Infrastructure and Energy Alternatives, Inc.

Thank you for joining us today to discuss IEA’s fourth quarter and full year 2018 financial results. With us today from management are JP Roehm, Chief Executive Officer; and Andy Layman, Chief Financial Officer.

Before turning the call over to management I would like to direct you to the Safe Harbor statement. Today’s discussion contains forward-looking statements about future growth and financial expectations.

Any forward-looking statements should be considered in conjunction with the cautionary statements in today’s press release and the risk factors included in the company’s SEC filings. Except as required by law, IEA undertakes no obligation to update its forward-looking statements.

In addition, since management will be presenting some non-GAAP financial measurements as references, the appropriate GAAP financial reconciliations can be found on the Investors section of IEA’s website as well as in today’s press release. And with that, I’ll now turn the call over to JP Roehm.

Please go ahead, JP.

Thanks, Larry. Good morning, and thank you all for joining our call today to discuss our fourth quarter and full year 2018 results.

2018 was a transformational year for IEA. This month marks our first anniversary as a publicly traded company.

Going public was an important step in our corporate development that positions us for enhanced access to capital and the ability to expand and diversify our business, and in 2018, we did just that. Over the past year, we became a much larger and substantially more diversified engineering and construction services company.

In the second half of the year, we closed two significant acquisitions, Consolidated Construction Services, which included Saiia and ACC; and William Charles Construction Group. These acquisitions were key to our long-term diversification strategy and consistent with our goal to scale IEA through strategic M&A.

That also helped us expand into important new business lines and establish a national footprint. Now, with Consolidated Construction Services, we hold formable positions in the civil and environmental engineering markets and have become a leading national provider of specialty paving, high-altitude and complex bridge construction.

With William Charles Construction, we gained a leading position in the rail construction market and we also see plenty of opportunity to expand our current heavy and light civil infrastructure contracts. With these acquisitions, we increased our revenue to more than $1 billion for the full year of 2018 on a pro forma basis, and we gained licenses to operate across all 50 states.

We also grew our employee count to more than 2,600 and our expanded team is well positioned to support our growing base of customer relationships. Additionally, our equipment fleet now exceeds 4,000 units, 8 times level we had heading into 2018.

This significant expansion allows us to serve our clients far more effectively and efficiently than in the past. We maintained a strong presence in wind energy, but we are no longer reliant solely on that business to drive overall growth.

Now that we have diversified our business mix, wind energy should account for approximately 42% of our revenue going forward, down from 88% prior to our recent acquisitions. We now have strong market positions in a variety of attractive, high-growth markets: renewable energy, rail, civil infrastructure and environmental remediation.

The companies we acquired were appealing because of their proven niche market capabilities and strong relationships with blue-chip customers, and also because their cultures and values are highly complementary to IEA. Strong management teams and highly skilled workforces are gaining factors to growth in the engineering services business, and we gained both of them with our recent acquisitions.

Also, 2018 was a year of significant achievement and with a powerful E&C platform that we have in place today, we are well-positioned for sustained growth. Now let's discuss our fourth quarter results at a high level.

As the number of companies have noted on their fourth quarter calls, the negative impacts of abysmal weather, particularly in Texas were substantial. As we previously announced, multiple severe weather events significantly impacted the construction of six of our nine major wind projects across three states: Texas, Iowa and Michigan.

Late in the third quarter and into the fourth quarter conditions were so severe that it actually felt like we’ve transitioned into an offshore wind construction market, here again instead of building land-based projects. As a construction company, we do anticipate some weather delays in our project budgets and from time-to-time we have faced harsh weather that impacted one or two projects for a short period of time.

However, there has never been an instance over the approximate 70 year history of IEA when multiple abnormal weather events in three separate geographic markets occurred all in the same short-time period and lasted for months. This was an unprecedented situation in terms of both the number of projects affected and the extended duration of the adverse weather conditions.

The wind construction industry is different than highway or heavy civil construction. Our wind projects should really be thought of as a power project.

There are large CapEx expenditures by our customers who can't afford delays because we are a tier 1 provider we have to deliver our projects on time and sometimes we must bear the cost of delays regardless of the reasons. We do have contractual protections against extraordinary events that entitle us to recover excess costs from customers, but we aren’t always made to hold.

With respect to our fourth quarter and full-year results, there were three primary factors, all related to the adverse weather conditions that significantly impacted our financial results. First, we made a conscious decision to meet all of our completion deadlines, and therefore, we chose to continue paying our specialized crews and for construction equipment, particularly our costly large cranes to remain on-site and idle during the periods of inclement weather.

We bore those additional costs in order to get the projects completed on time and to maintain our reputation and standing in the industry. Second, even after the severe rain bled up we continued to endure labor and equipment inefficiencies due to ongoing saturated soil condition at the job sites.

That continued throughout the fourth quarter and it never really dried up because of continued intermediate rainfall, moving cranes across soggy fields and then lifting 150,000 to 300,000 pound turbines 80 to 100 meters in the air on a muddy and unstable base is not safe, and safety is always our first priority. Finally, as we have mentioned in the past as the construction project moves through its lifecycle, margins historically tend to be higher at the end of the project.

However, this year, notably in our wind business, we didn’t experience that margin uptick as we had in the past because of the widespread adverse weather conditions. Taken together, these weather-related challenges created unanticipated costs that significantly exceeded the typical experience of IEA and our customers and as a result our fourth quarter and fiscal year 2018 financial results fell short of our expectations.

We have pursued costs and schedule relief in certain customer contracts and have collected on some costs related to the effects of the extraordinary weather. We remain focused on collecting our amounts due to IEA.

However, it is impossible to forecast the ultimate amount we will recover. These wind projects are all in the late stages of completion so we don't anticipate any additional downside related to construction risk.

While we believe the likelihood of a recurrence of a multiple location and extended duration weather event is extremely low, we always try to learn from experience and are working on ways to mitigate the impacts of similar events in the future, including tightening up our contracts, budgeting differently for weather-related contingencies, and looking into insurance for catastrophic weather events. In spite of historic bad weather we did execute effectively on our strategic initiatives in 2018.

Following our acquisition of Consolidated Construction Services and William Charles construction, we now serve a broader variety of end markets and geographies and have a significantly larger number of projects under construction at any one time. We believe this larger and more diversified mix of projects reduces concentration risk and will lead to more predictable results going forward.

Both Consolidated Construction Services and William Charles Construction are performing well and are on track to achieve anticipated synergies through customer cross-selling opportunities, equipment financing, reduced equipment, logistics and improved utilization as well as lower insurance costs and other expenses that come at scale. As we look forward to 2019, there are many opportunities for us to make a successful year.

First, the contracts we currently have in backlog should go a long way towards enabling us to achieve our 2019 revenue target. Second, our end markets continue to show growth.

And third and most importantly, we have the management and operations teams in place to execute this work on time and on budget. So this gives us confidence that we could meet and potentially exceed our 2019 financial goals.

The last year has significantly transformed IEA, making us a much larger company adding the complexities of public company compliance and after taking some time to digest our recent acquisition, giving us a strong base for continued organic and acquisition-based growth. While we have a strong management team in place, we always look to supplement the team when there is need or when great people become available.

In 2019, we are planning to add resources at the leadership level to ensure continued solid execution. With the breadth of opportunities before us, the next logical step is to hire a Chief Operating Officer.

We are looking for a proven leader, who understands our industry, fits our culture and will be a strong addition to the company. While we are not in a position to announce any names today, we do expect to be announcing the hire of a new COO in the near term.

I'll now turn the call over to Andy to discuss our quarterly results in further detail.

Thanks, JP, and thank you all again for joining us. For the fourth quarter, we reported revenues of $276 million comprised of approximately $151 million from our legacy business and the $125 million from our newly acquired businesses.

As JP mentioned, this significant extra costs we incurred as we met project deadlines, in spite of the severe weather on six major wind projects negatively impacted gross profit by approximately $36 million, which represented approximately $56 million in total incremental costs made-up of approximately $24 million in labor, $16 million in subcontractor overruns, and $16 million for additional equipment charges including crane mats and other construction materials that were required to complete the projects with tremendously saturated ground conditions. These incremental costs were partially offset by $20 million in changed orders to customers, of which $10 million has been collected.

This resulted in negative gross profit of $9.2 million which flowed through our income statement to result in $18.8 million loss in adjusted EBITDA. SG&A expenses for the quarter were $29.1 million and included $8.2 million of acquisition-related expenses and $8.6 million from our acquired businesses.

Other income in the fourth quarter included a $46.3 million pre-tax non-cash benefit related to the estimated fair value of the contingent consideration incurred in connection with a merger that took us public in March 2018. In simple terms, this means that we do not currently expect to be paying any earn out for 2018.

At year-end, we have the remaining accrual of $23.1 million for contingent consideration. As a result net income was $11 million for the quarter.

Turning to the balance sheet. At year-end, we had approximately $72 million of liquidity between cash and revolver availability.

Due to the increased costs from the adverse weather and our expected growth, we are working on initiatives to improve our liquidity. These include a continued focus on working capital management and aggressively working to collect unchanged orders from customers.

We are exploring other options as well such as the sale-leaseback of equipment and a building both of which were part of the assets included in our recent acquisitions. Now I'd like to spend a few minutes providing our 2019 financial guidance and reviewing some of the assumptions that went into formulating it.

Our 2019 guidance for revenue is the range of $1 billion to $1.2 billion and for adjusted EBITDA it is $90 million to $110 million, which represents an adjusted EBITDA margin of over 9%. As JP noted, our backlog through 2021 as of December 31st totaled $2.1 billion with $1 billion for 2019, along with a large pipeline of new project opportunities.

I am very confident in our revenue projections as nearly 100% of our revenue at the lower end of our range is currently in backlog. We also have additional opportunities in our pipeline, including in our several business that are booked and billed without ever entering backlog and these could help us reach the high-end of our revenue range.

Also due to the historical seasonality of most of our work, the majority of our revenue is expected to come in the back half of the year. As JP indicated, in 2019, we are very focused on operational execution, including completing the back office integration of our recent acquisitions and realizing the significant synergies from our newly scaled and diversified platform.

To-date we are pleased with both the performance of acquired businesses, and our progress towards achieving the identified synergies. Although we expect continued organic and M&A growth over the long-term, acquisitions are not our focus in 2019 as we plan to use the cash generated from operations to pay down debt and to de-lever the balance sheet.

With our strong backlog and our laser focus on operations, I am confident that we will achieve or exceed our projected earnings. With that, I'll now turn the call back to JP for closing remarks.

Thanks, Andy. Before we open the call up for questions, I would like to reiterate that we are excited about 2019 and the opportunities ahead.

The diversified and scaled platform we have in place today positions IEA well to pursue significant opportunities across our expanded end markets to serve our customers across the country and deliver projects safely, on time and on budget. Even with our more diversified platform, I want to emphasize that the wind business is and will continue to be an important component of what we do at IEA.

We remain focused on growing that business. Since our predecessor White Construction expanded into the construction of renewable energy projects in 2004, IEA grew its business to become the number one builder of wind energy projects in the United States with a market share of roughly 30%.

We have built more than 7,200 wind turbines across 35 states. We have long established and profitable relationships with many of the leading renewable energy developers in the United States and have completed wind projects with 10 of the 16 largest developers and owners in the country.

Industry projections call for wind power capacity to double by 2023 and demand for utility scale solar is expected to grow by nearly 400% over the next 15 years. Additionally, all our new business lines stand to benefit from strong secular trends as existing infrastructure ages and the US economy continues to grow.

For example, the US environmental remediation market is projected to exceed $30 billion in five years, while domestic highway and road construction is expected to reach $98 billion by 2021. And the rail construction industry, though smaller, is growing significantly and is expected to reach $6 billion in size by 2025, with more than $150 billion in infrastructure improvements needed to modernize and expand US rail capacity.

So looking forward, we have a platform, a great team, a terrific culture and a great plan in place to deliver stronger financial results in 2019, and over the long-term. Throughout this transformational process, we remain dedicated to sustaining a high-performance engaging work environment that reflects our long legacy of industry-leading performance.

Our people, clients, excellence, safety and integrity are paramount to our continued success. I would like to thank all of our analysts and especially our investors for their continued support and interest in IEA.

I would now like to open the call up for questions. Operator?

Curious to know in terms of the backlog for 2019, how much of that coverage your 2019 guidance? And maybe if you could touch on -- you touched on briefly in terms of seasonality.

I would think there would be less seasonality given your more diversified business and then also you touched on it. I’m curious just in the terms of, are there any projects that are expected to be quite large let's say more than 10% that could possibly affect you the way it did in 2018?

And just want to get a feel for what you’ve factored in for seasonality and potential weather hits surprises like it did this last year. What you've learned from setting guidance like you did last year?

Yes, so Paul. This is Andy.

I'll start to respond to this and maybe JP you can chime in. So I feel really confident about our guidance that we've put out, a 100% of our low end guidance is in backlog today.

So these are large projects and it’s really -- the timing of the starts and finishes are difficult to predict. So we're being cautious in our forecasting.

The opportunity pipeline is significant for us. So there could be additional opportunities come into the projections as we progress through the year.

Related to seasonality, we still remain fairly seasonal where 35% to 40% of our revenue comes during the first half of the year, and then we expect the bulk of the revenue through the end of the year

Paul as a follow-up to that, as far as 2019 in regards to weather, certainly we look at 2018 as it was an anomaly. We are certainly not planning for a repeat.

That being said, we have certainly examined a range of potential impacts for 2019 and factored in additional costs related to such weather and we are confident with our guidance from a margin perspective.

And then on the margin side just touching on that, maybe you can talk about levers you can pull to move margins higher and one of them you talked about before is these are self-help works that you're going to be doing proactively. And then Andy where are stabilized margins?

Where does this business in your mind on a stabilized basis? What was the range or what's the aspirational margin for you guys on a go forward basis?

First of all, I'll speak to margin enhancement opportunities and I think what you're speaking to is our movement that we started in 2018, self-perform high-voltage and power delivery work. That actually -- the 2018 went very well and we look to deploy further projects here in 2019.

We have got a great team established and the resources are in place. So we look to deploy several more projects on a self-perform basis that include our power delivery and high-voltage teams that will continue to enhance margin here in 2019.

Andy?

Yes, to respond to your question on ongoing margins, we put together three different pieces of this business. We are still in the process of doing that as we progress into 2019.

We feel comfortable with the guidance that we’ve put out. I think 9% is a reasonable EBITDA range to predict going forward.

And last question. I understand with respect to the focus on deleveraging but is there anything in your debt covenants or anything that would preclude you from issuing a share buyback authorization?

Actually what we are doing is that we have some initiatives that are in place. One is, at the end of the year we had -- first of all we don’t expect to have covenant compliant issues.

And then from a liquidity perspective at the end of the year we had over $70 million of cash. Additionally, when we -- through the acquisitions that we did in 2018, there were some owned assets, equipments in a building that came along with those acquisitions.

So we are in the process of monetizing those assets which we expect to generate about $25 million from equipment sale leaseback and expect that to close in Q1 and then an additional $5 million from the building sale. So we are really focused on utilizing the opportunities to improve liquidity to begin de-levering the balance sheet and reducing our overall cost to capital.

I guess Andy or JP, the $1 billion to $1.2 billion in revenue for this year, has anything changed with respect to sort of the run rate from the acquisitions? I think ACC was, call it, 700 million to 800 million in revs, William Charles kind of $300 million annually, is that kind of what you factor in here for the year?

Yes. Nothing has really changed.

I mean it's really about timing of projects. So the acquisitions are actually performing at or above the expectations, so they are performing very well.

The backlog is growing nicely across all the business lines. And really the business is just -- these are large projects in many cases, so it's about timing of when projects start and when they finish.

And we’re trying to be cautious about our forecasting going forward. And as new opportunities come in or timing improves or changes, we will sort of update our projections.

And is there a way we can kind of think about the volume of the wind projects you expect to execute on in 2019 versus what you did in 2018 and is this going to be sort of a slower year and then it ramps up into 2020, just about the work you’ve picked-up?

I think we expect opportunities to be equal to 2018 or possibly as we go through the year opportunities to improve upon the wind opportunities that we saw in 2018. Certainly nothing has changed from the market opportunities going into '20 or even 2021 than what we've talked about in previous calls.

And I think any kind of analyst projections that I've recently seen for the period 2019 through 2021 for the wind industry build out has continued to be consistent. So we don't -- we haven't seen any deviations from the market dynamics or our opportunity for such from our previous discussions.

And then particularly some of the new businesses you’ve acquired, JP where are you seeing the most attractive opportunities, in the -- I guess in the civil and transportation side right now?

I continue to be -- obviously the Saiia business brought us into environmental remediation, the coal ash remediation. We’re seeing some tremendous opportunities not only in Saiia’s traditional geographic areas, the Southeast US, but we've actually already started that kind of natural process of partnering Saiia’s resume up with other operating companies within IEA and pursuing -- leveraging sales of coal ash resume in other areas of the country with other IEA [operations].

So certainly the coal ash industry is one, and then I continue to be tremendously bullish on the rail opportunity with William Charles that was -- that's always been very attractive for me and what drew myself and the company to pursue that acquisition. I think it's very analogous to our wind business and the fact that it’s geographic diverse across the country, it’s -- where you take specialized teams in the remote locations and dealing with railroads are very, very blue-chip type customers that are similar to our wind industry business.

So obviously, I have come up -- my background over time has been in the heavy civil infrastructure but in particular I really like the environmental component of the Saiia and the coal ash opportunity across the platform at IEA and the rail opportunity with William Charles.

Thank you, operator. I would like to thank you all for participating in our call today.

If you have additional questions, please feel to reach out. Everybody, have a great day.

Thank you for joining us.