Q3 2022 Atlas Technical Consultants Inc Earnings Call
Okay.
Hello, and welcome to the Atlas Technical consultants third 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 then 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 part, our Chief strategy Officer of Atlas.
You may be getting Mr. Parnell.
Good morning, and thank you for joining us on the call today I'm joined by our CEO , Joe Boyer and our CFO David Cui.
We hope that you have seen our earnings release issued after the market closed yesterday.
Please note that we have also posted an investor presentation, which can be found in the investors section of our website at IR Dot one Atlas Dot com.
Before we begin I'd like to remind you that today's call may include forward looking statements.
These statements, describing our beliefs goals plans and strategies expectations projections forecast and assumptions are 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 will be discussing or providing certain non-GAAP financial measures today.
<unk> adjusted EBITDA adjusted EBITDA margins, adjusted net income and adjusted EPS.
We see our earnings release and filings for reconciliation of these non-GAAP measures to their most directly comparable GAAP measure.
I'll now turn it over to our CEO Joe Boyer.
Thank you Jonathan and I appreciate everyone joining us today.
I'm excited to represent Atlas has more than 3600 employees and presenting to you our record third quarter results.
On today's call I'll provide an overview of the quarter, what we're seeing in our core markets and updates on our strategic priorities.
And then David will continue with a more detailed discussion of our third quarter financial results.
Our outlook for the remainder of the year.
And then we'll open up the call for your questions.
Our third quarter was another record period for Atlas revenue adjusted EBITDA and backlog all reached new quarterly highs.
Gross margin remained strong and adjusted EBITDA margin when excluding pass through subcontractor cost reached a record level.
Organic revenue growth accelerated to 10%, our best quarterly organic growth performance as a public company.
This growth was driven by a combination of factors, including the backlog growth we have experienced over the last several quarters.
<unk> strength in our core transportation and environmental end markets and our ability to cross sell a broader portfolio of technical services across existing and new customers.
Gross margin, excluding subcontractor costs remained at a healthy level near 60% due to our ongoing pricing discipline strong execution and limited impact of inflation on our business model.
Adjusted EBITDA margin, excluding subcontractor costs was a record 20% highlighting the benefits of scale. We are recognizing as we continue to grow Atlas.
Our backlog at the end of the quarter reached another record level of $864 million, which is up 14% from last year and up 1% from last quarter.
Which is especially impressive as our third quarter is our highest revenue quarter of the year.
And in addition, we have $133 million of awards pending contract execution.
This is down from last quarter as we've converted several larger projects to backlog during the quarter and as we've noted.
Backlog in award figures can be lumpy from quarter to quarter due to the seasonality of our business and the impact of large project wins, which we expect to continue to be a key growth factor for Atlas going forward.
Now looking forward demand in our markets continues to be driven by long term secular thing is as our customers invest to enhance their environmental sustainability and to improve the overall efficiency of their existing infrastructure.
We are seeing this across all the key end markets, we serve including all forms of our transportation business government industrial commercial power and education end markets.
In our transportation markets, our customers are investing in new infrastructure, and then the maintenance and repair of existing assets.
We're seeing strong demand in all geographies and across all the transportation of Subsectors, we service, including highways and roads.
As tunnels and rail.
It's important to note that the technical services, we provide are required on nearly every transportation project.
Whether it's related to materials testing and inspection for asphalt resurfacing.
Structural inspections on existing bridges and tunnels.
Program and quality management for major capital projects, such as regional rail and transit expansions.
And our government and education markets.
We continue to see demand for our program management and building Sciences services.
This is part of our business addresses the industrial hygiene needs of our clients, including indoor air quality, especially this management led testing and overall project management.
You can see several examples of these in our third quarter wins included an asbestos monitoring program with Boston public schools.
And our capital planning services contract.
But the Orleans parish School Board in Louisiana.
We also continue to see solid demand from our industrial commercial and power customers as they address their environmental compliance needs and worked to limit their environmental impacts.
We continue to be confident in our position to benefit from the infrastructure investment and jobs Act. Once these funds begin to flow into our state and local customers in a more meaningful way.
A relevant example is the contract we recently announced with the Georgia Department of Transportation.
To provide program management services for ongoing and future transportation projects under the local administered projects program.
Atlas will work alongside G dot and local public agencies throughout the state to manage these crucial projects.
Now this is a five year contract with a maximum $25 million contract value.
S dollar from the infrastructure Bill begin to flow will be that are supported putting those dollars to work not only under this contract, but also through the wide array of other service contracts, we have in the state.
Additionally, as I've discussed on recent calls we've been successful in winning work on large programs.
Both existing and new customers and public and private markets.
Since becoming a public company, we have grown the number of contracts in our backlog at a greater than $5 million by over four times.
Our success in penetrating large programs is broad based across the end markets with large wins this year in transportation government commercial and power end markets.
Additionally.
The joint venture that we're part of it was recently selected to provide program and quality management services to a very large rail project.
It was contract details are being finalized and I look forward to sharing more details about that project in the near future.
So expanding our presence on large infrastructure and environmental programs not only improves our visibility into revenue, but also improves our ability to attract top tier talent and continue to win new work.
Important our scope on these projects remains within our core technical services capabilities, allowing us to maintain a low execution risk profile, which is a fundamental pillar of our business model.
We continue to closely monitor the factors impacting the broader macroeconomic environment.
How they would impact demand for our services on existing and future projects.
As I've noted previously services, we provide to end markets that are more sensitive to higher interest rates and general macroeconomic conditions, such as Newbuild commercial construction and real estate transaction, a relatively small piece of our business.
Additionally, nearly two thirds of our business is tied to services that are non discretionary in nature.
Including regulatory compliance ongoing testing and maintenance of existing infrastructure.
And as a result demand for a significant portion of our business is resilient through economic cycles.
Now beyond driving organic growth, we maintain a disciplined capital allocation strategy that is focused on growth through M&A and improving our overall capital structure.
Our M&A playbook is based on identifying targets with quality management teams.
It can enhance or expand our service offerings and or a regional presidents'.
Integrating them into Atlas.
Scaling the business across our platform through the cross selling of those services.
We are confident that our M&A strategy will continue to drive outsized growth and improve our leverage ratio.
Our M&A pipeline remains robust with a number of proprietary candidates. However, we'll remain disciplined and will continue to ensure that any partnership we pursue will be highly accretive to our shareholders.
Deleveraging and will position us for continued success during all stages of an economic cycle.
As we continue to grow we remain committed to strengthening our capital structure and are constantly evaluating all options that can drive shareholder value.
Our leverage remained steady from last quarter and is down significantly from last year.
Just on our earnings trajectory.
We'll expect to continue deleveraging in the coming quarters.
With that I'll turn the call over to David to provide details on our financial performance and outlook, then I'll come back with a few closing remarks David.
Thank you Joe.
Gross revenue of $162 1 million in the third quarter of 2022 was up 16, 9% compared to the prior year quarter.
Driven by 10% organic growth with strong performance in all our service areas as well as contributions from acquisitions.
Gross margin was 47, 4% down modestly compared to last year due to a greater percentage of sub contractor costs in the quarter.
Excluding sub contractor cost gross margin expanded 70 basis points to 59, 5%.
Driven by an increased utilization of our workforce.
<unk> project execution, and our disciplined pricing strategy.
Adjusted EBITDA was $25 8 million in the quarter, a 33% from last year and represented 20% of revenue. Excluding subcontractor costs. This was an improvement of 240 basis points compared to last year and a record level for Atlas.
Yes.
Year over year increase was mainly due to our stronger gross margin performance and leveraging our fixed overhead costs, which highlights the benefits of scale as we continue to grow our business, both organically and through acquisitions.
But the third quarter, we produced adjusted net income of $8 9 million and adjusted earnings per share of 23 cents versus adjusted net income of $5 million and adjusted earnings per share of <unk> 14 cents in the prior year quarter.
Year over year increase was mainly driven by improved operating results.
Moving onto our cash flow and balance sheet.
During the third quarter cash from operations was a use of $7 7 million in line with seasonal patterns.
And compared to a use of $6 2 million in the same quarter last year.
Because of the seasonal strength of our business in the third quarter working capital increased to support our robust revenue growth.
Based on our outlook for the remainder of the year combined with the seasonal patterns of our business. We expect positive cash generation in the fourth quarter and for the full year 2022.
Net debt at the end of the quarter was $513 million up slightly from 500 million at the end of last quarter.
Our bank covenant leverage ratio, which includes cost efficiencies and pro forma EBITDA from acquisitions remained steady at five six times and down significantly from $6 four last year. After we recapitalize the company in early 2021.
Showing an aggressive path to deleveraging our balance sheet and improving our overall capital structure remains a top priority for Atlas and we are continually looking at avenues to do so.
Moving onto our outlook for the remainder of the year.
We are reaffirming the midpoint and narrowing the ranges of our revenue and adjusted EBITDA outlook for 2022.
For revenue, we have tightened our guidance range by $10 million on each end and now expect 2022 revenue to be in the range of $590 million to $610 million.
An increase of 11, 5% at the midpoint as compared to our 2021 results.
The narrowed range reflects the strength of our backlog solid demand trends and the visibility on the timing of work through the end of the year.
We anticipate adjusted EBITDA to be in the range of $85 million to $89 million.
At the midpoint this represents growth of 19% and 100 basis points of margin expansion as compared to our 2021 results.
We tightened the range by $1 million on each end, reflecting the solid visibility we have into year end.
As Joe mentioned, our third quarter results demonstrate the long term earnings potential of our business and we're excited for the growth that lies ahead.
With that I'll now turn the call back to Joe for closing remarks.
Thank you David we.
We had another strong quarter with record levels of revenue adjusted EBITDA and backlog.
Our results and recent project wins highlight Atlas has long term potential and underscore the successes we've had in executing our strategy integrated acquisitions and growing the business.
We remain committed to growing organically and through M&A and.
And continuing to improve our overall capital structure.
Demand trends in all of our end markets and across all of our service lines are favorable.
Driven by robust infrastructure funding programs and a long term secular trends to improve the efficiency and sustainability of our nations infrastructure and environment.
We have established Atlas as a preeminent provider of high value mission critical services.
And are delivering on our strategy, we set out when we founded the company.
I'm proud to represent Atlas many employees and look forward to continuing to drive growth in the future.
Thank you again for joining us.
Operator, we can now open up the lines for Q&A. Please.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you were using a speakerphone please pick up your handset before pressing the keys.
If at any time your question that's been addressed and you would like to withdraw your question. Please press Star then two in.
In the interest of time, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Chris Moore with CJS Securities. Please go ahead.
Hi, Good morning, it's actually lead you go to for Chris Moore.
Hi, Good morning, So just good morning, I'm, just starting with the labor component both in terms of your labor and your customers' labor can you talk to employee levels in general turnover at Atlas and and how you view labor availability in terms of is it a gating factor to your growth as Youre looking forward.
Sure that was Lee Lee this is Joe <unk> how are you.
Good question Lee, Let me, let me tell you as I've as I've always said I think our our industries.
Always been tight with labor and it has been for a while that is one of the reasons why we well we set up an internal recruiting network within our company to help US stay ahead of our resource needs. So we feel good and we've been able to stay ahead of R.
Our resource demands.
Throughout this year and and and continue to do that and look forward to doing that.
Going forward so.
I can't really speak to our clients' labor I think they're back to work back in full force continuing to.
Execute and on delivered task orders and contracts for us as well, but we feel good about where we are in our labor needs and.
Don't see it as a as a.
Constricting our confining.
Resource for us going forward.
Okay.
That sounds great and then just as a follow up I'm just looking at the balance sheet. Obviously, you took some actions to protect yourself from the rising interest rates can you remind us.
How that hedge works and and you know in this current environment, where you're protected up too.
Yeah.
Yes, absolutely ladies as David Glenn Thanks for the question.
So it's it's certainly an interesting rate environment out there right now.
We're happy that we we jumped on this early I think the first point I would make is that.
Atlas's interest rate exposure at this point forward is fully mitigated through June of 2025. So there's no further downside interest rate risk for us at this point.
And how it works is.
We are factual weighted hedge.
On June 1st.
With J P Morgan and it basically caps the variable portion of our interest rate exposure at 3%. So basically the float on LIBOR.
Our debt has a LIBOR floor of one so the float between one and three as is our exposure we timed it well you know that since putting it in place to add has instituted or 75 basis point rate increases so with the hedge in place we've really.
Affectively baked and the exposure we have at this point at 3% the hedge instrument kicked in and has since that point as Kelvin anything above that.
Right now, we're seeing LIBOR pricing around four and a half.
So you know the additional one 5% above three.
As covered.
And its.
Secondly, paying out at twice what the cost of the hedges. So we're pleased with how that has worked for us.
I'm pleased that we have contained our risk.
One four.
That's all very helpful. Thanks, very much I'll hop back in queue.
Thanks Lee.
Our next question will come from Brent Thielman with D. A Davidson. Please go ahead.
Hey, Thanks, good morning.
Good morning, Brian .
Hey.
Joe or David.
Since how much take care of the current backlog.
We will convert in 2023 versus what goes out in that.
Subsequent years, I know youre going to pick up work along the way through next year, but just trying to get a sense of what sort of level of visibility to ease off as you get into next year.
Yeah sure sure Brad Hi, This is David I'll I'll take that one.
I mean first we're just well.
We're really pleased with the continued growth.
Both of our backlog.
Our 10th consecutive record quarter.
And we brought some sizable projects and programs.
And to the portfolio, which really improve our line of sight and predictability on revenues.
Typically we've been running at call it 65% ish two thirds of our next 12 months revenue and backlog and.
That's currently where we're operating now maybe a touch higher than that.
And we're in the we're in the throes of our budgeting and planning process for 2023, we're gonna be wrapping that up in the next month and we can speak to that with even more detail. When we report on the year, but it's safe to assume two thirds.
Okay really helpful. David and then.
I guess I'm curious with all the new work come in you know what.
What's the kind of public private customers split.
Especially it sounds like infrastructure work is picking up and then Joe can you just talk I mean.
The environmental solutions area. It seems like it's getting a lot of momentum can you just talk about.
Few real key markets the strength behind that thought of the baseball.
Sure.
So Brent just an overall update our public markets.
Our about approaching 60%.
Work there right. So we have we have grown our exposure in the public sector for sure.
The markets, where we're seeing growth.
<unk>.
As I mentioned in the call, we're seeing pretty steady across a lot of the end markets, but I would say clearly our transportation markets end markets continue to show considerable growth.
As well as our our public markets and that's anywhere from as we talked about from.
Our indoor air quality services the program management services.
We're seeing continued growth in education as well and.
Our indoor air quality and program management services for education facilities as well, so I'd say the continued growth.
In our program management services is coming around.
Around the transportation markets, our PC QM services line is growing.
But probably our fastest and as I said, it's really covered with our transportation end markets.
Okay very good thank you.
Our next question will come from Kathryn Thompson with Thompson Research Group. Please go ahead.
Hi, Thank you for taking my questions today.
As we look at the inflation curve.
Improving or at least stabilizing somewhat.
How has that changed and that process typically meet them are on the side of having escalators, but.
Are you running any instances, where you have relief and submit the Clos as you get further into the project. Thank you.
Catherine Let me say.
We we normally look at you know Ed escalation clauses in our contracts, particularly on longer term contracts on some of the.
Multiyear contracts, which typically do allow us to build that escalation clauses for labor or whatever it might be so that is a common parents here I would say that we have been diligent and.
And working on increasing our pricing as you can tell from our margin expansion.
Watch it carefully.
Haven't seen any changes in the and I would say in the bid process in regards to.
Allowing midterm escalation changes in our contract, but but obviously when task orders finish.
We we will look for and have continued to look for.
Escalations that are labor labor rates.
Hello.
Anything that I missed on that you wanted to know how well the I guess the only thing I would add is just reminding.
You Kathryn that we're 90% cost reimbursable. So it gives us a lot of latitude to exercise.
Pricing power, which we've done and quite honestly, we we arent, losing a lot of work based on price. So we're going to continue to stretch out and drive margins.
Going into 2023.
Okay.
Scott that you touched on is that.
Since your IPO.
Projects over 5 million are up four acts.
Where do you see that trajectory.
And how.
How do you.
Manage.
What's the ideal balance in terms of project size didn't think ability that can say they carry different very different type of Patrick mentioned in style.
Yes, let me.
Let me start with that I think it's difficult to me to say what that mix would look like going forward, we clearly have a strategy Kathryn.
Pursue larger more mochi projects marquee projects as we built our first we've added a tremendous amount of technical capabilities to our bench.
Water and deeper bench, which allows us to pursue more marquee projects I think.
So we the data we showed in our backlog is that we have about 85.
Projects that are greater than $5 million in our backlog and that's grown from from 'twenty that we had in 2019 so.
That mix will probably continue to grow as we still look at.
At larger projects going forward.
Like the where it is right now I think there's just the basis of our company the number of smaller projects we do.
Don't anticipate it being a huge shift from where we are currently but.
The opportunities in the pipeline for opportunities that are greater than $5 million still.
Our in our pipeline for opportunities going forward.
I can't really say.
What I think the ideal mix would be but I kind of like where we are right now and.
Yeah.
That's it.
Okay.
That's helpful.
Thank you.
Again, if you have a question. Please press Star then one our next question will come from Rob Brown with Lake Street Capital markets. Please go ahead.
Good morning, Thanks for taking my question.
And nice job on the quarter.
Just wanted to get a sense on your view on organic growth trends had a very strong organic growth in the quarter. How do you see that kind of looking shaping up for next year I assume with the backlog growth. It's it's quite strong, but how do you see organic growth. Thanks.
A couple of years.
Hi, Rob.
Well, certainly really pleased with where we landed in.
Third quarter is our highest organic growth quarter since we've gone public 10%.
Which puts us at about 7% year to date.
Fits nicely with where Joe and I have guided.
Since the beginning of the year to land the year somewhere between five and 7%.
And we think we'll land in the upper end of that guidance.
I'll I'll defer guiding to next year or beyond Rob just for the reason I mentioned, we're in the throes of our planning process right now.
We've got about another month's worth of work to do.
So look forward to talking to you about that.
Yeah, Ryan, but we do certainly anticipate the positive trend you've seen over the last two years with us.
To continue.
Okay, Okay great.
And then maybe on the M&A pipeline you talked about activity. There what areas are of interest are you sort of looking at at this point and Hum.
How is that pipeline kind of shaping up over the next 12 months.
Hey, Rob Good morning, Jonathon Parnell here.
We're still looking at some geographic areas, where we'd like to fill in certain expertise and were also available.
And some opportunities that bring technical expertise that we can now bolt onto the platform that we've built and sell nationally to our clients. So it's a little bit of a mix and we have a lot of deals in the pipeline. So it's very active a lot of interest in partnering with Atlas.
So that's what I would say about our pipeline.
Okay, great. Thank you I'll turn it over.
Thanks, Rob.
This concludes our question and answer session I would like to turn the conference back over to Joe Boyer CEO for any closing remarks.
Thanks, very much I wanted to thank everybody for joining us today. We appreciate your support of Atlas and and look forward to updating you on our progress. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.