Bowman Consulting Group Ltd.

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, adjusted net income, and net service billing. You can find this information together with the reconciliations, the most directly comparable GAAP information in the company's earnings press release and 8K filed with SEC, and on the company's investor website at investors.bowman.com. Management will deliver prepared remarks, after which they will take 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.

Thanks, Megan. Good morning, and thank you for joining the Bowman Consulting Group second quarter 2024 earnings call. With me this morning, Bruce Leibovitz, our CFO. I also want to welcome all of our new employees, including everyone who joined us recently from Element Engineering in Colorado and the SCS Group in Washington State. This morning, I'm going to start off with some introductory comments, after which Bruce will discuss our financial results. I'll then come back on the line for some additional remarks about our trajectory into 2025 and end with Q&A. Okay, during the three months ended June 30, 2024, we generated record quarterly gross and net revenue, surpassing $100 million in a single quarter for the first time. While short of expectations, it is a meaningful advance toward our goal of a $500 million annual gross revenue pace within our first five years as a public company. The acquisitions we made during and after the quarter expand our geospatial business, increase our public sector revenue, They add capabilities around renewable energy engineering, and they broaden our growing national water services practice. I'm pleased with the evolving position of the firm in the marketplace and the strategy that we're using to grow the business. It gives me great confidence in our collective ability to execute on our long-term vision. So during our quarterly calls and as we meet with investors, we spend a lot of time distinguishing between organic and acquired revenue and the associated growth rates. It's sometimes a tricky distinction to make because while we're highly acquisitive and much of our growth has been through acquisition, we are also both committed to and highly proficient at post-closing integration. By the time an acquired firm reaches its 12-month anniversary closing, it is often challenging to distinguish it within the overall organization and even more difficult to disaggregate it from our overall results of operations. In most cases, we have by that time integrated the systems individual practice areas, and professional staff throughout Bowman. While this enables us to be efficient at work sharing, unconstrained by geographic boundaries or legacy affiliations, it makes reporting on organic and acquired growth a challenge. As opposed to seeing this as a negative, it's an aspect of our approach that we're proud of, and we believe distinguishes us from many of our peers and adds value for our shareholders. Bruce will present a deeper dive into growth rates in his presentation, But suffice it to say, we believe our diversification efforts have been extremely impactful. With this, I'm going to turn the call over to Bruce to discuss financial results. Bruce? Thanks, Gary. Let's turn to slide four.

Quick reminder, we refer to net service revenue, net service billings, and net revenue interchangeably. It's a non-gap revenue metric that eliminates pass-through billings associated with subcontractors and outside production costs. Since pass-through billings are generally without markup, net revenue is meaningful because it reflects margin-contributing revenue generated by our workforce. Reconciliations of all non-GAAP metrics we'll discuss are available in the press release we issued last night. Let's start with the quarter. Gross revenue for the second quarter was $104.5 million, which, as Gary mentioned, is a milestone for us. Net revenue was $94 million, representing a 27% increase over second quarter 2023, with a 90% net to gross ratio, which shows growth of net revenue is keeping pace with the growth of gross revenue. Gross margin was slightly improved during the quarter at 52% compared to 50% last year, with SG&A holding steady at around 52% of net revenue. Net loss before tax increased by about $1 million, to a loss of $3.2 million from a loss of $2.2 million. Net loss after tax increased by approximately $1.4 million to a net loss of $2.1 million. Our tax benefit in the quarter was approximately $1.2 million after accounting for the unwinding of our uncertain tax position relating to Section 174 R&D expenses. More on that in a bit. Adjusted EBITDA was up 21% or $2.4 million for the quarter at $13.4 million, which is a 14.3% margin on net revenue. Not where we had hoped it would be, but up 20 basis points over first quarter 2024 nonetheless, so in the right direction. We're committed to holding overhead, and we're taking actions to ensure our labor is right sized for our adjusted revenue projections, which position us, positions us for higher margins in the second half. Fortunately, this does not require extreme or dramatic action to accomplish. Turning to the first half of 2024, gross revenue for the six months ended June 30 was 199.4 million. Net revenue was up 27% or 38.3 million at 179.7 million as compared to the first half of 2023. Gross margins for the six months was slightly improved at 52% compared to 51% last year, with SG&A up around one percentage point at 52% in net revenue. Net loss after tax increased by approximately 2.8 million to a net loss of 4.6 million. Adjusted EBITDA was up 23% or 4.8 million for the six months at 25.5 million, which is a 14.7% margin on net revenue. Let's turn to slide five. Non-cash stock compensation was just under 6.1 million in the second quarter, down nearly 12% from the second quarter of 2023 and nearly 23% from the first quarter of 2024. We're currently projecting non-cash stock compensation for 2024 to be in the range of $24 to $26 million, including accruals for 2024 related awards that will not be issued until early 2025. I'll point out that the number in the future expense table in the stock comp footnote of the 10Q is limited to issued awards only. Let's turn to slide six. Based on net losses in the quarter and the six months, basic and diluted EPS are the same in each period, at negative 13 cents for the quarter and negative 24 cents for the year. Basic and diluted adjusted EPS, also a non-GAAP metric, were both negative 3 cents for the three months, and they were positive 17 cents and positive 16 cents, respectively, for the six months. Let's turn to slide seven. Second quarter gross revenue by vertical was impacted by the introduction of CertX as their revenue was allocated to the emerging markets vertical. This resulted in a slight dilution of the other verticals with building infrastructure at 53%, transportation at 18%, power at 19%, and emerging markets at 9%. CertX-related revenue will continue to be included in emerging markets for the remainder of the calendar year. Let's turn to slide eight. Now I'm going to take a few minutes to discuss organic growth in a bit more detail. In our earnings release, we reported organic growth consistent with how we've reported it in the past. This approach to organic growth eliminates acquisitions from the acquired revenue bucket after their 12-month closing anniversary and reclassifies their prior period revenue as non-acquired. We then compare the results. On June 30th, 2024, the acquired revenue pool included Excellence, Dennis, CFA, Blanketship, iMesa, Hess Roundtree, TCE, Spieth Lewis, Certix, and more. Richter, Fisher, Holmontes, MTX, and Infrastructure converted to non-acquired. Based on that approach, the underlying disaggregated organic growth of net revenue in the second quarter by vertical was 33% for emerging markets, 17% for transportation, 10% for power, and effectively zero for building infrastructure, resulted in the reported weighted average of just around 6%. By the same approach, the underlying disaggregated organic growth of net revenue by vertical for the first six months of 2024 was 57% for emerging markets, 23% for power, 15% for transportation, and around 2% for building infrastructure. resulting in the weighted average of just around 10%. This quarter, however, we went a little further and evaluated organic growth for the first half of 2024 in two additional ways. First, we looked at it on a pro forma as adjusted basis, whereby we increased the base of revenue in the first half of 2023 to add pro forma first and second quarter results for the companies acquired during the second quarter of 2023. This effectively normalized their revenue for the periods, although it no longer ties to our reported revenue. For the first half of 2024, we again eliminated revenue from the companies acquired after the second quarter of 2023. Second approach, we looked at it on a pro forma as eliminated basis, whereby we eliminated all revenue from acquisitions completed in both 2023 and 2024 from both 2023 and 2024 revenue. This effectively created a level playing field of revenue for the first half of 23 and 24 based on the end of 2022. In the first case, pro forma as adjusted, organic growth of net revenue disaggregated by vertical for the first half of 2024 was 57% for emerging markets, just under 20% for power, just under 15% for transportation, and negative 1.4 for building infrastructure. with a weighted average of 7.1% for the six months. In the second case, pro forma as eliminated organic growth of net revenue by vertical for the first half of 2024 was 50% for emerging markets, 9.7 for power, 11.4 for transportation, and negative 10 for building infrastructure, with a weighted average for the six months of 14% for non-building infrastructure and negative one overall. Keep in mind, this approach ignores all organic growth associated with acquisitions from the first half of 2023 and beyond. Let's turn to slide nine. Transitioning to the balance sheet, we had approximately $71 million of net debt at the end of the quarter with $23 million in cash and over $72 million available on the new revolver. Our debt to adjusted EBITDA ratio was just under 1.4 times on the trailing four-quarter basis. There's no distress with respect to our capitalization and capabilities to continue to invest in growth. With respect to cash flow, we generated $5.6 million of cash from operating activities during the six months, which is roughly two and a half times last year's results. CapEx spending was roughly $7.5 million, or 3.7% of gross revenue during the first half, which I will point out is the total of the purchase of property and equipment and property and equipment acquired under finance leases lines on our statement of cash flow. Important that you have those two together. We're pleased with our 70% free cash flow conversion from adjusted EBITDA after CapEx. Shares outstanding on June 30th, 2024 was 17.6 million. As of today, including subsequent acquisitions, buybacks and withhold to cover activity, and activity under our incentive bonus plan, The count's approximately 18 million, with approximately 1.3 million of those shares being subject to forfeiture. There's an additional 700,000 shares of performance stock units, which vest based on total shareholder returns over the next four years. Those are not included in today's outstanding share count. Returning to R&D, we reversed the uncertain tax position this period in anticipation of finalizing our 2023 returns in October. Between diminishing likelihood that the Senate would act on the House resolution to repeal the tax change retroactively and increasingly unfavorable guidance, we decided it was time to unwind the position. The reversal alone had no effect on the P&L, with only reclassifications between long and short-term liability accounts on the balance sheet. The only real net impact was the reversal of approximately $5 million of previously accrued penalties and interest through our tax provision. In the future, if the tax is repealed, we will adjust our accounting accordingly. Otherwise, this is case closed. Let's turn to slide 10. As Gary mentioned in the release yesterday, backlog is at 19% year-over-year and 5% as compared to the end of last quarter. The distribution of backlog on June 30th was 48% of building infrastructure, 27% transportation, 18% power, and 9% emerging markets. This relative increase in transportation after the increase for emerging markets is reflective of some of the issues we've been having with transportation starts. Let's turn to slide 11. Lastly, as detailed in the press release, we're revising and narrowing our outlook for 2024 net service billing to a range of 375 to 385 million, and are likewise adjusting our outlook for adjusted EBITDA to a range of 58 to 63 million implying a midpoint margin of around 16%. While we're not pleased with having to lower guidance for the first time as a public company, we look forward to the reset and the ability to return to our old patterns with respect to guidance. As always, that guidance does not contemplate additional acquisitions we expect to announce between now and year end.