TRC Companies, Inc. (TRR) Q Earnings Conference Call Transcript. September 9, 2015

Transcription

1 TRC Companies, Inc. (TRR) Q Earnings Conference Call Transcript September 9, 2015 Good morning and welcome to the TRC Companies Fourth Quarter Fiscal 2015 Financial Results Conference Call. Today s call is being recorded. There will be an opportunity for questions at the end of the call. [ Instructions] At this time, I would now like to turn the call over to Mr. Martin Dodd, General Counsel for TRC. Please go ahead. Martin Dodd - General Counsel Thanks, Manny, and welcome, everybody. We are happy you could join us today. With me here in Lowell, Massachusetts, are Chris Vincze, our Chairman and Chief Executive Officer; and Tom Bennet, our Chief Financial Officer. The primary purpose of today s call is to review our fourth quarter and full fiscal 2015 financial performance. But also in the course of today s presentation, we will be giving you some of our thoughts on where we think our company and our markets are going. As such, to the extent we talk about future events, those remarks constitute what are called forward-looking statements as defined under federal securities laws. We believe it is important to be able to talk about where we see things headed. Nevertheless, forwardlooking statements are subject to risks and uncertainties, and there may be events in the future over which we have no control, which can cause actual results to differ materially from what we think today. For a more complete consideration of factors to keep in mind with respect to forward-looking statements, please refer to our public SEC filings, including the 10-K we filed this morning, our press release and the presentation slides we re using for today s call, which are posted on the Investor Centre of our website. With respect to those slides, they are intended as a visual supplement to our discussion today. We hope you find them helpful, but please consider them in the full context of our 10-K, our press release and our commentary today on the call. With that, I d like to turn the call over to Chris. Chris Vincze - Chairman, President and Chief Executive Officer Thank you, Martin. Welcome to TRC s fourth quarter and full year results call. The agenda for today s call will include a brief financial and operational overview and a business outlook; Tom will provide a detailed review of both TRC s fourth quarter and full year results. As always, we will provide an opportunity for any questions you might have. 1

2 Let s start the presentation, please refer to page three. Simply put, a strong quarter and a strong year. As you can see with the points listed below, TRC has made tremendous progress from a few years ago. In fact, we ve seen TRC s net service revenue compounded annual growth rate at 13.5% over the past four years. EBITDA compounded annual growth rate over the same period is nearly 30%. Our strategies and execution techniques are clearly working. Our fourth quarter s historically our strongest and 2015 is no exception. As you can see, our NSR increased by 21% year-over-year to $115 million. Similarly from a bottom line perspective, our operating income increased 19% and our EBITDA increased 15% year-over-year. From a full year perspective, TRC slightly bested our four-year average growth rates. Our NSR increased by 15%, our EBITDA increased by 35% year-over-year. The results of many of our margin initiatives are the reason for some of our improvements in particular on our EBITDA and operating income increases. Importantly, we continue to grow our backlog, which portends for continued growth opportunities in future periods, growing at 23% year-over-year to $317 million. As Tom will address in a few moments, many of our metrics and margins have reached new high points. Please move to the next slide. All three of our segments of TRC had strong fourth quarters and, generally speaking, solid full year performances. Our largest segment environmental led the way with very good results growing our NSR level at 28% year-over-year and our segment profitability nearly at 50%. The results were bolstered by two acquisitions for portions of the year. On an annual basis, very similar results. Our NSR grew over the year at 23% and our margins grew at 25%. Even with that said, our backlog continued to outpace our growth level growing at 3%. The greatest reason for the growth is with the related midstream activity, specifically pipeline permitting and related services. And while I say that, the total portfolio is performing well in many other markets are solid as well, real estate in particular has come around. Despite the volatility and general downward trajectory of the price of oil, we continue to see tremendous opportunities in the oil and gas markets specific to midstream. Between the move toward cleaner energy, basically no coal and less oil, natural gas continues to be a strategic growth energy source. Conversion of coal generating plants or new generating plants, eventual exportation of oil and the upgrading of old pipes, all lead to expanded opportunities even as new development and slowdown of global production occurs. On the next slide, we talk about our energy segment, which constitutes about 35% of total revenues for TRC. It also had a strong fourth quarter and a great year. The results were supplemented somewhat by a small acquisition last spring; backlog continues to grow nicely on a year-over-year basis. The growth drivers are a combination of renewable clean energy investments and the upgrade, transformation and reliability of existing transmission distribution systems across the country. While tens of billions of dollars have been spent over the past few years, the next five to 10 will maintain that level of spending in our estimates, especially as more efficient technologies rollout to the market. For example, microgrids. Microgrids are where our energy efficiency services intersect with our power delivery and transmission distribution services. 2

3 TRC is at the forefront of a number of pilot program establishing microgrids across many different systems and sources. These programs will provide more reliable electricity especially in times of crisis. Additionally, as flexible renewable technologies are accepted creating a much greener form of electricity. Our third segment on the next page, currently 13% of TRC s revenue is infrastructure. As you can see, infrastructure also had a nice quarter and a decent year. Most notably is our backlog growth of 92% year-over-year. The improving state and fiscal circumstances across the country and more aggressive postures towards transportation is generating the opportunities and creating a much stronger market place. TRC s ability to pursue successfully on design-build and PPP projects are driving our backlog specifically. From a market perspective, federally there is some hope that Congress will adopt the long-term funding bill that s been talked about quite aggressively over the last few months, a four- to six-year bill in particular. But again, at this point, we are fairly comfortable that the current level of funding will continue to be sustained while states continue to enhance and increase their funding. Additionally, we anticipate even greater demand in California, a TRC hub for transportation, as the Governor and legislature there continue to move forward with billions of dollars of upgrades on the roadway and bridge systems in California. Our next slide takes into account TRC s backlog, which grew 23% year-over-year and over 10% sequentially. We are well positioned for our fiscal 2016 with that backlog in mind. I listed a number of projects illustrating some of the types of projects we ve won recently and the extent of those opportunities, which are trending to be larger. In the environmental segment, wins exemplify rules covering coal in one case and the need to transport gas and liquids from a particular formation to markets in the other. The first project is due to EPA clamping down on recent coal ash pond breaches. The project involves providing coal combustion residual compliance, CCR; regulatory support, groundwater assessment, engineering design services for closure and/or retrofit of those ash ponds. The project work could reach $20 million per site, if we follow a design builds strategy with certain partners. We are examining many other projects of that type across our utility client base. The second project I listed, a large midstream client. Here, we are providing permitting and other environmental consulting services to a large midstream company. If it goes to construction, additional fees for that project will occur and ultimately we anticipate that project to last somewhere between two and three years. Both of these projects are absolutely in TRC s wheelhouse of services and again many other opportunities are being investigated as the rules and regulations surrounding these activities continue to be implemented. In our energy segment, the first project, a large international utility, is an EPC project. A large substation project that actually involves all three segments of TRC series, both infrastructure and environmental are participating in that in particular environmental is a large remediation component and a permitting 3

4 component to the project. And then the reminder is much of what we do in a typical design built procure and construction manage of a substation, in particular, in this case, Rhode Island. Second project is a more typical substation project, $7.6 million expanded relationship substation based in the northeast, a subsidiary of Eversource, PSNH, and again, ultimately in our wheelhouse of work for power delivery. Our third project, which we are seeing much more opportunities is a large California transportation agency moving forward with a large energy efficiency consulting agreement with us pursuing consultation of renewable, sustainability, consulting services, including the feasibility of the use of microgrids in their particular region. In our infrastructure segment, I listed two projects; the first is a long-term client, OCTA. It involves a $7.4 million HOV lane expansion, our typical civil roadway bridge design work and again additional fees assuming construction activity goes forward in the next two to three years. The second project is much more akin to the opportunities I discussed earlier, a large design build partnership activity. Our scope includes all civil and structural work for the $175 million construction project. TRC s fees are approximately 10% of the work and will progress over the next four years in doing roadway design, construction management, construction engineering, inspection and quality control. Our next slide illustrates, represents TRC s profitable growth strategy. As you can see below, TRC s growth rate organic growth grew at 72% for the full year, outpacing our acquisition growth rate throughout the year. We continue to invest in high margin organic growth activities in addition to hiring a new CMO, Todd Williams, who I announced on our last call, we recently hired a couple of key utility and oil and gas talents to support our client relationship and vertical business development activities. On the acquisition front, we continue to pursue a number of strategic acquisitions to support our growth and client solution objectives. In the course of the year, as I listed on the right side of the slide, we had three acquisitions, X-Line, which we announced on our last call, was the most recent and then two previous deals both in the environmental segment, NOVA Safety & Environmental and Covino Covino being based here in the Northeast and NOVA in the Permian basin providing oil and gas support services for us. My last slide before I turn the call over to Tom summarizes our key initiatives as we move forward into fiscal 2016 and beyond. As you may recall, we have been consistent in how we approach the business from a profitable growth and performance excellence perspective. We continue to strive for double digit growth and executing the business at a 10% EBITDA margin. Our last four years illustrate our ability to drive to those objectives, with fiscal 2015 almost resulting in a 10% margin business. All of this while reinvesting in our organization from a strategic level to system advancements to the creation of a better healthier working environment for our colleagues. In addition, we launched our new website this past June and I certainly suggest all of you to visit it. We continue to increase focus on our strategic market, in particular in North America, oil and gas, utility and 4

5 power and transportation. Additionally, the company is expanding into adjacent markets either regionally or technically, water and security are examples of where we are looking to continue to improve our suite of services. And then finally, we continue to support acquisitions that provide geographical expansions of, or enhance, technical capabilities. With a strong balance sheet, we are able to make many choices and continue those pursuits. With that I d like to turn the call over to Tom. Thanks Chris. Good morning everyone. Let's move to slide 10 in the package and I ll review some of the financial details for our fiscal fourth quarter, fiscal 2015 year ended June 30, compared with the same periods of the prior year. As Chris highlighted, our net service revenue of $114.6 million for the quarter was up $20.1 million or 21.2%, compared with the same quarter last year and each of our three segments recorded double-digit NSR growth. Organic growth accounted for 79% of the overall NSR growth in the quarter and as Chris said 72% for the entire fiscal year with acquisition-related growth accounting for the remainder. The top right chart on slide 10 shows that EBITDA, a non-gaap financial measure was $12.9 million in the quarter, up $1.7 million or 15%, compared with the same quarter of the prior year. Let's move to slide 11 for some details on the income statement. Cost of services was $90 million for the quarter, up $12.8 million or 16.6% compared with the prior year period. As you would expect, labor related cost associated with the increased headcount supporting the revenue growth was the primary factor in the cost increase. The ratio of cost of services to NSR declined to 78.6% in the quarter compared to 81.7% in the prior year period, indicating effective control of labor cost, while NSR expanded. Our G&A expenses increased by $5.2 million or 81.3% in the quarter. Looking at the lower right chart on slide 11, the corresponding G&A expense to NSR ratio was 10.1% in the quarter, an increase of 3.3% from the fourth quarter in the prior year. Last year's fourth quarter benefited from a $1.3 million favorable legal settlement, while this year's fourth quarter, we had increased legal and litigation expenses. For the full fiscal year, our G&A to NSR ratio was 9.1%, up 0.3% from 2014, with most of the difference in the ratio related to the favorable legal settlement in the prior year period, which reduced that cost ratio by 0.4%. Near the bottom of the table on slide 11, the EBITDA to NSR margin ratio was 11.3% in the fourth quarter, compared with 11.8% in the prior year fourth quarter, the EBITDA margin in the fourth quarter was hampered somewhat by the previously mentioned G&A cost items. Net income for the fourth quarter was $6.8 million, up $1.8 million or 34%, compared to the prior year fourth quarter and earnings per diluted share was $0.22 for the quarter, up 29% compared with $0.17 per share in the prior year. 5

6 Let's move to slide 12, which summarizes our full year results for fiscal The top two charts show our fiscal 2015 NSR and EBITDA growth of 15% and 35% respectively, compared with fiscal Operating income for the full-year grew $9.8 million or 47%, driven most recently by the strong results in each of our three quarters, prior to the fourth quarter. This is particularly true in our environmental and energy segments, which had 24.8% and 20.3% increases in segment profit, respectively. Overall, the increased operating income for the year is a product of controlling our cost to services growth to a rate well below our NSR growth. The lower right chart on slide 12 shows our EPS where $0.63 per diluted share for the year, up $0.23 or 58%, compared with $0.40 per share in the prior year. On slide 13, in the third row from the bottom of the table, as Chris mentioned, the 140 basis point increase in our EBITDA margin ratio to 9.8% for the full fiscal year compared to the 8.4% margin last year indicates that we have made substantial progress towards our stated margin goal of 10%. On slide 14 I have some final comments with respect to DSO and cash flow. Our day sales outstanding (DSO) cash flow related metric was 83 days at the end of the year, down 1 day compared with the prior year and down 7 days sequentially compared with the immediately prior third quarter. For fiscal 2016 which began on July 01, we have targeted a DSO in the range of 82 days to 86 days with that metric typically higher in our fiscal first quarter and hitting a low point in the last quarter of the fiscal year. Free cash flow for the fourth quarter was $17.9 million and consisted of operating cash flow of $19.5 million less our $1.6 million of capital expenditures. Free cash flow was up $1 million or 5.9% from the prior year cash flow of $16.9 million. On the far-right column of slide 14, you can see that our full year free cash flow of $25.5 million is $9.2 million or 56% higher than free cash flow in the prior year. Accordingly, we ended the quarter with $37.3 million of cash, up $9.7 million compared with the prior year. We currently have no borrowings outstanding on our $75 million credit facility and we did not have any activity under our $10 million three year stock repurchase program that had been authorized by our Board back in November of Please note that a reconciliation of our GAAP to non-gaap measures is provided on slide 15. This concludes my remarks for today and we ll now go back to the operator for Q&A. Manny? Question-and-Answer Session Thank you. We will now be conducting a question-and-answer session. [ Instructions] Thank you. Our first question is from Walter Riebenack, a private investor. Please go ahead. Tom, I m on a cell phone so I don t know if I heard you correctly but did I hear you say there were no repurchase of shares under the $10 million authorization? 6

7 That s correct, Walter. Okay. Next question I ve got on the G&A expenses, the increase gross was $5.2 million, I think you said. And you said that current largely because of legal costs? That s correct, yeah. Okay. Legal and litigation expense was what I said. Okay. All right. Very good. Thank you. Thank you, Walter. Take care. Thank you. At this time, I d like to turn the conference back to management for closing comments. Chris Vincze - Chairman, President and Chief Executive Officer Thank you, Manny. As always, I d like to thank my colleagues. Thank them in particular for a great quarter and a great fiscal year, also want to remind them that the summer is over and the first quarter is almost complete. Also, I d like to thank our shareholders and their continued support and interest in TRC and we will only have a brief respite of two months before we say hello again. So, we will see you in November. Thank you. Thank you. Ladies and gentlemen, this does conclude today s teleconference. You may disconnect your lines at this time and thank you for your participation. 7