Argan Q3 2024 Earnings Call Transcript

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Provided by Quartr
December 6, 2023

There are 7 speakers on the call.

Operator

Evening, ladies and gentlemen, and welcome to the Argonne Inc. Earnings Release Conference Call for the Q3 of Fiscal 2024, which ended October 31, 2023. This call is being recorded. All participants have been placed on a listen only mode. Following management's remarks, the call will be opened for questions.

Operator

There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, It is my pleasure to turn the floor over to your host for today, Jennifer Belodeau of IMS Investor Relations. Please go ahead.

Speaker 1

Thank you. Good evening, and welcome to our conference call to discuss RGAAN's results for the Q3 of fiscal year 2024 ended October 31, 2023. On the call today, we have David Watson, Chief Executive Officer and Hank Dyle, Chief Financial Officer. I will take a moment to read the Safe Harbor statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward looking statements.

Speaker 1

Such statements include, but are not limited to, Projections are statements of future goals and targets regarding the company's revenues and profits. These statements are subject to known and unknown factors and risks. The company's actual results, performance or achievements may differ materially from those expressed or implied by these forward looking statements, and some of the factors and risks that could cause or contribute to Such material differences have been described in this afternoon's press release and in our NAND filings with the U. S. Securities and Exchange Commission.

Speaker 1

These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward looking statements. Earlier this afternoon, the company issued a press release announcing its Q3 financial results and filed its Q3 Form 10 Q with the Securities and Exchange Commission. Okay. With that out of the way, I will now turn the call over to David Watson, CEO of Argan. Go ahead, David.

Speaker 2

Thanks, Jen, and thank you everybody for joining today. I'll start by reviewing some of the highlights of our operations and activities and Hank Diley, our CFO will go through or will go over our financial results for the Q3 of fiscal 2024 ended October 31, 2023. Then we'll open up the call for a brief Q and A. During the Q3, We saw revenues grow by 39 percent to $164,000,000 reflecting improvements from both our Power Industry Services in our industrial construction services businesses. We delivered solid profitability outside the Kilaroot job which I will cover later in detail and we saw continued strength in our balance sheet.

Speaker 2

Our backlog at October 31, 2023 was a healthy $730,000,000 and we closed the Q3 of fiscal 2024 with almost $400,000,000 of cash and investments and net liquidity of $240,000,000 Additionally, We continue to carry no debt. During the Q3, we repurchased approximately 43,000 shares of our common stock pursuant to our stock repurchase program for a total spend of approximately $1,700,000 or $40.54 per share. We were also pleased to increase our cash dividend payout 20% to $0.30 per quarter reflecting our confidence in our businesses. On Slide 4, you see our 3 reportable business segments. Power and Industry Services is comprised of our Gemma Power Systems and Atlantic Projects Company operating units, which focused on the construction of multiple types of power facilities, including efficient gas fired power plants, solar energy fields, Biomass Facilities and Wind Farms.

Speaker 2

Power Industry Services revenues increased 34% to $121,300,000 as compared to $90,700,000 for the Q3 of fiscal 2023. The segment represented 74% of our 3rd quarter revenues and reported pre tax book income of $11,000,000 Industrial Construction Services which is represented by The Roberts Company had a strong quarter and contributed 23.5 percent of our 3rd quarter consolidated revenues and a reported pre tax book income of $2,900,000 Revenues and pre tax book income both increased for the segment during the 3rd quarter by 74% 84% respectively as compared to the amounts reported for the comparable quarter last year. CRC provides solutions to mostly industrial and manufacturing clients with a focus on agriculture, petrochemical, Open paper, water and power industries as well as other newer industries adding to or expanding the number of production facilities in the Southeast. The segment focuses on industrial construction projects but provides other field services like plant maintenance turnarounds, shutdowns and emergency mobilizations as well as pipe and pressure vessel fabrication. Lastly, we have our Telecommunications Infrastructure Services Group, our smallest segment, which contributed 2.5% of our 3rd quarter revenues.

Speaker 2

SMC Infrastructure Solutions is our operating brand in the segment, providing outside construction services for the utility and telecommunications sectors as well as inside the premises, wiring services primarily for the federal government locations and military installations requiring high level security clearance. While our ability to drive substantial growth in revenues for the Q3 shows the underlying strength of our core businesses, During the Q3, our international subsidiary APC encountered significant and escalating operational and contractual challenges associated with the Kilroof project in Northern Ireland. By way of quick background, Kilroof is a 6 60 Megawatt gas fired power and being built just outside of Belfast. Hill Root is a Brownfield project and an existing structure that was first built in the 80s to house coal fired power generation assets. Last quarter, we discussed the challenges that have impacted our ability to execute As expected on the Kilroy project, including weather related work interruptions, COVID variance highlighting the workforce, material changes to the project, the war in Ukraine and global supply chain delays among others.

Speaker 2

In addition, Unresolved variances and claims have disrupted our progress and unresolved project related matters continue to meaningfully impact the contract, our cost and the project schedule negatively. At October 31, 2023 APC's estimates of the unfavorable financial impacts related to the difficulties on the Kilroy project escalated substantially. Accordingly, an estimated loss at completion of approximately $7,900,000 was recognized during the quarter ended October 31, 2023. The loss recorded for the 3 month period ended October 31, 2023 in the amount of approximately $10,700,000 includes an unfavorable adjustment of estimated gross profit of approximately $2,800,000 that was recorded in previous periods. As an organization, we are intently focused on efficient execution and project success and the impact of the unanticipated challenges that have resulted in the Kilroof loss is extremely disappointing to us as we know it is to our fellow shareholders.

Speaker 2

APC is continuing all efforts to resolve open variations, claims and appropriate extension of time to mitigate these losses and to improve the final financial results for this project. We estimate that we are over 95 since complete with design and construction and currently commissioning the facility and expect to be ready for the first fire of both gas turbines by early 2024. Excluding Kilaroop, execution has generally been strong across all the businesses during the Q3 and we remain committed to driving execution excellence and strong margin performance. Importantly, we continue to see tremendous opportunity for R GaN moving forward as the energy landscape continues its transitions from fossil fuel to cleaner alternatives like natural gas and renewables, coal fired power generation in the U. S.

Speaker 2

Is expected to drop by an additional 70% to represent only 5% of net electrical generation by 2,050, while the demand for stable grids and reliable power generation will only continue to grow. R GaN has earned a solid reputation as a proven design and construction partner for the power industry. And we are energized by the pipeline of opportunities we're seeing to work with both new and repeat customers as they built facilities designed to provide cleaner energy sources to meet growing power consumption practices. Last quarter, we announced our limited notices to proceed on a project with Vistra Energy. Project is well underway with Jima working with Vistra to complete 3 facilities located in Illinois to provide 160 megawatts of solar power plus 22 megawatts of battery storage capability.

Speaker 2

This is an exciting and substantial opportunity for us to continue to demonstrate our capabilities in the renewable energy space supporting the adoption of solar power as a reliable energy source. On slide 8, We highlight the Shannon Bridge power project in Ireland, an APC project pursued in which it is providing EPC services for a 2 64 Megawatt Thermal Power Plant. This is another large project of ours that has been performing well. APC and Gemma have combined their skills and experience to complete the Shannon Bridge project from start to finish. A timeline which includes design, procurement, construction and commissioning.

Speaker 2

This project demonstrates our ability to execute a major project on an extremely short timeline. We began work on this project in the first half of twenty twenty three and has a targeted completion date of early 2024. Shanbridge is being built to bolster the region's power infrastructure and support the electrical grid during emergencies or high usage periods. As the industry shifts to new power generation technologies, It's important to note that 82% of our current backlog of over $700,000,000 represents projects that support low carbon emissions demonstrating our commitment and our leadership role in the transition to cleaner power generation. So again, Before I hand the call over to Hank Diley to go over our financial performance in detail, I want to reiterate that while the latest developments with the Kilroy project are disappointing, we are generally seeing strong execution on all of our other major projects and we remain optimistic that our results over the long term will be strong.

Speaker 2

Hank?

Speaker 3

Thanks, David, and good afternoon, everyone. On slide 10, we present our consolidated statements of earnings for the 3rd quarter and the 1st 9 months of fiscal 2024. 3rd quarter revenues increased 39% to $164,000,000 reflecting an increase in revenues from both our Power Services and Industrial Services segments as compared to the Q3 of fiscal 2023. In the Q3, we achieved a 34% increase in revenues in our Power Industry Services segment, primarily related to projects under construction overseas and the Trumbull Energy Center, partially offset by decreased revenues associated with the Guernsey Power Station and the Maple Hill Solar Facility, as those projects reach the final completion stage. In our Industrial Construction Services segment, The company achieved revenue growth of 74%, driven by a substantial increase in field services and supporting steel fabrication work.

Speaker 3

That said, as David previously mentioned, APC has been contending with significant and escalating operational and contractual challenges associated with the Kilroof power station project in Northern Ireland. For the 3 months ended October 31, 2023, RGAAP reported consolidated gross profit of approximately $19,200,000 which represented a gross profit percentage of approximately 11.7% and reflected positive contributions from all 3 reportable business segments. However, These results were adversely impacted by the recorded loss of $10,700,000 related to the Kilrood project, an amount representing approximately 6.5 percent of consolidated revenues for the quarter. Consolidated gross profit for the quarter ended October 31, 2022 was $22,200,000 representing a gross profit percentage of 18.8%. Selling, general and administrative expenses of $11,400,000 The Q3 of fiscal 2024 decreased as compared to SG and A of $12,700,000 in the Q3 of fiscal 2023.

Speaker 3

Net income for the Q3 of fiscal 2024 as adversely affected by the Kill Root loss was $5,500,000 or $0.40 per diluted share compared to $7,800,000 or $0.56 per diluted share for last year's comparable quarter. EBITDA, which represents earnings before interest, taxes, depreciation and amortization for the quarter ended October 31, 2020 rate was $12,200,000 compared to $11,300,000 in the same period of last year. Looking at our year to date performance, revenues for the 1st 9 months of fiscal 2024 increased by 22% to $409,000,000 as compared to revenues of $336,000,000 for the comparable prior year period. Revenues in our Power Industry Services segment increased by $40,900,000 or 16 percent to $296,800,000 for the 9 months ended October 31, 2023, compared with revenues of $256,000,000 for the comparable period last year. Construction activities have increased in the current year for the Irish Shannon Bridge project, the Trumbull Energy Center and the ESB FlexGen Peaker Plants.

Speaker 3

The increased revenues were partially offset by the effects of decreased activities at the Guernsey Power Station and the Maple Hill Solar Energy Facility as those EPC projects wind down. Our consolidated gross profit of 14% for the 1st 9 months of fiscal 20 decreased as compared to gross margin of 19.7% in the 1st 9 months of fiscal 2023, primarily due to $11,500,000 of loss that was recorded in the 1st 9 months of 2024 related to the Kilroof project. Gross margins in our Power Industry Services, our Industrial Services In our Telecommunications Infrastructure Services segments were 14%, 12.8% and 25.1 percent respectively for the 1st 9 months of fiscal 2024 as compared to 20.7%, 15.8% and 21.1% respectively for the 1st 9 months of fiscal 2023. SG and A expenses decreased to $32,500,000 for the 1st 9 months of fiscal 2024 as compared to $34,200,000 for the 1st 9 months of fiscal 2023. Net income for the 1st 9 months of fiscal 2024 was $20,300,000 or $1.50 per diluted share compared to $19,500,000 were $1.36 per diluted share for the 1st 9 months of last fiscal year.

Speaker 3

EBITDA was $33,800,000 compared with EBITDA of $36,900,000 in the 1st 9 months of fiscal 2023. Most notably, these consolidated results were tempered by the reduction in Consolidated gross profit between periods related to the loss recorded on the Kilmerut contract as discussed earlier. Our income tax reporting for the periods ended October 31, 2023 is also negatively impacted by the Kill Root loss as we did not apply any income tax benefit to the resulting net operating loss incurred by APC in the UK. Excluding this adverse tax impact, our underlying Estimated annual effective income tax rate for fiscal 2024 is slightly over 23%. Before turning the call back to David, I would like to touch on the favorable returns we are experiencing in the current year related to our cash, cash equivalents and investments that are invested as described in our condensed consolidated financial statements.

Speaker 3

Other income for the 3 9 months ended October 31, 2023 included investment income and the approximate pre tax amounts of $4,000,000 $9,700,000 respectively. Based on our current amount of investments and the weighted average annual interest rate On those investments of 5.1%, our current run rate equates to more than $15,000,000 in annual investment income. With that, I'll turn the call back to David.

Speaker 2

Thanks, Hank. Turning to Slide 11, our consolidated project backlog remains solid at over $700,000,000 as of October 31, 2023. I think it's important to note that as expected and mentioned on our last call, we do not add any major projects in the quarter. However, we were pleased to add $70,000,000 in miscellaneous backlog during the quarter which partially offset the $164,000,000 of backlog that was converted to revenues. While this is a decline from the backlog level of $800,000,000 we maintained through the first half of fiscal 2024, we continue to see a strong pipeline of opportunities and our backlog continues to reflect longer term fully committed projects in both the Power Industry and Industrial Services segments.

Speaker 2

On Slide 12, we present certain major projects currently included in our backlog. We have 2 projects currently winding down, the Guernsey Power Station, which is the largest single phase gas fired power plant project in the U. S. And the Maple Hill Solar Facility. Both are substantially complete and are expected to reach final completion in Q4.

Speaker 2

The 3 ESB FlexGen Peaker Power Plants and the Shannon Bridge thermal plants are both in the final stages of construction and several of the power units have either started commissioning or getting close to starting commissioning. The Vistra Solar Plus battery projects in Illinois are relatively new to list for which we expect to receive full notices to proceed in Q4. We also include 2 separate water treatment plant projects that are being performed by TRC. Our backlog remains very healthy with a variety of projects that demonstrate the range of our capabilities and our recognition in the power industry as the effective industry partner not only in the U. S.

Speaker 2

But also in Ireland and the UK. Our balance sheet remains strong. As of October 31, 2023, cash, cash equivalents and investments totaled almost $400,000,000 generating meaningful investment yields and net liquidity was $240,000,000 with no debt. Stockholders' equity was $285,000,000 at October 31, 2023. As you can see from this liquidity bridge, Our business model ordinarily requires a very low level of capital expenditures.

Speaker 2

Our net liquidity of $240,200,000 at October 31, 2023 was slightly elevated compared with year end fiscal 2023. Since November 2021, we have returned a total of approximately $97,000,000 to shareholders as we've repurchased approximately 2,600,000 shares of our common stock or approximately 16% of shares outstanding at the beginning of the program, which equates to an average price of $37.38 per share. Additionally, since fiscal 2017, we have paid $1 per share annually through quarterly cash dividends. Importantly, as I mentioned at the start of this call, in September, Argin's Board increased the company's quarterly dividend by 20% from $0.25 to $0.30 per share reflecting the strength of our business and our confidence in our RGAAN's growth potential moving forward. ARGantt has always been very focused on long term value creation for shareholders.

Speaker 2

While our operating results can vary from quarter to quarter related to the timing of contracts, we remain focused on delivering long term value to shareholders. Since 2008, we have increased our tangible book value and cumulative dividends per share considerably. Our project backlog is a solid $700,000,000 as of October 31, 2023. The electrification of the economy is driving the need for dependable power grids and reliable energy sources from standard and emergency power usage to increased EV adoption and the accompanying charging requirements To enhance demand for data centers, more people are using more power for much longer periods of time than ever before. With our capabilities and proven track record as a full service construction and project management partner for multiple types of power facilities, we are seeing heightened interest for our services and our pipeline is strong.

Speaker 2

Importantly, our facility design and construction capabilities are energy agnostic, Positioning Arrhen as an ideal partner as demand for reliable power grids and enhanced emerging power resources is growing. We're excited about the opportunities we're seeing to help the energy industry as it transitions to meeting this increased demand through the establishment of both low emissions and renewable sources of power. Looking forward, during the Q4, we expect to receive full notice Proceed on several new renewable projects. We're working hard to mitigate risk and complete the Kilroy project early in calendar 2024 and our execution remains solid across our other projects including the full closeouts of both Guernsey and Maple Hill which is expected in the Q4. To close, we remain focused on our long term growth strategy, leverage Our core competencies to capitalize on existing and emerging market opportunities, maintain disciplined risk management with the goal of improving our project management effectiveness and minimizing costly project overruns.

Speaker 2

Strengthen our position as a partner of choice and the construction of new low and net zero emission power generation facilities as the industry transitions to cleaner energy alternatives while maintaining grid reliability. And last but not least, drive organic growth while also being mindful of acquisition opportunities that make sense for our business through thoughtful capital allocation. I'd like to thank our shareholders for their continued support and our employees for their dedication and hard work in building R GaN to our position as a valued power industry partner. With that, operator, let's open it up for questions.

Operator

At this time, we will be conducting a question and answer session. Our first question comes from Rob Brown with Lake Street Capital. Please proceed.

Speaker 4

Good afternoon.

Speaker 5

Good afternoon, Rob.

Speaker 4

Kind of first question touching on Kilroof and some of the challenges there. I guess the question is sort of how certain are you at this point that the charges you've taken are or kind of it or how much is left to kind of go and how much is uncertain at this point?

Speaker 5

Yes, Rob, we're We're doing everything we can to mitigate these losses. We have a challenging customer on a challenging project at the end of the day. We're continuing all efforts to resolve open variations, claims and appropriate extensions of time to mitigate these losses and improve the final result of this project. I mean, we plan to vigorously pursue all of our rights under the contract, including through legal means, if necessary. I mean, the good news is we are currently estimating that it is approximately 95% complete with design and construction.

Speaker 5

We have started commissioning on the facility and we expect to be ready for the first fire of both gas turbines by early 2024. The determination of the amount of the loss recorded in Q3, which was a lot, includes our estimates of the realistic level of effort and associated costs required for us to complete the project. And however, there can be no assurances that our overcoming the risk associated with this project won't cause us to incur unplanned future costs or to suffer unfavorable contract variations. December, January February are going to be important months for us on the project, both operationally and contractually. And we have some of our best team members throughout the Oregon organization focused on this.

Speaker 5

Again, we have substantial number of valid claims over 20,000,000 that we will be pursuing and hope to mitigate and improve current forecasts when successfully resolved. So yes, to answer your question, there is Possible downside, but there's also a possibility of upside.

Speaker 4

Okay. Okay, got it. Got it. And then I guess in general, the sort of some of these challenges in the European market, kind of change your strategy there or is this a one off situation?

Speaker 5

Well, I mean, we believe we have a strong core business at APC. They do great with shutdowns, outages and maintenance works and they're currently executing well on all our other larger projects with the exception of KilRoots. I know you're kind of alluding to Teesside. We've gone through both a leadership change since then And significant growth. Our revenues are up over 3 50% in 2 years.

Speaker 5

So while we are still working to improve the process disciplines within APC, we are optimistic about the future of the subsidiary. Due to our work to improve process and discipline in difficult market environment, which Europe has been for this, we do expect reduced revenues next fiscal year as we kind of solidify the business and modify our risk profile for market conditions now and into the future.

Speaker 4

Okay. Thank you. And then on the new project pipeline, I think you talked about some full notice proceeds in Q4. I guess, could you characterize kind of the pipeline between the renewables and the gas plant pipeline? And then what's the sort of Pipeline of gas plants that you're also pursuing at this point and what's the sort of outlook there?

Speaker 5

Yes. I mean, our backlog stayed strong and we do believe our pipeline is as well. Based on our current visibility into our pipeline, we do expect some additional large projects over the next 9 months And to your point, including getting full notices to proceed on some of our renewable jobs in Q4. The new work is going to be a mix of renewable and gas. We're primarily seeing gas fired plant opportunities in the PJM, the MISO and ERCOT regions, which are basically the Midwest, Texas to the Mid Atlantic and Southeast.

Speaker 5

And we ultimately expect to see our backlog meaningfully exceed where we are today. But as I've said before, you got to keep in mind the starts of future project wins are controlled by the customer, which makes it difficult to forecast our backlog given the material size of certain projects. And thermal jobs always take longer And we would like, but getting a development job to the finish is not easy. The PJ auctions have further delayed till the summer of 2024. So we expect a number of not just renewable, but gas jobs between now and through next year.

Speaker 5

But I do want to point out, we added without a major new job, dollars 70,000,000 of miscellaneous backlog during the quarter, which offset a lot of the $164,000,000 of backlog that we converted to revenues, which demonstrates the benefits of an increasingly diversified organization.

Speaker 4

Okay. Thank you. I'll turn it over.

Speaker 2

Thanks, Rob.

Operator

We appear to have no further questions in queue. Just one moment. We actually have a question coming from Chris Moore with CGS Securities. Chris, your line is live.

Speaker 6

Terrific. All right, guys. Thanks for taking a few questions. Yes, maybe we just stay with Kilrood for a bit. You had for a while, I've been talking about that being a Difficult project did end in Q2, I think you estimated it was about 80% done, now it's about 95%.

Speaker 6

I'm just still trying to understand a little bit Better in terms of what incrementally happened during the Q3 that drove this charge?

Speaker 5

Yes, sure, Chris. So just to be clear, the 95% complete is with the design and construction. That's not the entire job. That doesn't include commissioning, that we are definitely further way north of 80% on that. It's There's just been a lot of changes in the scope of this project that have just been difficult for us.

Speaker 5

And frankly, It's just been a really difficult customer to work with and we're doing our best to make it work because we want to have a successful project. And that just really kind of came to more of a head here during Q3, as well as you get super close to the end of the job Things that's there are a lot of risk at the end of the job, as you know, with any of our jobs that we do. And that's when things really kind of come to a head.

Speaker 6

Got it. I'll leave that one there. Maybe you could just help me with the math. Q3 gross margin without the Kilroyd issues Would have been roughly where?

Speaker 5

It would have been 8 point I think, Hank, 8.8%, something like that. It was A really strong quarter across the business with the exception of Kilroyd, which is no excuse.

Speaker 6

Got it. And is there was there any excess Guernsey margin in Q3?

Speaker 5

We'll finish Guernsey in Q4. We did close out some items on Guernsey during Q3, and We also reached substantial completion on Maple Hill in Q4 here. So our expectation is both Guernsey and Maple Hill are going to be fully finished out in Q4. But yes, we did close out some other items in Q3 for currency.

Speaker 6

Got you. And maybe talk about Roberts, it really looks to be hitting stride at $38 plus 1,000,000 this quarter. Is there anything different in the strategy today versus a few years ago that's I think the last 10, 11 quarters have been pretty strong?

Speaker 5

Chris, I appreciate that question. Roberts has been a long Process for me, for my years here at Argan, and I've just been really pleased to see where we are today on it. Then, Robert's generated over $30,000,000 as you mentioned. It's generated over $30,000,000 for the last three straight quarters for a total of $102,000,000 which is more than all of last year. We strategically consolidated some of our business segment our business Segments there, we consolidated 2 plants into 1 to reduce our cost and we've been focusing on doing field services, which has been a more profitable piece of that business.

Speaker 5

We've also made a change in leadership and we've also added to that leadership. So we feel like we've got a really strong team in place for growth over the long run. And As you can see, dollars 102,000,000 through 3 quarters, the run rate is north of 130 And the expectation is for this business to continue to grow.

Operator

We have reached the end of the question and answer session. I will now turn the call over to David Watson for closing remarks.

Speaker 5

Thank you all for participating in today's call. Happy holidays to each of you and we look forward to Speaking with you again when we report our Q4 fiscal 2024 earnings next year. Have a great evening.

Operator

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

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