Bowman Consulting Group Ltd.

Good morning. My name is Alyssa and I will be your conference operator today. At this time, I would like to welcome everyone to the Bowman Consulting Group third quarter 2023 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star 2 key. Thank you. Please note that many of the comments made today are considered forward-looking statements under federal security 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, adjusted net income, and net service billing. You can find this information together with the reconciliations to the most directly comparable GAAP information in 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 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 begin your prepared remarks.

Thank you, Alyssa. Good morning. Thank you, everyone, for joining the Bowman Consulting third quarter 2023 earnings conference call. As usual, I'm joined here today by Bruce Leibovitz, our chief financial officer. This past quarter is a solid indicator of what we are able to produce over the long term. Gross revenue approached $100 million and our adjusted EBITDA margin on net revenue exceeded 18%. At the time of our IPO, just about two and a half years ago, our five years' strategic growth objectives were to reach a 500 million gross revenue run rate and high teen adjusted EBITDA margin while maintaining a 10 to 15% net to gross spread. Our results this quarter and year to date clearly demonstrate we're on a trajectory to achieve those goals. While we did not close any acquisitions during the third quarter, we have closed two acquisitions here in the fourth quarter. Accordingly, I'd like to take a moment to formally welcome all our new employees from Excellence Engineering and Dennis Corporation to their first earnings call, along with all other employees who recently enjoyed and joined the Bowman team. As we continue to grow, our enduring ability to attract, develop, and retain talent is a testament to the culture and values that we're all committed to embracing and advancing. We continue to make good progress on our revenue diversification initiatives as evidenced by the ongoing increase in the contribution of non-building infrastructure revenue, which reached 45% of our total revenue, up meaningfully from 30% in the year of our IPO. We continue to experience strong and what we believe to be sustainable long-term demand for our services from both existing and new customers, including new to Bowman customers added through acquisitions. We're experiencing significant tailwinds related to the funding for transportation, energy, and reshoring initiatives, which are propelling us forward. We believe the recent Fed signals regarding monetary policy will further stimulate our industry in the near term. According to recently published government announcements, around $200 billion of infrastructure investment and jobs act fund funded public transportation and infrastructure projects have been announced to date. This spending represents less than 20% of the more than $1.2 trillion of funding secured under the IJA. We're clearly still in the early stages of this spending. Another roughly $60 billion in grants, incentives and initiatives for clean energy, clean water and community resiliency projects have been announced under the Inflation Reduction Act. This likewise represents just a small percentage of the committed funding available under this program. As various deadlines for long-term IRA qualification approach the rush to start projects and secure standing for benefits is underway. With respect to manufacturing and other restoring initiatives, the private sectors responded to funding by announcing over $600 million in new manufacturing infrastructure projects in the U.S., including over $200 million in clean energy, EVs, batteries, and storage, all sectors in which we are active. Now I'm going to turn the call over to Bruce to review our financial results, after which I'll take a few minutes to discuss our markets, our M&A pipeline, and our 2024 outlook. Bruce?

Terrific. Thanks, Gary. The third quarter was a breakout quarter for us in terms of demonstrating our capacity for revenue growth and operational efficiency. As we continue to grow, not every quarter will be a reflection of the last one or predictive of the next one. But the trends we're demonstrating are representative of what we believe we can achieve over time. Gross revenue for the third quarter increased 33% to $94.4 million as compared to the third quarter of last year. Year over year, organic growth of gross revenue for the quarter was 11%. Net service billing, a non-GAAP result for which we provide reconciliations in our press release and disclosures, increased 27% to 82.1 million in the third quarter compared to the third quarter of last year. Year-over-year organic growth of net service billing was just over 9% in the quarter. During the third quarter, building infrastructure represented 55% of our gross revenue with transportation at 21% and power and utilities representing 20%. Non-residential revenue represented nearly 66% of building infrastructure or 36% of gross revenue. Residential revenue represented just under 19% of gross revenue, with what we would characterize as for sale related residential, counting for just around 10% of gross revenue. In 2021, building infrastructure represented nearly 70% of gross revenue. While we are pleased with the progress we're making towards our long-term revenue diversification goals, there is more to be achieved. Year to date, Gross revenue is up 36% to $253.3 million for the first nine months of last year. Year-to-date, organic growth of gross revenue was just under 22%. Year-to-date, net service billing increased 32% to $223.5 million as compared to the first nine months of last year. Year-to-date, organic growth of net service billing is just under 20%. Gross margin for the second quarter was 51.6% on gross revenue, which was 70 basis points lower than gross margin in the third quarter last year. Year to date, gross margin was 51%, which is 40 basis points below the first nine months of last year. We consider these to be normal fluctuations in gross margin based on mix of business and utilization, which impacts the allocation of fringe cost to COGS. Included in cost of goods sold for the quarter and the year are 2.1 million and 5.3 million of non-cash stock compensation, respectively. Net of these non-cash costs, gross margin would have been 54% and 53% for the quarter and year-to-date, respectively. While we continue to believe these margins are normal for our current business model, we're optimistic that evolutions in disruptive technologies for our industry will help expand these margins over time. SG&A, which included $5 million of non-cash stock compensation for the quarter and $13 million year to date, was up 160 basis points as a percentage of net service billing in the third quarter compared to last year, but was down 120 basis points sequentially when compared to the second quarter of this year. This sequential period reduction in SG&A as a percentage of net service billing is the predictable result of the combination of outsized labor investments made in the second quarter and increased revenue generated this quarter. For the third quarter, we reported a net income of $1.2 million, which brings year-to-date net income to $1.1 million, inclusive of a $1.8 million tax benefit in large part derived from R&D tax credits and windfalls related to stock vesting values higher than grant date fair value. Adjusted EBITDA was up 57% in the second quarter to 15.1 million as compared to third quarter last year. Adjusted EBITDA margin net increased 350 basis points to 18.3% in the quarter. Year-to-date adjusted EBITDA is up 45% to 35.8 million and adjusted EBITDA margin net is up 140 basis points to 16%. As we grow, Intra-year margins can be uneven based on the timing of expenses and revenue mix. As such, we recommend investors focus on margin developed over multiple periods as a directional indicator. While this quarter's margin is a positive display of our potential, I don't believe it is the new baseline, at least not yet. Backlog at the end of the quarter was just under $300 million and is made up of approximately 54% building infrastructure 25% transportation, 19% power and utility, and 2% other emerging revenue areas. We're pleased with our ability to generate backlog growth that continues to outpace revenue recognition. Backlog is work that's contracted to be performed and is capped at 18 months in the case of long-term programmatic assignments. We generally expect roughly 75% of our backlog to turn in any 12-month period, but that number varies based on the composition of backlog. Cash flow from operations was 12.3 million through nine months, which represents a little over 10 million in the quarter. Cash flow from operations before changes in working capital for the nine months was nearly 21.8 million. We're pleased with our progress on cash flow generation. Net debt at the end of the quarter was just under 53 million, down from 61 million on June 30th. This net debt represents a leverage ratio of around 1.2 times trailing four quarters adjusted EBITDA. With over $14 million in cash on hand and over $45 million of capacity under the line, we're pleased with the state of our balance sheet. On the tax front, we continue to monitor guidance issued with respect to changes to research and development expense capitalization. Based on recent IRS guidance, we continue to proceed with a belief that the characteristics of our business practices afford us the ability to expense our R&D costs currently as opposed to capitalizing them. Because this is evolving tax law, we continue to maintain an uncertain tax position, referred to as a UTP, relating to the possibility that in the future our position will change. The uncertain tax liability is reflected on our statement of cash flows before changes in working capital as deferred tax. as if it were spent, but it is later added back to cash from operations through accrued expenses since we're not actually expending the cash. This neutralizes its impact on cash from operations. On our balance sheet, the UTP is included in other non-current liabilities along with accruals for contingent consideration. On September 30, and as of today, we have 14.6 million shares outstanding, including all shares issued in connection with restricted stock awards. During the third quarter, based on what we believe was an undervaluation of our equity relative to the performance of the business, the multiples of our peer group, and comparable transaction valuations, we established a limit order-based buying program under our $10 million stock repurchase authorization. During and subsequent to the quarter, we have purchased nearly 29,000 shares at an average price of $25.94 per share. While these numbers aren't big, they should communicate our commitment to flexible deployment of capital to protect and advance shareholder value. This quarter, we introduced a new non-GAAP metric of adjusted EPS, for which we provide a reconciliation to GAAP EPS in our press release. I want to reiterate that adjusted EPS should be evaluated as a non-GAAP measure that may not be calculated consistently with others in our peer group who likewise present this metric. In calculating this metric, consistent with our peers, we add back costs associated with acquisitions and pre-IPO stock compensation expense, along with other non-recurring, non-core expenses. We do not add back non-cash stock compensation in the normal course. When computing the tax effect of these add backs, we first recalculate our tax expense exclusive of any periodic windfall or shortfall tax impact of non-cash stock compensation vesting, then apply an average marginal effective tax rate to other ad backs. While it may not necessarily be the most advantageous to us way to present the tax benefit, we feel it is the most accurate and reflective approach. We believe this is useful information for investors to use to evaluate us against our peers, and as such, we will continue to include it in our press releases going forward. As we near the end of the year, we're tightening our 2023 guidance and introducing our outlook for 2024 based on current backlog, a preliminary understanding of our client's intentions for next year, and our forecast for business development. For 2023, we're narrowing our forecast to net service billing to be in the range of 306 to 312 million, with adjusted EBITDA in the range of 48 to 52 million. For 2024, we are initiating guidance of 345 to 360 million, with adjusted EBITDA on a range of 56 to 62 million. As always, these do not contemplate future acquisitions. With that, I'm going to turn the call back over to Gary for concluding remarks.