Q2 2024 Argan Inc Earnings Call

[music].

Good evening, ladies and gentlemen, and welcome to the Ari.

Hum.

Before.

And July 31 2023.

All participants have been placed multi mode.

Following management's remarks, the call will be opened up for questions. There is a slide presentation.

Yes.

The actor.

Okay.

It is my pleasure to turn the floor over to your host for today, John Nesbit of IMS Investor Relations. Please go ahead Sir.

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Good evening and welcome to our conference call to discuss our against results for the second quarter of fiscal year 2024 ended July 31, 2023 on the call today, we have David Watson, Chief Executive Officer, and Henk Daly, Chief Financial Officer, I will take a moment to read the safe Harbor statements statements made during this conference call and presented in the presentation.

<unk> that are not based on historical facts are forward looking statements. Such statements include but are not limited to projections or 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 state.

And some of the factors and risks that could cause or contribute to such material differences have been described in this afternoons press release and in our against filings with the U S Securities and Exchange Commission. 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 second quarter financial results and filed its second quarter Form 10-Q, with the Securities and Exchange Commission.

Out of the way I'll turn the call over to David Watson CEO of Argon go ahead David.

Thanks, Jen and thank you everyone for joining today I'll start by reviewing some of the highlights of our operations and activities and Hanes Tylee. Our CFO will go over our financial results for the second quarter of fiscal 2024 ended July 31 2023.

Then we'll open up the call for a brief Q&A.

We made great progress during the second quarter as evidenced by revenue growth of approximately 20% to $141 million with significantly improved bottom line profitability and continued strength in our balance sheet.

Also please during the quarter to see a consolidated gross margin improved sequentially as compared to the first quarter of 2024 coming in at 16, 8%, which is generally in line with our expectations based on a diversified mix of revenues.

Additionally, we marked our third consecutive quarter maintaining backlog in excess of 0.8 billion. Our current backlog includes the Shannon Bridge power project in Ireland, which is a power plant that will ensure a reliable electricity supply during critical situations in emergencies.

It also includes the value of the limited notices to proceed that we received for three solar plus battery power facilities in.

In Illinois with district energy.

And our balance sheet remains strong with $346 million of cash and investments and net liquidity of $240 million at July 31 2023.

Lastly, we carry no debt.

During the second quarter, we repurchased approximately 77000 shares of our common stock for a total spend of approximately $3 million or 39.24 per share.

Reviewing our three reportable business segments.

Power industry services represented 75% of our second quarter revenues and reported pre tax book income of $16 3 million.

Revenues and income both increased for this segment during the second quarter by 15, 3% and 12, 3%, respectively as compared to the amounts reported for the comparable quarter last year.

This segment is comprised of our gym, a power system and Atlantic projects company operating units.

Folks there's other construction of all types of power facilities, including efficient gas fired power plants solar energy fields.

<unk> has facilities in wind farms.

As I just mentioned following the quarter's close APC received a full notice to proceed on the Shannon Bridge project in Ireland and German received limited notices to proceed on the solar and battery projects for district energy.

The industrial construction services, which is represented by the Roberts company had a strong quarter and contributed 23% of our second quarter revenue at.

It reported pre tax book income of $3 2 million.

Revenues and income both increased for this segment during the second quarter by 42, 3% and 81, 1% respectively.

As compared to the amounts reported for the comparable quarter last year.

Roberts provide solutions to mostly industrial and manufacturing clients.

Because on agriculture, petrochemical pulp and paper water and power industries as well as other newer industries, adding to or expanding the number of production facilities in the southeast.

Segment focuses on construction projects provides other field services like plant maintenance turnarounds shutdowns and emergency mobilization, well, it's pipe and vessel fabrication.

Lastly, we have our telecommunications infrastructure services group, our smallest segment.

Which contributed 2% of our second quarter revenues.

<unk> infrastructure solutions is our operating brand in this segment provides outside construction services for the utility telecommunications sectors as well as inside the premises wired services for federal government locations and military installations required high level security clearance.

We believe argue as strongly positioned as the energy landscape emissions from coal power to cleaner altered.

Anticipated future decline in coal fired power Gen <unk>.

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With coal fired power generation in the U S expected to drop by an additional 70%.

It represents only 5% of that electricity generation by 2050.

And while the move to more permanently power resources is important.

Reliable power generally.

As Perry.

We have the capabilities and track record of proven success and assisting our power partners as they address and balance increasing levels of power consumption, but the demand for cleaner energy supply.

Our business is already playing a leadership role in this transition as Youll see on slide six where we've highlighted the details of our recent limited notices to proceed on a project with district energy.

But we will work with this drug to complete three facilities located in Illinois to provide solar power battery storage capability.

<unk> 160 megawatts of power on 22 megawatts of energy storage. We're excited to work this draw to drive the move to cleaner electrical power generation and specifically the growth of our solar power.

We look forward to executing another successful project with another new customer in the renewable energy space.

On slide seven we provide the details of the Shannon Bridge power project in Ireland.

<unk> recently received full notice to proceed on.

Services project for a 264 megawatt power plant.

We're excited to have the opportunity to combine the expertise ADC and Jim for.

This project's lifecycle, including design procurement construction and commissioning.

This project, which we began work earlier this year, an Olympic Patsy demonstrates our ability to dynamically work with our customers on a compressed schedule as we targeted completion for early next year.

The <unk> project is expected to strengthen the regions, our infrastructure and enhanced reliable electricity supply during times of high utilization or emergencies.

Yeah.

As the industry shifts to new power generation technologies it's.

It's important to note that 83% of our current backlog of over 0.8 billion represents products to support lower carbon emissions, demonstrating our commitment and our leadership role in the transition to cleaner power generation.

Now I'll hand, the call over to Hank daily to go over our financial performance.

Thanks, David and good afternoon, everyone.

On slide nine we present, our consolidated income statement for the second quarter.

And the first six months of fiscal 2024.

Second quarter of fiscal 2024 revenues increased 20% to $141 million, reflecting an increase in revenues for both our power services.

And industrial services segments as <unk>.

Turn to the second quarter of fiscal 2023.

In the second quarter we.

We achieved a 15% 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 get closer to final completion.

In our industrial construction services segment.

The company achieved revenue growth of 42% drip.

Driven by a meaningful increase in field services and fabrication work.

Gross margin in the second quarter was 16, 8%.

Decline as compared to 20.

6% in the second quarter.

Fiscal 2023 that related primarily to the changes in our mix of revenues.

As many of you know our margins can fluctuate quarter to quarter related to revenues mix.

Current project risk profiles.

Commercial terms and associated margin expectations for example, time and material contracts are less risky than fixed price and therefore generate a lower margin profile, which is acceptable on a rich risk adjusted basis.

Additionally, margins may also be impacted by where we are in the project lifecycle, while margins were down as compared to the second quarter of fiscal 2023.

We did see margins rebound sequentially.

As compared to the first quarter of fiscal 2024, which was 13, 7% to generally be more in line with our expectations.

Just on a diversified mix of revenues.

Selling general and administrative expenses of $10 5 million for the second quarter of fiscal 2024 decreased as compared to SG&A of $11 million in the second quarter of fiscal 2023.

Net income for the second quarter of fiscal 2024 improved significantly to $12 8 million were 94 cents per diluted share as.

As compared to net income of $4 2 million.

Or three cents per diluted share in the second quarter of fiscal 2023.

These results benefited from an increase in earnings on our invested funds.

As yields increased meaningfully between periods.

And from a reduction in the income tax expense between the periods due to the unfavorable research and development credits adjustment recorded in the prior year quarter.

EBITDA.

Which is defined as earnings before interest taxes, depreciation and amortization.

For the second quarter of fiscal 2024 was $17 9 million as.

As compared to $14 9 million in the second quarter of fiscal 2023.

Looking at our year to date performance revenues in the first six months of fiscal 2024 increased by 12%.

To $245 million as compared to revenues of $218 million in the prior year period.

Revenues in our power industry services segment increased by $10 $3 million due to the increase for the second quarter.

Construction activities have increased in the current year.

She enbridge project that.

The Trumbull Energy Center.

ESP, flexjet and peak or plants.

And the kill route power station.

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 margin of 15, 5% for the first six months of fiscal 2024.

Decreased as compared to gross margin of 22% in the first six months of fiscal 2023, primarily due to changes in the mix of our revenues and the reduction of profits on the Kilroy project.

Which has encountered a number of unanticipated challenges, which are meaningfully impacting the contract cost and schedule.

Gross margins in our power industry services or industrial services, and our telecommunications infrastructure services segments were 16%.

13, 4% and 22, 5% respectively for the first six months of fiscal 2024, as compared to 21, 2%, 16% and 23, 9% respectively for the first six months of fiscal 2023.

SG&A expenses decreased to $21 $1 million for the first half of fiscal 2024 as compared to $21 $6 million for the first half of fiscal 2023.

Net income for the first six months of fiscal 2024 was $14 9 million or $1 10.

Per diluted share compared to $11 7 million or 80 cents per diluted share for the first six months of last year and EBITDA was $21 6 million compared with EBITDA of $25 6 million in the first six months of fishing.

In 2023.

These results reflect a reduction in consolidated gross profit between periods offset by an increase in earnings on our invested funds and the reduction in income tax expense between periods due to the aforementioned research and development credits adjustment.

Accorded in the prior year.

With that I'm going to turn the call back to David.

Thanks, Thank turning to slide 10, our consolidated project backlog of over <unk> 8 billion as of July 31, 2023 remains consistent with where we stood at year end of fiscal 2023 and reflects the solid pipeline of opportunities we're seeing.

And the ongoing momentum in our business are.

Our backlog continues to reflect longer term fully committed projects in both the power and industrial construction services segments.

On slide 11, we present certain major projects currently included in our backlog.

We have two projects currently winding down the Guernsey power station, which is the largest single phase gas fired power plant project in the U S and then Maple Hills solar facility.

Are substantially complete and nearing final completion.

The killer power station and the ESB function peak or power plants are projects that are at or near peak activity.

New to the list of major projects are the Shannon Bridge power plant in Ireland, and the Viscera solar plus battery projects in Illinois, both of which we've already talked about in detail above <unk>.

Finally on this list Youll see two separate water treatment plant projects that are being performed by the Robert's company.

So our backlog remains strong with a diverse selection of project work, which demonstrates the breadth of our capabilities and our market recognition of our company as a reliable and efficient industry partner here in the U S and in Ireland and the UK.

Our balance sheet remains strong as of July 31, 2023, cash cash equivalents and investments totaled $346 million.

And net liquidity was $240 million with no debt.

Stockholders' equity was 285 billion at July 31, 2023.

As you can see from this liquidity bridge, our business model ordinarily requires a very low level of capital expenditures.

Our net liquidity was consistent with year end and remains robust $240 million as of July 31 2023.

Since November 2021, we have returned a total of approximately $95 million to shareholders as we repurchased approximately two 6 million 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.

32 per share.

Additionally, since fiscal 2017, we have paid a dollar per share annually through quarterly cash dividends.

Oregon has always been very focused on long term value creation for our shareholders. 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 <unk>.

Dividends per share considerably.

During the first half of fiscal 2024, we've continued to drive momentum in the business and have maintained project backlog at over <unk> 8 billion for three consecutive quarters.

Our project pipeline is robust and diverse contributing to our ability to drive consistency in our revenue performance at certain projects finish up and new projects ramp up.

And as I mentioned earlier, our margin profile, while down slightly compared to the second quarter of fiscal 2023 has rebounded sequentially and is generally in line with expectations based on the diverse revenue mix.

We remain focused on driving improved margins.

Additionally, we are confident that worldwide demand for reliable energy sources and grid stability will only increase and we believe that our reputation as a reliable partner for construction and project management plant conversion activities and technology services positions us well to capture the opportunity.

These were seen in the marketplace.

To close we remain focused on our long term growth strategy, leveraging our core competencies to capitalize on existing and emerging market opportunities.

Maintained disciplined risk management, the goal of improving our project management effectiveness and minimizing costly project overruns star.

Strengthen our position as a partner of choice in 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.

And lastly drive organic growth, while also being mindful of acquisition opportunities that makes 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, our again to our position as a valued power industry partner.

With that operator, let's open it up for questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

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11, again Thats Star one if you wish to ask a question on one moment, while we poll for questions.

And the first question today is coming from Rob Brown from Lake Street markets.

Your line of Flash.

Hi, good afternoon.

Afternoon, Rob.

Just wanted to kind of get a little bit more detail on the pipeline I think you've talked about it being strong and it's been strong recently I'm.

Just wanted to get your update on sort of the timing of the new project pipeline are you starting to see more conversions there more activity kind of in preparation for for awards or what are you seeing in terms of the pipeline activity.

Yeah, we have seen some conversions as as demonstrated by the Shannon Bridge.

Job that we announced earlier this month as well as the district solar battery jobs. So we do expect some new larger projects.

Towards the end of the year and into the next based on our current visibility into our pipeline.

We may see a reduction in our reported backlog over the next quarter as we convert current backlog into revenue, but ultimately do you expect to see our backlog meaningfully exceed where we are today keep.

Keep in mind.

Starts a future project wins are controlled by the customer, which makes it difficult to forecast our backlog given the material size of certain projects thermal jobs always take longer than that.

And then we would like to but given developmental job, it's not an easy job.

And given the PJM auctions have been further delayed until the summer of 2020 for restructuring of the interconnect process MISO is generally overloaded so.

There's a lot of things that are at play but at the end of the day. We are we are very bullish on seeing new jobs later this year and into next.

Okay, great excellent. Thanks for the color there and then on the Vista project.

That's an interesting kind of project and.

I think it was a limited notice to proceed what's the timeline or how does that play out in terms of full notice to proceed Ed.

And I guess, how the mechanics of that work.

Sure I mean, similar to two the Shannon Bridge project and a bunch of number of projects earlier.

Given the elongated supply chain.

Timeline today that we face a lot of projects are going with a limited notice to proceed early so that some of the that long lead time materials or equipment can be procured to make sure that the schedule is ultimately made so vista is no different than we had a L N T P or multiple.

<unk> on Shannon Bridge.

Wow Thermo has historically been our bread and butter and continues to be to this day, we are committed to building the energy transition in distress.

Is kind of an exciting step for us, but we're really looking forward to working with.

That customer.

Great. My last question is on kill route there.

You cited some cost challenges are challenges overall I guess, how would you kind of describe those at this point do you feel like those are under control or are there sort of.

Areas that you see for the risk.

Yeah, I mean, we're clearly disappointed with where we are in the project you know just to give a little background on the job killed route is a 660 megawatt gas fired power plant being built just outside of Belfast and an existing structure built in the early eighties to house coal fired power generation assets.

So 11. It is completed it will create a significant new electricity generation asset for the island of Ireland. We started the project in late 2021 and are approximately 80% complete with completion scheduled for early next year.

We do think encountered a number of meaningful challenges on the job, including the omni Cranberry and COVID-19.

The Ukraine war and their impacts on the global supply chains and prices are 50 year rains and building in a brownfield building site. Among other factors. So that that those challenges have resulted in us having to reverse certain previously recorded a profit on the job and we are working hard to achieve the completion of the project.

In a way that is reasonably acceptable to all stakeholders.

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

Thanks, Rob.

Thank you 11, again, ladies and gentlemen, if you wish to enter the queue to ask a question. Please press star one on your phone Thats Star one if you wish to ask a question at this time.

Next question is coming from Chris Moore from CJS Securities Your line of life.

Good afternoon, guys. Thanks for taking a few questions.

Chris.

Okay afternoons Mccann embraced it looks like it's going to be a pretty quick turn so.

Will that start ramping this quarter or Q4.

Yeah. Good question. We started earlier this this year pursuant to the limited notices to proceed and given that this is an emergency or or rush job activity on the job site pursuant to the LNG P has been significant I mean, the schedule is to finish by early next year. So there is a lot of work being performed in a short period of time.

And it's and yes. It is already ramping are ramped Chris I mean, I walked the job site about a month ago and activity was happening everywhere, so really impressive.

God I assume the margins associated with this project or a.

A little bit lower than than the bigger U S natural gas projects.

It all depends on on the contractual terms and the rest of the commercial risks that we take on and so you know it's hard to do to be able to make that differentiation.

So there's potential for excess margin that you had like a like a traditional U S natural gas.

Contract.

It is our goal to have a successful project for everyone that we that we do and to account for it as best we can.

Fair enough.

I mean, just in terms of Trumbull.

You know kind of the timing of when you think it will be.

You know kind of peak quarterly revenue.

Obviously, the see the time frame on your heat I'm, just trying to get a little bit of a sense for the ramp.

So we are right on schedule and I'm very happy with the progress of the Trumbull job another huge job for us in Ohio, I would expect.

Given the cadence of well this schedule and the cadence of any.

Gas fired power plant job that the peak activity will be reached during the latter half of fiscal year 'twenty five in and on into fiscal year fiscal year 'twenty six.

Got it.

Other income was.

Meaningfully higher than I had modeled.

Does that 4.118 million is that a is that.

Stable for the balance of fiscal 'twenty four.

It's you know where where we're pleased to have the strong balance sheet that we have and we've been purposeful in and putting that money to work not only in the short term money market funds and Cds, but also in longer duration treasury bills and the yields that were seen like youre seeing.

Everywhere is is north of of.

On average around 5% or so so is the $4 1 million sustainable there were a couple of other things that run through the other income line item, Chris but the majority of it is the interest and dividend income from our investments and so it's it's it's something that's that's meaningful.

Got it and maybe just my last one a follow up on one of Rob's on the pipeline. So it sounds like you're looking for new projects.

Hopefully later this fiscal year early next.

I guess the question is are there how many significant natural gas.

Projects potential projects in the U S or are there many of these days.

I'm, just trying to get a sense in terms of.

You know kind of what the overall backdrop looks like.

Yeah. So there's a number of converging forces. Some some that are positive some that are challenging.

The positive data points, Chris is the Oems.

Are getting really busy again and their production lines are basically full full speed ahead. So if someone wants to build a thermal or a gas fired power plant they need to get a turbine ordered early in the process. So that should be very telling as to where the interest in <unk>.

Is in gas fired power plants, not just in the U S but internationally.

That being said as I mentioned earlier when I was responding to a question from Rob you know, there's there's the the <unk>.

J M. If there's delays in the the capacity auctions, there's the interconnection process, that's getting in the middle of a restructuring that has been gummed up so there's a number of of an in MISO being overloaded. So theres a number of things that kind of go against that and then in general.

You know they gas power plants, there, we see a number of them being sided developers trying to set up not just developers that are private but also public utilities and we're excited about what we're seeing over the next couple of years and then and on.

Got it that's helpful I will leave it there thanks, David Great.

Great Chris.

Thank you there are no other questions in the queue at this time I would now like to hand, the call back to David Watson for closing remarks.

Okay.

Great. Thank you everybody for joining us for our Q2 fiscal 'twenty four earnings call and I appreciate the participation and interest in our company and I look forward to speaking with each of you next time, we have a call.

Take care.

Yeah.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.

I didn't have scripted with me.