TRC Companies, Inc. (TRR) Q2 2015 Earnings Conference Call Transcript February 04, 2015 Good morning. Welcome to the TRC Companies Second Quarter Fiscal 2015 Financial Results Conference Call. Today's call is being recorded. [ Instructions] At this time, I would like to turn the call over to Mr. Martin Dodd, General Counsel for TRC. Please go ahead, sir. Martin Dodd - Senior Vice President, General Counsel, Secretary Thanks, Christine. Welcome, everyone. 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. As you know, the primary purpose of today's call is to review our second quarter financial performance, but also, in the course of today's presentation, we ll 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 the federal securities laws. We believe it is important to be able to talk about where we see things headed; nevertheless, forward-looking 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-Q, we filed this morning, our press release and the presentation slides we are using for today's call, which are posted on the Investor Center of our website. With respect to those slides, they are intended as a visual supplement of our discussion today. We hope you find them helpful, but please consider them in the full context of our 10-Q, our press release and our commentary today on the call. With that, I would like to turn the call over to Chris. 1
Chris Vincze - TRC Companies, Inc. Chairman, CEO Thank you, Martin. Welcome, again, to TRC's second quarter fiscal 2015 financial results call. I will provide an overview of our second quarter performance and speak to our business outlook. Tom will provide a financial review of both the quarter and the year-to-date results. We will finish our brief call with any questions you may have. Let's begin on Slide 3, clearly a strong quarter, all arrows are pointing in the right direction. More importantly, the company continues to make progress, illustrating that our profitable growth and performance excellence initiatives are working. TRC continues to climb the ladder of creating a high growth and efficient performing business. From a top-line perspective, we are continuing to grow from a balance perspective, with 47% of our growth coming from organic investments and strategies, and 53% from our acquisitions. If you look at our operating results, very favorable bottom-line performances, all growing in and around 30% year-over-year. As far as our backlog, and I will speak more to that in a moment, we continue to have a positive trend from a year-over-year perspective. On Slide 4, we begin to talk about our three segments, our Environmental segment continues to be our largest area of business just north of about 50% of our total revenues for the quarter. Nice growth on both, top-line and bottom-line, 18% and 16%, respectively. The growth drivers for the quarter include our oil and gas activities, specifically our permitting businesses in our pipeline projects. Also, [we re] seeing quite a bit of pick up in the real estate and construction space for the first time; and finally TRC is pursuing many different power plant projects in the power industry, based on the recent regulations impacting coal facilities. We certainly anticipate that area of business to continue to grow force as well. Our next segment, the Energy segment, also had a good quarter. Overall, the market is strong, but some level of uncertainties on how to spend capital exist, delaying some of our projects. Importantly, we improved our execution year-over-year growing 8% on a segment profit basis. This is also in the face of our national expansion activities. TRC has tripled its volumes in the West Coast over the past two years and progressing well in mid-western states. From an opportunity prospective, we are seeing more EPC programs than we have in years. Our third segment, Infrastructure, Slide 6, this picture does not tell the whole story. Timing issues really hurt the performance for this sector on all fronts. We anticipate the number of change orders and contracts to be finalized in the course of this quarter and the next, which will positively impact the business for the second half. Importantly, these are not in dispute, they are just in bureaucracy. The market actually is becoming much stronger [as] states are not only looking to invest with budget surpluses, but are also adding gas taxes as a form of revenue to support infrastructure improvements. Federally, we anticipate a major package to be approved in 2
the course of the next 12 months. In fact the President's budget that was released earlier this week, is calling for $0.5 trillion dollar investment in an infrastructure fund, based on a tax reform program. While we are not necessarily anticipating that, we certainly do believe there will be some progress made on a major national infrastructure fund, which will support a lot of our businesses. Our next slide represents our backlog and new project wins, once again, timing issues with some awards impacted the overall picture. We still see an 8.5% growth on a year-over-year basis, so it is consistently positive and we anticipate that to continue for the long-term. A couple of projects in each sector that I would like to highlight that speak to some of the areas of business that we listed, Spectra Energy continues to provide us ongoing activity related to environmental impacting studies and assessments for our pipeline projects throughout the different parts of the country. More recently with our NOVA acquisition in the Southwest Permian Basin, we are now winning quite a few projects related to pipeline lay down yards as well as holding in storage area site work, permitting beam and tank storage area construction management activities. This particular project is worth over $1.5 million over the course of the next six or eight months. We are starting to see quite a bit more work related to that as we expand our services in the Texas marketplace. In our energy area NYSERDA a long-term client, has recently awarded us a $2 million dollar project over the next few years, providing services on multi-family buildings. We are responsible for the implementation of this program across residential units of five or more. Then on the infrastructure side, I will highlight one of our largest awards most recently. It's the construction engineering inspection services for more than 500 bridges throughout the state of Pennsylvania. The project is part of the Pennsylvania Department of Transportation's Rapid Bridge Replacement program. It's a public-private partnership to repair aging and deficient infrastructure projects. Our partners are Plenary Walsh Keystone Partners. The project was just awarded to us over the last quarter and contractually assigned just recently this quarter. We are anticipating about 36 months to 48 months of work with an option to expand this contract by another $5 million to $10 million in another two years, assuming good progress. Overall, a very good circumstance from a backlog standpoint, we continue to see record levels of opportunity throughout the business as well, in particular in EPC in public-type partnership opportunities. Our next slide, Page 8, refers to our growth strategy, which again continues to be a balanced strategy. We continue to invest in TRCs growth market in particular in the power and oil and gas base from an internal perspective and we continue to pursue strategic acquisitions to expand our platform in key North American markets, either through geographical expansion or through technical capacity expansions. As you can see by the chart on the left, we have grown our 3
businesses [in] this particular quarter fairly evenly, 47% from organic activities and 53% from our acquisitions. Two most recent acquisitions, which occurred in the first quarter of this fiscal year, I am happy to report has been fully integrated into TRC's platform. At this stage of integration, we are looking for all possible synergies on the business levels moving forward. Our next slide is a slide in anticipation of questions we have been receiving from a number of our investors, as well as our other constituents. The slide [is] illustrating our views on the impact of the recent decline of oil prices to TRC's business. As of this moment in time, we don't believe there are any short-term impacts to the business as it relates to TRC. We have shown from our perspective the three different markets, as it relates the oil and gas market, where the particular impacts are from the lower pricing of oil, in particular on the capital spending side of new source oil, which is typically referred to as upstream work. TRC's activities in that space have been limited throughout. Out of our total revenue stream, and the chart shows on the far right the percentages of our total revenue streams, which is only about 10% of total TRC, so 6% of the 10% is related upstream work. We actually believe we will see some level of acquisition, due diligence and other activities as companies in that space are looking for new partners. Again, overall, we are not anticipating a decline of services from that perspective. Our bread-and-butter is in the midstream space as you can see, which is typically in the pipeline activity, and we continue to believe certainly based on a number of our meetings with our clients and number of our board members, or former [board members], [and] our executives of the oil industry, that the current activities and expenditures are going to move forward. Clearly, there is a long-term trend to lower prices of oil, we do anticipate that even this might be impacted at some point in the future. A second element that is certainly worthy of conversation, as it might relate to TRC, those states in which oil revenues are major elements of their revenue streams also might be impacted. So, states like Texas, North Dakota and Pennsylvania, to some degree, actually may curtail some other expenditures, such as transportation or other capital expenditures, that they have based on lower oil revenues, and that they have been anticipating that may not occur. However, to this date, again, we have not seen that secondary impact as of yet, but we are looking very closely at this issue and tracking it, and as of now don't view it as a material impact to our company. Lastly, just a quick summary on the investment thesis, which continues to be very strong. TRC is consistently improving across the board in how we grow and execute our business. We are striving for a 10% EBITDA margin business and we are on our way to achieving that. We continue to focus on our long-term strategy of growth, both as it relates to our strategic hires, innovation and technology sides, organically; and we continue to focus on expanding our strategic acquisitions that provide us geographical expansions and enhanced technical capabilities. With our strong balance sheet, again, we believe we have the ability to execute on both of these fronts as we have shown as recently as this past couple of quarters. 4
The three primary markets that we are focused on, oil and gas continually, utility and power industry, which is our single largest area of business lines, and then transportation, which we view is a up-and-coming area of business, especially in light of the infrastructure and transportation funds that will be allocated to that particular market sector. With that I would like to turn it over to Tom. Thanks, Chris. Good morning, everyone. Let's move to Slide 11, and I will review some of the financial details for our second quarter, which ended December 26, compared with the second quarter in the prior fiscal year. As Chris, highlighted, our net service revenue of $99.8 million for the quarter was up $8.7 million or 10% compared with the same quarter of last year. Again, the revenue growth was balanced 47% organic, and the remainder, acquisitions. Operating income was $6.9 million for the quarter, up $1.7 million or 32% compared with the same quarter of the prior year. The increase in operating income was driven by several factors, including the double-digit NSR growth, particularly in our Environmental segment, where the 18% NSR growth resulted in a 16% increase in segment profit, all of which was partially offset by higher depreciation and amortization expense related to acquisition activity. EBITDA, a non-gaap financial measure was $9.5 million for the quarter. That was up $2.1 million or 28% compared to same quarter of the prior year. Let's move to Slide 12 for details on the income statement, cost of services were $82.6 million in the quarter, up $6.2 million or 8.1% compared with the prior year period. Labor related costs associated with increased headcount, supporting revenue growth, [were] the primary factor driving cost of services. The ratio of cost of services to NSR declined to 82.7% for the quarter compared 83.8% in the prior year indicative of efficient project execution and cost management. Our G&A expenses increased by $0.9 million or 11.8% in the quarter. Looking at the lower right chart on Slide 12, the corresponding G&A and expense to NSR ratio was 8.4% in the quarter, slightly higher than the 8.2% ratio in the prior year. For the six-month year-to-date period, our G&A to NSR ratio is now 8.5% compared to 9.4% in the same six-month period last year, indicating continued control over our administrative support costs as we grow the top-line. Moving further down Slide 12, the EBITDA to NSR margin ratio improved to 9.5% in the quarter compared with 8.2% in the prior year quarter, and is now 9.2% for the six-month year-todate period, up 1.1 percentage points from the prior year six-month margin of 8.1%. Continuing down near the bottom of Slide 12, net income for the quarter was for $4 million, up $0.9 million or 29% compared to the prior year. Earnings per diluted share was $0.13 for the quarter, up 30% compared to $0.10 per share in the prior year. EPS for the six-month year-to-date period is now $0.25 per diluted share, up 32% compared to $0.19 per share in the prior year. 5
Let's move to Slide 15 for some final comments on DSO and cash flow. Our DSO or days sales outstanding metrics was 85 days at the end of the second quarter, down one day compared to the second quarter of the prior year, and down a full seven days, sequentially, compared to the immediately prior first quarter. We continue to target a DSO of 80 days or less, with our DSO typically higher in the first quarter and trending lower throughout the remainder of the fiscal year. Free cash flow, which is operating cash flow less capital expenditures was negative $3.8 million for the second quarter compared with negative $7.8 million in the prior year period. On the far right column of the data table on this page, you can see that our six-month cash flow is $5.4 million, ahead of the year-to-date cash flow in the prior year six-month period. Accordingly, we ended the second quarter with $13.3 million of cash compared with $8.5 million in the prior year. We currently have no borrowings outstanding on our $75 million revolving credit facility. Under our stock repurchase program, we had no activity. Recall, that our Board had approved a $10 million three-year stock repurchase program last quarter, much like our approach to investments in our organic growth and acquisition program. We will continue to monitor the price of our stock and will manage the repurchase program on an opportunistic basis and within the requirements of applicable regulations. On Slide 16, we provide a reconciliation of our GAAP results to non-gaap measures. That concludes my remarks today. Christine, I would like to come back to you to open up the session for Q&A. Question-and-Answer Session Thank you. [ Instructions] Our first question comes from the line of Walter Riebenack, a private investor. Please proceed with your question. This is directed to Tom. Tom, you just mentioned the buyback program. Has TRC purchased any stock? We did not, Walter. No activity in the quarter. Okay. Well, I don't know when this started, so I am assuming that $10 million is still intact. 6
Yes. The board authorized a three-year program last quarter. I announced that on that call. It's a $10 million authorization over a three-year period. Okay, so you haven't repurchased any stock. That is correct. All right. Thank you. Thank you, Walter. We will keep you informed. [ Instructions] We have no further questions at this time. I will now turn the conference back over to Mr. Chris Vincze for any closing or additional remarks. Chris Vincze - TRC Companies, Inc. Chairman, CEO Thank you, Christine. Thank you, everybody, for attending our call today. Despite some of the weather that we are having in many parts of the country, our tundra here in the Northeast, but again appreciate everybody's attention and support and especially to my colleagues who continue to perform exceedingly well. Thanks, everybody. We will talk to you in the spring. That concludes our conference call. Thank you for joining us today. 7