Bowman Consulting Group Ltd.

Good morning, my name is Harry and I'll be your conference operator today. At this time, I would like to welcome everyone to the Bowman Consulting Group fourth quarter and fall year 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. Thank you. 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 8K filed with the SEC on company investors website at investors.bowman.com. Management will deliver prepared remarks, after which they will be taking live questions from published 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 now begin your prepared remarks. Gary Bowman Thank you.

Welcome to the Bowman Q4 and full year 2021 earnings call. I'm Gary Bowman, Chairman and CEO of Bowman. I'm joined this morning by Bruce Leibovitz, our Chief Financial Officer. Before we start, I'd like to acknowledge all the hardworking staff members of Bowman, both those who have been with the firm for a while and those who joined us through our recent acquisitions. The results that we report this morning flow from the unrelenting efforts of all our employees in the service of our clients, our communities and our shareholders. And 2021 is a transformational year for Bowman. We started out the year as a closely held private company with just over 700 employees in 25 offices. By the end of the year, we were an 1,100-person public company working out of some 40 offices. We acquired eight firms throughout 2021 and added a ninth acquisition early in 2022. Through our acquisitions, we broadened our service offerings with the addition of mechanical and electrical engineering, building commissioning, and building envelope and energy efficiency consulting. Our acquisitions extended the reach of our footprint by adding locations in Houston and Denver, Fort Worth, Raleigh, Atlanta, Baltimore, Louisville, and Waco, Texas, while organic expansion added offices in the Carolinas, Arizona, and California. Most importantly, we added talented professionals and extraordinary leadership to our team. I could not be more pleased with the results of the execution of our strategy in the first year of our public company. As Bruce will describe, we delivered record growth and net revenue in 2021. Overall year-over-year rate of growth in net service billings was 30%, with year-over-year rate of organic growth coming in at 19%. We expect continued strong momentum and top-line growth, and management will be focused on increasing margin as we build scale to floor public company overhead. We continue to report revenue based on four core markets, building infrastructure, transportation, power and utilities, and emerging markets. Recall that emerging markets denotes markets that are emerging as potentially prominent markets for us, including water resources, mining, renewable energy, and energy efficiency. The majority of our business continues to flow from what we broadly categorize as building infrastructure market. We understand that to many who read our filings and listen to our calls, the building infrastructure designation implies exposure to cyclical risks associated with residential markets. As we said in the past, this market segment, as we categorize it, is far more broad than just residential real estate. Over the course of this year, we'll endeavor to refine categorizations and disclosures of revenue by market to alleviate confusion. On that note, Our building infrastructure business, which includes commercial, industrial, residential, government, and other projects that involve buildings and maintenance planning grew by $28 million, 37% year over year. Fulfillment centers and data centers were huge drivers of our commercial business throughout the year. Commercial work represented 30% of our Q4 sales and is making up a similar percent of our Q1 sales this year. Chick-fil-A and other quick-serve restaurants continue to contribute meaningfully to sales and revenue. On the residential front, built for rent developers, Hancock and Continental Properties were both top 10 clients in terms of revenue in 2021. We see this as a significant transformation in the residential space, one in which we built market-leading expertise. Despite the prospect of rising interest rates, we're confident that our business serving both traditional and non-traditional residential developers and builders will continue to be robust over the foreseeable future. Although transportation revenue fell this year as compared to 2020, we have many more tangible opportunities in the transportation market today than there were a year ago. We're focused on increasing our transportation business, both through organic growth with existing new clients and through acquisitions we expect to close this year. Our work on the mile-long bridge, the Cook County Paving Project, Burleigh Avenue, always in Illinois, continue to generate meaningful recurring revenue. A recent win of a substantial segment, the I-35 Northeast Expansion Project in San Antonio, also contribute meaningful transportation revenue over the next several years. The infrastructure bill is beginning to create more project opportunities as transportation authorities get better visibility and available funds and priorities for funding. As we said, we expect to see a more meaningful impact to our business from the infrastructure bill beginning in 2023. Our power utilities work with 10% year-over-year during 2021. We've recently expanded our relationship with the People's Gas Division of the WEC Energy Group. Our undergrounding work with Florida Power and Light and Tampa Electric held steady in 2021. We expect that to continue through 2022 and beyond. The U.S. power grid faces underlying pressure to increase resiliency, integrate technology such as electric vehicles, distributed generation and battery storage to upgrade and replace aging infrastructure and implement safeguards against prolonged outages. Bowman's well positioned to capitalize on all these initiatives. In the emerging markets, mining was up marginally in 2021 over 2020, but we expect that business to grow substantially, likely doubling in 2022. Net revenue from water resources increased by 37% in 2021, a significant backlog, which we believe will generate net revenue growth again in 2022. In renewables, we established a substantial relationship with a large provider of renewable energy solutions to commercial and industrial facilities in the fourth quarter. We're providing a wide array of services, including survey, civil, structural, and electrical engineering for solar and battery storage projects throughout the Northeast and Mid-Atlantic. Earlier in the year, we began working for Pattern Energy for a number of wind energy projects. Through acquisitions, we built and continue to build a core competency around renewables and look forward to growing this market in 2022 and beyond. In 2021, We made eight acquisitions, seven of them being post-IPO, six of them in the fourth quarter. So far this year, we've made one additional acquisition. We've assembled a full-time dedicated integration team to ensure successful integration of the acquired companies. Our acquisition philosophy is focused on revenue synergy and optimization of operating efficiency. We've successfully added a land survey in Raleigh, Atlanta, and Houston to complement those operations. and we've introduced mechanical and electrical engineering services to industrial clients in Louisville and commercial clients around the country. We've expanded our electrical and renewables business through specialized design expertise required from multiple sources. The two Texas operations we acquired as Terra and 1519 are already work sharing and cross-selling with our Dallas and Austin offices. I'm very pleased with our execution so far. Our strategic plan is to go through a combination of both organic and acquired growth with an emphasis on being highly acquisitive. To that end, our M&A pipeline is as full as it's ever been. And while nothing is for sure until it's closed, we expect to be able to acquire an excess of $75 million of annualized revenue this year, with deals starting to close in early in the second quarter. That would bring a total acquired annual revenue post-IPO by the end of this year to around $100 million. In 2021, the average size of an acquisition was just under $5 million in revenue. In 2022, I expect that average to be over $10 million in deal size, with the deal size continually growing. Our recent equity offering added nearly $18 million of leverageable capital to our war chest. This has enabled us to remain aggressive with our M&A initiatives, and it positions us to continue the momentum we've built. Through our M&A program so far, we've added nearly 250 employees to Bowman. Our technology and culture have enabled us to put these new employees to work on projects throughout the company. This has given us a tremendous advantage in a tight labor market. Our staff of recruiters has worked with our leadership to develop streamlined processes for identification, interviewing, and onboarding. Today's environment, while challenging, is not something new to us. It's always been a people business, and the labor market has been tight for most of the years that I've been in this business. We're well equipped to meet our demand for people, and I believe we have one of the best collections of skilled and dedicated employees in the market. Except for automobiles and computers, we're not directly affected by any supply chain disruption. We don't buy raw materials, we don't resell goods, and we don't build anything. Some of our clients have been affected by supply chain disruption. An overwhelming majority of our clients are not directly affected, and the demand for our services has been unabated. Demand for design services remains strong. Our sales and backlog continue to grow. And for now, we have the pricing power to offset any increases in costs. We have tremendous confidence about our future, and as Bruce will discuss, we're raising and narrowing our guidance for 2022. As new acquisitions close, we will continue to increase our guidance accordingly. Our leadership team has been through a number of business cycles in their careers. We are acutely aware of the consequence of relaxing our guard. We have every indication that in the foreseeable future, the engineering services market will continue to produce healthy demand and robust growth. Now I'm going to turn it over to Bruce to discuss our results in greater detail. Great. Thank you, Gary. Good morning, everybody. As Gary mentioned, 2021 was a transformational year for Bowman. We've accomplished so much, it's hard to believe we're still talking about our first 10K for a year in which we were public for only seven months. I want to add my thanks to the entire Bowman accounting team for your tireless effort to help transform us to a public company that delivers quality financial filings in a timely manner. It's been no small feat, and we're all grateful for your efforts. Gross revenue for the fourth quarter increased $12 million to $41.9 million, up 40% from $29.9 million in Q4 2020. Gross revenue for fiscal 2021 increased $28 million to $150 million, up 23% from $122 million for fiscal 2020. Of the $28 million increase for the year, $12 million was from acquired revenue and $16 million was organic, representing a 13% organic growth rate. Net revenue, a non-GAAP metric, is gross revenue as outside subconsultants and other direct expenses. Net revenue is the revenue generated by our workforce and is a better revenue proxy for growth and profitability. Net revenue increased 11.5 million or 43.7%, 37.8 million in the fourth quarter. Net revenue for the year increased 31.2 million or 30.1% to 134.9 million. This represents an increase of net revenue as a percentage of gross revenue from 85% to just under 90%. We believe this was primarily the result of lower transportation revenue in 2021. Of the $31.2 million increase in net revenue, $11.5 million was from acquisition, and the remaining $19.7 million was from organic, representing a 19% organic growth rate for the year. Gross margin for the fourth quarter was 51% as compared to 50% in 2020, and 50% for the full year as compared to 45% for 2020. The improvement of gross margin is principally a function of net revenue being a higher percentage of gross revenue, 90% versus 88% in the fourth quarter, and 90% versus 85% for the full year. SG&A was 49.4% of gross revenue in the fourth quarter and 46% for the full year. This compares to 43.2 for the fourth quarter of 2020 and 42.2 for the full year. The 3.8 percentage point year over year increase in SG&A is directly attributable to our transformation to a public company and non-cash stock compensation awarded in connection with our IPO. Of the $17.5 million increase in SG&A, $5.7 million is attributable to increases in non-cash stock comp and performance bonuses. Reducing the SG&A percentage of gross revenue is a strategic initiative, which will result from growing overhead at a lower rate than we grow revenue. We believe a three to six point decrease in SG&A as a percentage of revenue is achievable over the next few years. As we continue to acquire and grow organically, we will absorb the overhead it takes to be a public company and increase margins accordingly. Our net loss for the fourth quarter was just under $600,000, and our net income for the year was just under $300,000, which exceeded estimates. Both results were positively affected by an income tax benefit that is in large part impacted by our research and development tax credits. For 2021, we estimate the credits to be close to $1.7 million. This is a permanent tax credit, which we expect to continue to produce annually and continue to grow. Adjusted EBITDA for the fourth quarter was $3.5 million, representing a 9.4% adjusted EBITDA margin net, and $16.5 million for the year, representing a 12.2% adjusted EBITDA margin net. This compares to $12.7 for the fourth quarter of 2020 and $13.4 for the full year. Adjusted EBITDA is a non-GAAP metric, which adds non-recurring and non-cash expenses to EBITDA. In 2021, this included IPO expenses, certain one-time expenses associated with the ramp-up of our post-IPO M&A program. As of December 31st, 2021, the company had a little over 2.2 million restricted shares subject to forfeiture and future vesting at a weighted average price of $13.74. All of these shares are included in the outstanding share count of 11, 489, 579 listed on the balance sheet. Keep in mind, however, that this number is before the follow-on offering of roughly a million shares. There were no options outstanding at 1231. In addition, the company has 261,000 performance stock units issued, which are not part of the outstanding share count. Our basic and dilutive share counts are weighted average shares outstanding based on part of the year as a private company. Currently, outstanding restricted and performance stock awards will generate $10 million 10.6 million of non-cash stock comp expense in 2022, 9.3 million in 2023, 4.9 million in 2024, 1.3 million in 2025 before trailing off in 2026. For the year, we generated $4.7 million of cash from operating activities. In the reconciliation of net income to operating cash, depreciation and amortization, along with non-cash stock compensation, represented a $14.2 million add-back, while increases in accounts receivable accounted for an $8.8 million decrease. At $4.7 million, we converted 35% of adjusted EBITDA into operating cash. We believe this particular public year is not an indication of our future ability to convert adjusted EBITDA to cash at more of a normalized rate of approximately 65% or higher. On February 11th, we completed a follow-on equity offering, generating approximately $16 million of new capital for the company. Based on our pace of acquisitions and the health of our M&A pipeline, this was an important addition to our war chest. Today we have approximately $28 million of cash on our balance sheet and zero outstanding on our $17 million line with Bank of America. As Gary discussed, We feel we are adequately capitalized to finance upcoming acquisitions in the pipeline over the next six months. At this point, we believe we have sufficient equity on our balance sheet to support additional debt when the need arises for more capital to continue our M&A program. What exactly that would look like is yet to be determined. Gross backlog at December 31st was $167 million, up from $113 million at December 31st, 2020. Backlog was approximately 62% building infrastructure, 19% transportation, 16% power and utilities, and 3% other emerging markets. Backlog includes projects that have started and ones that are contracted but not yet started. Within the projects that had started and generated revenue by the end of 2021, there's approximately $133 million of remaining performance obligations, also a proxy for backlog, of which $116 million of revenue is projected to be realized in 2022. We also expect additional revenue from the unstarted backlog, so we began 2022 with what we estimate to be over $125 million of revenue from backlog. As indicated in yesterday's release, we are increasing and narrowing our previously issued 2022 top-line guidance to net revenue of $170 million to $185 million and increasing our adjusted EBITDA guidance to $23 to $27 million. As is our policy, this guidance only includes acquisitions closed at the time we issue the guidance and does not contemplate additional acquisitions we expect to close this year. As those occur, we will update our guidance accordingly in connection with each quarterly conference call. I'm going to now turn the call back over to Gary for concluding remarks and then Q&A. Thanks, Bruce. These continue to be exciting times here at Bowman, and I cannot be more pleased with the execution of our strategic growth plan. The growth we're generating is extraordinary. The quality of the work we're producing is exemplary. The integration of required companies and the synergies we are creating really outpaced my expectations. Our future is bright and confident. We'll continue to increase shareholder value for everyone who's invested in Bowman. Thanks again to everyone who works every day and makes us successful. I'll now turn the call back to the operator for questions. Thanks.

Thank you. At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Our first question is from Brent Hillman from DA Davidson. Brent, your line is now open. Please proceed.