Bowman Consulting Group Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 7, 2024

Key Takeaways

  • The company achieved a record quarterly gross and net revenue of over $100 million in Q2, marking progress toward its $500 million annual gross revenue target.
  • Adjusted EBITDA rose 21 percent year-over-year to $13.4 million (14.3 percent margin), even as the net loss after tax widened to $2.1 million due to elevated costs and tax adjustments.
  • A series of acquisitions—including Element Engineering, FCS Group, Certex and others—has expanded capabilities in geospatial imaging, renewable energy engineering and water services, with most deals fully integrated within 12 months.
  • Backlog increased 19 percent year-over-year, but several large transportation awards are awaiting contract finalization and notice to proceed, which may extend revenue recognition into H2.
  • 2024 guidance was narrowed to $375 million–$385 million in net service billings and $58 million–$63 million in adjusted EBITDA (≈16 percent margin), reflecting updated revenue timing assumptions without counting expected late-year acquisitions.
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Earnings Conference Call
Bowman Consulting Group Q2 2024
00:00 / 00:00

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Operator

Good morning. My name is Megan, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Bowman Consulting Group Second Quarter 2024 Conference Call. All lines have been placed on mute for the presentation portion of the call, with the opportunity for questions and answers at the end. 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, adjusted net income, and Net Service Billing.

Operator

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 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.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Thanks, Megan. Good morning, and thank you for joining the Bowman Consulting Group second quarter 2024 earnings call. With me this morning is Bruce Labovitz, 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 FCS 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.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

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, they 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 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.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

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.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

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?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Thanks, Gary. Let's turn to slide four. Quick reminder, we refer to net service revenue, net service billings, and net revenue interchangeably. This is a non-GAAP 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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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 expensing. 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....

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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% of 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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

We're currently projecting non-cash stock compensation for 2024 to be in the range of $24 million-$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 10-Q is limited to issued awards only. Let's turn to slide 6. Based on net losses in the quarter and the six months, basic and diluted EPS are the same in each period, at -$0.13 for the quarter and -$0.24 for the year. Basic and diluted adjusted EPS, also a non-GAAP metric, were both -$0.03 for the three months, and they were positive $0.17 and positive $0.16, respectively, for the six months. Let's turn to slide 7.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Second quarter gross revenue by vertical was impacted by the introduction of Surdex, 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%. Surdex-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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

On June 30th, 2024, the acquired revenue pool included Excellence, Dennis, CFA, Blankinship, High Mesa, Hess-Rountree, TCE, Speece Lewis, Surdex, and more. Richter, Fisher, Hole Montes, 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 0% 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 a weighted average of just around 10%.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

This effectively created a level playing field of revenue for the first half of 2023 and 2024, 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-10% for building infrastructure, with a weighted average for the six months of 14% for non-building infrastructure and negative 1 overall.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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 9. 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 renew revolver. Our debt to adjusted EBITDA ratio was just under 1.4 times on a 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 2.5 times last year's results.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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 add those two together. We're pleased with our 70% free cash flow conversion from adjusted EBITDA after CapEx. Shares outstanding on June 30, 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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

As Gary mentioned in the release yesterday, backlog is up 19% year-over-year, and 5% as compared to the end of last quarter. The distribution of backlog on June 30 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 million-$385 million, and are likewise adjusting our outlook for Adjusted EBITDA to a range of $58 million-$63 million, implying a midpoint margin of around 16%.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

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. Gary?

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Thank you, Bruce. Now, let's turn to slide number 12. Before opening the call to Q&A, I want to take a few minutes to address markets, share some recent successes and awards, touch on areas of our business where we are excited about for the future, and reassure everyone that we're laser focused on the performance of our operations. In 2022, we acquired Anchor Consultants. That's a small company in Philadelphia, focused on bridge and marine engineering. This acquisition and its talented staff laid a foundation for what is now a flourishing, expanded ports and harbors group. With added depth of leadership, this sub-market of our transportation vertical is now proving to be an extremely promising practice area.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

The group's been very active lately, with several wins up and down the East Coast from private and public port operators, both as a prime and as a team member, along some of the biggest firms in the industry. Leveraging our extensive skills in Geographic Information Systems, or GIS for short, our ports and harbors group is providing delivery to clients utilizing sophisticated integrated technology that has distinguished us as a leader in port asset conditions tracking, assessment, and management. Ports and harbors, they're interesting microeconomies unto themselves, exhibiting diverse demands for land and water-based infrastructure, logistics, safety, and sustainability planning. I'm really excited about the inroads we're making, the successes we're seeing, and the potential for the future of our ports and harbors practice.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Over the past couple of years, the growth in our capabilities related to geospatial, high-resolution imaging, mapping, and GIS services has kept pace with the other practice areas at Bowman. We've gone from being a terrestrial-based surveying firm to one that offers multiple altitudes of geospatial imaging, LiDAR and scanning, including both aerial and underwater. Accelerated by the recent addition of CertX, we've added a variety of new scanning services to our portfolio. As an example, aerial scanning to detect methane emissions provides enormous long-term potential.... By combining GIS, high and low altitude scanning, and terrestrial-based mobile mapping, we've developed a comprehensive end-to-end methane detection, documentation, remediation planning, and information management offering that is well aligned with numerous federal, state, and local funding opportunities available over the foreseeable future.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

The combination of multiple acquisitions, including 1519 Surveying, Spatial Acuity, MTX, Excellence, Surdex, and others, has enabled us to credibly pursue this long-lived opportunity. Elsewhere throughout the company, we're seeing interesting transitions and evolutions in markets. As an example, the demand for usable data center land is voracious, and commercial and residential landowners, along with major overhead electric corridors, are utilizing us to assess the viability of land use modifications. Climate change and alterations of historical weather patterns have led to significant storm preparedness and response assignments in areas that have and have not been susceptible to extreme weather in the past. As a real-time example, just yesterday, it was announced that Tropical Storm Debby was predicted to dump 4-10 in more rain on Charleston than the city experienced a mere nine years ago, during what was then categorized as a 1,000-year storm.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

We have a very active presence in Charleston. We recently added senior executive-level leadership to our team with extensive experience in climate change, sea level rise, and coastal resiliency. As public utilities and their municipalities struggle to attract professionals to manage their operations, demand for utility services and staff augmentation has increased. As an example, we were just awarded a five-year contract valued at approximately $10 million to embed staff within a local jurisdiction in California. This was a direct result of our Infrastructure Engineers acquisition in 2023. In Austin and Houston, we were recently selected for county roadway projects valued at more than $1 million, with the opportunity to add construction management and inspection services, known as CEI, as the project progresses. The CEI opportunity in Texas is a result of skills exported throughout the company from our Chicago operation.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Also in Texas, we were recently awarded a 2,500-acre solar engineering project, which is a result of other renewables-oriented acquisitions such as SEI and more. In Arizona, a significant heap leach construction support and quality assurance assignment is just one of several recent substantial mining wins. While building infrastructure has lagged in terms of organic growth over the past 12 months, we have both experiential and anecdotal evidence that causes us to foresee a likely rebound ahead. In both Texas and Arizona, we were recently awarded new engineering contracts for single-family master planned communities valued at over $2 million. We expect forthcoming reductions in rates to reignite sub verticals of the building infrastructure market, particularly multifamily and build-for-rent housing.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Convenience stores, quick service restaurants, and even big box retailers are active, with many of our well-known national brand customers engaging us with new projects. Our growing national MEP practice is poised to benefit from recent EPA regulatory changes to HVAC refrigerant standards. Fire protection, part of our buildings practice, catalyzed by the acquisition of Fisher Engineering last year, has been notified of a new NAVFAC assignment to perform surveys of hazardous materials storage facilities worldwide, including Marine Corps bases in the continental U.S. and Japan. This is a good example of our complementary philosophies of not expanding our footprint internationally and serving customers anywhere, anytime, as needed. We were also recently notified of a pending award to perform small and medium-scale spill and fire testing to support alternative fire protection approaches for aircraft hangars.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

The public sector clients we are working for in fire protection provide tremendous crossover synergy opportunities. Okay, now let's turn to slide 13. The bottom line to all of this is our growth plan is working. Every day we're winning assignments that, while not necessarily newsworthy individually, are collectively propelling our growth. I've been in the industry a long time, and my experience tells me this is a time for adjacent diversification across complementary verticals and skill sets, and that's what I'm committing to advancing at Bowman as we grow. Now, while the growth and opportunity I've at, the, growth and opportunity I've outlined is promising, we all recognize it must be accompanied by sustainable improvement of bottom-line results. This is a business where success is built around a right-sized workforce and rationalized overhead.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

We constantly assess our workforce and overhead, considering evolving visibility to both short- and long-term revenue, customer demand, and quality assurance. As needed, we have, we are currently, and we will again in the future, adopt our cross structure to changing circumstances as they evolve. With that, I'll now turn the call back to Megan for Q&A.

Operator

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause here just a moment to compile the Q&A roster. Your first question comes from the line of Aaron Spychala with Craig-Hallum. Your line is open.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum

Yeah, good morning, Gary and Bruce. Thanks for taking the questions. You know, first for me, last quarter, you kind of noted you were looking for a very strong year for building infrastructure and now, you know, calling out organic contraction in the first half. Can you just kind of talk about what's changed in the past few months? You know, what end markets are you seeing slow down the most? And, you know, what areas are you maybe excited about, data centers in the past that we've talked about? I'd appreciate that. Thanks.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

... Yeah, good morning, Aaron. I'll say, we still do believe, you know, in the aggregate, that building infrastructure is going to be a strong performer. I mean, it's when you start to, you know, to assess it in very granular detail between organic and acquired... But it is. We are investing in it. We think it's a, you know, it's a good place to be. It's not somewhere we want to withdraw from. So we do think it, you know, that there's going to be strong performance there. Gary, you want to talk a little bit to the sort of which parts and what?

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

We're selling work in multifamily, and but it's being booked, but being put on hold, waiting for a more promising or a more favorable interest rate environment. So that's what we're seeing, optimism amongst our clients, but they're both rationalizing their business models for a new interest rate environment and sitting tight, waiting for the interest rates to decrease.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

You know, there's been sort of general, I think, confusion of late, you know, even the last few months in the marketplace between, you know, impacts of discussion of, you know, sort of changing evolution in the trajectory of rate discussions. You know, a lot going on, certainly in the geopolitical world, and uncertainties. And, you know, those have impacted us more quickly, I think, than, you know, circumstances like these in the past have. But I think they're temporary. I do think it's still a promising market. Data center's obviously very strong. We've got big box retailers who are issuing new orders for new stores. We've got a lot going on in healthcare.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

We've got a lot going on in the MEP world, and, you know, as talked about in terms of sort of preparing for transitions in regulatory environments, and fire protection, all, all in that group. But there are definitely the submarkets of multifamily, certainly urban commercial, which it doesn't really dramatically affect us, you know, as our drag areas.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

A market that was very strong for us up until a year ago was the build-for-rent market, and that has really slowed down. But we hear from our clients in that market that they're poised to reignite once interest rates start coming down.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum

Okay. Understood. Thanks for the color there. And then, you know, in transportation, you noted multiple large projects where you've been selected, you know, that are still working through final contracting and notice to proceed. Can you just give a little bit more detail on what items are causing those delays? You know, how confident you are that they'll start up in the second half, and that they'll... Are they still to be added to backlog, and what could this mean for kind of segment growth as we look towards 2025?

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Yeah. So, the process in that is, you know, you submit, you get awarded, in broad strokes here. You know, you get awarded, then you go through a negotiation. So you've submitted a price target and a characteristic of your package, but then you still have to go through a negotiation, get the contract executed, and then get a notice to proceed. That just has seemed to take longer in the last six months, you know, more recently. They don't get added to backlog until they're contracted. So, there's the process of getting a contract and getting it into backlog, and then getting everybody at the authorities lined up to proceed.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

In some cases, as Gary talked about, with shortages of personnel, things are just sort of dragging a little bit longer than we anticipated with some of these larger projects.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

We are in touch with these DOT clients continuously, and they give us a lot of reason to be confident that it will indeed commence in the second half of this year.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum

All right. Thanks for taking the questions. I'll turn it over.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Thanks, Aaron.

Operator

Thank you. Your next question comes from the line of Andy Wittman with Baird. Your line is open.

Andy Wittman
Andy Wittman
Analyst at Baird

Great. Good morning. Thanks for taking my questions, guys. I guess I just had a question here about, Bruce, you mentioned that, like, some of the multifamily awards, it sounds like you've got the contract, but, there is, like, the developers are kind of holding off and waiting for interest rates or something else to happen before you are able to get to work. So, in a situation like that, where you have the contract, but the job isn't moving yet, you don't have the notice to proceed, does that still wind up in backlog, or do you also need the notice to proceed for you to feel comfortable putting that in your backlog number?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

So, a little bit different in the multifamily world. You don't get the same sort of big contract number. It generally comes in phases, more so than, like, a single, you know, big contract with one notice to proceed. But our philosophy is, when it's under contract and there is a reasonable determination that it is going to proceed, it goes into backlog.

Andy Wittman
Andy Wittman
Analyst at Baird

Got it. Okay, so, given all of this and given your comments, in the prior answer about just how things are taking a little bit longer, is it a fair assumption to think about, the backlog that you are reporting this quarter as maybe extending out in time? Or do you think the burn rate will be consistent with historical averages?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

You know, I think there may be on the long end of what is normally, you know, in the backlog. So you sort of figure that, you know, 70%-80% of your backlog turns in a 12-month period, the rest of it turns a little longer. You know, maybe the turns a little longer part turns a little longer than it normally, you know, than it otherwise was, and that maybe there's a small portion of the current portion still turns within the 12 months, but it might be a little bit later in the 12 months right now, you know, than previously. But I don't—I mean, it's delaying, but we do continue to backfill with shorter term projects, that you know, come and go out of backlog.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

You know, there's probably a little bit of an extension there. I, I don't know that I would, you know, say it's like, "Okay, now it's two years," you know, as opposed to a year.

Andy Wittman
Andy Wittman
Analyst at Baird

Yeah. Yep. Yep. Okay. Appreciate that perspective. And then,

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

That's part of, Andy, that's part of the reassessment of the second half of the year, is we're okay contemplating that there may be a little bit of drag in, you know, in that backlog.

Andy Wittman
Andy Wittman
Analyst at Baird

Yep, that makes sense. I just thought I would ask you to just comment on kind of your outlook for free cash flow this year, Bruce. I don't know what you're thinking, but I thought it may be a good forum to kind of talk about what your expectations are on that end.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

So, you know, everybody... You know, I talk to four people, I get five definitions of how they think about, you know, cash flow conversion and, and free cash flow. In the absolute sort of simplest of senses, saying, well, Adjusted EBITDA, net of, net of CapEx, you know, we're, we're running in that 70% range on a Adjusted EBITDA to, you know, to cash flow. Things are gonna get a little bit impacted this year by the change in the tax for us. If you just think about, you know, having to write a big advance of our taxes this year. So that's gonna have a short-term negative impact on cash flow conversion from Adjusted EBITDA, 'cause that, that portion of, of real money that goes out the door for tax is gonna go up.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

But if you think about on a GAAP basis, not accounting for timing change, you know, I think we're still consistent with where we are today, you know, going forward.

Andy Wittman
Andy Wittman
Analyst at Baird

Got it. Okay, I'm gonna leave it there. Thank you very much.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Thanks.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Thanks, Andy.

Operator

Thank you. Your next question goes to the line of Brent Thielman with D.A. Davidson. Your line is open.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Hello, Brent.

Brent Thielman
Brent Thielman
Analyst at D.A. Davidson

Yeah, thanks. Bruce, I guess hoping you could create maybe a little more of a bridge of the EBITDA this year versus last, in some of the moving pieces within that. I mean, if I kind of go back and tally up the deals you guys have done since the second quarter last year, it's around kind of $60+ million in annualized net service billings, but, you know, we're up $2.5 million in EBITDA from last year. So, I you know, understand some of the moving pieces you've given, you've given from an organic perspective, but maybe just around EBITDA, what's working against you and what's working for you? Because I would've thought we'd seen a bigger increase just from those deals.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Yeah, I mean, I think what's working against us is we're not hitting the, you know, the revenue that we expected the labor force we have to be able to generate, and that, you know, our cost structure is designed for, you know, a higher revenue base, and we are, you know, addressing how to optimize that, you know, that cost structure in a somewhat adjusted revenue expectation. But I think that the, you know, the answer is that we're a little out of whack on our, you know, on our conversion of labor to revenue and associated profitability.

Brent Thielman
Brent Thielman
Analyst at D.A. Davidson

Okay. And, you know, obviously there's an implied kind of back half ramp in EBITDA here, and it seems like a lot of that, and, and correct me if I'm wrong, is contingent on converting this sort of transportation awards or backlog. You know, being in August now, is there, is there any evidence in the business that's, that's happening? I, you know, Garrett, I heard you give a couple signals there, but any other details that kind of give you a confidence that that's gonna convert here in the second half?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

So-

Brent Thielman
Brent Thielman
Analyst at D.A. Davidson

versus, you know, maybe pushing it out later?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

I would actually suggest... Yeah, I'd suggest it's slightly a little bit differently, Brent, that the revision in our outlook contemplates that we think there is some delay in revenue, and, you know, we do have, you know, a strong base of business. We have a strong demand from clients, a good backlog, and we do feel that there is... The reason we've adjusted to where we have is that that's - that is visible to us, you know, at this point in time, and believe that, you know, that that's achievable. We don't need additional cost structure to generate additional revenue.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

So, you know, we think we can—you know—that the increase in pace in the second half, with upside from some of the things that we think are scheduled a little later than we think, coming in a little sooner than we think.

Brent Thielman
Brent Thielman
Analyst at D.A. Davidson

Okay. And just the last question is, you've evolved the business here in the last few years and agree, you know, the diversity has benefited you in the long run. But it seems as though you are taking on larger sort of assignments. Does that mean we should sort of expect more bumpiness? Is that the new normal in the business, or do you sort of consider these kind of isolated issues?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Yeah, I think, you know, they're isolated issues that, you know, frankly, there may be a little more regularity to the isolation. You know, we are growing, we are getting bigger, we are taking on bigger assignments. Impact to them can have bigger short-term effect. They can also—but they're also, you know, very productive in the long run to have. So, I'm not sure I would call it the new normal. It may be a little more extreme, but I think there is, you know, in all honesty, there is some likelihood that, you know, that some bigger projects could have. And, I think at this period where we are transitioning, you know, there can be some more impact from them.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

We will get to the other side of that, where there are enough of them, and they are the norm, and they really don't have effect. I think we're in that sort of growth spurt, where they could, for the short term, have a little bit more visibility, if that makes sense.

Brent Thielman
Brent Thielman
Analyst at D.A. Davidson

Yeah. Okay, I'll pass it on. Thank you.

Operator

Thank you. Your next question comes from the line of Alex Rygiel with B. Riley. Your line is now open.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Morning, Alex.

Alex Rygiel
Alex Rygiel
Managing Director at B. Riley

Thanks. Good morning, Gary and Bruce. Couple quick questions here.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Good morning, Alex.

Alex Rygiel
Alex Rygiel
Managing Director at B. Riley

Morning, guys. With the softness in organic growth, are you seeing any pressure on billing rates and any thoughts directionally on gross margin over the next couple quarters?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

We're not seeing pricing pressures downward. That's not been an issue that we're seeing in the marketplace.

Alex Rygiel
Alex Rygiel
Managing Director at B. Riley

And then, I don't think this question really came up yet. Net Service Billing growth is up kind of 27% year-over-year, yet backlog growth is only up about 19%. So, what do you think organic growth inside backlog is right now?

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

I'm only pausing because it's a little complicated. In some respect, it depends, to a certain extent, when it delivers, at what point in the life cycle of an acquisition. You know, in terms of sort of whether they're in their first-year period or not, from the way we think about it. You know, Alex, I'm not exactly sure how to parse it out in terms of what organic growth is in backlog. Other than to say, I'd expect that it's slightly consistent overall with our, you know, mid-single-digit organic growth rate.

Alex Rygiel
Alex Rygiel
Managing Director at B. Riley

Perfect. Thank you.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Thanks, Alex.

Operator

Thank you. Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Jeff Martin with Roth MKM. Your line is now open.

Jeff Martin
Jeff Martin
Co-Director of Research and Senior Research Analyst at Roth MKM

Thanks, good morning, Gary and Bruce.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Morning, Jeff.

Jeff Martin
Jeff Martin
Co-Director of Research and Senior Research Analyst at Roth MKM

Wanted to drill down a little more on transportation segment. Those new awards, are those existing markets, or are those new markets? And is the funding, is funding the primary issue, or are there other factors that are delaying the starts?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

It's not funding at all. That's really not the issue. And when you say new markets, they're existing geographies. They're generally existing clients. Sometimes they are new services within the portfolio of things we do because the authorities are expanding the range of things that they're subcontracting and, you know, and outsourcing. So we are continually, as sort of adjacently expanding the capabilities in those markets.

Gary Bowman
Gary Bowman
CEO at Bowman Consulting Group

Yeah, I just reinforce what Bruce said. The big contracts that we're sitting tight to get notice to proceed on, they are in markets that we've been serving.

Jeff Martin
Jeff Martin
Co-Director of Research and Senior Research Analyst at Roth MKM

Okay, great. And then you've owned CertX almost four months now. I know that's not a long time, but just was curious if you could provide an update on, one, integration, and two, the ability to take their services across your business lines?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

We're very pleased with the pace and progress in integration, and also very pleased with some of the synergies, even this early on. There's been a good bit of cross-selling. The folks are very excited about the cross-selling opportunities. I mean, I'm hearing anecdotally that some of the folks that had initial some reluctance to go to a new provider, that being ourselves, are seeing successes and getting over that reluctance. So we're quite pleased with the prospect of synergies.

Jeff Martin
Jeff Martin
Co-Director of Research and Senior Research Analyst at Roth MKM

Great, and then one more, if I could. You mentioned, you know, a market focus and labor adjustments. Just was curious if you could elaborate on that one, and two, what kind of timeline you anticipate that to be over?

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Well, Jeff, we're looking at, you know, we want to be able to deliver, you know, improved margin by, you know, during the course of the rest of this year, particularly fourth quarter have it be evidenced. It's not—we're not going through and, you know, making huge, you know, adjustments. It's, you know, it's assessing where we can be better at labor sharing, you know, as opposed to growing labor. It's, you know, it's looking around and deciding where and how, you know, we can optimize the, you know, what we call the revenue factor, you know, on our business units by, you know, addressing how we utilize labor around the system.

Jeff Martin
Jeff Martin
Co-Director of Research and Senior Research Analyst at Roth MKM

Thank you.

Operator

Thank you. Your next question comes from the line of Aaron Spychala with Craig-Hallum. Your line is open.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum

Yeah.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Welcome back.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum

Hi again, guys. I just had one yeah, thank you. I just had one follow-up on, on guidance. Can you just talk about how you're thinking about the split between, you know, third and fourth quarter? Are you still trying to be somewhat conservative on, on 4Q, just given some of the issues last year? And then maybe just a, a breakdown on, you know, organic growth in, in guidance. Seems like it might be kind of mid- to high-single digits, but just wanted to confirm.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Yeah. So I think, you know, at the moment, we're kind of looking at the third and fourth quarter relatively ratably, maybe a slight, you know, marginal higher third than fourth, but not dramatic, certainly. As I look ahead kind of at year end, at the midpoint of the guidance, and I think about on the pro forma as adjusted basis that we talked about in the call, you know, maybe in the 6% to 6%-8% organic rate for the year. That's not gonna tie to our actual revenue, right? Because we're doing this sort of on a pro forma basis, but that's about mid-single digits.

Aaron Spychalla
Aaron Spychalla
Analyst at Craig-Hallum

Right. Okay. No, I think that's helpful to just kind of try to parse that out, so thanks for that.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Okay.

Operator

Thank you. Again, if you would like to ask a question, press star, then the number one on your telephone keypad.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

All right. Why don't we close the call now?

Operator

There are no further questions at this time. Mr. Bowman, I turn the call back over to you.

Bruce Labovitz
Bruce Labovitz
CFO at Bowman Consulting Group

Great. Thanks, Megan. Just to wrap up, we've had a very successful run in our first three years as a public company, but that said, we are not gonna rest on our laurels. We've got a lot of work to do to achieve our profitability and long-term organic growth goals. Rest assured that both operational excellence and organic growth are and will continue to be a primary focus for both myself and our entire leadership team. So I wanna thank everybody for the participation in this morning's call. Good morning!

Operator

This concludes today's conference call. You may now disconnect.

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