Bowman Consulting Group Ltd. (NASDAQ:BWMN) Q2 2022 Earnings Conference Call August 12, 2022 9:00 AM ET
Company Participants
Gary Bowman – Chairman and Chief Executive Officer
Bruce Labovitz – Chief Financial Officer
Conference Call Participants
Brent Thielman – D.A. Davidson & Co.
Alexander Rygiel – B. Riley Securities, Inc.
Operator
Good morning. My name is Lydia and I will be your conference operator today. At this time, I’d like to welcome everyone to the Bowman Consulting Group Second Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
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, and the Company is not obligated to publicly update or revise these forward-looking statements. In addition, on today’s call, the Company will discuss certain non-GAAP financial information, such as adjusted EBITDA and net service billing.
You can find this information together with the reconciliations to the most directly comparable GAAP information, the Company’s earnings press release and 8-K filed with the SEC and on the Company’s investor website at investors.bowman.com.
Management will deliver prepared remarks, after which they will be taking live questions from public research analysts. Throughout the call, attendees on the webcast may post questions for management to answer on the call or in subsequent communications, but there will be no live Q&A from the webcast attendees. Replays of the call will be available on the Company’s investor website.
Mr. Bowman, you may begin your prepared remarks.
Gary Bowman
Thank you, Lydia. Welcome, everyone to the Bowman Consulting Group second quarter 2022 earnings call. I’m Gary Bowman, the Chairman and CEO of Bowman, joined this morning by Bruce Labovitz, our Chief Financial Officer.
Before we get started, I would like to welcome – extended welcome to everyone from PDC and Fabre Engineering, our two most recent acquisitions. The talented professionals joining us from Southern California and Florida Panhandle to expand our reach, add to our client network and add to our depth of talent. We are excited to have these transactions complete, and we’ve already realized some significant cross-selling successes with both of these firms. In addition, I’d like to thank all the members of the Bowman team who worked tirelessly delivering the exceptional growth that we’ve been experiencing.
Our people focus their efforts on delivering value to our clients and supporting each other by sharing work and cross-selling and by creating an inclusive culture that we are all proud of. As outlined in our press release last night, the second quarter of 2022 picked up where the first quarter left off with continued strong growth and record results. Our net revenue in the quarter puts on a pace of over $200 million a year for the first time. We continue to deliver on our strategy of driving both organic and acquisitive growth with an organic net revenue growth rate of roughly 30% year-over-year.
Looking to the second half of the year, we are confident in the likelihood of continued growth, even in light of potentially challenging economic conditions. The mix of our business, we believe insulates us from any meaningful impacts from rising interest rates and volatile energy prices. [Indiscernible] and in connection with our ongoing acquisition program, we are raising our guidance for the full-year.
Now I’m going to turn the call over to Bruce, who will discuss our financial results in detail, and then I’ll return to talk a little bit about our markets and our M&A program. Bruce, go ahead?
Bruce Labovitz
Great. Thank you, Gary. Welcome, everybody. We are pleased to be here today talking about another record quarter. It’s hard to believe that we are finally at a point where we are now comparing two quarters, both of which were where we operated as a public company.
Gross revenue for the second quarter increased $25.9 million to $62.4 million or 71%. Year-over-year organic gross revenue was 27%. Net revenue for the quarter increased $23.9 million to $56.4 million or 74%. Year-over-year organic growth for net revenue was 32%. It’s important to note that this is true organic growth in the volume of work build, not simply the impact of increased pricing.
We saw growth in orders and net revenue across all our markets, resulting from the implementation of our growth plan, which focuses on cross-selling to existing customers throughout our national offices, creating revenue synergies from acquisitions and focusing our efforts on increasing our work with existing clients and winning new assignments.
Adjusted EBITDA for the second quarter increased $3.4 million or 81% to $7.6 million as compared to the year ago period. This represents an adjusted EBITDA margin net of 13.4%, which is up 50 basis points as compared to last year. You can find the reconciliation for non-GAAP metrics in our press release.
Gross revenue for the six months ended June 30 increased $46.6 million to $114.9 million or 68%. Year-over-year organic growth of gross revenue was 31%. Net revenue for the six months ended June 30 increased $42.8 million to $104.1 million or 70%. Year-over-year organic growth for net revenue was 34%. In our business, it is a positive when the growth of net revenue outpaces the growth of gross revenue.
Adjusted EBITDA for the six months ended June 30 increased $6.7 million or 81% to $15 million. This represents an adjusted EBITDA margin net of 14.4%, which is up 90 basis points compared to last year. Gross margin for the second quarter was 50%, virtually identical to the same period last year. Overhead for the quarter was 45% of gross revenue as compared to 47% in the prior year, which is a positive trend that illustrates our operating leverage through the efficiency of scale.
Gross revenue for the second quarter was comprised of roughly 68% building infrastructure, 15% transportation, 13% power and utilities and 4%, what we refer to as other emerging markets, which includes water resources, mining and other energy transition services.
Diving a bit deeper into the building infrastructure market, we note that roughly 44% of the 68% of gross revenue that was building infrastructure was residential in nature, including for-sale housing, multifamily housing and mixed-use developments. Of that 44% that was residential in nature, 49% related to for-sale homebuilding activities. As such, for-sale residential services represented approximately 15% of total gross revenue for the quarter.
Gross revenue for the six months ended June 30, comprised of roughly 71% building infrastructure, 12% transportation, 13% power in utilities and 4% other emerging markets. Again, diving a bit deeper into the building infrastructure market for the six months, we know that likewise, roughly 44% of the 71% of gross revenue that was building infrastructure was residential in nature, of which 49% was related to for-sale homebuilding activities. As such, again, for-sale residential services represented approximately 15% of total gross revenue for the six months.
We think it’s important to highlight this because there seems to be a sense in the marketplace that we are highly dependent on for-sale residential homebuilding type activities and that the downturn in that market could have a substantial drag on our future results. While it is a meaningful component of our overall business, it is not overweighted in its potential impact to our future results.
Our balance sheet remains strong with net debt of approximately $6 million and a net leverage ratio well below one. Our CapEx remained consistent at roughly 3.7% of gross revenue for the six months, with our CapEx spending funded through our capital lease facilities, all of which have plenty of available capacity remaining. Inclusive of a nearly $10 million change in net working capital adjustment, principally comprised of increased accounts receivable as a result of rapid organic growth.
We generated in excess of $4 million of cash from operating activities during the six months ended June 30. We ended the quarter with nearly $26 million in cash and our full $25 million of availability under our revolving credit facility. We recently received preliminary approval from BofA to increase the credit facility to $50 million and have received expressions of interest from other sources of non-bank debt capital to provide unsecured debt facilities as needed.
At this time, we are confident that we have sufficient access to capital to continue executing on our strategic growth plans well into next year without raising any additional equity capital. That does not mean we will not continue to use our equity as a component of consideration and acquisitions. But to be clear, at this point in time, we do not anticipate a public market equity raise in the foreseeable future.
With respect to equity, on June 30, 2022, we had roughly 13,264,000 shares outstanding. There have been no meaningful additional equity issuances since the end of the quarter. In July, in connection with the PDC acquisition, we issued a convertible note with up to 285,000 unregistered shares subject to conversion at $14 per share over two years.
Upon conversion, the shares would have a six-month holding period none have been converted as of today. Our backlog on June 30 was $205.6 million. This is an increase of $38.6 million or 23% as compared to December 31, 2021, and an increase of $82 million or 66% as compared to June 30, 2021. Backlog is comprised of roughly 53% building infrastructure, 30% transportation, 15% power and utilities and 2% other emerging markets. Consistent with gross revenue, approximately 13% of our June 30 gross backlog relates to for-sale residential housing.
As Gary mentioned, we are increasing our fiscal year 2022 guidance for net service billing to a range of $202 million to $220 million with adjusted EBITDA in a range of $29 million to $33 million. This increase from previously issued guidance of $185 million to $200 million and $25 million to $29 million is the result of both recent acquisitions and expected continuation of organic growth. Keep in mind, our guidance only includes acquisitions that have been completed as of the day the guidance is issued. Future acquisitions could have an accretive impact to our forecast.
The integration of our acquisitions into our systems is an ongoing process, which generally takes between three and six months to complete for each acquisition. Our dedicated integration team and our corporate accounting group are doing a great job bringing all of these different systems, processes, cultures and organizations together into one unified platform. I want to say a particular thank you to those folks for all their hard work.
I’ll now turn the call back over to Gary.
Gary Bowman
Thanks, Bruce. I’m going to turn my attention now to our business and state of our markets and the status of our strategic growth plan and the vision for the future of our business.
I will start by addressing the macro environment that we are working in. The demand for infrastructure investment is the strong as it’s ever been during my 40 years in this business. Both public and private sector clients are competing for the services of firms like ours. What we are experiencing is a convergence of a growing market in which there is more business to be had, and growth within our business that’s clearly taking market share from competition. While some of the markets we serve are reactive to interest rates on are driven solely by changes in rates.
It’s important to remember that in historical context, rates they are still substantially lower than they’ve been during other periods of inflation and aggressive federal reserve tightening. The mix of markets and some markets that we serve provides a buffer against economic cyclicality. While we all hear the same rhetoric about economic conditions and forecasts, these indications seem to run contrary to the resolute confidence that our clients are showing their business and their willingness to spend on infrastructure investment, which has made clear to us by the continued robust demand for our services across all sectors.
Our bookings and new orders, which we refer to as our sales continue to grow month in and month out with a book-to-burn ratio well in excess of one. We are acutely attuned to any single of macroeconomic headwinds that may adversely affect our business. And to date, we’ve yet to experience any systemic slowdown in demand for our services.
We are beginning to see the early stages of dollars flowing from the transportation infrastructure bill and the recent reconciliation legislation that earmarks money for investment in energy transition is already sparked conversations with both current and new clients about future projects.
Our strategic growth plan has two primary components: organic growth and acquisitive growth. While these are two distinct avenues of growth they overlap in many areas. As we evaluate potential acquisition, our primary objectives are to identify cultures that are consistent with ours, businesses that are in attractive markets and geographies and that provide opportunity for value creation through revenue synergies.
While there is a deep market for the kinds of companies that we are willing to buy at the valuations we are willing to pay, the tricky part is integrating these companies, not simply from an operation point of view, but from a mindset of cross-selling and revenue synergies. We are close to 70 offices around the country. We have a tremendous opportunity to grow revenue by cross-selling our services to existing clients of acquired firms as well as increasing our share of our current clients [indiscernible].
We’ve begun integrating our transportation practice in the managed practice and have begun cross-selling our clients with additional capabilities related to traffic studies. We successfully landed large projects on the Gulf Coast in favor and have been able to penetrate and building services assignments to our new MEP practices. From our 1519 acquisition, we have expanded our survey services to oil and gas providers throughout Texas and beyond.
We have grown our revenue for acquired firms such that in less than a year. We have in the aggregate picked up over half term on purchase price. With 12 acquisitions completed in the last 18 months, we have created a platform from which we can deliver almost any civil engineering service to each of the markets we serve. We have heard some great assignments recently that have resulted from the acquisitions that we have closed and the skill sets they bought to us, the technical sources that we’ve added.
Our vision for this company is to continue to build on the depth of experience and breadth of services that we can offer to the markets we concentrate on. We are focusing these efforts, especially on energy transition, power and utilities and transportation infrastructure markets.
Our M&A pipeline is as deep as it’s ever been with plenty of opportunity within our target valuation range. Year-to-date, we have acquired approximately $50 million of net revenue at an average multiple of under 6x estimated 2022 adjusted EBITDA. We expect to continue to be acquisitive throughout the second half of the year, but will likely maintain a lower risk profile with respect to acquisition size until things settle down in the overall economy. We will continue to look for companies that diversify our portfolio of experiences and opportunities and extend additional revenue synergies and cross-selling opportunities.
Again, thanks to everyone at Bowman for working hard every day, exceeding expectations of our clients and creating value for our communities, our investors and for cultivating a culture to make Bowman a great place to build a career.
I’ll now turn the call back over to the operator for the question-and-answer session. Thanks.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Brent Thielman of D.A. Davison. Please go ahead.
Brent Thielman
Hey, great. Thanks. Gary, Bruce, good morning.
Gary Bowman
Good morning, Brent.
Bruce Labovitz
Good morning, Brent.
Brent Thielman
I was curious – yes, first off, I’m just curious if there’s a way to think about the contribution to organic growth from sort of more billable hours versus higher billing per hour I think you made a comment in the prepared remarks, and I was curious about that?
Bruce Labovitz
I’m not sure there’s specifically a way to answer that the way you’ve asked it, except that the – I think the comment in the prepared remarks was that the organic growth is not simply a function of the same workforce at the same utilization rate at higher billing rates. It is a function of an increased headcount working at slightly higher utilization rates for more clients.
Brent Thielman
Okay. Okay. Thanks, Bruce. And then it looks like the nonhousing piece, the building’s infrastructure sort of vertical is continues to grow really well. Maybe you could just talk about some areas that have been really strong for you in that side of the business.
Bruce Labovitz
Yes, commercial and municipals.
Gary Bowman
Yes, both of those markets are very robust. So it’s all the government markets we’re in are, I guess, fully recovered from COVID. So they’re spending at very healthy paces, pursuing new projects in healthy basis. And the commercial and retail developers, I say developers our end clients are more often than not the actual retail chains, and they’re very aggressive in their expansion. So that’s very helpful. Some specific submarkets that data centers within building infrastructure has been extremely strong. Schools and other educational type facilities have been very strong. We’ve seen industrial commercial has been strong. We work with Amazon, for instance, on their HQ2 project in the D.C. area that JBG really – it’s a strong market that type of work. So all of those areas have been positively impacted.
Brent Thielman
Okay. And then March, you laid out sort of these plans to be able to acquire $75 million or more in annualized I guess, net service billings, you’re up to looks like over $40 million now. How robust are the discussions today? Kind of how is this evolving economic climate impacting those discussions? Is it working against achieving that target? Is it helping the pipeline? Just be curious about that.
Gary Bowman
The pipeline is robust. And I don’t certainly don’t sense any change, I’d say, in the sentiment of the seller. And their expectations haven’t changed. Their expectations are the same, but the market is still as robust as it’s been. I’d say we are probably quite – we really like these smaller acquisitions because there’s a lot of integration involved, but we’re finding – we’re getting a lot of synergy bang for our buck. So I know we were talking about a higher – I think maybe we said an average size of $10 million. They’re not going to average $10 million this year. But if we don’t hit $75 million, we’ll be close to it this year. So the marketplace is as robust and the pipeline is robust as it’s ever been, Brent.
Bruce Labovitz
But I think it’s important to also to remember, $75 million was aspirational. It is not incorporated into guidance in any way necessarily. So we don’t include an acquisition unless it’s closed. So we still would like to continue to be acquisitive if it’s $68 million or $75 million or $50 million not – will continue…
Gary Bowman
…or $85 million.
Bruce Labovitz
Yes. We’ll continue to update guidance as we are successful in that strategy, but a downside on that number wouldn’t affect guidance.
Gary Bowman
I think the bottom line is the market and the environment is just where we expected and hoped it would be at this time of the year – at this time of the year.
Brent Thielman
Okay. And then others in the engineering space have started to talk about the transportation end market increasing either as a direct or sort of indirect result of the increased infrastructure funding. Are you seeing that in your bid activities now?
Gary Bowman
We’re seeing some of it up in Illinois. And man, I know some of their clients are seeing some activity. So yes, we are starting to say, projects hitting the street that are as a result from the transportation bill.
Brent Thielman
Okay. Thanks, guys. I will get back in queue.
Gary Bowman
Thanks, Brent.
Operator
Your next question comes from the line of Alex Rygiel of B. Riley Securities. Your line is open.
Alexander Rygiel
Thank you. Good morning, gentlemen. A very nice quarter. A couple of quick questions here.
Gary Bowman
Thank you, Alex.
Alexander Rygiel
Bruce, coming back to that first question as it related to organic revenue growth. Obviously, again, a lot of different components kind of building into that 34% growth year-over-year. I guess, the question here is there a way to kind of simply think about how much of it is due to improved pricing versus organic volume versus synergistic volume?
Bruce Labovitz
Not without kind of being a bit of a lag because you can’t – it’s very hard to look at price, we’re not like a hotel room that’s sort of year-over-year, what’s the price or day over day. If I had to try to disaggregate that number into the kind of form you’ve asked, Alex, I’d say 80% of that is really just organic growth in work that we’re being asked to do from clients that we have or clients that we are acquiring not through acquisition, right. There’s – I think another component that was sort of 10% of that would be sort of synergistic maybe kind of somewhere between that 10% and 20% of okay, cross-selling and synergy. But I kind of think of those first two as one big suit together. We’re generating more work from nonacquisitive sources. I mean, our headcount is growing not just because of acquisition, but because of increased volume of work to be done. Yes, there is some value accretion that’s occurring, right, because of the shortage of supply of people like us in the market to do work. But we’re not just the same headcount doing the same utilization, generating more revenue. I would…
Alexander Rygiel
That’s helpful. And then as it relates to your backlog, what end markets do you think are expanding the fastest organically right now?
Bruce Labovitz
Probably transportation and power utilities out of our backlog. And then growing – so I would call those the nominally fastest growing. Percentage fastest-growing might be the energy transition business, but it is not necessarily having the same bang or buck kind of impact that the other two are having. But it sounds sort of out of favor to say, but building infrastructure is continuing to grow organically. We monitor homebuilding. We monitor the commercial developers. We monitor everybody.
You listen to the Hortons and the Lennars, and they’re talking about not slowing down their investment in inventory. They may be slowing their starts a bit, but they’re not abating their demand or lot inventory. They might be shifting it off their balance sheet to a private developers balance sheet looking for more finished lot acquisition as opposed to direct acquisition, but that’s still in the aggregate demand for our service unchanged or increasing. So we feel pretty good about the three primaries. Water is growing fast just by virtue of it being a resource that is becoming more scarce in certain parts of the geographies that we serve.
Alexander Rygiel
And then lastly, as it relates to your guidance, the low end of your revenue guidance of 205 would suggest that the back half of the year sort of declines from 2Q, is that your typical seasonality that you expect or are you being conservative? Or do you see something in the marketplace that would suggest kind of a slowdown from the pace in 2Q?
Bruce Labovitz
We generally do see just a slightly lighter Q4. The holidays – I mean we’re a people business, people take vacations. You can only bill hours that people are working. So we generally – sort of that Thanksgiving to New Year’s period can be a little bit slower for us, not always. Alex, it’s probably just more – we all turn the news on every morning. We all hear what’s going on. We want to be in a position where we’re not being dismissive to the potential for slowdown so that’s our low end. But I think that where we gave a range because we feel that the low end is just that and are more optimistic that there could be a higher end as well.
Alexander Rygiel
Very helpful. Thank you very much.
Bruce Labovitz
Thanks, Alex.
Operator
[Operator Instructions] We have a follow-up question from Alex Rygiel of B. Riley Securities. Your line is open.
Bruce Labovitz
Welcome back.
Alexander Rygiel
Thanks. One last question. Yes. Thanks. You’ve made a number of acquisitions so far. You have a number of acquisitions planned going forward. Can you just touch upon sort of how systems integration is going, how back-office integration is going, some of the successes or some of the complications that you’ve had and how your platforms kind of established for layering on you’re having another kind of a couple of years of active M&A?
Bruce Labovitz
Yes. So integration is one of the most challenging parts. And there’s really two components to it. And I can refer – I can address the systems side of it, the cultural side of it, it’s just equally as challenging, but we have a great team of people that work every day to get the cultural and orientation kind of integration going. Systems side, Alex, we have a really strong back end process here. We’ve got strong ERP in place. Going public, that was something we knew was going to be part of our life. And it was something that was well vetted ahead of time that we had the capability to implement this plan. It is absolutely challenging. It has cost us headcount, meaning we’ve had to add people. It’s a challenge. We bring on systems that range from shoeboxes and notes to QuickBooks to the same kind of ERP systems that we have.
But they’re all good companies with good organizations and good knowledge of their businesses. And so we go through a process and first couple of months, first things we do is integrate what we consider to be critical processes such as cash management and revenue recognition. And then we work towards fully integrating our billing processes and creating visibility uniformly in one platform to all of our data. It’s probably the most challenging part of the first couple of months of any integration is kind of getting your arms around all of the data so that I can present it in a way to our leadership team that’s meaningful to that.
Gary Bowman
And I’ll speak to what Bruce was talking about the cultural part. And that’s for us, it’s a lot more than just doing everybody at Bowman hat, wallet card with our cultural values, we concentrate tremendous amount on inculcating from the word go culture cross-selling, and that has been tremendously successful. It really exceeded our expectations. We’ve actually begun here in the past several weeks to start to quantify that. And it’s something that’s a little bit of gray area to quantify it. But as we start counting it up, it’s kind of mind blowing. I don’t know if we can come up with a KPI on that or not, but I don’t know a wallet card is also a business cost.
Bruce Labovitz
We do all that stuff.
Gary Bowman
But what we’ve done, and that’s not what we focus on.
Bruce Labovitz
It was one thing I’ll just close that with it. I do not anticipate there being any substantial requirement for big CapEx spending to support the back end of all of this integration. It’s people Well, we’ve got all the systems and capacities in place from a – sort of from ERP point of view to keep going.
Alexander Rygiel
Very helpful. Thank you.
Operator
And finally, we have a follow-up from Brent Thielman of D.A. Davidson. Your line is open.
Brent Thielman
Hey, Thanks. Bruce, what are your cash flow expectations for the second half?
Bruce Labovitz
Yes. I think similar to what we’re seeing in the first half. We are continuing to invest cash generation in growth. So we can – when we make acquisitions, the acquisitions provide working capital as part of the consideration kind of the conditions of acquisitions. And our organic growth continues to consume cash flow. But I think we’re now kind of on a trajectory for the second half of the year that will probably mimic the first half of the year, if not improve it just slightly.
Brent Thielman
Okay. Thank you.
Operator
There are no further questions at this time. Mr. Bowman, I turn the call back over to you.
Gary Bowman
Thanks, Olivia. Just to wrap up, we’re very happy to be on the call this morning and report such a great quarter. I want to thank everybody for spending time with us this morning. I certainly thank all of our investors for the faith that they put in us, and we are committed to continuing to create value here. Good morning to everyone. Thank you.
Operator
This concludes today’s conference call. You may now disconnect.
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