Q3 2022 Bowman Consulting Group Ltd Earnings Call
[music].
I'd like to welcome everyone to the by minute consulting groups third quarter 2022 conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by T. St. Key. Please note that many of the comments made today are considered forward.
Looking statements under federal Securities laws as described in the company's filings with the SEC These statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed in the company is not obligated to publicly update or revise these forward looking statements. In addition on today's call the company will discuss.
Such non-GAAP financial information, such as adjusted EBITDA or net satisfying.
You can find this information together with the reconciliation to the most directly comparable GAAP information at the company's earnings press release, and 8-K filed with the S. E C and on the company's Investor website at investors don't buy them in Dot Com management will deliver prepared remarks, after which they will be taking live questions from published research analysts throughout the coup attempt.
On the webcast may pose questions for management to answer on the cool or in subsequent communications, but there'll be no live Q&A from the webcast attendees replays of the call will be available on the company's Investor website. Mr. Bergman you may begin your prepared remarks.
Right.
And Youre welcome Bromine consulting group third quarter 2022, only four I'm, Jerry Berman, Chairman and CEO of Bowman I'm joined this morning by Bruce Leibovitz, Our Chief Financial Officer.
I wanted to start by thanking everybody for your continued commitment to delivering exceptional solutions to our customers and for yet another record quarter to our shareholders Brian .
Brian and many of your employees through acquisitions this quarter and I'm pleased to have all of you as part of the Vulcan team.
Also recognize that today's Watson today, I would like to add a special. Thank you to many government employees were also service veterans.
Given the strength of the quarter and the momentum we are experiencing so far in the fourth quarter. There continues to be an apparent disconnect between the behavior of our clients is affected by the key performance indicators of our business and the recessionary concerns we hear in the media.
While we've adopted what we consider to be a cautious and defensive approach to managing the size of our internal investments and our risk in specific growth initiatives pace.
Pace of new orders and high utilization rates gives us confidence that we will again see growth in 2023.
At the time of our IPO, we talked about our five year strategic growth initiative, which included a 12% organic compound growth rate target and an aggressive acquisition program, which when combined would result in a thoughtful growth trajectory from a $100 million of net revenue in 2000 $20 million to $500 million of net.
Revenue in 2025.
Nearly two years ago with a $265 million plus run rate by the end of Q3 were ahead of plan.
Since our last conference call in August our M&A and integration teams have been busy.
Closed on three new acquisitions with additional opportunities currently at various stages in the pipeline.
Microengineering added at Marine Waterflood ports and Harbor engineering skills to our portfolio of services, while also adding underwater survey.
<unk> demonstrates our continued commitment to expanding our energy transition in solar infrastructure engineering practice to support clients the complex energy infrastructure requirements.
The special acuity reflects our belief in the value of leveraging certain geospatial data collection of reality capture technologies that are in high demand by our customers while also enabling.
Efficient growth.
Each of these acquisitions brings a unique value proposition to both of them and they all provide a meaningful base of business from which we intend to cross sell our services and grow revenue.
Now I'm going to turn the call over to Bruce who will discuss our financial results in detail and I'll return to talk a bit about our markets before taking your questions. Bruce great. Thank you Gary we're pleased to be here today discussing another record quarter.
When I refer to the quarter I mean, the three months ended September 32022.
When I refer to last year I mean, the period ended September 32021.
Throughout my presentation, I will refer to certain non-GAAP financial information, such as EBITDA and net service billing, which we also refer to as net revenue.
You can find this information together with reconciliations to the most direct comparable GAAP information in yesterday's earnings release and in our 10-Q, which will be we will be filing on Monday since the SEC is closed today in honor of veterans day.
Last night, we released results for another consecutive quarter of record gross revenue net service billing and adjusted EBITDA.
We've continued to deliver exceptional organic and acquisitive growth in the third quarter of 2022 and year to date.
When you normalize the acquisitions closed during the quarter ended in the fourth quarter, we're pacing at a net service billing rate of over $265 million annually.
Based on the acquisitions closed since our last call and order trends, we've been experiencing so far in the fourth quarter, we raised guidance for the full year and concurrently introduced net service revenue and adjusted EBITDA guidance for 2023, which we believe suggests as Gary indicated rational optimism about next year.
Gross revenue for the quarter increased $31 5 million or 79% to $71 2 million year.
Year over year organic gross revenue growth was 23% net.
Net service billings for the quarter increased $29 2 million or 82% to.
To $64 9 million year over year organic growth for net revenue was 25%.
Net income for the quarter was $3 4 million or <unk> 26 per share basic and <unk> 25 per share dilutive. This is an eight five fold increase over the prior quarter.
Adjusted EBITDA for the quarter increased $5 2 million or 118% to $9 6 million as compared to Q3 2021.
This represents an adjusted EBITDA margin net of 14, 8%, which is up 240 basis points as compared to Q3 2021.
Turning to the year gross revenue for the nine months ended September 32022 increased $78 1 million or 72% to $186 1 million.
Year over year organic growth of gross revenue was 28%.
Net revenue for the nine months increased to $71 9 million or 70% to $169 million year over year organic growth for net revenue was 31%.
Net income for the year was $4 5 million or 36 per share basic and <unk> 34 per share diluted this is a fourfold increase over the prior year.
Adjusted EBITDA for the year increased $11 9 million or <unk>, 94% to $24 6 million.
This represents an adjusted EBITDA margin net of 14, 6%, which is up 150 basis points compared to last year.
Based on relatively unchanged utilization rates and a 23% growth in our core non acquisition head count.
We estimate that approximately 92% of the organic growth in net revenue is the result of increased work, suggesting roughly 8% of the growth.
The organic growth is due to inflation wage inflation.
Gross margin for the quarter was 52% as compared to 51% last year.
Overhead for the quarter was roughly 49% of net revenue as compared to 52% in the prior year.
We believe this 300 point basis 300 basis points improvement demonstrates our thesis regarding the operating leverage we can achieve through the efficiencies of scale.
The distribution of gross revenue for the quarter was roughly 63% building infrastructure, 19% transportation, 12% power and utilities and 6% other emerging markets, which includes water resources mining and other energy transition services.
Given market uncertainty around certain aspects of the building infrastructure market, we again dug a little deeper into the distribution of revenue to give as much transparency to the market as possible.
To that end for sale residential related services represented approximately 11% of total gross revenue for the quarter.
Again, turning for the year the distribution of gross revenue for the nine months ended September 32022 was roughly 68% building infrastructure, 14% transportation, 13% power and utilities and 5% other emerging markets for sale residential related services represented approximately <unk> 12 per.
<unk> of total gross revenue year to date.
As we discussed last call while for sale residential services are a meaningful component of our overall business, we do not consider it to be over weighted with respect to its potential impact on future results.
During the year, we have reduced building infrastructure from 74% to 63% of gross revenue, while increasing transportation from 8% to 19% and emerging markets from 4% to 6%.
Our power and utilities has grown nominally it has declined marginally as a percentage of gross revenue, we hope to reverse that trend over the next few quarters.
Our balance sheet remains strong with $23 million in cash as of September 30, net debt of approximately $19 million and a net leverage ratio well below one.
Our debt is a combination of fixed rate seller financing notes from acquisitions and capital leases, we have no balance sheet.
Outstanding with no balance excuse me under outstanding under our revolver.
With our existing debt, we have no meaningful exposure to escalating interest rate carry due to rate increases.
Before changes in working capital, we generated nearly $24 million from operating activities was just over 12 million from operating activities after changes in working capital the.
The change in working capital is again, principally the result of increased accounts receivable because of our rapid organic and acquired growth.
Our backlog as of September 30 was $230 million. This was a nine month increase of $63 million or 38% as compared to December 31, 2021, and an increase of $91 million or 65% as compared to September 32021.
Backlog is comprised of roughly 51% building infrastructure, 33% transportation, 13% power and utilities and 3% other emerging markets in general we expect roughly 80% of our backlog to turn into revenue within a 12 month period.
As Gary mentioned, we're increasing and narrowing our fiscal 2022 guidance for net service billing to a range of $2 30 to 234 million with adjusted EBITDA in a range of $33 million to $35 million.
This is our fourth beat and raise of 2022 guidance since introducing our outlook last November .
The increase from previously issued guidance as a result of both recent acquisitions and expected continuation of organic growth.
We're also introducing fiscal 2023 guidance for net revenue of $270 million to $290 million and adjusted EBITDA in the range of $42 million to $48 million.
It represents an adjusted EBITDA net margin of approximately 16%.
Growth next year as a result of existing revenues projections from discussions with clients.
And expected growth.
Keep in mind, our guidance only includes acquisitions that had been completed as of the date of the guidance is issued future acquisitions could have an accretive impact to our forecast.
Finally yesterday after earnings released in connection with our regularly scheduled meeting.
Our board meeting authorized a stock repurchase plan of up to $10 million. The program is to be used as deemed reasonable from time to time to address market inefficiencies with respect to our stock are.
Our top priority for capital allocation remains investment in strategic growth, both acquired and organic.
We're confident that we have sufficient cash on hand cash flow from operations and access to debt to meet all potential demands for capital.
Have no current intentions to execute a structured equity offering we will continue to use our equity as a component of consideration and acquisitions.
I wish to thank everyone.
For being on the call.
I will turn the call back over to Gary.
Okay. Thanks Bruce.
I'm going to take a moment to address our positioning relative to the general economy, and the state of our markets and our plans for capital allocation, including mergers and acquisitions.
As I did last call I'll start with the macro environment for our industry markets and our customers.
Bottom line is demand for infrastructure investment and the built environment remains strong overall signals from our clients suggests most sectors and markets continued to experience an imbalance between the demand for our work and our industry's capacity to meet that demand.
In the residential market that includes mixed use for sale housing for sale housing demand from homebuilders for developable and buildable lots remained strong on the dirt.
Or through third party developers.
Housing stock continues to remain low from a historical perspective relative to demand and build their balance sheets are as healthy as they've ever been built.
Builders and developers are for sale multifamily and mixed use projects are adapting their models for the current demand climate.
We have every indication that we remain active in your inventory creation efforts to be positioned to benefit when conditions reach equilibrium and revert to more normalized supply and demand dynamic.
As Bruce mentioned.
Revenue from our for sale residential clients.
Represented just 11% of our revenue in Q3, and 12% year to date.
Overall, we are beginning to realize our goal of de concentrating building infrastructure within our revenue base.
Transportation and traffic engineering continues to grow and provide an opportunity for capturing incremental market share as it increases the concentration within our revenue mix.
So our transportation traffic teen growth through acquisition and hiring so too does the size of the opportunity set for which would compete.
Through acquisitions, we have both expanded and deepened our transportation credentials, which has resulted in an enhanced competitive position nationally with dot's municipalities private roadway developers commercial operators and other transportation authorities.
We've made several announcements recently regarding new projects for a range of transportation and traffic services.
We're getting we are beginning to experience the early benefits of the transportation infrastructure Bill and.
We foresee a healthy uptick in transportation assignments in 'twenty, three and extending into 2024.
Demand for power and utility services continues to expand and evolve into longer term larger and larger scale projects with increasingly larger contract values to compete for.
Recent extreme weather events are served to reinforce the need for times of fortification and resilience initiatives, we support for public quasi public and private utilities to ensure uninterrupted provisioning of critical electric gas and water resources to the customers.
Our underground work continues to expand rapidly with existing and new clients and our work with energy efficiency is in high demand.
Reports from Florida. After the recent Hurricane suggested kind of electric and underground and work we've been doing with pipes electric in Florida power and light.
<unk> had a profoundly positive effect on minimizing dangerous and life threatening long term service disruptions.
Our other markets, which we refer to as other emerging markets include water and wastewater resources mining marine infrastructure and energy transition.
We're pleased with each of their contribution to our results in particular the work we're doing for solar and wind producers and also the battery storage operators has great potential for future growth.
In addition, with all the transportation infrastructure spending being planned today, an area of focus for us is to expand our mining support business.
Unscripted copper mines include aggregates another film components.
Sure you'll hear more about that from us over the next few quarters.
So overall, while it would be inaccurate to say, they're not some pockets of weakness those two areas are softening we are experience being more off more than offset by what continues to be an increasing demand for infrastructure engineering.
Turning to labor.
The high degree of overlap of our skill sets required between the markets between the markets. We serve is deliberate and affords us an opportunity to leverage and optimize our labor force to maximize our utilization.
This remains a fundamental tenant of our M&A program.
We continue to be engaged with and invested in substantial employee retention and recruiting efforts.
Yes, labor is tight but it's manageable.
Our increased investment in employee engagement is paying dividends, we have reduced voluntary turnover and increased our hiring hiring rate with a talented professionals we pursue.
Being a public company has had a very positive influence on our ability to attract and retain employees.
Bookings are what we refer to as sales continued to grow along with revenue as evidenced by a book to burn ratio that's significantly above one.
This can be seen in our backlog growth. It's also important to note that our book to burn ratio is exclusive of backlog added through acquisition.
Our M&A pipeline remains active with deals of varying sizes, all valued inside of our target valuation range.
Year to date, we've acquired over $50 million of annualized net revenue at an average multiple of under six times 2022, adjusted EBITDA estimates were.
We expect to close on a few more acquisitions by year end that will be similar in size to our recent deals.
We may not hit our $75 million target that we laid out at the beginning of the year, but we'll probably end up somewhere in the low $60 million area.
As a result, we're very happy with this year's acquisition program.
We're looking back to the acquisitions, we closed in 2021, we've generated a 24% annualized growth rate for net revenue from those acquisitions alone.
On an average multiple of roughly five five times that represents an improvement of approximately one turn of purchase price multiple.
Now, let's take a moment to focus on our commitment to geospatial technology and help define reality capture.
Reality capture involves the use of advanced technologies, such as high definition, 360 cameras and three dimensional laser scanners to collect existing.
<unk> built conditions for use during design construction and operations.
What is often referred to as geospatial tools were photogrammetry technology is used to enhance the speed and accuracy of data collection.
For civil and commercial infrastructure to support the progress measurement and project control.
The technological advancements in geospatial applications for engineering and construction presented a tremendous opportunity for leveraging this technology to extend the utilization of our human capital.
We're very excited about this line of business and expect to cover it more in future calls.
In closing we are pleased to continue to deliver on our commitments to our shareholders.
Proud of the work we've done.
I look forward to continuing our work into 2023.
While I wish everyone, a happy and healthy Thanksgiving and holiday season.
Now I'm going to turn the call back to the operator for a Q&A session.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one I'll go to that thank you Pat We report so just a moment to compile the Q&A roster.
And our first question today goes to Alex Regal of B Riley Alex. Please go ahead. Your line is open.
Thank you good morning, gentlemen, Gary and Bruce very very nice quarter.
Thank you Alex couple of quick questions here.
Quick questions first organic growth has been fantastic 25%.
In the current quarter can you talk about some of the reasons, Mike Bowman is taking share.
A big contributor very contributor through our organic growth is the synergies with our acquisitions.
I can't.
Can't measure that but I would guess.
You know maybe a third of that organic growth is for synergistic opportunities we've been realizing.
Yeah.
Yeah.
I think we have the scale that we're creating as we grow the national footprint and we grow the size of the labor and the configuration of the workforce that we have and the adaptability of the scarcity.
The ability of multiple pockets of labor to cover for other pockets that allowed us to be nimble and very responsive.
Two opportunities and not be constrained in any way by geographic limitations and that's really afforded us the ability to go after stealing market share from other from other providers.
Very helpful. And then you talked a little bit about and thank you for the metrics on.
What is driving organic growth being kind of volume versus price mix, that's very very helpful.
As it relates to price and in theory as it relates to <unk>.
Tight labor market and labor inflation, clearly that prices, obviously driven by increased cost of labor.
So maybe can you can you address number one whether or not you are pricing program is keeping up with the rise in labor rates and number two how.
Sticky.
Is that during sort of recessionary periods kind of like.
What we're seeing in kind of other end markets.
Yeah, I think the first thing Thats kind of point out is labor in our industry isn't like a commodity traded daily with fluctuation in pricing that is ongoing.
It's a relatively fixed with incrementally increasing.
Cost, but it doesn't move on a curve.
Bond prices relative to interest rates. So there is a creek certainly that's occurred and then there is a likewise creep in in rate. We think we have kept up in.
With rate inflation, meaning sort of the cost of labor and and opportunity to charge clients.
They're not always directly connected sometimes it is sometimes you are little bit ahead of labor because you can feel the constraint in the market and take advantage of it sometimes youre behind labor because labor has understand the constraints in the market, we're seeing a settling of that dynamic.
And I think inflation.
Inflation.
Inflation in the marketplace seems to have sort of settled a little bit and likewise with the two parts of our business the cost of labor and the opportunity with right I think we're finding that to settle in a little bit, but they move together and if we our clients are our quick enough to know that.
If they sense that the labor market cost is coming down rates will will either lead or follow that.
But they don't necessarily cross so you don't see one dive, particularly below the other two where you have an imbalance that causes loss.
Very helpful and then lastly.
As your revenue mix shifts here a little bit.
Clearly from a couple of years ago, but even kind of moving forward.
Some of these newer markets that you are getting into how do you think your profit margin might be impacted by that shift.
So we fundamentally our premise is that its more about scale than it is about distribution of revenue between markets.
Now that we're ever going to get to a point, where one is gonna be so take over so dominantly over another and when you look at our gross margins.
Theres points here and there, but there's not tens of points here and there. So I think the bigger thing you may see as we shift the distribution is the is the percentage of gross to net.
We will find probably expands a little bit as transportation becomes a.
Bigger part of our business is just sort of a dynamic and characteristic of that market to us.
Gary.
Got it covered covered well make sure we're doing a good job.
So I don't know that that mix some of the things that we could see a couple of points from from technology, becoming more pervasive and some of the work that we do in that Gary I think we focused a little bit on geospatial because it does provide some opportunity for leverage on on time spent.
But fundamentally we are a people business and the people do the work and the multipliers are generally sort of consistent.
The bigger fish one of the other efficiencies you get is when you get larger longer longer term contracts, that's not necessarily a mix within the markets, but a mix of how the revenue is constituted.
Very helpful. Thank you very much good luck.
Yes.
Thanks, Alex.
Thank you and the next question go to Brent Thielman of D. A Davidson. Please go ahead. Your line is open.
Hey, great. Thanks, Congrats on a great quarter.
Yeah.
Thanks Breakfast here Tom.
I guess the first question the the outlook into 'twenty three suggest sort of around 140 basis point improvement in EBITDA margin.
'twenty two is that <unk>.
<unk> reflective of your ability to better better leverage your SG&A are you.
Are you, assuming improving terms on bookings and new contracts I know.
Cost of Labor is rising I imagine youre leveraging that to some degree, but maybe you could just talk around that that increase in margin in the next year yeah.
Principally branch I would say it comes from the realizations realizing scale up of SG&A over a much bigger topline. We've spent a lot of time and energy and money in the last year and a half building an infrastructure to support the size that we do.
Oversupply with the <unk>.
<unk> that we had grown too because we had to build the infrastructure around go public in dealing with M&A and integration of all of that we believe we're going to start to realize some of the leverage benefit of that over the next year.
I don't think that it's overly weighted with a spread between fees and labor and increase in gross margin.
We do think that our bill.
There's a little bit of margin to be had from I think some of the technology channels that we're building.
Principally I would say it's about overhead scale.
Okay, and when you think about this call it $50 million increase in revenue at the midpoint on the guidance.
What kind of pull on existing resources does this require I mean, how much more utilization can you extract from your existing workforce versus kind of talent acquisition youre going to have to go out and do to drive that.
Brett it's really where we are being very successful in the talent recruiting market. So it's really not everybody everybody is working hard and everybody is stretched.
But we're not recognizing this by continuing to stretch our workforce more we are successfully adding to our workforce.
Okay. Okay, and then you generated a lot of free cash flow. This quarter I mean, the guidance you had sort of a similar similar level of EBITDA in the fourth quarter. I mean do you think you can see similar levels of cash conversion this quarter base.
Yes, I do I think we're we're starting to hit that debt.
Glide path of where the cash flows coming through we're focusing a lot on sort of the pre change in working capital as we think about it because the organic growth rates that we are producing are consuming a lot of cash almost as if we're making acquisitions and ourselves on a regular basis.
But still the bottom line of growth I think if you look at the trend over the year, we've certainly seen that that improving.
I don't know that its got a turn or turn straight up but it's going to continue on a path of improvement.
Okay, and then on building infrastructure.
Just curious what the backlog informed you about sort of where the underlying markets in that business are going but we hear a lot of discussion around the industry around large.
Sort of industrial and nonresidential facilities and projects being developed.
I'm wondering if that's becoming a much more meaningful driver of the business now just be curious if you could dive into that.
This segment.
What's driving that.
Yeah.
And Mike.
My outlook on where that stands it's not driven so much it just looking at the numbers.
It's been spending a lot of time in the past several months being out in the field talking to people listening.
Our share of building and structure, which is the commercial data centers.
<unk> distribution type facilities has has increased as a share of our building infrastructure, we're not seeing any softening in commercial markets retail markets.
And so far we're not seeing softening in many of our residential markets. We are seeing some significant softening in some residential markets out west. So we are in.
And everybody is aware of that sensitive to it.
Where we're moving work around.
As mentioned I think as Bruce said in his comments.
Our staff is the talents of commercial markets and residential markets pretty easily a fungible one to the other.
Travel.
Bruce.
Worked together so much we finish each other's sentences.
But so.
We're getting we're staying ahead of that.
So far we're staying out of that we're certainly sensitive to where that's headed.
Okay.
Sorry, just one more for me.
It would seem to me that the buyback.
It's been authorized.
Sort of a message.
Go out and either.
Hi around stock right now that are maybe cheaper than where youre finding acquisition targets.
I guess how does that.
Sort of inform you mean around doing deals in the near term on your capital allocation priorities right now.
Yeah, Brett the program is more defensive than it is offensive.
We are still committed to growing through acquisition in deploying capital.
Into good acquisitions.
We don't we're not setting up a trading desk to be active in the market. It's really a message that says the board understands that there's volatility in the market understands that the price of the stock.
Is that the meeting yesterday with with highly undervalued and that we want to send a message to our shareholders existing and prospective that we believe in the shares in the stock in the future of the stock and to the extent that there is an inefficiency in the market relative to evaluation will be there.
But we are still very much focused on capital allocation in the ideal world to be around acquisitions.
That that growth.
The sort of having.
The future impact of exponential potential value in terms of what they add to us so don't want to the message to get out there.
The message to be that we've turned our focus away from growth and towards market, but that we're communicating the confidence we have and our willingness to allocate capital in the event that.
Event that if needed.
Or the right opportunity.
We needed to step in.
Okay, Alright appreciate it guys. Thank you.
Thanks Brent.
Yes.
Thank you there are no further questions at this time, Mr. Backman Auton Nicobar diabetes.
Thanks, Maria and thanks to everybody for participating.
Participating in our call this morning.
Special Thanks to our investors for the states you continue to ship showing us.
And wish everybody a good morning.
Thanks, everybody.
Thank you. This now concludes today's conference call. Thank you for joining you may now disconnect your lines.
Okay.