Shimmick Q2 2024 Earnings Call Transcript

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August 16, 2024

There are 6 speakers on the call.

Operator

Greetings and welcome to the Schimmick's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Rasmus, Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us on today's conference call to discuss Schimmick's Q2 2024 results. Slides for today's presentation are available on the Investor Relations section of our website, www.shimic.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 Q2 press release for definitional information and reconciliations of historical non GAAP measures to the comparable GAAP financial measures. With that, it is my pleasure to turn the call over to Steve Richards, Schimmick's CEO.

Speaker 2

Good morning, and thank you all for joining us on today's call. I'm joined by Amanda Mobley, Schimmock's Interim CFO. We settled 1 of the 2 legacy Zlot's project claims for $33,000,000 of cash to be paid sometime later this year, which will improve our liquidity. The settlement also eliminates distractions and continued legal costs and is key to continuing our transformation. As part of the settlement, the quarter includes a $23,000,000 reduction in legacy projects revenue, and additional $7,000,000 in gross margin, which Amanda will further discuss later.

Speaker 2

After accounting for the settlement, we delivered Q2 2024 revenues of $91,000,000 and experienced a net loss of $51,000,000 with an adjusted EBITDA loss of $40,000,000 Cement Projects revenue totaled $84,000,000 in the 2nd quarter versus $103,000,000 a year ago. Cement Project gross margins were 5% for the quarter, a decline from 8% gross margin for the Q1 2023, driven by schedule extensions, pending change orders and increased costs. That said, we're encouraged by the 6% sequential margin improvement as compared to the Q1 of 2024 on this front and look forward to building off this momentum. As we did on our last call, we'll provide a breakdown of results between Shemuk projects, projects that began after the E comm sale transaction and legacy projects, those that started before the E comm sale transaction. Amanda 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 Q2, primarily related to the legacy project settlement agreement and cost overruns experienced as well as additional legal fees on the legacy loss projects in order to continue to pursue the contract mods and recoveries from projects with owners. Although we are experiencing near term headwinds due to project timing, cost issues with legacy projects, we remain encouraged by the progress we have seen converting our backlog to Chemek projects versus legacy projects. At the end of the Q2, Chemek projects continue to represent a larger portion of our backlog versus legacy projects. Additionally, our overall backlog remains strong at $923,000,000 as of the end of the second quarter. We continue to have a robust pipeline of future work, which we expect to grow alongside increases in federal funding and a growing demand for water.

Speaker 2

As we described on the last call, we had a destimating personnel late in the Q2 to be responsive to this pipeline of work. We're beginning to see the uptick in our bidding efforts bear fruit. Most recently, following the end of the Q2, we secured a win for a $14,500,000 project for Delta Diablo cogeneration system replacement in Antioch, California. The Delta Diablo operates an existing cogeneration system at the wastewater treatment plant, once again reinforcing our go forward focus on water related projects. The cogeneration system improvements project will include the demolition of the existing plant and replace with a new cogeneration engine, digester gas conditioning equipment, exhaust systems and boiler.

Speaker 2

This also includes upgrades to electrical and control infrastructure and demolition of an existing digester gas storage sphere. Gimmick's work will aid the district's resource recovery capabilities, reduce grid power consumption and promote more efficient and reliable plant performance. More than 75% of our work is generated from repeat customers. Public customers and associated public funding allows for a predictable long term flow of programs and projects. CIMA's core market vision is coming to reality with a more asset light, higher margin, water focused company targeting projects that make use of significant in sourcing technical skills on projects that average 3 years in duration.

Speaker 2

I'd like also to take some time to address the update on Shemik's transformation. As many of you are aware, Chemek has a long history of successfully winning and delivering complex water and other critical infrastructure projects in the state of California. The market for water and critical complexity of projects forecasted to grow for decades. Today, the company announced initiatives as part of our transformation plan to increasing our focus on the California water and critical infrastructure market. These initiatives include increasing the bid activity by increasing the number of estimators in Southern Northern California, rightsizing our cost structure by reducing our overheads in non core areas and redefining our operating model with a renewed focus on supporting the field to safely deliver projects on time and on budget for our clients across California.

Speaker 2

Our transformation at Chemek is well underway and we continue to work towards refocusing our operations to best position ourselves to capture the market we see in the California market. Turning to the next slide, I'd like to take a moment to highlight our recently completed $42,000,000 project at the Richmond wastewater treatment plant, which has been a significant milestone for both CEMIC and the City of Richmond. In 2010, the Richmond facility was identified as needing critical rehabilitation due to its impact on the San Francisco Bay Area. To address this, Chemek was brought in to execute a series of high priority upgrades designed to improve treatment quality and meet both current and future environmental regulations. Summit constructed new buildings, upgraded the aeration basins with state of the art forced air diffusion system and removed outdated and unused facilities.

Speaker 2

These strategic improvements have not only enhanced the operational efficiency of the plant, but also reduced its environmental footprint. Now with the project successfully completed, the Richmond wastewater system operates more efficiently. The new project has significantly reduced energy usage, chemical treatment needs and greenhouse gas emissions while cutting costs for the city. This means a cleaner environment, reduced orders and overall improved quality of life for the residents of Richmond. This project is a testament to Shmick's commitment to delivering sustainable infrastructure solutions that benefit both communities and the environment.

Speaker 2

We are proud of the outcome and look forward to continuing our work in this vital sector. With that, I'd like to turn the call over to Amanda, 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 Q2, we've recorded revenue of $91,000,000 compared to $155,000,000 for the prior year period, primarily as a result of the legacy project settlement mentioned earlier and discussed more on the next slide and from lower activity on existing jobs and job pointing down, partially offset by an increase in the revenue driven by a new water infrastructure job. We had a net loss of $51,000,000 compared to a net loss of $10,000,000 for the prior year period, again largely as a result of the legacy project settlement as well as equity and loss of unconsolidated joint ventures. 2nd quarter adjusted EBITDA was a loss of $40,000,000 compared to a loss of $2,000,000 in the prior year period.

Speaker 3

Revenue recognized on foundations projects was $8,000,000 in the Q2 of 2024 compared to 9,000,000 a year ago. The $1,000,000 decline in revenue was a result of timing of jobs winding down. As a reminder, we entered into an agreement to sell the assets of non core foundations projects and will wind down work during the year. Gross margin recognized non foundations projects was a negative $2,000,000 and a negative $7,000,000 for the 3 months ended June 28, 2024 and June 30, 2023 respectively. The increase in the gross margin was a result of cost overruns incurred on 2 jobs during the 3 months ended June 30, 2023, which were substantially completed during the 2023 fiscal year.

Speaker 3

Legacy projects revenue decreased by $44,000,000 to a negative $2,000,000 compared to 2023 and to gross margin of negative $34,000,000 primarily impacted by the legacy project settlement and cost overruns and continued legal costs. As the 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 projects, which will be all be recognized in the period. Revenue recognized on these legacy loss projects was a negative $7,000,000 $27,000,000 for the 3 months ended June 28, 2024 and June 30, 2023, respectively. Gross margin recognized on these legacy loss projects was a negative $32,000,000 for the 3 months ended June 28, 2024 and a negative $1,000,000 for the 3 months ended June 30, 2023. We continue to actively pursue all opportunities to offset these costs.

Speaker 3

Turning to the balance sheet. Unrestricted cash and cash equivalents at June 28, 2024, totaled $22,000,000 and availability under the revolving credit facility and credit facility totaled $7,000,000 $6,000,000 respectively, resulting in total liquidity of $35,000,000 Turning to the next slide. As Steve mentioned earlier, we expect to receive $33,000,000 in cash related to a claim on a large legacy project later this year. However, our 2nd quarter results were impacted by a change in estimate from the settlement agreement and on the legacy loss project. As a result of the settlement and previously estimated contract revenue, the company recognized a net loss of $30,000,000 which includes a $23,000,000 reduction to revenue and a $7,000,000 adjustment to forward loss reserve recorded within the condensed consolidated statements of operations for the 3 6 months ended June 28, 2024.

Speaker 3

While this obviously impacted our revenue While this obviously impacted our revenue recorded in the quarter, we expect to receive cash payment later this year, which has helped support our liquidity position and eliminate the continuation of litigation costs. On August 9, 2024, we completed the previously disclosed transaction for the sales leaseback of our equipment yard in Tracy, California. The agreement consummated the sale of the equipment yard for $20,500,000 and allows us to continue using the property under a 7 year lease. We received net proceeds of $17,000,000 after adjustments for prepaid rent for February of 2026 and related closing costs. The equipment yard had a net book value of approximately $3,000,000 and the remaining $17,000,000 of net proceeds received from the transaction were used to repay borrowings under the revolving credit facility.

Speaker 3

For the fiscal year ending January 3, 2025, after excluding non core foundations projects revenue of $64,000,000 for the fiscal year ending December 29, 2023, we now expect that SHIMMEC projects revenue to remain generally flat with gross margin between 4% to 9%. Legacy projects revenue of $55,000,000 to $65,000,000 with negative gross margins of 80% to 90% due to the legacy loss project settlement. Additional costs reported for the legacy loss project related to pending changeovers and other cost overruns. The guidance reflects our execution on our strategy, a 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.

Speaker 3

With that, I'd like to turn it over now to Steve for some additional remarks.

Speaker 2

Thanks, Amanda. In conclusion, we are encouraged by the continued progress made in working off the legacy loss project backlog. It is important to note that we are approaching the finish line related to the legacy loss projects and hope to have these distractions behind us as we close 2024 and enter 2025. We expect the jury trial to be held in the second half of the year on claims on our other large legacy loss job. Shemit projects are beginning to correct itself, albeit slower than we anticipated.

Speaker 2

We believe these challenges to be short term in nature as Shemit continues to be favorably positioned to take advantage of the sizable market opportunities ahead, and we continue to expect new project startups to advance. It's 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 CapEx portfolio, coupled with potential M and A activities, position us 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, we may now open the line for questions.

Operator

Thank you. The floor is now open for questions. Our first question today is coming from Gerry Sweeney of ROTH Capital Partners. Please go ahead.

Speaker 4

Good morning. Thanks for taking my call.

Speaker 2

Good morning, sir. Steve, I

Speaker 4

was wondering if you could give us a little bit of maybe qualitative background on the new projects out there, the activity, not so much projects that you won, but what you're seeing in terms of the funnel and maybe thoughts on how some of that translates over the next 2, 3, 4, 5, 6 quarters?

Speaker 2

Well, we're seeing a lot of activity in the California market, Southern California, Northern California, both. The projects fit our profile with the number of projects out there really having to filter them down to being those projects that we like in size, dollars 50,000,000 to $150,000,000 3 year average duration. So we've seen a lot of those projects. What I've been most encouraged about is that a good amount of that work is allowing us to self perform up to our target amount of about 75%. So good pipeline.

Speaker 2

We're adding more estimators actually, Jerry, to take on the pipeline that we see both in the Northwest and Southwest divisions plus our Electrical division of work. So pretty excited about it all.

Speaker 4

Got it. And then obviously on the legacy projects, could you I think you gave a little bit of guidance on that front. Could you just go over that again real quick? And then I probably have some follow-up questions on that front.

Speaker 2

Yes. Amanda will jump in with me on this. But what we see happening, we mentioned in the release that we see one of the legacy projects entering into a jury trial later this year. So we're encouraged by that to get by that claim from a backlog standpoint and working that job off. We've got the majority of the most difficult part of the job nearly complete.

Speaker 2

It will finish off in the spring and then we'll enter into more traditional installation of a manufactured piece of the work. The other project, again, the interim milestones for the most difficult work are approaching completion by the end of 'twenty four. Overall completion would be later in 2025 for the majority of the project. Amanda, do you want to add any color as far as backlog numbers and what's to burn on the legacy A contract?

Speaker 3

Yes, I hit on kind of the same remarks there that we'll continue to see the backlog winding down in the legacy jobs. The majority of that will be done through 2025 and a little going into 2026 there continue to decrease the backlog.

Speaker 4

Got it. And then obviously you had a settlement on the lock project and then you have this other project that you're going to trial on. But I was curious if there is an opportunity for any other are there still claims outstanding that you could recoup some losses?

Speaker 2

Yes, sure. Normal course of business for us, we always see change orders coming through the system and they have the potential to improve not only margins but certainly cash flow.

Speaker 4

Got it. And how much in the quarter were legal fees? And obviously, as you get closer to some of these trials, legal fees ramp up. But just curious as to maybe a more normalized even SG and A once you get through some of this the settlements and this trial, what would sort of be a normalized G and A run rate?

Speaker 2

Manif, do you want to hit on the legal fees that were incurred in the quarter?

Speaker 3

Yes.

Speaker 2

I'm not sure that's readily available, but

Speaker 3

Yes. We would just see more information in the Q that will come out later, but for the legal fees, about $2,000,000 for the quarter.

Speaker 4

Okay, got it. Okay.

Speaker 2

And you're right, Jerry, as we approach the trial, for example, those fees really ramp up from the standpoint of the legal activity, whether it be depositions or just the press to be ready for the trial. Normal run rate, what Manoj just described, we would see that fall off. And so it would be an improvement for job cost and overhead.

Speaker 4

Got it. And just digging around here on the SHIM projects, you talked about maybe back half loaded and you've made some sequential improvements on gross margins. Barring weather or unforeseen circumstances that would slow things down, Would we could we anticipate margins improving through the rest of the year? Is that what you sort of infer when you say back half loaded?

Speaker 2

Yes, that's right. Our guidance, we just came through was lower end of the guidance and we've got the higher range still out there. So that would tell you that we see improvements over the next two quarters.

Speaker 4

Okay, great. All right. I know I have a follow-up with you, so I'll jump back in line. But thanks.

Speaker 2

All right. Thanks, Jerry.

Speaker 3

Thank you.

Operator

Thank you. The next question is coming from Aaron Spyhala of Craig Hallum. Please go ahead.

Speaker 5

Yes. Good morning, Steve and Amanda. Thanks for taking the questions. First, you talked about a new operating model. Can you just share a little more on what that entails?

Speaker 5

You kind of hit targeted project size a little bit $50,000,000 to $150,000,000 But just anything margins, anything else behind that would be helpful.

Speaker 2

Yes. So geographically, we'll be focused on the California area. We're already set up there with our regional offices, headquarters in Irvine and then our major regional office in Suisun City, which is a little bit east of Oakland. So we've got the right geographic presence for not only our estimating teams that know the local supply chain, know the local market, but also our leadership and the key staff that are running the jobs. So we feel really good about that and the craft labor that's following us.

Speaker 2

I think that from a margin standpoint, we haven't seen a drop in margin opportunity as we're bidding work. And for us, the key is that we find the right nousetrap to when it's off to find that best way to finish the cost of it most efficiently and we'll get our share of the market. So we see in that upper teen area still has been the target area for job margins.

Speaker 5

All right. Thanks for that. And then just on the addition of more estimating personnel. With the pipeline you have today and just expected growth, how are you feeling about just labor capacity and labor availability in the market and just kind of overall capacity for your business as you move forward?

Speaker 2

Right. Well, what we're able to do with our teams, first of all, is we have to work share across regions. And so we've got folks that are coming out of our deemphasis on the national market to be having them as additional support for our California pursuits. And so that's a value add immediately that we can transfer over. From the standpoint of recruiting other staff, this is a great networking business.

Speaker 2

We've got a lot of connectivity in the industry and feel good about being able to get those right people. We're really scrutinizing the folks that we bring on. We want to bring those that have not only the talent, but the right culture fit for Schimmick and feel good about what we've who we've recruited so far.

Speaker 5

All right. Thanks for that. And then just on the new projects, I mean, you got the guidance out there obviously for the year in the back half, but it sounds like starting to see project execution improve after just some of the higher kind of start up costs and delays that you saw earlier this year?

Speaker 2

Yes, that's what we're seeing. We're seeing, for example, last year, we started the major project we won in Elsinore and that job is well past mobilization now and into its run rate of revenues and margins here in keeping pace. So that would be a good example of what we see through the balance of the year on jobs that move the needle for us.

Speaker 5

All right, thanks. And then just maybe last question on cash flow. Can you just kind of talk about how you think that trends in the coming quarters and just kind of outlook as we head into 2025?

Speaker 2

Yes, the activities over the last quarter have been significant. Not only previously we had announced the asset purchase or sale of the foundations business and those assets finishing that work as Amanda mentioned in her remarks, finishing that work up later this year. So that provided some liquidity. And then in addition, the sale leaseback of the $17,000,000 provides cash into the system. And then certainly the settlement with the Corps of Engineers, so the $33,000,000 sets us up nicely from that liquidity standpoint.

Speaker 2

So feel very good about the decisions we made to improve the liquidity and sets us up well for not only the balance of the year, but finishing those projects.

Speaker 5

All right. Sounds good. Thanks for taking the questions. I'll turn it over. Thanks, Aaron.

Speaker 3

Thanks, Aaron.

Operator

Thank you. Ladies and gentlemen, that concludes today's question and answer session and today's conference call. We would like to thank you for your participation and interest in Schimmock Corporation. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

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