Earnings Call Transcript - GV Q1 2020

Operator, Operator

Welcome to the Goldfield Corporation First Quarter 2020 Conference Call. I would now like to turn the conference over to Kristine Walczak of Effective Corporate Communications. Ms. Walczak, you may begin.

Kristine Walczak, Communications

Thank you, and good morning, everyone. I'd like to welcome you to the Goldfield Corporation conference call to discuss the company's first quarter results for 2020, which were reported yesterday. Joining us on today's call are President and Chief Executive Officer, John Sottile; and Chief Financial Officer, Steve Wherry. If you did not receive yesterday's press release, please contact me at 312-898-3072, and we will send you a copy, or go to Goldfield's website where a copy is available under the Investor Relations tab. A replay of today's webcast will be available on the company's website under the Investor Relations tab. Before we begin, I want to remind you this discussion may contain forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as may, will, expect, anticipate, believe, estimate, plan and continue or similar words. Any forward-looking statements are based upon Goldfield management's current expectations about future events, and Goldfield assumes no obligation to update any such forward-looking statements, except as required by law. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these forward-looking statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's Form 10-Q for the quarterly period ended March 31, 2020. Also, certain non-GAAP financial information will be discussed on the call today. A reconciliation of this non-GAAP information to the most comparable GAAP measure is set forth in yesterday's press release, which can be found on the Investors section of the company's website. With that said, let me turn the call over to John Sottile.

John Sottile, CEO

Thank you, Kristine, and good morning. We appreciate you joining us and for your continued interest in The Goldfield Corporation. After my initial remarks, I will turn the discussion over to our CFO, Steve Wherry, who will update you on the financial performance for the first quarter of 2020. We entered 2020 with a record backlog and a strong balance sheet. Our results for the first quarter 2020 also included improved electrical construction revenue and margin compared to 2019. We achieved these results despite a slow start during the first quarter with certain MSA contracts. As we expected and shared with you in the last quarter, our work on those MSA contracts is now underway and should contribute to enhanced results for the second quarter and beyond during 2020. We are pleased with the results, notwithstanding the challenging environment faced by most companies today. More importantly, the health and safety of our employees comes first. As of now, we have not been significantly impacted by COVID-19, other than some additional time requirements for our executive and field personnel. We have proactively taken measures to mitigate the spread of the virus and to ensure stability. To date, we have no crew shutdowns as a result of the pandemic. We are continuing to monitor the impact of the pandemic, and we are prepared to react to changes that we may encounter. Importantly, we continue to deliver our commitment to our shareholders by executing projects and securing future work. Since we provide critical infrastructure services and perform virtually all of the electrical construction work outdoors, the company's businesses have not experienced any material adverse impacts. We believe that both our electrical construction revenue and net income will show strong improvements in the second quarter. However, we do anticipate that current economic uncertainty will impact our real estate development operations by delaying the start of several projects. Our Texas-Southwest region demonstrated striking improvement from last year's first quarter, contributing to growth in both top and bottom lines. This performance is a function of the ongoing expansion into substation and distribution services, development of new customer relationships and securing profitable projects from new and existing customers. Looking forward, the expansion into substation and distribution services, award of new MSAs, securing of major project awards and our strong backlog should have a material positive effect on our results in the second quarter and throughout 2020. This, combined with our strong balance sheet and successful efforts to expand our target market, should provide the opportunity for continued growth in revenue and shareholder value. At this point, I'd like to turn the call over to Steve Wherry, our CFO, to provide a review of our financials. Steve?

Stephen Wherry, CFO

Thank you, John, and good morning, everyone. On today's call, I will be reviewing our first quarter results as compared to the prior year. First quarter 2020 total revenue was $45 million, a decrease of $3 million or 6% compared to the same period last year. The decrease in total revenue was primarily attributable to lower real estate development revenue, partially offset by improved electrical construction revenue. Electrical construction revenue in the 2020 first quarter was $43 million, an increase of $2 million or 4% from $41 million for the same period in 2019. This improvement was primarily due to increases in MSA project activity, including service line expansion in the Texas-Southwest region, partially offset by decreases in non-MSA project activity, mainly in the mid-Atlantic region. As you may recall, we mentioned last quarter that the new MSA we secured in the Mid-Atlantic region would experience a slow start in the first quarter of 2020, but would produce material revenue and profit beginning in the second quarter. In the Southeast region, we remain at lower than projected crew levels. Revenue from real estate development operations decreased to $2 million for the 3 months ended March 30, 2020, from $6 million in the same period in 2019 due to the decrease in the number of units available for sale. As John mentioned, we believe that the current economic uncertainty will impact our real estate development operations this year by delaying the start of certain projects. Gross margin on electrical construction operations increased to 15.3% compared to 14.7% for the same period in 2019. This improvement was mainly due to our service line expansions, as well as higher foundation construction activity with improved margins across multiple service regions. Lower project activity in both our Southeast and Mid-Atlantic regions negatively impacted margins. Comparing the year-over-year first quarter results, depreciation and amortization expenses increased approximately $312,000 or 12% to $3 million. This increase was mainly due to higher capital expenditures in 2019 to support revenue growth in electrical construction operations. Selling, general and administrative expenses increased $75,000 or 3% to $3 million, mainly due to a one-time severance charge. Also contributing to this increase were higher legal expenses, partially offset by lower real estate development selling expenses and corporate executive accrued bonus expense. Operating income was $2 million in the 2020 first quarter compared to $3 million in the same 2019 period. This decrease was mainly due to lower real estate development gross profit and higher depreciation expense, partially offset by higher electrical construction gross profit. In the first quarter of 2020, our provision for income taxes was a benefit of $106,000 compared to an expense of $827,000 in the same period last year. The recently enacted CARES Act includes certain modifications to the tax code, which resulted in a material benefit to the company's income tax provision for the first quarter of 2020. Our current effective tax rate for the first quarter was a benefit of 7.7% compared to an expense of 31.7% in the same period last year, primarily due to a one-time item recorded as a result of the CARES Act. Net income decreased to $1.5 million or $0.06 per share for the 2020 first quarter from $1.8 million or $0.07 per share in the same period of 2019. This decrease is primarily due to the decline in real estate development activity, partially offset by a decrease in the tax provision. Cash used in our operating activities in the period ended March 31, 2020, totaled $4 million compared to cash provided by operations of $2 million in 2019. The decrease in operating cash flows is primarily attributable to the timing of real estate development and electrical construction projects. EBITDA for the first quarter ended March 31, 2020, was $5 million compared to $6 million for the same period of 2019. This decrease was primarily due to lower gross profit from real estate development operations, partially offset by higher gross profit from electrical construction. Total backlog at March 31, 2020, increased $265 million or 127% to $473 million compared to $208 million a year ago. This improvement is due to the increase in estimated MSA work, primarily attributable to the award of 4 new MSAs, 2 of which are from new MSA customers. At the end of the first quarter of 2020, our 12-month total electrical construction backlog increased 75% to $173 million compared to $99 million 1 year ago, mainly due to the increase in firm MSA project activity, as well as an increase in the estimated MSA work. At March 31, 2020, we had approximately $27 million of cash and cash equivalents, $45 million of funded debt and a $23 million revolving line of credit, of which $12 million was available for borrowing. Total capital expenditures for the 3 months ended March 31, 2020, were $5 million compared to $12 million in the same period a year ago. This decrease was due to the mix of assets purchased versus leased in the comparable quarters for our electrical construction operations. Our CapEx projection for the full year 2020 is $14 million. This concludes our prepared remarks. Operator, please open the call to questions.

Operator, Operator

Our first question is from Sam Rebotsky with SER Asset Management.

Sam Rebotsky, Analyst

Now based on our backlog, should we assume that the MSAs that the revenue will increase proportionately and the profitability will follow?

John Sottile, CEO

Not necessarily. These are multiyear MSAs, and the revenue and income will occur over a span of 3 to 7 years.

Stephen Wherry, CFO

Yes, sir.

John Sottile, CEO

They run from 3 to 7 years, Sam. While we anticipate an increase in revenue and corresponding profit, it won't happen proportionately or double overnight. We do not expect that. It was challenging for us because when these four MSAs were signed, no work was being released, which negatively impacted the first quarter. This is one reason the first quarter was underperforming, as we couldn't initiate the projects that were already in the pipeline. After we signed them, it typically takes a month or two to ramp up, but we are now starting to see projects being initiated, and we are actively working on those covered by the four MSAs.

Sam Rebotsky, Analyst

Now these four MSAs, which district are they? Texas, Southeast, what’s the breakdown?

John Sottile, CEO

Well, there's Florida, Texas, Mid-Atlantic, generally, all across the board, to be honest with you. But principally in those areas.

Sam Rebotsky, Analyst

And at this point in time, the Texas area, we have improved our profitability, and everything is working pretty good as far as because in this first quarter, the sales improved pretty decently. So I assume you have straightened out, more or less, the profitability of the Texas operation?

John Sottile, CEO

Texas has shown improvement. There are various factors aside from transmission in Texas that relate to service lines in both distribution, which are contributing to revenue and profit. We are optimistic that this trend will continue as we progress. In the first quarter, they started operations in 2019. Before that, they either incurred losses or contributed very little. It takes time to fully develop these new service lines and realize their potential. However, we believe this will be a more significant contributor than we had anticipated previously. In all honesty, the utilities themselves face processes that have been negatively impacted by COVID-19, leading to constant changes in compliance rules. Many are working from home, which raises concerns about their productivity in managing tasks. Work is progressing well, but COVID-19 does have some effect on our customers.

Sam Rebotsky, Analyst

And as far as the COVID-19, as far as our contracts are concerned, is there any possibility, if there's any delays that because of the excess costs were reimbursed relative to that, I mean, the way we bid those jobs?

John Sottile, CEO

Well, you've said two different things. Under our current contracts, generally, the answer is no. Under future contracts, we have to make assessments as to what we think the impact may be on the projects from COVID-19, if any. So we are being very cautious about potential delays and the reasons for these potential delays that may occur. It gets into subcontracts, and penalties, and lots of other factors that the utilities are aware of when we enter into a contract.

Operator, Operator

Our next question is from the line of George Gasper, Private Investor.

Unidentified Analyst, Analyst

Just a little bit more on the Texas situation. It was a struggle getting started, and you really put a lot of effort in getting it straightened out, and it looks to be moving ahead here. Can you describe a little bit more about the area in Texas that you are working and what your opportunities are for expansion there in branching out?

John Sottile, CEO

We operate throughout the entire state. But in addition to that, many of our projects will run into Oklahoma, Colorado, Arkansas and Missouri. So Texas is a good place to work out of. We have yards in Fort Worth, the Dallas-Fort Worth area, and we have them in Bastrop. And of course, Texas is enormous. But out of our primary yards, we are able to work in 4 or 5 other states competitively.

Unidentified Analyst, Analyst

I have a question about substation activity that you've mentioned several times. It seems there is a significant increase in the demand for electricity and the transmission of power over long distances. It appears to me that there may need to be upgrades in the installation and replacement of substations. Is that a possibility for your company?

John Sottile, CEO

That is absolutely correct. Every power line needs to have at least a couple of substations. Many of these substations are in urgent need of upgrades. Each time a new power line is installed, a new substation is necessary. When a power line is upgraded, the corresponding substation also needs an upgrade. In addition to constructing new substations, we also engage in significant repair and upgrade work, and we are improving our efficiency every day. I am pleasantly surprised by the volume of work we are currently experiencing and the potential future work in the substation sector.

Unidentified Analyst, Analyst

That's very encouraging. And going back, coming out of that region, moving back to more South Central. You indicated in the past calls that you are breaking into Kentucky. How is that going along?

John Sottile, CEO

We have several contracts in Kentucky, both in transmission and distribution. We are working on methods to continue to improve our profitability and continuity of work. I believe the opportunities are excellent, but it still has some way to go before it reaches the maturity that Texas has achieved for us. It's important to note that east of Texas is a solid area to establish.

Unidentified Analyst, Analyst

Great. And just a general question about your view of trying to expand your overall business. Are there areas of product offerings that you can expand on generally looking forward to broaden your revenue stream capabilities?

John Sottile, CEO

Yes. As I've shared with you in the past, George, our general area that we work runs from, let's say, Virginia around to West Texas. Having said that, there are major utilities that we will be courting in those areas. And our goal is to continue to fill in the utilities that we are not currently working for, and then either create new yards, acquire new companies or organically grow them. But it is still to just fill in these areas. We believe these areas are going to continue to be strong growth areas and should result in excellent sources of revenue and related profit.

Unidentified Analyst, Analyst

Okay. Okay. That's good. And one specific question about a product line. I think I asked this in the last conference call. About the 5G install environment, has that encouraged you to try to branch into that?

John Sottile, CEO

We install fiber optic cable regardless of the technology, including 5G. Just like with wind farms, the source of electricity doesn't matter to us; it's all about the delivery through wires. While some electricity is direct current, we primarily deal with alternating current, and the method of generation is secondary. 5G is simply a new opportunity for communication companies, and while it's not a major part of our business, we do have partnerships with several of them.

Operator, Operator

Our next question is from the line of Kurt Caramanidis with Carl M. Hennig.

Kurt Caramanidis, Analyst

I'm curious about whether having employees working from home has affected your business. Has bidding activity decreased at all? Do you expect that as things open up during the quarter, it might increase? What is your current perspective on bidding activity and the size of opportunities and projects?

John Sottile, CEO

That's a tough question for me. I don't believe we're as negatively impacted as one might expect given the number of customers who are working from home. We are still seeing projects coming in. I do know that in real estate, we had to delay a significant project by about five or six months due to government processes, which was disappointing because it would have generated considerable income in 2020, but now it's pushed to 2021. I think it's a bit speculative, but I find it hard to believe that people will be as productive at home as they are in an office environment, mainly due to their ability to collaborate with others, including fellow engineers, on project designs. So, it's challenging to provide a definitive answer. I hope that's not the case. However, our revenue levels haven't collapsed, and I believe that by this summer and fall, we will see revenue improvements. I just can't shake the feeling that their productivity is not quite what it has been historically.

Kurt Caramanidis, Analyst

On the margin front, the gross margin in the fourth quarter saw a significant increase, but we experienced a decline due to start-up costs and a slow beginning to Q1 this year. Do you anticipate a return to upper teens margins for the remainder of the year? What are your general thoughts on gross margins for Q2 and beyond?

John Sottile, CEO

We are still aiming for a range of 16% to 19%, but we also believe there are good opportunities to exceed that. It is important to begin the new projects. Additionally, we need to be cautious when evaluating Goldfield on a quarter-over-quarter basis. I remain optimistic about the margins and potential improvements. However, for caution's sake, let's stick with the 16% to 19% estimate, and hopefully, we can enhance that. Keep in mind that there has been progress. Was it better over one quarter or year-over-year? Steve?

Stephen Wherry, CFO

Yes, we were...

John Sottile, CEO

It's 15.3% versus...

Stephen Wherry, CFO

15.3% and 14.7%.

John Sottile, CEO

Yes. So it actually did improve, but it was not what we would like to see. But the failure to sign those MSAs or the delays, rather, to run those MSAs, adversely affected Q1. I'm not going to kid you there. It's just draw again, draw again, draw again to get those signed. And once you get them signed, it's not like the switch gets turned on and they dump it all on you. Then they have to go and continue to engineer the new projects, and then you have to go through the normal processes. It can take several months. We are now just getting to where we are seeing the results or the opportunities from the new MSAs, and some of them are brand new, to see the results of those. So we think there are excellent opportunities for continued improvement in the revenue and, of course, the related margins.

Kurt Caramanidis, Analyst

Great. Just to follow up on my first question, are there any significant opportunities coming up like last fall when you announced some major deals? How is the outlook on that? Is there anything we might see in the next quarter that would be noteworthy, or something that deserves a release?

John Sottile, CEO

We are continually engaged in substantial projects, and for each project we secure, several others do not move forward. They are indeed out there, and if I suggest that I don't anticipate one next week, it's likely that one will emerge. We are currently working on and bidding for some significant projects. However, that doesn't guarantee we will secure them.

Operator, Operator

Our next question is from the line of Steven Branstetter with ABL Investments.

Unidentified Analyst, Analyst

On the real estate front, are we going to assume the second half of the year is going to be pretty slow on both?

John Sottile, CEO

I think that is accurate. Yes. The real estate is a small division of the company and only employs three individuals. And substantially, everything is outsourced. During much of the time, we are building single-family homes, we are building townhomes and other smaller projects. The larger oceanfront projects that also command the big margins generally take between 2 and 2.5 years to purchase, engineer, price and build and sell. So I would say that it will be flat.

Unidentified Analyst, Analyst

Are you looking at any opportunities to purchase land?

John Sottile, CEO

You bet you. Yes, sir. We got several of them.

Operator, Operator

Our next question is a follow-up from the line of Sam Rebotsky with SER Asset Management.

Sam Rebotsky, Analyst

Yes. John and Steve, this is a challenging time, but you have shown capability in acquiring these projects and achieving profitability, which is expected to improve. It seems fitting to come forward and share your progress. Unfortunately, you're unable to present at a conference, but if there are virtual conferences available, I think it would be beneficial to pursue those opportunities to share your story and potentially increase the valuation of Goldfield. Have you considered participating in any of these virtual conferences to convey your story?

John Sottile, CEO

Absolutely. As you know, the world is changing quickly. We want to ensure that when we design one of these virtual conferences, we target the right group and can effectively engage them, regardless of the method we choose. I believe that's a good idea, and if we can attract the appropriate investors to the conference, then yes, I think it's a good approach and I wholeheartedly agree.

Operator, Operator

Thank you. At this time, I will turn the floor back to John Sottile for closing remarks.

John Sottile, CEO

I would like to thank everyone for joining us on our conference call today. Also, I would like to express my sincere thanks to our shareholders for their continued support.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.