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Infrastructure and Energy Alternatives, Inc. (IEA) Q2 2021 Earnings Call Transcript

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IEA earnings call for the period ending June 30, 2021.

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Infrastructure and Energy Alternatives, Inc. (IEA)
Q2 2021 Earnings Call
Aug 10, 2021, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to Infrastructure and Energy Alternatives second-quarter 2021 conference call. [Operator instructions] And with that, I will turn the call over to Kimberly Esterkin, investor relations for IEA. Kimberly, please go ahead.

Kimberly Esterkin -- Investor Relations

Hello and thank you for joining us today to discuss IEA's second-quarter 2021 financial results. With us from management are JP Roehm, president and chief executive officer; and Pete Moerbeek, executive vice president and chief financial officer. Before turning the call over to management, I would like to note that today's discussion contains forward-looking statements about IEA's future growth and financial expectations. Any forward-looking statements should be considered in conjunction with the cautionary statements in IEA's second-quarter 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 after today's call. Since management will be presenting some non-GAAP financial measurements as references, including adjusted EBITDA, the appropriate GAAP financial reconciliations can be found in the press release issued on July 28, 2021. And with that, I'll turn the call over to JP Roehm, chief executive officer. Please go ahead, JP.

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JP Roehm -- President and Chief Executive Officer

Well, thank you, Kimberly and good morning to everyone. We appreciate you joining our second-quarter 2021 earnings conference call. I want to start by mentioning the series of financial transactions that we have begun to modify and improve our capital structure. As you can tell from the many press releases and Forms 8-K, we are addressing many of the challenges of the old capital structure.

I will leave the details to Pete, but we are excited for the future of IEA. For the second quarter, IEA generated record revenues of $560 million. Our Renewables segment accounted for 76% of that revenue, generating $425 million, an increase of 31% year over year. Of note, our solar division revenues grew from $7 million in Q2 in 2020 to over $108 million in Q2 2021.

That's an increase of more than $100 million. We started building our solar capabilities at the end of 2019 and we are now seeing the results of those efforts. Our specialty civil segment accounted for 24% of the quarter's revenue with revenue at $135 million. That was a decrease of 13.5% year over year primarily from the impact of a large heavy civil project in the second quarter of 2020, which did not repeat this year, along with unseasonably rainy conditions in parts of the country.

Our specialty civil businesses are still seeing the impact of project delays resulting from the pandemic, especially in our rail transportation business. We're not totally out of the woods when it comes to COVID-19. We continue to maintain health and safety requirements at our project sites. And from time to time, we experience some delays or other supply chain issues.

It's worth noting that we do have contractual protections to reduce our financial exposure to those project delays and project cost escalations. Not only did we achieve record revenues for the second quarter, but we also ended Q2 with more business in our backlog than in any other time in the company's history. Backlog increased by $86 million during the quarter to total, $2.8 billion, up nearly 60% on a year over year basis. We won wind and solar projects in multiple locations this past quarter, including wind and solar farms in Texas, the No.

1 ranked state for operating wind, solar and energy storage capacity in the country; a 200-megawatt utility-scale wind farm in Northwest Iowa, the first state to generate more than 30% of its total electricity from wind, and 145-megawatt utility scale wind farm in Colorado, a state which is committed to achieving 100% clean energy generation by 2040. Wind repowering projects are also gaining traction. The U.S. ranks fourth among the top 20 wind repowering markets by capacity with the repowering market expected to reach $25 billion annually by 2030.

IEA is uniquely positioned to act on this opportunity. During the second quarter, we were awarded a $70 million balance of plant power contract to repower the 240-megawatt Big Sky wind farm in Illinois. By the end of the construction in July 2022, this project is expected to increase Big Sky's annual energy output by over 60%. Projects like Big Sky highlight the long-term opportunity in the wind market as installed infrastructure ages and new technologies improve efficiencies.

Not only is our backlog at an all-time high, it is comprised of a much more balanced mix of business than it's ever had in the past as we book more strong wins in transportation and environmental remediation this past quarter. For example, IEA won a $126 million contract from the Illinois Department of Transportation to reconstruct the I-57 and I-74 interchange in Champaign, Illinois. This includes the building of 12 new ramps and bridges. Work on this project began in July.

Although not funded by money from the federal infrastructure bill, this project provides an example of what a typical federally funded project could be in the future. The American Act calls for $343 billion invested in roads, bridges and safety, with $32 billion specifically set aside for bridge repairs. This project shows that IEA can be a player in that market. Renewables has propelled our growth over the past several years and I believe that we are now on the cusp of a similar opportunity in the coal ash remediation business.

Coal ash is generated by the burning of coal at power plants and it contains contaminants such as cadmium, mercury and arsenic. Without proper management, these contaminants can pollute waterways, groundwater and drinking water and even the air. Large spills near Kingston, Tennessee and Eden, North Carolina caused widespread environmental and economic damage to the nearby waterways and properties and resulted into federal rules that ultimately protect coal ash disposal. These rules usually require that we build new ponds and landfills that comply with current regulations.

And in transport, the coal ash residuals from the plant or former storage sites to the new disposal sites. We don't do the engineering for these projects and we don't take on any of the environmental risk associated with these projects as our customers retain that liability. Coal ash at times has the consistency similar to that of quicksand and the job requires a significant amount of equipment and expertise, thus requiring an emphasis on safe operations in a company of scale. We work mostly under master services agreements that enable us to be paid on either a per ton basis or a time and materials basis, further reducing risk and making these projects attractive from a margin perspective.

The coal ash removal agreement we recently announced with a large utility underscores the opportunity in this marketplace. It's a multiyear opportunity that starts at a slow pace in the first two years and then will continue for over 10 years. Before speaking further about the growth trajectory of our end markets, I'll turn the call over to our CFO, Pete Moerbeek, to highlight the second-quarter's financial results and speak to our 2021 guidance and, of course, address our recent capital structure transactions. Pete?

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

Thanks, JP and good morning to everyone. Since we filed our second-quarter Form 10-Q and earnings release almost two weeks ago, I will mention only a few highlights. As JP mentioned, our second-quarter results were strong. Revenues of $560.1 million were a new record for our company and more than doubled sequentially.

Gross margins totaled 9.5% for the second quarter and did decline from 11.3% in the year-ago period. There are two primary reasons for the decline, which we believe to be temporary. The first is a result of the pandemic, which delayed the start of new work this year as evidenced by the first-quarter's low revenue. At the outside of any project, we established specific contingencies which are treated as expected costs as we calculate revenues using the percentage of completion rules.

As we complete the project, we can usually derisk the project and reduce its contingency, resulting in margin improvements. In most quarters, we have projects in various stages of completion and this contingency effect is not pronounced. However, in the second quarter, we had an unusually high number of projects still in their early stages. As these projects move toward completion throughout the rest of this year, we expect to return to more normal margins.

The second reason for the reduced margin in Q2 was the need to prepare for the third and fourth quarters of this year. We will be running in full force. We added 2,000 employees in the second quarter. As we onboard and provide training in Q2, the new hires are not yet actively working on projects.

However, they are now working, which will help margins in the third and fourth quarters. For the quarter, SG&A expenses were 5.5% of revenue compared to 5.8% of revenue in the prior period. Our full-year expectation is that SG&A expenses will be similar to last year's mid-6% of revenue range. Some other financial highlights.

In the second quarter, our cash used in operations totaled $11.4 million compared to $64.6 million in the same period a year ago. We expect to generate positive cash flow in the second half of the year. Interest expense for the quarter totaled $14.5 million, down from $16.2 million in the second quarter of 2020, primarily as a result of lower effective interest rates in our term loan, partially offset by an increased dividend rate on our Series B preferred stock from 12% to 13.5%. Adjusted EBITDA for the quarter totaled $35.7 million or 6.4% of revenues as compared to $39.3 million or 8.2% of revenues in the second quarter of 2020.

The expected margin improvements that I discussed earlier will also improve our adjusted EBITDA margin in the second half of the year. Capital expenditures for the second quarter totaled $18.2 million, of which $7.9 million was financed through leases. We continue to expect that capital expenditures for the year will be approximately 2% of our revenue for 2021. Lastly, turning to backlog.

We added $86 million to our backlog in the second quarter, which as JP mentioned, resulted in record backlog of $2.8 billion. This amount includes only three years of the coal ash contract JP spoke to earlier. We expect to recognize $1.8 billion of our total backlog amount in the next 12 months. IEA remains on track to meet our full-year guidance and we are reaffirming our revenue and adjusted EBITDA guidance ranges.

We continue to expect revenue in the range of $1.8 billion to $1.95 billion and adjusted EBITDA in the range of $130 million to $140 million for the full-year 2021. That implies a very strong third and fourth quarter with favorable comps to 2020. From a financial perspective, the three months of the quarter were on target and relatively calm. The past three to four weeks, not so much.

We have begun a series of transactions that will significantly improve our capital structure and make it more transparent and understandable. Much of the transaction information can be found in the prospectus supplement that we filed on July 28 and we will post more detailed information after the closings on our website in an 8-K in the near future. First, we launched an equity offering that priced on July 28 and closed on August 2, in which we sold 18.3 million new shares at $11 per share for net proceeds of $196.3 million. Ares purchased almost 60% of this offering, 10.9 million shares or prefunded warrants.

The demand for the non-Ares shares was for about twice the number available and we completed the offering at only a 5.7% discount from the previous day closing price. Second, we priced a $300 million high-yield bond offering last Friday. The transaction will close on August 17. The 6.625% senior notes will be due on August 15, 2029, an eight year tenor.

The notes priced at 98.485%. These notes will require semi-annual interest-only payments until their due date. We're very pleased with the results as this offering was our initial high-yield bond issuance, that both Moody's and S&P upgraded our ratings in the past two weeks were obvious positives. Third, we are in the final negotiations for an expanded revolver credit agreement with four banks.

We are expecting to receive $150 million revolver, which is double the amount of our current revolver. The revolver is expected to close on August 18. Fourth, Ares, the owner of our Series A and Series B preferred shares, has agreed to convert all of their Series A preferred to common stock as allowed in the Series A agreements. They have also agreed to convert their Series B penny warrants to common stock.

We will use the proceeds from the equity offering and the high-yield notes to redeem our current secured bank notes and redeem all of the Series B preferred shares. When we are done with the transaction, we will have a balance sheet with capital leases and equipment debt of approximately $57 million, $300 million of unsecured high-yield notes and no preferred debt or equity. We will have approximately 52 million common shares or share equivalents outstanding. So why do these transactions and why do them now? The benefits are readily apparent.

We are extending the average maturity of our debt from 3.5 years to around eight years, which is very important for our sureties. We paid approximately $41 million of cash interest last year and expect a reduction from these transactions of at least $20 million for annual cash interest payments. Our interest payments should also be tax-deductible unlike the previous Series B dividend payments, which were not. That we are able to make these improvements to our balance sheet is due to the efforts of Ares and a special committee of our board of directors.

Ares has agreed to a series of governance rights, including 2 of 9 or 10 directors and a voting interest of around 32%. We expect that their economic interest will be approximately 38% of our total ownership. Ares is converting a senior security, which paid at least 12% in cash dividends per year into common shares. We believe this is a very strong vote of confidence for our company.

Finally, the transactions will also allow us to grow faster as our new revolver will give us the capacity to conduct accretive tuck-in acquisitions that make strategic sense with attractively priced capital. Before turning the call back to him, JP and I want to acknowledge the many contributors to these transactions, especially the help of Erin Roth, our new General Counsel and the members of my finance team. With our revised capital structure and record revenues and backlog, IEA is ready for our next phase of growth. JP, back to you.

JP Roehm -- President and Chief Executive Officer

Thank you, Pete and it's certainly been a whirlwind. That said, the overarching theme for our IEA business right now is the growing demand. I've been a part of this IEA family for more than two decades and I've never seen this much momentum across all of our businesses at the very same time. We are the largest publicly traded wind and solar EPC company in the United States.

In our environmental business, we believe that the recent contract win makes us the top provider of remediation services for coal combustion residuals. And in our specialty civil business, we are a top 20 player in rail and highway construction. Our market position in these end markets has been only strengthening over time. Wind and solar are the preferred source of new energy generation in the United States.

We do not see our wind or solar business slowing down anytime soon. According to the U.S. government, wind and solar are now the lowest cost forms of new power generation in the country. Over the past three years alone, almost two-thirds of all new power generation in the country has been from renewables.

The EPC services we provide account for between 28% and 32% on average of a utility scale wind and solar project. That means IEA is one of the largest recipients of the billions of dollars that will continue to be invested in new renewables energy generation. As virtually all owners procure the wind turbines and solar panels for their projects, we do not have any technological risk or significant capex in the project while directly benefiting from the underlying growth of this renewables industry. In June, the IRS expanded the continuity safe harbor, which means the current wind and solar tax credits will likely apply to most projects through 2025.

That means that some more marginal projects may now become viable. Our newly formed wind services group, which performs maintenance work, is also seeing increased opportunities. Currently, wind farm owners in the United States spent approximately $2.6 billion on maintenance services annually, with most of that money currently going to the turbine manufacturers. As the manufacturers change their focus to increase their turbine capacity, we see an opportunity for IEA to become a credible independent player.

Beyond renewables, as I noted earlier, we're seeing strong growth drivers for our specialty civil segment. Our environmental business is expected to be a major growth engine for IEA as large coal ash remediation projects are awarded to meet the federal regulatory deadlines. What's exciting about the coal ash opportunity is that it's in its early stages. IEA has the capabilities and credentials to win these large multiyear contracts.

There are over 700 sites across the United States with over 2 billion metric tons of coal ash that must be remediated and disposed of properly. At present, less than 15% of existing impoundments and landfills have been remediated to date. Using data publicly available from Duke Energy, we believe the remediation opportunity for these sites across the country could be as much as $50 million to over $150 billion, depending on the price per ton of coal ash removed over the next 10 to 15 years. Major regulations in this area did not come into effect until 2018.

So in other words, there's going to be a lot of work in the coming years. Our transportation business, which was previously constrained because of COVID-19 and federal and state budget constraints is starting to improve, with the expected increase of federal government spend on infrastructure, we believe that business is going to grow. IEA is recognized as among the leaders in both freight and passenger rail projects. We also have a terrific franchise in bridge and highway construction in some of the popular states across the United States.

The federal infrastructure bill is expected to result in a 50% increase in federal spending for highway and rail infrastructure. As a top 20 contractor in both areas, we expect to be a major beneficiary of this increase in spending. We await final action in the Senate on an infrastructure bill and anticipate there will be follow-on legislation to address decarbonization in this country. As best as we can tell at this time, the legislation will provide additional impetus to all of our business lines.

IEA's future is bright and we now have the right capital structure to push our growth higher. With improved liquidity and reduced debt, we can continue to invest in our organic growth, while also making strategic bolt-on acquisitions that accelerate our growth in each of our end markets. Thank you again for joining us this morning for our second-quarter call. Operator, would you please open up the call to questions.Question and Answer

Questions & Answers:


[Operator instructions] Our first question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Brent Thielman -- D.A. Davidson -- Analyst

Hey. Thank you. Good morning, JP, Pete. 

JP Roehm -- President and Chief Executive Officer

Hey, Brent.

Brent Thielman -- D.A. Davidson -- Analyst

I guess I want to start on the clash remediation opportunity, pretty unique, pretty interesting and obviously picked up here in the quarter. Can you just talk about -- you gave some sort of higher-level numbers there, JP, but talk about where you think that business can go in the next few years. What are the potential sort of contributions we can think about? Some of these new contracts come to light and obviously, you guys will be a participant there. I'd just love to get some more color there.

JP Roehm -- President and Chief Executive Officer

Well, I think, certainly, this is a market that we've been looking at since our acquisition in 2018. We knew the market was coming. I think the announcement, the contract we announced on the East Coast here recently is certainly indicative of a market that we knew was coming. And we think it's certainly a major growth driver, use the analogy, another leg of the stool.

When you have a $50 billion-plus addressable market out there and truly a competitive mix of competitors out there that is limited, at least limited from a scale perspective, we think there's a tremendous opportunity for us ahead. And particularly as we alluded to here in our remarks, certainly probably an area that kind of tends to consolidation over time. So we're -- we have been working over time to position ourselves as a leader in this industry and expect to maintain that leadership position for quite some time.

Brent Thielman -- D.A. Davidson -- Analyst

OK. And then in the 10-Q and actually, Pete, I think you touched on it, you said you expected to work through around $1.8 billion of the backlog over the next 12 months, I guess, is the vast majority of that coming here in the second half of the year? Just wondering, do you need to book a lot more shorter-term work to hit the revenue guidance here implied in the second half?

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

No, not at all. We will hit the -- we expect to hit the revenue guidance. If anything, we're expecting to be toward the top end of that. Traditionally, the first and second quarters tend to be a little bit lower.

So first quarter next year, second quarter next year may be slightly lower than the run rate we're on now. We are going as fast as we can. And -- but the only thing that really impact us is weird, strange whether the client is not delivering the turbines or solar rays when they're supposed to. Those are about the things that we -- that keep us up at night.

The rest of the way, we expect to see some very solid numbers in second half of the year.

Brent Thielman -- D.A. Davidson -- Analyst

Yup. And then the wind maintenance business, I know it's still early on, but maybe could you talk about the contributions to date, the traction you're seeing with customers in that new offering, if there's any sort of targets you're looking to get the business to either this year or over the next couple of years?

JP Roehm -- President and Chief Executive Officer

Well, we haven't been out with any kind of guidance on that particular business unit. What I can say, Brent, is it is taking off and scaling at our kind of what we anticipated internally. I think we're well in excess of 100 technicians today in that business line. So I would say, certainly, it's meeting or even exceeding our expectations.

And given the forward runway in that market, we expect that its materiality in the segment will grow over time. But we're not out there yet where we want to put any specific numbers around it.

Brent Thielman -- D.A. Davidson -- Analyst

OK. Just last one, the repowering contract, JP, you talked about $70 million. I tended to think of these sort of repowering opportunities as smaller. Would you call that unusually large for that type of work or is that the kind of stuff you're seeing out there?

JP Roehm -- President and Chief Executive Officer

Could you say it one more time, Brent? I'm sorry.

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

exercising of the repowering contract.

Brent Thielman -- D.A. Davidson -- Analyst

The repowering, the $70 million contract. Just wondering if that's unusually large or consistent with the sorts of opportunities you're seeing.

JP Roehm -- President and Chief Executive Officer

Good question. It's probably on the larger end of the scale. But I think it's also indicative of -- Big Sky is actually a project that we constructed in 2009. So as projects get more into that 10-year lifespan, which they would be getting bigger because 10 years ago, the wind industry was scaling, yes, perhaps they will get larger.

But I would say, so far, that's been on the bigger end of the landscape we've seen for repowering.

Brent Thielman -- D.A. Davidson -- Analyst

OK, thank you. I'll pass it on.


Our next question comes from the line of Adam Thalhimer with Thompson Davis. Please proceed with your question.

Adam Thalhimer -- Thompson Davis -- Analyst

Hey. Good morning guys. Congrats on all the transactions.

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

Good morning, Adam.

JP Roehm -- President and Chief Executive Officer

Hey, Adam.

Adam Thalhimer -- Thompson Davis -- Analyst

Just kind of wanted to carry on there on the repower opportunity. JP, what's the total market like? Are you bidding a lot of those jobs right now?

JP Roehm -- President and Chief Executive Officer

I would say the market is still pretty well dominated by new build, Adam. I think one thing that in the near term could cause that to grow is the recent IRS guidance or extended their guidance on the safe -- the continuity safe harbor for the production tax credit. So I could see some projects kind of come in, in 2022 and 2023, just because of that extension of the continuity safe harbor. But I'd still say, if the -- the market is by far dominated by new build.

And I think EPCs like ourselves, use that as levelization of resources and kind of fit these repowering projects in, in gaps of our schedule. And I don't look at that really to change too much in the near future.

Adam Thalhimer -- Thompson Davis -- Analyst

OK. And then on the core wind and solar business, can you give us some insight into the discussions you're having with clients and potential clients today in light of logistics issues and materials costs?

JP Roehm -- President and Chief Executive Officer

Yeah. Certainly, probably that has been more in the solar industry given the content of steel. That has probably been where we've seen most of the escalation. And yes, I mean, our -- we've not seen it really stop or delay any near-term projects here.

Certainly, our customers are not happy about the current markets in the -- particularly in the steel market, but projects are proceeding and we've been able to pass those escalations along. I know as far as projects that are more in later '22 and into 2023, they are looking at -- customers are looking at delaying orders as much as they can for steel products because I think steel is currently predicted to kind of tail off in Q4, but we'll see. The theme is we have -- there's -- just the way our contracts are structured and how they come to market, we have minimal risk for that and common practices to pass those escalations along.

Adam Thalhimer -- Thompson Davis -- Analyst

OK. Perfect. And then last one for me. What's the theoretical capacity of the environmental segments? Like what could the revenue be if you look a couple of years out?

JP Roehm -- President and Chief Executive Officer

Well, if you look at IEA today, I think what we've said in the past is we'd like to get our solar EPC revenues similar to our wind EPC revenues. I think that is certainly achievable in the somewhat near term. We haven't committed to a time frame for that, but I think that's certainly achievable. Certainly, the market is there.

We -- but I think similar -- a solar market similar to our wind market as we have now, wind market is basically a $1 billion run rate business. So you can do the math. But we think, certainly, the business in the not-too-distant future could be at that $1 billion run rate in each kind of -- in each of those solar and wind new build lines.

Adam Thalhimer -- Thompson Davis -- Analyst

And then what if you -- I was thinking on the -- I mean that's good to hear, but I was thinking on the environmental side.

JP Roehm -- President and Chief Executive Officer

Yes. Yes. Well, yes, Pete's sitting here, tell me. Come on, environmental.

Adam Thalhimer -- Thompson Davis -- Analyst

I did not know that on $1 billion each in solar and wind, though, that's good to hear.

JP Roehm -- President and Chief Executive Officer

Yes. Well, the market is out there and we're growing our market share. So -- but in -- as it relates to coal ash, I think we want to be careful about tapering the near-term expectations. But I think the key is we would -- the key drivers that we would point out there is it's certainly when you book in a $50 billion to $150 billion market, you can probably count the service providers at scale in the country almost on one hand.

I think you can certainly look at IEA has positioned themselves as the top provider with this recent win. So we think it's a big opportunity. I think we want to temper expectations about putting any numbers out at this time on that. But when you have $50 billion to $150 billion addressable market over the next 10 or 15 years and there's a handful of players, I think we're in a -- I think it's a great growth area of the business.

Adam Thalhimer -- Thompson Davis -- Analyst

Sounds good. Thanks guys.

JP Roehm -- President and Chief Executive Officer

Thank you.


[Operator instructions] Our next question comes from the line of Noelle Dilts with Stifel. Please proceed with your question.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Hi, guys. 

JP Roehm -- President and Chief Executive Officer

Good morning.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Good morning and again, congrats on all the progress on the balance sheet. 

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

Thank you. 

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Sure. So the first question I wanted to ask is kind of been touched on by some of the other questions. But one of the things that I think I still encounter when I speak with investors is a concern that wind might start to tail off given some of the tax credits currently rolling off, technically and that basically that solar might offset that. But your comments -- just Adam suggested that maybe you at least think wind can hold steady.

So if could you just delve into that a bit and kind of talk about your expectations on the longer-term outlook for the wind side of the business? Thanks.

JP Roehm -- President and Chief Executive Officer

Yeah. Noelle, great question. And Pete and I get a lot of these questions from investors or other stakeholders in the business. And we acknowledge that there's certain analysts and others that seem to predict a downturn in the wind industry in the near term.

Quite frankly, honestly, we just don't see it. And a few reasons behind that. Number one, our best barometer is what our customers are telling us. And I think we maybe talked about this on the last few quarterly calls, but what I always draw people to, I think, is one of the best barometers in the industry is go pull NextEra's last few quarterly calls and see what kind of statements they're making.

They're a great barometer for the industry. Their market share is the largest player, both development and asset owner of renewables in the country. I think the market share is in the high 20s, if not low 30s. So they're a great benchmark.

And I think what you're going to find is, unequivocally, they've kind of said that they're going to double down on wind and solar and their spin between 2022 and 2025. I can tell you from our mix of clients, we're hearing similar middle-of-the-fairway statements. So certainly, clients are and their pipeline that they share with us -- I think you're certainly aware of the competitive landscape of wind and solar EPCs. And given the fact that it is a limited landscape, we are very close to our clients.

We're almost embedded with our clients and understand what projects and what their pipeline is for the next two to three years. So not to beat the dead horse, but that is certainly what gives us an extreme amount of confidence is being -- having that inside knowledge to what our capex spend is of our clients. And then you kind of look at the other drivers in the industry. You mentioned the tailoff and the tax credits.

Well, when you actually look at the extensions that have happened in the last few years in Congress, along with the last COVID relief legislation in December of last year and then the revised IRS guidance that came out of just a handful of weeks ago in June, that essentially also extended the continuity safe harbor provisions as well as lessen the standard for the continuity safe harbor. You can get real confident that the existing legislation is going to be a driver through 2025. And that's absent anything that's kind of happened and then with this reconciliation bill or any of the other bipartisan infrastructure bill in Congress. So -- and then also, we've got state RPSs out there that I know we've talked about before.

And then lastly, just a tremendous continuing appetite of the corporate and industrial demand of the Facebooks, the Amazons, the General Motors, McDonald's and what have you that is buying almost half the renewable energy that was produced this year. And we don't -- and that's, I think, a continuing development of ESG phenomenon. So we look at that -- we feel very confident going forward on the continued viability of wind going forward.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Great. That's really, really helpful. And the next -- I'm not sure that you'll go into this much detail, but I was wondering if just given the gross margin in specialty civil in the quarter, if you could just kind of revisit, one, how you're thinking about gross margins for the year potentially for each division. And then if you could kind of talk about your longer-term targets from a gross margin perspective.

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

Well, I can certainly do the first part of it, Noelle. We expect to get back to very similar margins as last year in both segments. We were impacted by COVID and the fact that the rail projects were at lower volume and lower margin. As we look through the rest of the year, we think we'll get reasonably close on the specialty civil and we should do similar as we did last year, the renewables.

Certainly, to get to the overall adjusted EBITDA number that we are guiding to, we're going to have to improve margins over where they were in second quarter. And on a longer-term basis, that's harder. As we sit here right now, we would expect that the margins will continue in the 11% to 14% on renewables. And that we've said specialty civil is going to be in the high single digits or very low 10s with hopefully the coal ash toward the top end of that, the rail kind of in the middle and your DOT highway were kind of toward the bottom end of that range.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

Right. OK. And then last, this is very detailed question, but just given all of the changes with the shares coming in and the conversion, etc. I was wondering if you have an estimate for where you think the share base will kind of work out for the third and fourth quarter.

I'm sure we've all done our own math, but just maybe trying to get everyone on the same page. Thanks.

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

Good enough. I want to say that we're going to be in the 52 million to 54 million share range. And I get there by doing 25 million where we are currently, then we -- if you add to that, the 6 million that Ares has converted, add to that the 18.3 million that we just did, 2.6 million or so of Series A conversion and then anywhere from 1 million to 2 million just on the RSUs, etc., outstanding and hopefully and I wasn't adding it, that gets you in the 52 million to 54 million range.

Noelle Dilts -- Stifel Financial Corp. -- Analyst

OK, thank you.

JP Roehm -- President and Chief Executive Officer

Thanks, Noelle.


There are no further questions in the queue. I'd like to hand the call back over to JP Roehm for closing remarks.

JP Roehm -- President and Chief Executive Officer

Well, thank you, operator and thank you for everyone that's joined us today on our Q2 2021 call. Stay healthy, stay safe and we look forward to reporting our Q3 results in early November. So we'll see you all then. Thank you.


[Operator signoff]

Duration: 43 minutes

Call participants:

Kimberly Esterkin -- Investor Relations

JP Roehm -- President and Chief Executive Officer

Pete Moerbeek -- Executive Vice President and Chief Financial Officer

Brent Thielman -- D.A. Davidson -- Analyst

Adam Thalhimer -- Thompson Davis -- Analyst

Noelle Dilts -- Stifel Financial Corp. -- Analyst

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