <unk>.
Quarter in the first quarter here, we had a large.
Geotechnical and drilling project and I'd now that really drove significant subcontractor UCITS in there. So it's a little off of that quarter. So over time, though over the year I think youll see our ste.
<unk> focus on trying to deliver is.
As many of our services and keep those opportunities in house as there is better margins for us and subcontract. It out so outside of contract requirements I don't anticipate any additional need and some contracting out work from where we currently are.
Okay great.
With several you also touched on larger projects.
Okay, Alright, I tried project Penn station.
Continue to grow that platform and add surfaces.
Which is an evolution in the firm.
The company.
How is this resonating with your stakeholders and your customers.
You continue to develop in your capabilities.
Yes.
Well, let me I believe it's been extremely favorably.
<unk> from our shareholder J Golders, our investors I think just being able to deliver.
A wider array of services and <unk>.
Using our existing relationships with our customers in an offering.
You know.
An expanded list of opportunities keeps those relationships going we go to new geographies.
Catherine in that.
And I think some of our customers do have larger projects and as we've grown more comfortable with us pursuing that work as well.
I think although we you know we do rely on our national platform of experts you know we have a technical organization that we deliver our work from.
And so trying to bring the right technical resource to the job, we still have and rely on local relationships. That's really the key to driving our business is having those local relationships and then using all of our technical capabilities and bringing them to the right job at the right time.
Okay. Finally that my my last question.
Listen you're you really are.
Services company, but you're not immune to some of the ongoing challenges with supply chain.
As you complete jobs and work with your key customers, who are also mentioned supply chain. How has that that's quite journey chain been for you. So far in 'twenty, two isn't any better or worse and changed versus six months ago, and then how do you see it going forward.
A year.
Yes, I would say.
As you mentioned supply chain is not a significant challenge to us personally and may delay or widen our project schedule, but there are markets in which it has a direct impact to us I think I've mentioned two quarters ago in regards to landfill liners.
And particularly on projects in the Midwest for US there was a slowdown in that at that.
Really caused about a two months delay in us being able to do landfill wider inspection work continue that has since moved on and those projects are moving.
We have a little bit of challenge.
Just getting vehicles just for us our own resources.
We've just had our recent delivery of trucks that we ordered.
Six months ago, or so we got us to where were static about that.
And then I think also our petroleum market, we do quite a bit of work in the retail petroleum market and there are some <unk>.
Lays there in regards to getting.
New tanks at retail.
Gas stations and those those kind of issues or driving some project.
Delays, there, but what we.
We don't see significant.
Issues outside of that.
I'm just going to add anything I missed some guys that you would add to that.
Thank you.
We don't expect a significant worsening by any means going forward.
So I think I think we've been able to dodge sort of supply chain commodity side impact that other EPC firms in light of experience and I think the only other thing I'd add to that is we did have a.
A concrete strike in the Pacific northwest that caused us some pretty good impacts in the first quarter and the Pacific Northwest.
Now been resolved and projects are being accelerated to pick up that change but they.
They said I don't see any.
Additional challenges going forward outside of those that I've mentioned.
Okay perfect. Thanks, so much thank you.
Catherine appreciate it.
We have reached the end of the question and answer session I'd now like to turn the call back over to Joe Boyer for closing comments.
Thank you operator appreciate that.
And I want to thank everyone for joining us today and we do appreciate your support of Atlas and look forward to updating you on our continued progress going forward. So thank you have a great afternoon.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.