Atlas Technical Consultants, Inc.

Hello and welcome to the Atlas Technical Consultant second quarter 2022 conference call. Currently, all participants are in motion-only mode. A question and answer session will follow the formal presentation. If anyone should require operator's 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 take the call over to your host, Jonathan Parnell, Chief Strategy Officer of Atlas. Thank you. You may begin, Mr. Parnell.

Good morning, and thank you for joining us. We hope that you've seen our earnings release issued after the market closed yesterday. Please note that we have also posted an updated investor presentation, which can be found in the investor section of our website at ir.oneatlas.com. Before we begin, I'd like to remind you that today's call may include forward-looking statements. Any statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts, 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, uncertainties, 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'll be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margins, adjusted net income, and adjusted EPS. Please see our earnings release and filings for reconciliation of these non-GAAP measures to their most directly comparable GAAP measure.

I will now turn the call over to our CEO, Joe Boyer. Thank you, Jonathan, and I appreciate everybody joining us today. On today's call, I'll provide an overview of our second quarter results, what we're seeing in our core markets, and updates on our strategic priorities. Then David will continue with the discussion of our second quarter financial results and our outlook for the remainder of the year, and then we'll open up the call for questions. The second quarter was another strong period for Atlas with record revenue, adjusted EBITDA, and backlog. These results clearly highlight the successes we are seeing in our strategy to build a national leader in high-value, mission-critical technical services to both infrastructure and environmental markets here in the U.S. In the quarter, we generated 19% revenue growth, including an acceleration of our organic revenue growth to 8%, over 17% adjusted EBITDA margin, and sequential backlog growth, all to record levels, and cash flow improved in line with typical seasonal patterns. Our 8% organic revenue growth in the quarter is one of the best quarterly organic growth rates we've recorded as a public company. The strong organic growth in the quarter was driven in part by the robust backlog growth we've experienced over the past several quarters. Fundamentals in our key end markets and geographies remain favorable throughout the quarter. We saw particular strength with our transportation, state and local government, and power clients, all of which we expect to remain key growth drivers for Atlas moving forward. We also continue to see benefits from increased cross-selling of services across the Atlas platform, including recently acquired services. As we've scaled the business and added strength to our technical service offering, we're gaining greater share with our clients and winning more marquee projects. To provide you with a better idea of how the strategy is benefiting Atlas, Let me take a minute, please, to describe a few projects we believe really highlight this success. In California, where we've had a long-standing relationship with Caltrans, we were able to leverage our success with them on construction, engineering, and inspection services into a statewide materials engineering and testing services contract, increasing the number of services under the Atlas umbrella that we are providing to this customer. In Idaho, We were recently awarded a $5 million construction engineering and inspection project in our program construction and quality management service line. This is our first transportation-related PCQM award in the state, where we have previously mainly provided testing, inspection, and certification services. Again, an example where we are cross-selling a key customer with additional services. Switching to the private side of our business, in the Southeast, where we have historically provided utilities with smaller environmental-related services on a one-off task order basis. We have leveraged our experience, scale, and breadth of capabilities into a $25 million long-term master engineering and environmental services contract, one of the nation's largest utilities. We are also expanding our services with large national government agencies. For example, we've been providing the Department of Energy with geotactical services at one of its largest energy laboratories and are now expanding our scope with a $20 million program that includes testing, inspection, and certification services, which we hope to leverage to other sites across the country. While these are only some examples where we are seeing success with our cross-selling strategy, we believe they are great examples of the benefits of our strategy and highlight how it is contributing to growth across the Atlas platform. In addition to strong revenue growth, we had a record gross margin of 60.4% in the quarter when excluding pass-through subcontractor costs. This margin performance is a testament to our high-quality services Atlas offers and demonstrates our ability to pass inflationary pressures through to our clients. Backlog at the end of the quarter reached another record level at $855 million, up modestly from last quarter and up 14% from last year. As we've talked about with cross-selling, we're winning work across all of our end markets and across all of our service lines. Importantly, We continue to see demand being driven by long-term secular themes as our customers drive to improve their environmental sustainability and to improve the overall efficiency of their existing infrastructure. Beyond our $855 million backlog, we have approximately $155 million of awards pending contract execution, which is significantly higher than the $110 million we had for last quarter and marking the first time the combination of these figures is greater than $1 billion. As we've discussed, the backlogs and awards 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 driver for Atlas going forward. And as we look into the second half of the year, We continue to see solid demand for our services, especially in our core transportation and environmental-related end markets, driven by the underlying secular themes such as the aging of a nation's infrastructure and increased focus on environmental sustainability. While we are cognizant of the factors impacting the broader macroeconomic environment and the risk it can pose to demand for certain services in our markets, we believe we are well positioned to navigate any volatility that may be on the horizon. First, I'd note that our services we provide to end markets that are most sensitive to higher interest rates and general macroeconomic conditions, such as new build commercial construction and real estate transactions, are a relatively small piece of our business. Secondly, and probably most importantly, Nearly two-thirds of our business is tied to existing assets and services that are driven by non-discretionary spending because they are tied to regulatory compliance, ongoing testing, and maintenance, making demand for our services relatively resilient through most economic cycles. Driving organic growth remains one of our top priorities, and we believe we are in a good position to do so given the nature of the services we provide, the diversity of our in-market exposure, our robust backlog and award pipeline, as well as our thorough cross-selling initiatives. Beyond driving organic growth, we have a proven strategy that broadens and enhances our technical service offerings and geographic footprint through strategic acquisitions. Our M&A playbook is based on identifying targets with quality management teams that can enhance or expand our service offerings and our regional presence. integrating them into the Atlas structure, retaining their key employees, and then scaling the business across our platform, including the cross-selling of services. In the first quarter when we acquired Transmart, we talked about being able to leverage their expertise in intelligent transportation systems and electrical engineering across our national customer base. And we are already seeing opportunities here and are currently working to position Atlas for electric vehicle charging infrastructure opportunities in Georgia on projects that will be funded through the National Electric Vehicle Infrastructure Formula Program. Transmart's unique blend of transportation and electrical engineering capabilities places us in a strong position to pursue these types of opportunities in the $5 billion NEVI program. We are also building on relationships that come to Atlas through our acquisitions. Last year, we acquired O'Neill Services Group, a premier construction quality assurance and environmental services firm based in the Pacific Northwest. We're leveraging their strong relationships that were brought to us through the acquisition to establish a strategic alliance with a large national infrastructure construction company. The alliance will allow Atlas to seamlessly provide them with environmental quality assurance and inspection services positioned our company for additional work on major infrastructure projects with them across the U.S. As we continue to grow, we remain committed to strengthen our capital structure and are constantly evaluating all options that could drive shareholder value. We reduced our total debt in the quarter. Leverage was down modestly from last quarter. And based on our earnings forecast and robust cash generation outlook for the second half of 2022, We expect a further improvement in the leverage ratio in the coming quarters. We are confident that our M&A strategy will continue to drive outsized growth and improve our leverage ratio. We have a robust M&A pipeline with proprietary candidates. However, we maintain a disciplined capital allocation strategy, and we'll continue to ensure that any partnership we pursue will be highly accretive to our shareholders, deleveraging and will position analysts for continued success during all stages of the economic cycle. Lastly, I'd like to reiterate our commitment to ESG. In June, we issued our inaugural ESG report titled Leading with Heart. The report highlights the progress we've made internally as a company on related topics, as well as how we help our customers meet their ESG objectives. We have also set goals that will shape how we operate as a responsible and sustainable company and how we serve our customers and cultivate an outstanding workplace. With that, I'll turn the call over to David to provide details on our financial performance and outlook, and I'll come back with a few closing remarks. David? Thank you, Joe.

Gross revenue of $156.5 million in the second quarter of 2022 was up 19% compared to the prior year quarter, driven by 8% organic growth with strong performance in all of our service areas, as well as contributions from acquisitions. Gross margin was 47.3% down modestly compared to last year due to a greater percentage of subcontractor costs in the quarter. Excluding subcontractor costs, gross margin expanded 90 basis points to 60.4%, our strongest quarterly result on record. This was driven by utilization of our workforce, strong execution, and our disciplined pricing strategy. Adjusted EBITDA was $21.2 million in the quarter, up 16.7% from last year, and represented 17.3% of revenues. excluding subcontractor costs. This was an improvement of 20 basis points compared to last year. Year-over-year increase was mainly due to our stronger gross margin and leveraging of fixed overhead costs. This, however, was tempered by higher personnel costs as we are investing in our workforce and retaining key talent in support of current and ongoing growth. driven by the factors Joe discussed, such as a record backlog, pending new awards, and traction on larger projects. For the second quarter, we produced adjusted net income of $4.5 million and adjusted EPS of $0.12 versus adjusted net income of $4.1 million and adjusted EPS of $0.11 in the prior year quarter. The year-over-year increase was mainly driven by the improved operating results we mentioned. Moving on to our cash flow in the balance sheet. During the second quarter, we generated $9.8 million of cash from operations, and this was compared to $7.8 million in the same quarter last year. Our cash flow in the quarter represented strong performance for the business as we enter our strongest revenue-generating quarter of the year, where working capital demands increase. As we've discussed previously, improving working capital management is a key priority for us, and we're focused on driving this throughout all levels of our organization. Based on our outlook, we continue to see stronger cash flow in the second half of 2022, with quarterly improvements in the third and fourth quarter, and expect full-year cash flow in 2022 to exceed that of 2021. Net debt at the end of the quarter was $500 million, down from $508 million at the end of last quarter. Our bank covenant leverage ratio, which includes cost efficiencies and pro forma EBITDA from acquisitions, decreased to 5.6 times from 5.7 times last quarter and down significantly from 6.7 times when we recapitalized the company in early 2021. Pursuing an aggressive path to deleveraging our balance sheet and improving our overall capital structure remains a top priority for Atlas, and we're continually looking for avenues to do so. Consistent with this, on June 1st, we entered into an interest rate hedge agreement with JPMorgan Chase, which caps the variable portion of our interest rate at 3%. This agreement eliminates the uncertainty of extreme downside risk in a rising interest rate environment. Also last week, as a result of our continued deleveraging of the business since our recapitalization in early 2021, we effectuated a $20 million expansion of our revolving credit facility via the pre-established accordion feature with JPMorgan Chase. increasing the aggregate capacity to 60 million. This expanded capacity better supports the financial flexibility suited for a rapid growth enterprise of our size and trajectory. Again, we appreciate the continued strong support of our lenders, Blackstone and JPMorgan Chase, as we continue to execute on our robust growth strategy. Moving on to our outlook for the remainder of the year, we are reaffirming our revenue and adjusted EBITDA outlook for 2022. We expect 2022 revenue to be in the range of $580 to $620 million, an increase of 11.5% at the midpoint as compared to our 2021 results. This outlook reflects the strength of our backlog and visibility on the timing of work and continued solid demand for our technical services, as Joe discussed in his remarks. We anticipate adjusted EBITDA to be in the range of $84 to $90 million. At the midpoint, this represents growth of 19% and 100 basis points of margin expansion as compared to our 2021 results. We are keenly focused on driving our cash flow throughout the year, and as I mentioned, expect enhanced cash flow results moving forward, especially as we get into the latter part of the year. We are extremely excited about this growth expectation for our business moving forward, and with that, I will now turn the call back to Joe for closing remarks.

Thank you, David. As I mentioned earlier in the call, when we formed Atlas nearly five years ago, Our goal was to build a leading national provider of mission-critical technical services to both infrastructure and environmental markets. We've made great progress in growing this business both organically and through M&A over the last several years and are excited about the growth prospects going forward. We've had a great start to the year with accelerating organic growth and reaching record quarterly levels of revenue, adjusted EBITDA, and backlog. We are investing in our people and processes, cultivating a strong workplace and culture, and building a great portfolio of technical services that are in high demand and that are needed to keep our nation running in a safe, efficient, and environmentally sustainable manner. Thank you again for joining us. Operator, we can now open up the lines for Q&A, please.

We will now begin the question and answer session. To ask a question, you may press star then 1 in the telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up.

At this time, we will pause one moment here to assemble our roster. Our first question will come from Chris Moore with CJS Securities.

You may now go ahead. Hi, good morning. It's Pete Lucas for Chris. First question for me relates to labor. First at Atlas, in terms of employee levels and turnover, looks like you guys have a significant number of job openings. How do you view labor availability at this point, and is that a gating factor in terms of your growth? And then as a side question, what are you hearing from your customers? Is it impacting their growth in terms of labor availability?

Pete, thanks very much for that question. This is Joe Boyer. You know, we, and I've often said this, we're always in a tight labor market here. It just has been since we started this business. And we have internally relied on recruiters to help us fill our positions and stay ahead of our demands for labor. And we've done an absolutely great job of that. ever since back in the period of COVID and going through today. So we see a nice, steady progression of our backlog and future going into Qs 3 and 4. Our labor demands, our utilization is high, but we still have three or four points of labor production in our current labor force, and we're steadily adding labor to that, direct labor, and new hires to that as we go along. So We feel good about our outlook for our labor and fill in those positions. Let me say, in regards to our clients and their issues with labor, I can't say that I've had any input from our clients in regards to restrictions on their business due to labor. I know we are seeing increased demand for program management services to help them with their positions projects on our public sector markets.

Very helpful. Thanks. And a follow-up from me just on revenue. Anything you can talk about in terms of cadence you look for from Q3 to Q4? And in terms of your guidance that you stated, the 580 to 620, a wide range, and we're into Q3 here. Just wondering, are there any wild cards in Q4 in terms of whether you make the high end of that range or not, and what specifically are you focused on there?

Great, thanks. This is David Quinn. So you should expect to see sort of the traditional profile for our business, meaning the third quarter is typically our strongest quarter. So, you know, you're going to see a minimum, let's say, 5% bump in volume coming off of Q2. And then you'll probably see Q4, you know, trail back down maybe more closely in line with our second quarter as the momentum of the business continues to build. You know, relative to the outlook for the year, first, we feel very confident about the guidance, the strength of our backlog, the contract not executed at $155 million that Joe mentioned. So we have great visibility through the end of the year. That said, you know, the 580 to 620 range, you know, what could influence that? You know, really not a lot. We've got a couple of larger projects that are going to come online. But at this point, you know, we've got a pretty good line of sight on it, and we feel good about revenue.

Very helpful. Thanks.

I'll jump back in the queue.

Our next question will come from Rob Brown with Lake Street Capital Markets.

You may now go ahead.

Hi, Joe. Hi, Dave. Congrats on the next quarter.

Thank you, Rob. Appreciate that.

First question is really on the M&A pipeline. I think you talked about evaluating some things. Just wanted to get a sense of how active is it at this point and how do you see that over the next few months? How's the environment at this point? Has there been any changes in valuation?

Yeah. Hey, Rob. So I'll take that in two parts. In terms of valuation, this is John Parnell, by the way. We really haven't seen much change in recent months. There's still a lot of interest in the space due to the resilient nature of public work spending. And obviously that's been bolstered recently here by the infrastructure bill. So we haven't seen a change in terms of multiples, but we're still seeing plenty of opportunities right in our valuation wheelhouse where we've been successful all along. In terms of our pipeline and activity going forward, we have a very full pipeline with proprietary deals that we're continuing to evaluate. I would say, however, now more than ever, We're focused on being disciplined in our capital allocation strategy, and we'll only move forward with deals that have a client base that we know is going to be resilient through all stages of the economic cycle. It's going to be highly accretive to our existing shareholders and deleveraging. And we saw some volatility in our stock price in Q2, and I think it's safe to say in situations like that, we're not going to be jumping out ahead to issue a lot of shares to fund M&A. So I hope that's helpful, Rob.

That's great. Thank you. And then second question on gross margins, a nice uptick in the quarter. What's sort of your thoughts on increasing those going forward? How is pricing and kind of labor costs flowing through at this point? And do you see that stepping up in the back half?

Yeah, so we're really pleased, obviously, where the quarter came in. We broke through the 60% level, the 60.2%. which is an all-time record for the firm for gross margins on labor. You know, I think what we're seeing in the quarter is that we're really demonstrating the pricing power of, you know, what's a 90% cost-reimbursable organization. We've been aggressively instituting increases across the client portfolio, and we're really now seeing the benefit of that catch up to our results. You know, in addition, we're seeing excellent utilization across our workforce, as Joe mentioned. We increased our workforce by several hundred this quarter, and utilization is higher than it's ever been. So we're really starting to see that efficiency prove out as well. Relative to driving our gross margins up on labor, they're pretty high. Over 60% is elite for sure. You'll still continue to see some flux in the mix of efficiency self-performance versus subcontractors. And we had a little bit more subcontractor contribution this quarter. And we're always going to be trying to move the needle on that as well. But I think we're kind of in a range where, you know, you may see it move a point, a point and a half on gross, but, you know, we're in pretty good range right now.

Okay, thank you. I'll turn it over.

Our next question will come from Brent Thielman with DA Davidson.

You may now go ahead.

Hey, thanks. Good morning, guys. Hey, good morning, Brent. Hey, Brent. Hey, nice quarter. I guess the question, it looks like your pending awards were up nicely from the first quarter, but your bookings and backlog look to be lower. Are you seeing slower conversion of pending awards to award? Maybe you've just got some larger pursuits that take longer to get approved, or maybe there's just another explanation around that.

Brent, thanks very much. You know, really, I can't say that we are seeing a slowdown in the awards. I think that those awards pending signatures and, you know, to move the backlog does vary quarter to quarter. And as you saw the growth, we grew it about $40 million or so in the quarter. But it's not indicative of anything other than just straight timing of some projects, some large project awards. We haven't seen any slowdown in moving those from pending to backlog, anything noticeable.

Yep. Okay. Understood. And then, Dave, I guess, I mean, you typically generate really good cash flow here in the second half. probably put the dent in the leverage. This 50-odd million in adjusted EBITDA that you anticipate doing over the next couple quarters, are you expecting sort of typical conversion, call it 50-odd percent, to operating cash flows? Is there anything in this environment we're in right now that changes those dynamics at all?

Yeah, Brent, I would say we're probably looking at something a little closer to 35% to 40%. You know, and obviously, we're going to press to do better than that, but we're probably in a 35 to 40% range. And, you know, we're seeing some, we are seeing some impacts of the inflationary environment, obviously, some impacts with interest rates rising and that kind of thing, which is tempering it a bit in the back half of the year. But we will, you know, true to form, we'll deliver a very strong cash flow second half to the year.

Okay, great. Thanks, guys.

Our next question will come from Don Christ with Johnson Rice.

You may now go ahead.

Good morning, gentlemen. How are you all today? Hey, Don. Good morning. Good, Don. How are you doing? Doing well, doing well.

I just wanted to, I guess, ask a little bit more on Brent's question and more for my knowledge of the industry. As far as inflation is concerned amongst your customers, does that influence kind of buckets of money that could go towards your projects? And I'm more kind of curious as to, you know, gasoline prices all, you know, they've come back recently, but, you know, a lot of municipalities were kind of in a tight situation there. And I didn't know if the ongoing contracts that you have with them could be influenced and kind of slow down new awards if they had to kind of shift money around, you know, to pay for, you know, municipality gas prices for cops or anything like that. And just any color you could give around there would be helpful.

Okay. Let me sort of take the first part. I think, Don, what we're seeing is don't want to remind you that a lot of our work is around maintenance of existing vehicles. you know, projects and infrastructure. So stuff that's sort of non-discretionary, right, has to be done. But we are, you know, we are seeing some impacts of the inflation and construction costs with our clients. And really that's around budgeting on projects. They might have put a project out on a scale and construction costs have come back higher than than budgeted, so they've had to come back in and retool that project, put it out in a scope in a smaller fashion to match. We see quite of that in the public markets, municipalities for sure, and the projects continue to come out just a little bit smaller to make sure they match their budgets and stuff. So that's really the only impact we've seen in regards to what you're referring to, but it doesn't impact our work. We're still out in the field, still progressing our work along. And I'm trying to, can you help me on the second part of your question? You were talking about, I sort of missed the second half of the question.

Well, it's just that, you know, we've seen some reports that buckets of money have been moved around in municipalities because of, you know, higher gas prices, etc., And I'm more referring to the press releases that police departments, et cetera, have been blowing through their budgets because gas prices were $2 to $3 more than they budgeted, et cetera. And I didn't know if that kind of impacted any awarding of contracts going forward, whether it regards to roads or maintenance of anything else.

Yes. Okay. You know, I can't say that I can add a whole lot to that other than what I've described there. I think, Don, I mean, I can't. The coffers of the public clients we're seeing are really full, and the projects are continuing to come out. You know, I don't know that I have insight into them moving around, you know, their pockets of money behind the scene, but our steady projects have been rolling out. We're continuing to do a lot of our work under the MMIP programs and management pieces of maintaining their existing infrastructure. So we aren't seeing any current delays, particularly in our public and municipalities market on any other infrastructure projects. Seems pretty steadily moving along. So

That's good, and I appreciate all the color there. Just one more quick one, if I could slip it in. Are you still seeing a lot of demand kind of going into early 23 from infrastructure projects, from the infrastructure bill specifically? Because I don't believe those have really started rolling out yet.

That's correct. You know, I think, as I've said, we continue to see That more is a 2023 type impact on our business. I mean, I think we are seeing, you know, municipalities and DOTs are planning projects, but the funding hasn't quite come through on that. So we're still seeing it as a 2023 impact to our business.

I appreciate all the color notes up back in queue. Thanks. Thanks.

Again, if you have a question, please press star then 1. Our next question will come from Noel Diltz with CIFL. You may now go ahead.

Hi. Good morning. So I was looking at your percentage of self-reformed revenues. It was a little bit lower. I think you talked about some reasons why. I'm curious how to think about that moving forward, given your project mix and that you're ramping on some of these larger projects. Should we expect, I guess, how should we think about self-perform versus outsource work moving forward? Thanks.

Yeah, Noel, great question. I'll start here, and Joe may add to it. But, yeah, as we are bringing on larger projects and programs to the platform, you know, often, you know, we do see that the contracts have some minority or disadvantaged business requirements that come along with them. And that does drive a bit of an uptick on our subcontract component. On a positive note, we have seen some ramping of our field geotechnical drilling and analytical chemistry activities this quarter in support of our government solutions work, environmental solutions work. And lastly, there has also been some inflationary impacts on our subcontracts where they're looking to recover their costs the same way We are. So, you know, the fact that we're maybe 78% this quarter versus 81 where we've been running, we're not too worried about it. We're going to kind of move, I think, in that 79 to 81 range from quarter to quarter. Joe?

Yeah, I wouldn't add anything other than that. I don't think anything real appreciable. I think, you know, our margins are on subcontract work. maybe have changed a little bit in regards to some of the field mix, more geotechnical work. So I just think, well, between 78 and 81, that's gonna be, we're gonna sort of be in that range depending on what projects are in the field and what the mixes might be.

Okay, got it. And then just on with the Inflation Reduction Act moving forward, Have you looked into or how are you thinking about any potential impacts for some of the environmental work that you do? Do you think this could sort of lead to an uptick in work given that, you know, private corporations may be facing tougher regulations or standards? Any thoughts on that?

Yes, Noelle, that's a great question. You know, I will tell you that, you know, that one's fairly new on our radar screen and we are trying to still analyze that. But as we see it, You know, it's just like the infrastructure bill. It's more of an infrastructure bill for the environment, right? So, and there are tremendous amounts of buckets in there that we, you know, perform really well in the markets. I mean, you know, there's EV charging stations in there as well, new built EG facilities. There's block grants for air pollution. There's air monitoring in there, whole climate resiliency facilities. So all those elements of that Inflation Reduction Act, we feel, just like the infrastructure bill, play nice into our services. So still in the early stages of analyzing that, but we see it as an upside potential going forward.

Great. Thank you.

This concludes our question and answer session.

I would like to turn the conference back over to Joe Boyer for any closing remarks.

Thank you very much. And listen, thanks, everybody, for joining us today. We appreciate your support and look forward to discussing our results in Qs 3 and 4. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.