Shimmick Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 13, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Chemex First Quarter 20 24 Earnings Conference Call. At this time, all participants are in listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Grosznes with Investor Relations at Schimmick. Please go ahead, sir.

Speaker 1

Good afternoon, and thank you for joining us on today's conference call to discuss Schimmick's Q1 2024 results. Slides for today's presentation are available on the Investor Relations section of our website, www.schimmick.com. During this conference call, management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.

Speaker 1

We do not undertake a duty to update any forward looking statements. Today's presentation also includes references to non GAAP financial measures. You should refer to the information contained in the company's Q1 press release for definitional information and reconciliations of historical non GAAP financial measures to comparable GAAP financial measures. With that, it is my pleasure to turn it over to Steve Richard, Chemek's CEO.

Speaker 2

Thanks, Anthony, and good afternoon, everyone. Thank you all for joining today's call. I'm joined by Devin Nordhagen, Schimmick's CFO. As noted in our earnings press release issued earlier today, we are in the process of negotiating with 1 of our lenders a waiver of default under our credit facility. As a result, we do not expect to file our quarterly report on Form 10Q by the prescribed deadline and expect to file an extension on Form 12b-twenty 5 with the Securities and Exchange Commission.

Speaker 2

While our Q1 results, which are based on currently available information, are subject to revision as management completes its internal review, we do not expect the waiver to result in changes to our Q1 2024 results. Our independent registered public accounting firm has also not finalized its review of our Q1 2024 results. Our Q1 results were challenged due to the combination of short term delays in new projects commencing operations and the winding down of legacy projects. We delivered Q1 2024 revenues of $120,000,000 and experienced a net loss of $33,000,000 with an adjusted EBITDA loss of $24,000,000 As we did in our last call, we'll provide a breakdown of results between Shemik projects, projects that began after EECOM sales transaction and legacy projects, those that started before the EECOM sale transaction. Devin will provide more details specifically related to the breakdown of these results.

Speaker 2

However, of note, our overall gross margin was weaker in the Q1, primarily related to a subset of the legacy projects, those defined as legacy loss projects that experienced cost overruns as well as additional legal fees in order to continue pursuit of contract modifications and recoveries from project owners. It is important to note that these legacy lots projects, any change in the overall estimate to complete flows into the current period not just actually incurred and thus changes are front end loaded. To refresh your memory on the specific accounting treatment for gross margin in our business, we have provided a detailed explanation in our 10 ks. In summary, for the legacy loss projects, we have recognized the estimated cost to complete and the loss expected from those projects. If the estimate of cost to complete on fixed price contracts indicated further loss, the entire amount of the additional loss expected over the life of the project is recognized as the period cost and our cost of revenue.

Speaker 2

We continue to work down the legacy projects backlog with $23,000,000 of revenue in the quarter, down from $56,000,000 last year at this time. CEMIC project gross margins were slightly negative for the quarter as we incurred costs that have not yet received expected change orders. Regarding backlog, although we are experiencing near term headwinds due to project timing and cost issues with legacy projects, remain encouraged by the progress we've seen converting our backlog to Shemik projects versus legacy projects. At the end of the Q1, Shemik projects represented over 80% of our backlog. Additionally, our overall pipeline remains at approximately $1,000,000,000 as of the end of the Q1.

Speaker 2

I'm pleased to report that Shemik secured 2 projects in the Q1 of 2024. Chemek will construct a new box culvert to function as a new irrigation drainage ditch and storm drain for over 10,000 acres of land to accommodate future rail upgrades east of the San Francisco Bay near Stockton, California. In Southwest of Stockton, at the CINAHL water treatment plant, CEMIC secured an electrical subcontract to support new advanced water treatment through the addition of new ozonination system. Here, CEMIC will install electrical at multiple new facilities, including an ozone generator being building an electrical building and a large liquid oxygen and nitrogen facility. We continue to have a robust pipeline of future work, which we expect to grow alongside increases in federal funding and the growing demand for water.

Speaker 2

We added estimating personnel late in the Q1 to be responsive to this pipeline of work. More than 75% of our work is generated from repeat customers. Public customers and associated public funding allows for predictable long term flow of programs and projects. Subsequent to quarter end, we entered into a transaction expected to raise $39,000,000 an asset purchase agreement for the sale of our foundation drilling assets for a total consideration of approximately $17,500,000 and a letter of intent for the sale leaseback of our equipment facility in Tracy, California, which we expect to receive approximately $22,000,000 at closing. Both transactions are expected to close in the Q2 of fiscal 2024.

Speaker 2

We intend to use the net proceeds of both of these transactions to repay borrowings under our existing credit facility with MidCap. In addition, selling the foundation drilling assets, which are not core to our water business, enhances liquidity while lowering our annual capital expenditure requirements. CEMIC core market vision is becoming a reality with a more asset light, higher margin, water focused company targeting projects that make use of significant in sourcing technical skills and projects that average 3 years in duration. While the industry continues to face headwinds, including labor shortages and price inflation, modernizing water infrastructure was recently identified as the hotspot in a 2024 industry report published by GovWind. The demand for this work is forecasted to grow faster than in any other sectors, in turn increasing demand for CEMIC services.

Speaker 2

According to the American Water Works Association, the U. S. Needs to invest $1,000,000,000,000 over the next 20 plus years to meet the water infrastructure needs of a growing population and economy. The investment, as previously recorded, includes $50,000,000,000 from the bipartisan infrastructure law, plus an additional $5,800,000,000 announced last year from state revolving funds. Another identified hotspot is disaster response, which drives the demand for infrastructure required to mitigate or prevent damage from severe storms, hurricanes, droughts and flooding, further driving demand for shimic services.

Speaker 2

For both of these hotspots, modernizing water infrastructure and disaster response, California was identified as the 2nd and 4th largest vendor respectively by state, slowing increased demand in Chemek's core geographic market. Spending on infrastructure is expected to strengthen in 2024 with IJA funding peak still to come. According to S and P Global's 1st quarter analysis, the strong spending increase was in one of Chemic's core markets, the combined water and sewer segment with a 23.3% year over year gain. Additionally, infrastructure spending in California is expected to remain robust. Turning to the next slide, I'd like to spend the time highlighting another one of our high profile jobs, a $360,000,000 water treatment facility, the North City Pure Water Treatment Facility and Pump Station in San Diego, California.

Speaker 2

GEMIC is implementing new technology to purify recycled water, providing a safe and sustainable water supply, which will reduce the city's dependence on imported water and also reduce wastewater discharge into the ocean. Schenke has finished most concrete activities and is now working on the mechanical and electrical elements of the facility, including electrical rooms, exterior conduit, fire protection, HVAC and more. Treatment equipment, including ozone equipment, has been delivered and is being installed. We're a little over halfway complete with the project and the work is progressing on schedule for the reverse osmosis and biological activated carbon treatment areas of the facility. This is just another example of the highly sophisticated level of installing and integrating technologies that our in source team does every day.

Speaker 2

With that, I'd like to turn the call over to Devin, who will discuss our financial results.

Speaker 3

Thanks, Steve. All comparisons made today will be on a year over year basis compared to the same period in 2023. For the Q1, we reported revenue of $120,000,000 compared to $164,000,000 for the prior year period, primarily as a result of the decline in legacy revenue and in foundation drilling revenue in the quarter. We had a net loss of $33,000,000 compared to a net loss of $9,000,000 for the prior year period, again, largely as a result of the negative gross margins in legacy and foundations. 1st quarter adjusted EBITDA was a loss of $24,000,000 compared to a loss of $1,000,000 in the prior year period.

Speaker 3

In the Q1, after factoring out our non core foundations projects, Chemex projects revenue increased $2,000,000 to $90,000,000 compared to 2023, while gross margin contracted to a negative $1,000,000 The $2,000,000 increase in revenue was primarily the result of the timing of new jobs and jobs ramping up. The decline in gross margin was primarily the result of jobs winding down and those costs tied to pending change orders. As noted by Steve earlier, the company has entered into an agreement to sell the assets of our non core foundation projects in the Q2 of 2024 and will be winding down any remaining work during the year. As the revenue will decline during the year, the company will be reporting revenue related to these projects separately for 2024. Revenue recognized on Foundations projects was $7,000,000 $20,000,000 for the 3 months ended Q1 'twenty four and Q1 'twenty three, respectively.

Speaker 3

The $13,000,000 decline in revenue was the result of timing of multiple jobs winding down. Gross margin recognized on Foundations projects was negative $4,000,000 $2,000,000 for the 3 months ended Q1 'twenty four and Q1 'twenty three, respectively. The decline in the gross margin was the result of cost overruns and multiple subcontract jobs and timing of jobs winding down. Legacy projects revenue decreased by $33,000,000 to $23,000,000 compared to 2023, and gross margin contracted to a negative $11,000,000 As Steve explained, legacy projects results were primarily impacted by a subset of projects that we define as legacy loss projects, which experienced cost overruns as well as additional legal fees in order to continue our pursuit of contract modifications and recoveries from these project owners. On this subset, we have recognized the estimated cost to complete and the loss expected from these projects.

Speaker 3

As these legacy loss projects continue to wind down to completion, no further gross margin will be recognized. And in some cases, there may be additional costs associated with these projects, which will all be recognized in the period. Revenue recognized on these legacy loss projects was $15,000,000 $27,000,000 for the 3 months ended Q1 'twenty four and Q1 'twenty three, respectively. Gross margin recognized on these legacy loss projects was negative $11,000,000 and negative $1,000,000 for the 3 months ended Q1 'twenty four and Q1 'twenty three, respectively. We continue to actively pursue all opportunities to offset these costs.

Speaker 3

The loss for the quarter has put us out of compliance with the covenants in our existing credit facility with MidCap. We are in the process of negotiating a waiver and amendment with MidCap as well as pursuing alternative financing arrangements with other potential lenders. As a result of these ongoing discussions, we are unable to file our quarterly report on Form 10Q within the prescribed deadline. For additional information, see the extension of Form 12B-twenty 5 that we will file with the Securities and Exchange Commission. For the full fiscal year ending December 27, 2024, after excluding noncore foundations projects revenue of $64,000,000 for the fiscal year ending December 29, 2023, and assuming successful resolution with MidCap, we expect Chemex projects revenue to grow 7% to 13%, with gross margin between 7% to 13%, trending towards the lower end of the range for gross margin.

Speaker 3

Legacy projects revenue to decrease by 45% to 55%, with negative gross margin of 5% to 10%, trending towards the lower end of the range for gross margin. The guidance reflects our execution on our strategy, our robust pipeline, the improving quality of our backlog and our continued operational execution as well as our efforts to work off our legacy projects. We believe that our results will be back half weighted in 2024 with further strong momentum for growth in 2025. With that, I'd like to turn it over now to Steve for some additional remarks.

Speaker 2

Thanks, Devin. In conclusion, we are encouraged by the continued progress made in working off the legacy LOFT projects backlog. We're confident that the slow start in the Q1 for CIMIC projects will correct itself over the year as new project startups advance and ongoing projects work through completion. It's not unusual to see project startup costs accrue faster than revenue collection and earnings recognition and then become more balanced as the project progresses. We believe these challenges to be short term in nature as Shemak continues to be favorably positioned to take advantage of the sizable market opportunities ahead.

Speaker 2

It is important to reinforce that our strategy for our core business remains unchanged. Our vertical integration minimizes risk and our strategic shift towards a higher margin, low cost ex portfolio coupled with potential M and A activity positions us well for enhanced margins and growth. We want to once again thank our team for their tireless efforts as we work to transform Chemek into one of America's best water infrastructure companies. Operator, you may now open the line for questions.

Operator

Thank you, The next first question we have comes from Gerry Sweeney of ROTH Capital. Please go ahead.

Speaker 4

Good afternoon, Devin and Steve. Thanks for taking my questions.

Speaker 2

Hey, Jerry. Good afternoon. Hey.

Speaker 4

On the sale of the equipment, how confident are you that you can close that in the Q2 and your confidence in achieving the numbers that you prescribed in your remarks?

Speaker 2

Yes, highly confident, Jerry. It will be early in the quarter. So we're very confident towards that.

Speaker 4

Okay. And you did talk about getting better as we went through the rest of this year and you kept some of your kept your guidance in place. Obviously, Q1 was a challenge. Again, similar question, confidence that things are turning around and you can achieve that guidance?

Speaker 2

We do. We feel that I mentioned that the projects kind of slow start ramping up and costs like mobilization kind of lead the project cost side and then we don't get a lot of earnings recognition in that way. And so once the projects stabilize and we've got a good run, we're often going with earnings recognition and so keeping pace with the cost revenues. We've mentioned in the past the Elsinore project as an example. The team is now well in place moving in the field with construction activities and we look at that project, for example, to the one that improves from a margin recognition standpoint and catching up with revenues.

Speaker 4

As we go into the Q2, obviously, we're a little bit into the quarter now. Q1 was a challenge. Are there any other large issues percolating that we should be aware of when we're looking at 2Q? Or should we see an improvement in 2Q as in further improvement through the rest of the year?

Speaker 2

We'll stick with our guidance. We feel that we are back half weighted. So 2Q we're early in 2Q, obviously. And so we see that as being a continuing improvement and climbing the curve. So we feel good about it.

Speaker 3

Got it.

Speaker 4

Change orders, obviously, change orders actually, I think, hit some of the gross profit. Are you collecting change orders? And is that cadence going to change? Does that actually become a net positive at some period at some point?

Speaker 2

Yes. Devin mentioned that in his remarks and he can add on to this. But we feel good about a couple of things. One is that we've got an excellent team that can complete contract administration activities in a time full basis so that when we go and are ready to negotiate change orders, we've got all of our paper and materials in place to have a timely change order execution. But not uncommon to see some of those change orders lag in a project as it gets towards the end.

Speaker 2

And that's what we're kind of seeing in some of our not only legacy projects, but some of our newer smaller projects. Devin, if you want to add anything there?

Speaker 4

No, I

Speaker 3

think that covers pretty good. I think with the leg and the changeovers, most of our jobs, as we've mentioned before, are firm fixed price jobs. And so oftentimes, we incur the cost and then have to work with the client and follow the contract and go through the procedures to get the change order tied to those costs.

Speaker 4

Got it. So is the current state of the balance sheet impact your ability to go out bid jobs? Will that be a headwind?

Speaker 2

No. I see the we work closely with our share rep company. That's a big part of the stakeholder groups that we work with. We look at this mid cap covenant as being something that we'll overcome quickly, just a timing issue for us. And so really don't see anything.

Speaker 2

And in fact, the things we've done to improve our balance sheet and with the sales transaction that we mentioned for our foundations business and then the sale leaseback are real positive things for us. And I look at that as strengthening our liquidity so that we can go and pursue the work we want to pursue.

Speaker 4

Okay. That's it for me. Thank you.

Operator

Thanks, Jerry. The next question we have comes from Arren Spychalla of Craig Hallum. Please go ahead.

Speaker 5

Yes. Good afternoon, Steve and Devin. Thanks for taking the questions. First on the legacy loss projects, can you just give us an update there? How much work is still remaining on those couple of projects?

Speaker 5

And just kind of what's on the balance sheet as far as kind of potential claims and the outlook to kind of get a potential positive resolution there?

Speaker 2

Yes, right now at the end of the quarter, the projects are nearing 80% completion. And so they're largely tracking with the high risk parts of the job are really behind us now. And we're looking forward to kind of a downward turn, whether it be the amount of labor on the jobs or if you will, that risk that remains. So feel good about the trajectory and the teams in the field have accomplished huge milestone to getting to where they're at right now at this nearing 80% level. I don't think that we're able to really talk, Aaron, about the what's in the balance sheet for the, if you will, the change order settlements.

Speaker 2

But Devin, you can clarify that for me? No, that's right, Steve.

Speaker 5

All right. Thanks for that. And then it sounds like the pipeline, you're still expecting kind of back half weighted for conversion there. But can you just talk to that a little bit, the outlook for self performing as much of these projects as you can, given some of the supply chain and labor kind of issues you talked about, just availability of these projects out in the market? It seems like you're still confident in that in the back half of this year.

Speaker 2

We are. Shymik has always had a strong following of not only our superintendents, but the foreman and the craft that follow the foreman. So we've got a great network of craft that stays with the company. So feel good about being able to service the jobs that we need and get the craft that we need to complete the work. From a pipeline standpoint, definitely are encouraged by the pipeline that's coming through.

Speaker 2

I mentioned briefly, you may have caught it in my remarks that in fact we're adding new estimating members to our team, so that we can even bid more and feel real good about that. We're as we finish work, we bring our operations team back into the office to estimate work and to go back and run that work that they win. So feel good about it, feel good about our resource base and how we're attacking the work.

Speaker 5

All right. And then just given the kind of recent EPA ruling on PFAS, can you just kind of talk about that a little bit, how you think that opportunity could look for you guys moving forward, anything on size and timing potentially there?

Speaker 2

Yes, we're still waiting for kind of that outcome. We're watching the major design firms get some of their assignments and so we're encouraged by that. I think I've mentioned in the past to some of our calls that PFOS is kind of regionally driven or where it's going to be needed to be treated. It's very specific to that groundwater source in that local area. So we see an opportunity, but we're going to have to track into those geographies that we're in.

Speaker 2

Sometimes the opportunities come in the smaller forms. And so we're kind of measuring those, kind of looking for some of these PFOS opportunities and maybe become a larger scope of work so that we are more competitive in that. Some of the smaller ones kind of tend to go to the local contractors that don't have kind of the overhead layer that we have. So it's looking forward to the opportunity, but a little bigger is what we need right now.

Speaker 5

All right. And then just maybe last for me, I appreciate the guidance and how you kind of broke things out there. But can you just kind of talk to longer term, still the margin targets on kind of Schimmick projects going forward from a gross margin standpoint? Are you still kind of thinking those kind of low double digit, potentially mid teens over time type gross margins still?

Speaker 2

We do. We've maintained our discipline. Some companies I think you'll see in the early quarter they'll say, oh, I need to go fill my backlog and they'll maybe dive on their margins. That's not Schilling. But what we are looking for is complicated work, work that's in that $50,000,000 to $150,000,000 range, kind of a 3 year duration average wise and work that we can use at least 80% of our team to complete the self perform elements of the work.

Speaker 2

And so it's really haven't changed our formula and we're definitely maintaining our discipline on the margins that we're seeking for this new work.

Speaker 5

All right. I appreciate the color. Thanks for taking the questions. I'll turn it over. Thanks, Ed.

Operator

Thank you, sir.

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