NV5 Global, Inc. (NASDAQ:NVEE) Q2 2023 Earnings Call Transcript

NV5 Global, Inc. (NASDAQ:NVEE) Q2 2023 Earnings Call Transcript August 9, 2023

NV5 Global, Inc. misses on earnings expectations. Reported EPS is $1.29 EPS, expectations were $1.31.

Operator: Good afternoon, everyone and thank you for participating in today’s conference call to discuss NV5’s Financial Results for the Second Quarter 2023 Ended July 1, 2023. Joining us today are Dickerson Wright, Chairman and CEO of NV5; Edward Codispoti, CFO of NV5; Alex Hockman, President and COO of NV5; Ben Heraud, COO of NV5; and Richard Tong, Executive Vice President and General Counsel at NV5. I would like now to turn the call over to Richard Tong.

Richard Tong: Thank you operator. Welcome, everyone to NV5’s second quarter 2023 earnings call. Before we proceed, I would like to notify all participants that today’s presentation can be found on ir.nv5.com and remind everyone that today’s discussion contains forward-looking statements about the company’s future business and financial performance. These are based on management’s current expectations and are subject to risks and uncertainties. Factors that could cause results to differ materially from these statements are included in today’s presentation slides and in our reports on file with the SEC. During this call GAAP and non-GAAP financial measures will be discussed. A reconciliation between the two is available in today’s earnings release and on the company’s website at www.nv5.com.

Please note that unless otherwise stated all references to second quarter 2023 comparisons are being made against the second quarter of 2022. In this presentation NV5 has included certain non-GAAP financial measures as defined in Regulation G promulgated by the Securities and Exchange Act of 1934 as amended. The non-GAAP financial measures included in this presentation are adjusted earnings per share and adjusted EBITDA. NV5 provides non-GAAP financial measures to supplement GAAP measures as they provide additional insight into NV5’s financial results. However, non-GAAP measures have limitations as analytical tools and should not be considered in isolation and are not in accordance or a substitute for GAAP. In addition, other companies may define non-GAAP measures differently, which limits the ability of investors to compare non-GAAP measures of NV5 to those used by peer companies.

A webcast replay of this call and its accompanying presentation are also available via the link provided in today’s news release and on the Investors section of the company’s website. You may also find today’s presentation, which will be referenced during this call on the Investors section of the company’s website. We will begin the call with comments from Dickerson Wright, Chairman and CEO of NV5, and turning the call over to Ben Heraud, COO of NV5, then hearing from Alex Hockman, President and COO of NV5, before turning the call over to Ed Codispoti, Chief Financial Officer for a review of the second quarter 2023 results. Dickerson Wright will then provide closing comments before we open the call for your questions. Dickerson please go ahead.

Dickerson Wright: Thank you, Richard, and thanks to everyone for joining us today for this call. The second quarter results exceeded our planned budget. We are on track to meet the guidance previously given for 2023. As you see turning to page 5, not only was an improvement over quarter one but we finished the quarter above consensus. Results consisted of organic growth from our existing business but also revenue and organic growth of acquisitions made prior to and during quarter number one. In particular, the acquisitions of software and analytical services strengthens a stable foundation for growth and subscription based and reoccurring revenue. We also announced some recent project wins that support and enhance a sustainable infrastructure, and assist the existing utility power grid.

We have begun to see the Federal Infrastructure bill materialize. We have recently begun to see green shoots for our real estate transactional business, with revenue increasing, but still not at prior rates. We have established organic growth initiatives that can provide additional resources for our clients. We have structured the organization to have our most senior people spend additional time with our clients. We feel that this will increase organic growth. Perhaps, we can now go to Slide 6, which highlights our technology expansion with the acquisition of — which was announced yesterday of Red Technology in Singapore. This increases our resources in the areas, strengthening our mission-critical data center support activity and promoting further organic growth in the Asia Pacific region.

In fact, the acquisition will be a catalyst for further growth, and adds to our existing employee base. The employee base now numbers over 250 full-time equivalents in the region. I will now turn the presentation over to Ben Heraud and Alex Hockman, to provide an update on the Buildings and Infrastructure businesses.

Ben Heraud: Please turn to Slide 7. In 2020, we formed a highly focused division within our international team called NV5 Mission Critical. The idea was to provide a one-stop shop for blue chip clients that was highly outcome-driven. Our clients needed a consultant that could rapidly bring international standards to unskilled markets, while adopting the local regulations and culture. Our Mission Critical business has grown close to 400% since its founding, and in the first half of the year it has delivered 14% organic growth. The acquisition of Red Technologies expands both our client base, and service offerings in the mission-critical space. Red Technologies provides IT and fiber optic consulting, which is both upstream and downstream of our systems design and commissioning services.

Having already worked together on a number of projects, we are very well positioned to vertically integrate our services and bring more recurring revenue into the business. In the domestic market, we’re also seeing areas of very strong growth. The acquisition of Sage Energy in 2021, bolstered our clean energy group, with expertise in renewables and the electric vehicle market services that are in very high demand right now. As an owner’s representative, we engage at the early phase of a project, which often leads to downstream engineering work in other NV5 verticals. At the beginning of this year, we formed a building digitization group, drawing from our expertise in geospatial, building analytics and information modeling to provide scanned system and digital twin platforms to our clients.

This is now becoming a core part of our more traditional services such as MEP design and program management, bringing more value to our clients, allowing us to deliver projects more efficiently while growing our subscription-based revenue. Our Technology & Acoustics Group is on track for a record year. We continue to be market leaders in higher education, a market which is currently seeing a strong rebound since the pandemic. We continue to diversify into other markets, with recent master services agreements awarded with a large software and government entity. Alex Hockman, will now give an update on the Infrastructure and Utilities businesses.

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Alex Hockman: Thank you, Ben and good afternoon to everyone. Please turn to Slide 8. NV5 has been at the forefront of sustainable planning, design and construction to meet the demands of the population functionality and protecting our environment. We have participated in the Institute for Sustainable Infrastructure and have been active in the development of ENVISION. ENVISION is a holistic sustainability framework, and rating system that enables a thorough examination of the sustainability and resiliency of all types of civil infrastructure. Examples of infrastructure investments that protect our environment include the recently announced $16 million New York City DEP greenwater stormwater project. This project will include the design of an interceptor sewer system to address the concerns with combined sewage outflow systems also known as CSOs. When treatment plants are overcapacity untreated sewage is discharged directly into our waterways.

The design and construction of interceptor systems reduces the demand on treatment centers and drastically improves the water quality of our rivers and oceans. We are also starting to see projects resulting from the Infrastructure Investment and Jobs Act, IIJA which is also known as the Bipartisan Infrastructure law or BIL. The BIL will make available more than $1 trillion in funding for infrastructure programs across transportation, energy and water sectors through a combination of grants loans and tax incentives. Our Philadelphia office authored a successful raise grant application for Camden County, New Jersey announced in June, 2023. Through this grant, Camden County won $19 million for segments of the Camden County trail, a 34-mile trail through 17 municipalities, which NV5 is designing.

RAISE is an acronym for Rebuilding American Infrastructure with Sustainability and Equity. And our Long Island office has performed grant writing services for counties and towns and are awaiting results of the application for federal funds for pedestrian safety and non-motorized Greenway programs. We are in the early stages, but are well-positioned to assist our public and private sector clients with grant writing, design and project management services for these important infrastructure projects. The multi-disciplined approach of our utility services group has us well-positioned to assist throughout the life cycle of energy company’s assets and capital improvement projects. We are seeing increased activity across all of our areas of expertise including transmission and distribution lines, substations, gas, LNG and the rapidly growing demand for EV charging stations.

Recently a major West Coast utility reported that undergrounding lines was by far more effective in reducing outages and preventing fires than attempting to mitigate fires through forest management. NV5 has extensive expertise in all aspects and disciplines required to design and project manage these improvements and are projecting significant growth in the future. At this time, I will turn it back to Dickerson.

Dickerson Wright: Thank you Alex. By turning to Slide 9, we will provide an update of our geospatial platform and we’ll speak about our continued success as well as our strategy for future growth. The geospatial platform provides three key solutions; one, it mitigates risk; two, it plans for growth; and three, manages our existing resources. As Ed Codispoti will mention later, we are increasing our investments to provide the most updated technology and to better address new markets. Data acquisition requires updated aerial measurement equipment. Software solutions provide a competitive edge and embeds our relationship with clients with patented software solutions. NV5 is by far the leader in analytical solutions for our clients.

These solutions tailor the acquired data to user friendly solutions. Going to Slide 10, you’ll see that we depict our backlog and key wins for the second quarter. You’ll really see that our backlog grew 70% over Q2 2022 or Q2 last year, all the way to $803 million over a rolling 12-month period. Our key wins touched most of our service offerings. Our geospatial wins provide data for our government agencies, including the Department of Defense. Our infrastructure wins enhances our delivery and energy efficiency for the existing utility grid. Our geospatial technology investments, will support our geospatial wins. We will now transition the presentation to our CFO, Ed Codispoti to provide an overview of our second quarter performance. Go ahead, Ed.

Edward Codispoti: Thank you, Dickerson and good afternoon, everyone. If you would please turn to Slide 12 of the presentation, I’ll review our second quarter 2023 financial results. Our gross revenues were $222.6 million compared to $202.7 million in the second quarter of last year. The 10% increase in growth was primarily fueled by our Axim and VIS acquisitions as well as organic growth in our geospatial business, which combined represented about $31.4 million. Our top line growth was partially offset by decreases in our real estate transactional business revenue of $8.3 million, driven by market reactions to interest rates and decreases in our LNG business revenue of $3 million driven by the timing of project cycles. Gross profit was $110.3 million compared to $99.2 million in the second quarter of last year, an increase of $11.1 million or 11%.

Gross margin also expanded by 50 basis points during this period. Net income was $15.4 million in the quarter compared to $17.3 million in the second quarter of last year, a decrease of $1.9 million. Net income was impacted by amortization expense from acquisitions, which increased $3.2 million when compared to the second quarter of last year and interest expense which increased $2.8 million. Additionally, our net income this quarter was affected by profit margins in our real estate transactional business due to market reactions to interest rates and profit margins in our LNG business due to the timing of project cycles, as well as the reduction of acquisition earn-out accruals. I’ll note that we did see resiliency in our real estate business revenue, as it increased 26% over the first quarter of this year.

Our adjusted EBITDA was $35 million compared to $37.8 million in the second quarter of last year. As was the case with net income, adjusted EBITDA was impacted by the real estate business and timing of LNG projects. Our GAAP diluted earnings per share were $1 per share in the second quarter of 2023 compared to $1.13 per share in the second quarter of 2022. Our adjusted earnings per share which excludes the impact of intangible amortization and acquisition-related costs were $1.29 per share in the second quarter of this year compared to $1.49 per share in the second quarter of last year. On Slide 13, you can see that our cash flows from operations during the second quarter were $14.2 million. Our cash flows from operations for the second quarter were impacted by working capital timing during the quarter, which to a certain extent was driven by the bringing on board of the Axim and VIS acquisitions.

As of July 1, 2023, we had $28.8 million of cash on hand and our net leverage was 1.4x. This net leverage includes the impact of the Axim and Viz acquisitions. Turning now to Slide 14. We can see how we have invested CapEx in our future growth so far this year. When you look at the $10.2 million of CapEx investments, we made in the first half of this year about $8.4 million related to geospatial growth. Of this amount $2 million was invested in our new geospatial vessel to expand the capacity of our fleet and which has already been engaged in active projects. Another $1.5 million went towards offshore wind equipment to support the offshore wind growth initiative and about $2.7 million was invested in Topo-bathymetric LiDAR sensors for rivers and nearshore geospatial contracts.

We believe these investments along with the strength of our balance sheet position us well for future growth. I’ll now turn it back over to Dickerson for some closing comments.

Dickerson Wright: Thank you, Ed. What is our strategy and drivers for future growth? Let’s now turn to Slide 15 and you will see mention seven focus points to position NV5 for future growth. Number one, we’ll expand our geospatial leadership, which approaches $300 million and makes us the leader at least in North America for sure in the geospatial activity. As Ben mentioned international data centre expansion from new markets and M&A activity will also be a driver. We’re going to capitalize on the federal infrastructure activity which we are starting to see begin now in its infancy. There will always be utility improvements for power distribution and natural gas conversion to LNG and NV5 is positioned very well to capitalize on these opportunities.

We will continue our public sector focus, which requires mandated in central services and it’s not dependent on economic conditions. Clean energy and building efficiency will always be something that we focus on to grow. And last but not least is the sustainable infrastructure that Alex mentioned not only in the civil area but in every aspect of the infrastructure support services, we will look for sustainability. So we remain optimistic and we’ll continue to implement our strategy and stay nimble in our approach based upon market conditions. We maintain our 2023 guidance of $878 million to $915 million revenues and our GAAP and adjusted EPS guidance will remain the same. Thank you.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from Chris Moore, CJS Securities. Chris, please go ahead.

Chris Moore: Hey. Good afternoon, guys. Thanks for taking a couple questions. So revenue growth guide stays at roughly 14%. Just give me a sense how much of that is versus M&A.

Dickerson Wright: Yes. We expect the organic to be in the high single digits Chris. So around 7% or so is what we’re planning for.

Chris Moore: Got it. Very helpful. Backlog $803 million just roughly what percentage of that is geospatial? Has that changed significantly year-over-year?

Dickerson Wright: Geospatial — This is Dick. Thanks, Chris for the question. Geospatial has been running about 50% of their turnover and I think the turnover growth will be about $200 million this year. So, not all of that $803 million of course is based on the geospatial activity. So I would say it’s about 25%.

Chris Moore: Got it. Very helpful. And last one for me. Maybe I know LNG project cycle impacted the first half. Can you talk a little bit more about where you are in those project cycles? And what the impact would be in the second half of the year?

Dickerson Wright: Well, yes, LNG of course is billed as what we call a percentage of completion. So, it’s their estimate of the completion of that projects that they’re working on will vastly impact the revenue that they choose to generate. So we always try to match up labor and revenue at the same time. So they are being more conservative in they’re growing. And we think towards the second half of the year the LNG business, because of the percentage of completion will be stronger or higher. But it doesn’t depict any slowdown in the LNG process. It’s just that how they’re recognizing the revenue on a percent of completion basis.

Chris Moore: Got it. So the accounting related to that should be a little bit of a tailwind for the second half.

Dickerson Wright: Correct. Correct.

Chris Moore: Got it. all right. I appreciate it. I’ll leave it there guys.

Dickerson Wright: Thanks Chris.

Operator: Next question comes from Andy Wittmann from Baird. Andy, please go ahead.

Andy Wittmann: Okay. Thanks for taking my questions guys. Good afternoon. I guess I wanted to start just trying to understand the margin profile in the quarter your G&A line was down pretty substantially in the quarter to $11.5 million. That number had been reliably running in the $17 million to — gosh, just over $18 million per quarter run rate. So I was wondering, what the difference was this quarter? Perhaps it was maybe accruals for incentive compensation or maybe did you take your, I guess, you’d call it a contra expense on the earn-out liability that you reversed and got to benefit from. Was that — does that show up in G&A? And I was just hoping you could help us understand that item on the income statement.

Edward Codispoti: Absolutely Andy, it’s the latter of those that you just mentioned. It’s the — it’s a reversal of an earn-out accrual. And so if you refer to the reconciliation of GAAP to non-GAAP in the back of the earnings release, you’ll see that our acquisition-related costs had a reversal of $5.3 million on a net basis during the quarter. So that’s part of it. We have as you know earn-out built into some of our acquisitions, and that was just an earn-out that was not met that was reversed during the quarter.

Andy Wittmann: Okay.

Dickerson Wright: It’s milestone-based. It’s milestone-based. Andy this is Dick. Milestone-based, there’s segments of the earn-out that depends on the acquisition. And I am not specific to what Ed is mentioning. But the earn-out does not indicate necessarily that they are not operating correctly revenue-wise, but it’s that segment of time they were supposed to meet — and the acquisitions may have met a certain revenue base on a certain timeframe according to the contract, and they may not have met it. Sometimes they’ll catch-up, sometimes they won’t.