Q1 2024 Shimmick Corp Earnings Call
Operator: Greetings and welcome to Shimmick's first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Rosmus, with Investor Relations at Shimmick. Please go ahead, sir.
Greetings and welcome to <unk> first quarter 'twenty 'twenty four earnings conference call.
This time, all participants are in listen only mode.
Anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Rasmus with Investor Relations at <unk>. Please go ahead Sir.
Anthony Rosmus: Good afternoon, and thank you for joining us on today's conference call to discuss Shimmick's first quarter 2024 results. Slides for today's presentation are available on the investor relations section of our website, www.shimmick.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risk and uncertainty. 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.
Rasmus: Good afternoon, and thank you for joining us on today's conference call to discuss <unk> first quarter 2024 results slides for today's presentation are available on the Investor Relations section of our website www Dot dot com.
Rasmus: 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 identified the principal risks and uncertainties that may affect our performance and in our reports and.
Rasmus: Filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website, 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 information contained in the Companys.
Anthony Rosmus: We do not undertake a duty to update any forward booking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to information contained in the company's first quarter press release for definitional information and reconciliations of historical non-GAAP financial measures to comparable GAAP financial measures. With that, it's my pleasure to turn it over to Steve Richards, Shimmick's CEO.
Speaker Change: First quarter press release for definitional information and reconciliations of historical non-GAAP financial measures to comparable GAAP financial measures with that it's my pleasure to turn it over to Steve Richard Schimek CEO.
Steve Richards: Thanks, Anthony. And good afternoon, everyone.
Speaker Change: Thanks, Anthony and good afternoon, everyone. Thank you all for joining today's call I'm joined by Kevin undertaken Cynic CFO.
Steve Richards: Thank you all for joining today's call. I'm joined by Devin Nortagan, Shimmick CFO. As noted in our earnings press release issued earlier today, we are in the process of negotiating with one 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 10-Q by the prescribed deadline and expect to file an extension on Form 12-B-25 with the Securities and Exchange Commission.
Speaker Change: As noted in our earnings press release issued earlier today, we are in the process of negotiating whenever lenders a wave of default under our credit facility. As a result, we do not expect a call that quarterly report on Form 10-Q by the prescribed deadline and expect to file an extension on form <unk> 25, with the Securities and Exchange Commission.
Steve Richards: While our first quarter results, which are based on currently available information, are subject to revision as management completes its internal review, we do not expect a waiver to result in changes to our first quarter 2024 results. Our independent registered public accounting firm has also not finalized its review of our first quarter 2024 results.
Speaker Change: While our first quarter 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 first quarter 2020 core results.
Speaker Change: Our independent registered public accounting firm has also not finalized its review of our first quarter 2020 core result.
Steve Richards: The first quarter 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 first quarter 2024 revenues of $120 million and experienced a net loss of $33 million with a nejusity of a loss of $24 million. As we did in our last call, we'll provide a breakdown of results between Shimmick projects, projects that began after the eECOM sales transaction, and legacy projects, those that started before the eECOM sales transaction. Devin will provide more details specifically related to the breakdown of these results.
Speaker Change: Okay.
Speaker Change: Our first quarter results were challenged due to the combination of search and delays in new projects commencing operations and the winding down of legacy projects.
Speaker Change: We delivered first quarter 2020 core revenues of $120 million and experienced a net loss of $33 million with an adjusted EBITDA loss of 24 million.
Speaker Change: As we did on our last call. We will provide a breakdown of results between shinnick projects projects that began after ecommerce sales transaction and legacy projects those that started before the E comm sale transaction.
Speaker Change: Kevin will provide more details specifically related to the breakdown of these results. However, I would note. Our overall gross margin was weaker in the first quarter, 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 the pursuit of.
Steve Richards: However, of note, our overall gross margin was weaker in the first quarter, 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 modification and recoveries from project owners. It is important to note that these legacy loss projects, any change in the overall estimate to complete flows into the current period, not as 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-K.
Speaker Change: Contract modification and recoveries from project owners.
Speaker Change: It is important to note that these legacy loss projects any change in the overall estimate to complete flows into the current period not is actually incurred and thus changes are front end loaded to refresh your memory on the specific accounting treatment for gross margins in our business. We have provided a detailed explanation in our 10-K in summary.
Steve Richards: 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 losses, the entire amount of the additional loss expected over the life of the project is recognized as a period cost in our cost of revenue. We continue to work down the Legacy Projects backlog with $23 million of revenue in the quarter, down from $56 million last year at this time. However, project growth margins were slightly negative for the quarter as we incurred costs that had not yet received expected change orders.
Speaker Change: For the legacy loss projects, we had recognized the estimated cost to complete and the loss expected from those projects.
Speaker Change: If the estimated 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 a period cost and our cost of revenue.
Speaker Change: We continue to work down the legacy projects backlog with 23 million of revenue in the quarter down from 56 million last year at this time.
Speaker Change: The next class project gross margins were slightly negative for the quarter as we incurred costs that have not yet and so you'd expect the change orders.
Steve Richards: Regarding backlog, although we are experiencing near-term headwinds due to project timing and cost issues with legacy projects, we remain encouraged by the progress we've seen converting our backlog to Shimmick projects versus legacy projects. At the end of the first quarter, Shimmick projects represented over 80% of our backlog.
Speaker Change: 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, we shouldn't project versus legacy projects at the end of the first quarter Cynic projects represented over 80% of our backlog. Additionally, our overall HIFU.
Steve Richards: Additionally, our overall pipeline remains at approximately one billion as of the end of the first quarter. I'm pleased to report that Schimmick secured two projects in the first quarter of 2024. Schimmick 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.
Speaker Change: <unk> remains at approximately 1 billion as of the end of the first quarter.
I'm pleased to report that <unk> secured two projects in the first quarter of 2020 quarter chemical construct a new box cover to function as a new irrigation drainage days and storm drain for over 10000 acres of land.
Speaker Change: Future rail upgrades east of the San Francisco Bay near Sucked, California.
Steve Richards: In southwest of Stockton at the Sinal Water Treatment Plant, Schimmick secured an electrical subcontract to support new advanced water treatment through the addition of a new open donation system. Here, Schimmick will install electrical systems at multiple new facilities, including an ozone generator building, an electrical building, and a large liquid oxygen nitrogen facility. 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. We added estimating personnel late in the first quarter to be responsive to this pipeline of work.
Speaker Change: And southwest of Stockton at this in all water treatment plant and a secured an electrical subcontract to support new advanced water treatment through the addition of new organization system Sunoco.
Speaker Change: <unk> nickel install electrical systems at multiple new facilities, including an ozone generator being.
Speaker Change: Building, an electrical building and a large liquid oxygen nitrogen facility.
Speaker Change: We continued to have a robust pipeline of future work, which you expect to grow alongside increases in federal funding and the growing demand for water. We added as many personnel late in the first quarter to be responsive to this pipeline of work.
Steve Richards: More than 75% of our work is generated from repeat customers. Public customers and associated public funding allow for a predictable, long-term flow of programs and projects. Subsequent to quarter end, we entered into a transaction expected to raise $39 million, an asset purchase agreement for the sale of our foundation drilling assets for a total consideration of approximately $17.5 million, and a letter of intent for the sale leaseback of our equipment facility in Tracy, California, for which we expect to receive approximately $22 million at closing. Both transactions are expected to close in the second quarter of fiscal 2024.
Speaker Change: 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.
Steve Richards: 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. Shimmick's core market vision is becoming a reality with a more asset-light, higher-margin, water-focused company targeting projects that make use of significant insourcing of technical skills on projects that average three years in duration.
Speaker Change: Subsequent to quarter end, we entered into a transaction expected to raise 39 $39 billion and asset purchase agreement for the sale of our foundation drilling assets for a total consideration of approximately $17 $5 million and a letter of intent for the sale leaseback or equipment facility in Tracy, California, which we expect to receive approximately.
Speaker Change: $22 million at closing.
Speaker Change: Both transactions are expected to close in the second quarter of fiscal 2024.
We intend to use the net proceeds of both of these transactions to repay borrowings under our existing credit facility with midcap and.
Speaker Change: In addition, some of the foundation drilling assets, which are not core to our water business enhances liquidity, while lowering our annual capital expenditure requirements.
Speaker Change: Senate core market vision is becoming reality with a more asset light higher margin water focused company targeting projects that make use of significant insourcing technical skills and projects that average three years in duration.
Steve Richards: While the industry continues to face headwinds, including labor shortages and price inflation, modernizing water infrastructure was recently identified as a hotspot in a 2024 industry report published by GovWind. The demand for this work is forecasted to grow faster than in any other sector, in turn increasing demand for Shimmick services. According to the American Water Works Association, the U.S. needs to invest $1 trillion over the next 20 years to meet the water infrastructure needs of a growing population and economy.
Speaker Change: While the industry continues to face headwinds, including labor shortages and price inflation modernizing water influx such infrastructure was recently identified as a hotspot and a 'twenty 'twenty four industry report published by Gov win.
Speaker Change: The demand for this work is forecasted to grow faster than in any other sectors in turn increasing demand for <unk> services.
Speaker Change: According to the American Water works Association, the USD and desk, one trillion dollars over the next 20 plus years to meet the water infrastructure needs of a growing population and economy.
Steve Richards: The investment, as previously reported, includes $50 billion from the bipartisan infrastructure law, plus an additional $5.8 billion 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 Shimmick services. For both of these hotspots, modernizing water infrastructure and disaster response, California was identified as the second and fourth largest spender, respectively, by state, showing increased demand in Shimmick's core geographic market.
Speaker Change: Investment as previously previously reported includes $50 billion and the bipartisan infrastructure law, plus an additional $5 $8 million announced last year from state revolving funds.
Speaker Change: Another identified hotspots disaster response, which drives the demand for infrastructure required to mitigate or prevent damage from severe storms hurricanes droughts and flooding or the drove a driving demand portion it services.
Speaker Change: Both of these hotspots modern modernizing water infrastructure and disaster response, California was identified as the second and fourth largest sender respectively by state. So an increased demand in <unk> core geographic market.
Steve Richards: Spending on infrastructure is expected to strengthen in 2024 with IAJA funding's peak still to come. According to S&P Global's first quarter analysis, the strong spending increase was in one of Shimmick's core markets, the combined water and sewer segment, with a 23.3 percent year-over-year gain. Additionally, infrastructure spending in California is expected to remain robust. Straight to the next slide, I'd like to spend the time highlighting another one of our high-profile jobs, a $360 million water treatment facility, the North City Pier Water Treatment Facility and Pump Station in San Diego, California.
Speaker Change: Spending on infrastructure is expected to strengthen in 2020 core without a J a funding peak still to come.
Speaker Change: According to S&P Global's first quarter analysis, the strong spending increase within one of <unk> 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.
Speaker Change: Turning to next slide I'd like to spend the time, highlighting another one of our high profile jobs.
Speaker Change: $360 million of water treatment facility, the north pure North city pure water treatment facility and pump station in San Diego, California.
Steve Richards: Shimmick 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. Schimmick 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.
Speaker Change: Jimmy because implementing new technology to purify our recycled water, providing a safe and sustainable water supply, which will reduce the city's dependence on imported water and also reduce wastewater discharged into the ocean.
Speaker Change: Zinc is Shinnick has finished most concrete activity now working on the mechanical and electrical all myself facility, including electrical rooms exterior conduit and fire protection HVAC more treatment.
Speaker Change: Treatment equipment, including ozone equipment has been delivered and is being installed.
Speaker Change: 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 isn't.
Steve Richards: This is just another example of the highly sophisticated level of installing and integrating technologies that our in-source team does every day. With that, I'd like to turn the call over to Devin, who will discuss our financial results.
Speaker Change: This is just another example of the highly sophisticated level of installing and integrating technologies that are in sourcing does every day and with that I'd like to turn the call over to Kevin who will discuss our financial results.
Devin Nortagan: All comparisons made today will be on a year-over-year basis compared to the same period in 2023. For the first quarter, we reported revenue of $120 million compared to $164 million 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 million compared to a net loss of $9 million for the prior year period, again, largely as a result of the negative gross margins in legacy and foundation. First quarter adjusted EBITDA was a loss of $24 million compared to a loss of $1 million in the prior year period, in the first quarter after factoring out our non-core foundations project.
Kevin: Thanks, Steve all comparisons made today will be on a year over year basis compared to the same period in 2023.
Kevin: But the first quarter, we reported revenue of $120 million compared to $164 million for the prior year period, primarily as a result of the decline in legacy revenue.
Kevin: In foundation Jillian revenue in the quarter.
Kevin: Had a net loss of $33 million compared to a net loss of $9 million for the prior year period.
Kevin: Largely as a result of the negative gross margins in legacy and foundations.
Kevin: First quarter adjusted EBITDA was a loss of $24 million compared to a loss of $1 million in the prior year period.
Kevin: In the first quarter after factoring out our noncore foundation's projects <unk> projects revenue increased $2 million to $90 million compared to 2023, while gross margin contracted to a negative $1 million.
Devin Nortagan: Schimmick's project's revenue increased $2 million to $90 million, compared to 2023, while gross margin contracted to a negative $1 million. The $2 million increase in revenue was primarily the result of the timing of new jobs and jobs ramping up.
Kevin: The 2 million dollar increase in revenue was primarily the result of the timing of new jobs and jobs ramping up that.
Devin Nortagan: The decline in gross margin was primarily the result of jobs going 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 second quarter of 2024 and will be winding down any remaining work during the year. As revenue will decline during the year, the company will be reporting revenue related to these projects separately for 2024. Revenue recognized on Foundation's projects was $7 million and $20 million for the three months ended Q1-24 and Q1-23, respectively.
Kevin: The decline in gross margin was primarily the result jobs winding down and those costs tied to pending change orders.
Speaker Change: As noted by Steve earlier, the company has entered into an agreement to sell the assets of our noncore Foundation projects in the second quarter of 2024, and we will be winding down any remaining work during the year.
Speaker Change: As the revenue will decline during the year.
Speaker Change: The company will be reporting revenue related to these projects separately for 'twenty 'twenty four.
Speaker Change: New recognized on foundations projects was $7 million and $20 million for the three months ended Q1 24 in Q1 23, respectively.
Devin Nortagan: The $13 million decline in revenue was the result of the timing of multiple jobs winding down. Gross margin recognized on the Foundation's projects was $-4 million and $2 million for the three months ended Q1-24 and Q1-23, respectively. The decline in the gross margin was the result of cost overruns on multiple subcontract jobs and the timing of jobs winding down. Legacy Projects revenue decreased by $33 million to $23 million compared to 2023, and gross margin contracted to be negative $11 million.
Speaker Change: The $13 million decline in revenue was the result of timing of multiple jobs winding down.
Speaker Change: Gross margin recognized on foundations projects was negative $4 million and $2 million for the three months ended Q1 24 in Q1 23, respectively.
Speaker Change: The decline in the gross margin was the result of cost overruns and multiple sub contract jobs and timing of jobs winding down.
Speaker Change: Legacy projects revenue decreased by $33 million to $23 million compared to 2023 and.
Speaker Change: Gross margin contracted to a negative $11 million.
Speaker Change: Yes.
Devin Nortagan: 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. For this subset, we have recognized the estimated cost to complete and the loss expected from these projects. 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.
Speaker Change: Steve explained legacy projects results were primarily impacted by a subset of projects that we defined 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 this project owners.
Speaker Change: On this subset we have recognized the estimated cost to complete and the loss of expected from these projects.
Speaker Change: As these legacy loss projects continue to wind down to completion no further gross margin will be recognized.
Speaker Change: And in some cases, there may be additional costs associated with these projects, which will all be recognized in the period.
Devin Nortagan: Revenue recognized on these legacy loss projects was $15 million and $27 million for the three months ended Q1-24 and Q1-23, respectively. Gross margin recognized on these legacy loss projects was negative $11 million and negative $1 million for the three months ended Q1-24 and Q1-23, respectively. We continue to actively pursue all opportunities to offset these costs.
Speaker Change: Revenue recognized on the legacy loss projects with $15 million and $27 million for the three months ended Q1 24 and.
Speaker Change: Q1 23, respectively.
Speaker Change: Gross margin recognized under the legacy loss projects was negative $11 million and negative 1 million for the three months ended Q1 dollars 24 in Q1 'twenty three respectively.
Speaker Change: We continue to actively pursue all opportunities to offset these costs.
Devin Nortagan: 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 10-Q within the prescribed deadline. For additional information, see the extension of Form 12B-25 that we will file with the Securities and Exchange Commission.
Speaker Change: The loss for the quarter has put us out of compliance with the covenants in our existing credit facility with mid cap.
Speaker Change: We are in the process of negotiating a waiver and amendment with mid cap as well as pursuing alternative financing arrangements with other potential lenders.
Speaker Change: As a result of these ongoing discussions we were unable to file our quarterly report on Form 10-Q within the prescribed deadline.
Speaker Change: But just know information see the extension of a form <unk> 25.
Speaker Change: We'll file with the Securities and exchange Kim.
Devin Nortagan: Commission. For the full fiscal year ending December 27th, 2024, after excluding non-core foundations projects revenue of $64 million for the fiscal year ending December 29th, 2023, and assuming successful resolution with MidCap, we expect Shimmick's projected revenue to grow 7% to 13%, with gross margin between 7% to 13%, trending towards the lower end of the range for gross margin. Legacy Projects revenue to decrease by 45 to 55 percent, with a negative gross margin of 5 to 10 percent, trending towards the lower end of the range for gross margin.
Speaker Change: Commission.
Speaker Change: For the full fiscal year ending December 27th 2024, after excluding non core foundations projects revenue of $64 million for the fiscal year ending December 29 2023.
Speaker Change: And assuming successful resolution with mid cap, we expect she makes 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 Change: Legacy projects revenue to decrease by 45% to 55% with negative gross margin of 5% to 10%.
Speaker Change: Towards the lower end of the range for gross margin.
Devin Nortagan: 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 halfway 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 Change: The guidance reflects our execution on our strategy.
Speaker Change: 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.
Speaker Change: We believe that our results will be back half weighted in 2024 with further strong momentum for growth in 2025.
Speaker Change: With that I'd like to turn it over now to Steve for some additional remarks.
Steve Richards: In conclusion, we are encouraged by the continued progress made in working off the Legacy Lodge Projects Backlog. We are confident that the slow start in the first quarter for Shimmick Projects will correct itself over the year as new project startup costs accrue faster than revenue collection and earnings recognition and then become more balanced as the project progresses.
Steve: Thanks, Kevin.
Steve: In conclusion, we're encouraged by the continued progress made in working off the legacy loss projects backlog, we're confident that the slow start in the first quarter for Senate projects will correct itself over the year as new project startups of dance and ongoing projects work through completion.
Steve: It's not unusual to see project startup costs that grew faster than revenue collection and earnings recognition and then become more balanced as the project progresses.
Steve Richards: We believe these challenges to be short-term in nature as Shimmick continues to be favorably positioned to take advantage of the sizable market opportunities ahead. 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 portfolio, coupled with potential M&A activities, 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 Shimmick into one of America's best water infrastructure companies. Operator, you may now open the line for questions.
Steve: We believe these challenges to be short term in nature as China continues to be favorably positioned to take advantage of the sizable market opportunities ahead.
Steve: It is important to reinforce that our strategy for our core business remains unchanged, our vertical integration and minimizes risks in our strategic shift towards our higher margin low carb X portfolio, coupled with potential M&A activity positions us well for enhanced margins and growth.
Steve: I want to once again, thank our team for their tireless efforts as we work to transform <unk> into one of America's basketball infrastructure companies.
Speaker Change: Operator, you May now open the line for questions.
Yeah.
Speaker Change: Thank you Sir.
Operator: Thank you, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press the star key and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: At this time, we will be conducting a question and answer session if.
Speaker Change: If you would like to ask a question. Please press star and then one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue you.
Speaker Change: You May press Star and then two if you would like to remove your question from the Q4.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Operator: Again, if you would like to ask a question, please press star and then 1 now. The next first question we have comes from Jerry Sweeney of Roth Capital. Please go ahead. Good afternoon, Governor Steeve. Thanks for taking the time.
Speaker Change: Again, if you would like to ask a question. Please press star and then one now.
Speaker Change: First question, we have comes from Gerry Sweeney of Roth Capital. Please go ahead.
Jerry Sweeney: Good afternoon, Governor Steve. Thanks for taking my question. Hey, Joe. Good afternoon. On the sale of the equipment, how confident are you that you can close that in the second quarter, and are confident in achieving the numbers that you prescribed in your remote assessments?
Gerry Sweeney: Good afternoon, Steve Thanks for taking my questions.
Gerry Sweeney: Okay.
Gerry Sweeney: Hey, Joe good afternoon.
Gerry Sweeney: Yeah.
Gerry Sweeney: On the sale of <unk>.
Gerry Sweeney: Great.
Joe: How confident are you that you can close that in the second quarter.
Joe: Complex on achieving the numbers that you are prescribed.
Joe: Okay.
Steve Richards: I'm highly confident, Jerry. It'll be early in the quarter, so we're very confident about that.
Speaker Change: Yeah highly confident Jerry it'll it'll be early in the quarter. So we're very comfortable with that.
Jerry Sweeney: Okay. You know, you talked about getting better as we went through the rest of this year, and you 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 Change: Okay.
Speaker Change: Yeah, you did talk about getting better as we went through the rest of this year and you kept some of you guys kept your guidance in place. Obviously Q1 was a challenge again tomorrow question confidence that things are turning around you can achieve that guidance.
Steve Richards: We do. We feel that, you know, I mentioned that the projects kind of slowly 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 project's stabilized and we've got a good run, we're off and running with earnings recognition. And so, keeping pace with the costs and 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, as one that improves from a margin recognition standpoint and catches up with revenue.
Speaker Change: We do we tell that to you know I mentioned that the projects kind of slow start ramping up and our cost like mobilization kind of lead the project cost side and then we don't get a library and its recognition in that way until once the projects stabilize and if we've got a good run where we're often going with earnings recognition.
Speaker Change: And so it's keeping pace with the cost and revenue.
Speaker Change: 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 the margin recognition standpoint, and catching up with guidance.
Speaker Change: Yeah.
Jerry Sweeney: As we go into the second quarter, obviously, we're a little bit into the quarter now. 2-1 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 and then further improvement through the rest of the year?
Speaker Change: As we go into the second quarter.
Speaker Change: Obviously, we're a little bit quarter now Q1 was a challenge.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Are there any other large issue is percolating that we should be aware of when we're looking at Q2 or should we see improvement through two Lincoln turn of improvement through the rest of the year.
Steve Richards: We'll stick with our guidance. We feel that we are back halfway and so, you know, 2Q, we're early in 2Q, obviously, and so we see that as being, you know, a continuing improvement and climbing the curve. So we feel good about it.
Speaker Change: But let's stick with the guidance, we feel that we are back half weighted so.
Speaker Change: Two Q, we're early into Q, obviously until we see that has been a continuing.
Speaker Change: Continuing improvement in climate occurred so we feel good about it.
Jerry Sweeney: Got it. Change orders. Obviously, you know, change orders have actually hit some of the course profit. You know, are you collecting change orders, and is that cadence going to change? Could that actually become a net positive at some point?
Speaker Change: Got it.
Speaker Change: Change orders, obviously changed.
Speaker Change: I think I hit some of it of.
Speaker Change: Gross profit.
Speaker Change: Are you collecting change orders and is.
Speaker Change: Is that Q1 is going to charge did that actually become a net positive at some point.
Steve Richards: Yeah, Devin mentioned that in his remarks, and he can add 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 on a timely 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 it's not uncommon to see some of those change orders lag in a project as it gets towards the end. 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,
Speaker Change: Yeah. It doesn't mentioned that in his remarks and he can add onto that that 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 pool basis. So that when we go and are ready to negotiate.
Speaker Change: Negotiate change orders, we've got all of their paper and materials in place to have a title change order execution, but are not uncommon to see some of those change orders lag in the project as it gets towards the end and that's what we're kind of seeing in some of our and not only legacy projects that some of our newer smaller projects Devin I don't know if you want to add anything there.
Devin Nortagan: No, I think that covers it pretty well. I think with the leg and the changeovers, you know, 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.
Devin: No I didn't think it was a pretty good I think with the lag in the changeovers you know most of our jobs as we've mentioned before our firm fixed price jobs and so oftentimes we incurred the cost and then how to work.
Devin: Work with the client and followed the contract and go through the procedures to get the change order tied to those costs.
Jerry Sweeney: Got it. Does the current state of the balance sheet impact your ability to go out and bid jobs? Will that be a headwind?
Speaker Change: Got it.
Current state of the balance sheet impact your ability to go out and bid jobs.
Speaker Change: Will that be a headwind.
Speaker Change: Okay.
Steve Richards: No, I see the, you know, we work closely with our surety company; that's a big part of the stakeholder group 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, and in fact, the things we've done to improve our balance sheet with the sales transactions 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 Change: No.
Speaker Change: See the Oh, we work closely with their surety company, that's a big part of the stakeholder group that we work with and we look at this mid cap Covenant is something that we will overcome quickly. It just a timing issue for us and so I really don't see anything and in fact, the things we've done to improve our balance sheet and with the sales transaction that we mentioned before.
Speaker Change: Our foundation business and then the sale leaseback or real real positive things for us and I look at that is strengthening our liquidity. So that we can go pursue the work we want to pursue.
Jerry Sweeney: Okay, that's it for me. Thank you.
Speaker Change: Okay. That's it for me thank you.
Speaker Change: Thanks James.
Operator: The next question we have comes from Irons Bychala of Craig Hallam; please go ahead.
Speaker Change: The next question, we have comes from Aaron's by China.
Speaker Change: Craig Hallum. Please go ahead.
Irons Bychala: Yeah, good afternoon, Steve and Devin. Thanks for taking the questions. You know, first on the legacy loss projects, can you just give us an update there? You know, how much work is still remaining on those couple of projects and, and just kind of what's on the balance sheet as far as potential claims and the outlook to kind of get a potential positive resolution?
Aaron: Yeah, Good afternoon, Stephen Devin Thanks for taking the questions.
Aaron: First on the legacy loss projects can you just give us an update there you know how much work is still remaining on those couple of projects end and just kind of whats you know what's on the on the balance sheet as far as kind of potential claims and in the outlook to kind of get a potential positive.
Aaron: Resolution there.
Steve Richards: Yeah, 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 jobs 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, you know, if you will, that risk that remains. So feel good about the trajectory, and the teams in the field have accomplished huge milestones in getting to where they're at right now because they are nearing the 80% level. I don't think that we're able to really talk, Aaron, about what's in the balance sheet for the, if you will, the change order settlements, but Devin, you can clarify that for me.
Aaron: Yeah right now it ended the quarter the projects are nearing 80% completion until they're largely tracking with the high risk.
Aaron: Risk parts of the job or are 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 are accomplished.
Huge milestones in getting to where they're at right now is nearing 80% level.
Speaker Change: I don't think.
Speaker Change: That we were able to really talking about the what's in the balance sheet for the if you will the change order settlement's been Devin if you can clarify that.
Devin Nortagan: No, that's right, Steve.
Devin: No that's right Steve.
Irons Bychala: Alright, thanks for that. And then, you know, it sounds like the pipeline, you're still expecting kind of a back half weighted for conversion there. But can you just, you know, talk a little bit about the outlook for self-performing as many of these projects as you can, given some of the supply chain and labor kind of issues you talked about, just, you know, availability of these projects out in the market? It seems like you're still confident in that in the back half of this year.
Devin: Alright.
Devin: Thanks for that and then you know 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 I'm, just you know avail.
Devin: The ability of these projects out in the market. It seems like you're still confident in that are in the back half of this year.
Steve Richards: We are. Shimmick has always had a strong following not only among our superintendents but the foreman and the craft that follow the foreman. So we've got a great network of crafts that stay with the company. So I feel good about being able to do the jobs that we need and get the crafts that we need to complete the work. From a pipeline standpoint, we're definitely encouraged by the pipeline that's coming through. 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.
Speaker Change: We are simply has always had a strong following of not only our superintendents to form in the craft at Pollo performance. So we've got a great network of crap 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 I mentioned briefly you may have caught it in my remarks that in fact, we're adding new estimating our members to our team. So that we can even bid more and feel real good about.
Steve Richards: As we finish work, we bring our operations team back into the office to estimate work and go back and run that work at the wind. So feel good about it. Feel good about our resource base and how we're attacking the work.
Speaker Change: That where as we finished work we bring our operations team back into the office designate work and to go back and run that worked at the wind so feel good about it and feel good about our resource base and how we're tackling the work.
Irons Bychala: All right. And then, 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, any size and timing potential there?
Speaker Change: Alright, and then just given the kind of recent EPA ruling on <unk>.
Speaker Change: <unk> you know could you just kind of talk about that a little bit how you think that opportunity could look for you guys moving forward.
Speaker Change: Anything on size and timing potentially there.
Steve Richards: Yeah, we're still waiting for kind of an 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 on some of our calls that PFAS is kind of regionally driven or, you know, where it's going to be needed to be treated. It's very specific to that groundwater source in that local area.
Speaker Change: Yeah, we're still waiting for kind of that outcome. We're watching this major design firms get some of their assignments and so encouraged by that.
Speaker Change: I think I've mentioned in the past to some of our calls that a P forces kind of regionally driven or you know 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 gonna have to tracking to those geographies that we're in are sometimes the opportunities come into smaller forms and so where we're kind of.
Irons Bychala: So we see an opportunity, but we're going to have to track them to those geographies that we're in. Sometimes opportunities come in smaller forms. And so we're kind of measuring those, kind of looking for some of these PFAS opportunities to 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, you know, kind of the overhead layer that we have. So I'm looking forward to the opportunity, but something a little bigger is what we need right now.
Speaker Change: Measuring those kind of looking for some of these people opportunities 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 the local contractors that don't have you know kind of the overhead layer that we have so looking forward to the opportunity, but a little bigger is what we need right now.
Irons Bychala: All right. And then, maybe last for me, I appreciate the guidance and how you kind of broke things out there, but can you just kind of talk about, you know, longer term, you know, still the margin targets on kind of Shimmick projects going forward from a gross margin standpoint? Are you still, you know, kind of thinking those kind of low double digit, potentially mid-teens over time, type gross margins? We do.
Speaker Change: Alright, 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 too.
Speaker Change: Longer term you know still the the margin targets on kind of Schimek projects going forward from a gross margin standpoint are you still kind of thinking those kind of low double digit potentially mid teens overtime type type gross margin still.
Steve Richards: We do. We've maintained our discipline. You know, 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 a gimmick. What we're looking for is complicated work, work that's in that $50 to $150 million range, kind of a three-year duration average-wise, and work where we can use at least 80% of our team to complete these self-reform elements of the work. And so we 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 Change: We do we've maintained our disciplined you know some.
Speaker Change: Some companies I think you'll see it in the early quarter, they'll say well I need to go cold My backlog and now maybe dive on their margins that that's not something like that but we're looking for is complicated work work that's in that $50 million to $150 million range kind of a three year duration average wise and work that we can use at least 80% of our.
Speaker Change: Team to complete the self perform elements of the work and so it's it's really havent changed our formula and we're definitely maintaining our discipline on on the margins that we're seeking for this new work.
Irons Bychala: All right. I appreciate the color.
Speaker Change: Alright, I appreciate the color thanks for taking the questions I'll turn it over.
Irons Bychala: Thanks for taking the questions. I'll turn it over to you. Thank you.
Speaker Change: Thank you.
Speaker Change: Okay.
Operator: Thank you, sir. Ladies and gentlemen, we have reached the end of our question and answer session. This concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Speaker Change: Thank you Sam.
Ladies and gentlemen, we have reached the end of our question and answer session. This concludes today's conference. Thank you for joining US you may now disconnect your lines.
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Speaker Change: Okay.