Q3 2024 Shimmick Corp Earnings Call
Good day and welcome to Shemek Corporation's 3rd 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.
Speaker Change: I'd now like to turn the call over to Anthony Rasmus in Vesta Relations. Please go ahead.
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Anthony Rasmus: Good morning, and thank you for joining us on today's conference call to discuss SHMIC's third quarter 2024 results.
Slides for today's presentation.
Anthony Rasmus: During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risk and uncertainties.
Actual results could
Anthony Rasmus: differ materially from our forward-looking statements if any of our key assumptions are incorrect.
Anthony Rasmus: We identified the principal risk 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. We do not undertake a duty to update any forward-looking statements.
Today's presentation also includes references to non-GAAP financial measures.
Speaker Change: You should refer to the information contained in the company's third quarter press release for definitional information and reconciliations of historical non-GAAP measures to comparable GAAP financial measures. With that, it is my pleasure to turn the call over to Steve Richards, SHMIC's CEO.
Steve Richards: Good morning, and thank you all for joining today's call. I'm joined by Amanda Mobley, Chemex Interim CFO.
Steve Richards: Earlier this month, we announced the settlement of our last major outstanding claim of our legacy loss project.
Steve Richards: Under the terms of the settlement in our Golden Gate Bridge project, we will receive $97 million before the end of the year as reimbursement for costs incurred on the project. We are pleased to have reached a resolution of this claim and I will provide more details in a minute.
Speaker Change: With the large legacy settlements behind us, it felt it was time to hand off Chemek to a new leader. I am proud of what we have accomplished at Chemek and over my 43 year career.
Speaker Change: The projects we do make a difference in people's lives, and I've had the opportunity to work with an outstanding team who is focused on operational excellence.
Speaker Change: As we look forward to the next chapter, I am pleased to announce Yural Yao as Chemex New CEO. Yural has extensive knowledge of both the California and the water and critical infrastructure market.
Speaker Change: Yaral will officially step into the role as Chemex Moves CEO on December 2nd, 2024.
Speaker Change: I thank everyone who has supported me over my career. I'm excited to introduce you all and working with Tim over the next few months to ensure a smooth transition.
Speaker Change: Turning back to the business results, we delivered third quarter 2024 revenues of $166 million and experienced a net loss of $2 million with an adjusted EBITDA of $30 million.
Speaker Change: Stemmix Project's revenue totaled $101 million in the third quarter versus $110 million a year ago.
Speaker Change: Shimmick project gross revenues are 6% for the quarter, a decline of 15% gross margin in the third quarter of 2023, driven by wind-down in completion of projects partially offset by new work.
Speaker Change: We remain encouraged by the margin performance trend in 2024, as this is the second straight quarter with sequential margin improvement compared to 5% in the second quarter of 2024 and negative 1% in the first quarter.
Speaker Change: As we did on our last call, we'll provide a breakdown of results between SHMIC projects, projects that began after the EECOM sale transaction, and legacy projects, those that started before the EECOM sale transaction.
Speaker Change: Amanda will provide more details specifically related to the breakdown of those results.
Speaker Change: Finally, I want to address briefly the recent election, which we don't expect to have a material impact on our business.
Speaker Change: Infrastructure typically has bipartisan support and in California we expect to see additional opportunities from the recently passed California Proposition 4 which authorizes bonding for 10 billion dollars for infrastructure related projects that address climate change with the largest allocation of nearly 40 percent focused on water projects.
Speaker Change: Turning to the next slide, Chemex, through its consolidating joint venture with Danny's Construction Company LLC, the Chemex-Danny's joint venture, will receive $97 million before the end of this year as a result of our settlement agreement on the litigation of our Golden Gate Bridge project.
Speaker Change: Under the terms of the settlement, there will also be a contract change order for reduced scope of work of $6 million and a contract change order for extension of project completion and cost incurred on the TGV project.
Speaker Change: After paying subcontractor pass-through claims, we plan to use the remaining proceeds for ongoing operations, including completion of the Golden Gate Bridge project.
Speaker Change: We are expected to reach substantial completion of this on-site portion of the project in the third quarter of 2025, with the remaining work after that related to the subcontractor's off-site equipment fabrication activities.
Speaker Change: We are proud of the work that has been done on this project, which installed life-saving suicide prevention nets on the iconic Golden Gate Bridge.
Speaker Change: It is a difficult working environment with the heights, the weather, and the traffic control. Our team has done an exceptional job on the project. We are pleased to have settled the claim as another step forward in our transformation plan.
Speaker Change: We look forward to being able to further focus our efforts and financial resources on advancing our core projects.
Speaker Change: Turning to the next slide, I'd like to highlight a recently completed project at the Smith Canal Gate.
Speaker Change: We began work on this project in July 2020 to address critical flood protection needs for the San Joaquin area.
Speaker Change: Shimmick's solutions included constructing a thick cellular sheet pile flood wall along the San Joaquin River, a mitre gate structure with temporary in-water works and shoring, improvements to Dad's Point, and enhanced access to the Stockton Gulf and Country Club.
Speaker Change: These elements protect the canal from high water events while allowing essential access for boaters during normal conditions.
Speaker Change: With the project now completed, these improvements significantly enhance Stockton's flood resilience, protecting homes and business from high water events while meeting state and federal standards.
Speaker Change: With that, I'd like to turn the call over to Amanda who will discuss our financial results.
Thanks, Gabe.
Speaker Change: On behalf of the company, I want to thank you for your leadership and bringing Simmons to this point. You have been an integral part of establishing a strong foundation for future growth. We are grateful for all your contributions and congratulate you on your 43-year career.
Speaker Change: I look forward to working with you and Ural on this new transition and I'm excited to have him join us.
Speaker Change: Turning back to the financials, all comparisons made today will be on a year-over-year basis compared to the same period in 2023.
Speaker Change: For the third quarter, we reported revenue of $166 million compared to $175 million for the prior year period, which includes the impact of the GGB project settlement, which I will discuss in a minute.
Speaker Change: Moving on to the Shimmick Projects. Revenue recognized on Shimmick Projects that focus on water infrastructure and other critical infrastructure was a hundred and one million dollars in the third quarter 2024 compared to a hundred and ten million dollars a year ago.
Speaker Change: The decrease was primarily the result of a decrease from lower activity on existing jobs and jobs winding down, partially offset by revenue from a new water infrastructure job.
Speaker Change: Gross margin recognized on Schmidt projects in the third year was 6% compared to 14% a year ago.
Speaker Change: As Steve mentioned, we had our highest recorded growth margin percentage of the year.
Speaker Change: Revenue recognized on Foundation projects was $11 million in the third quarter 2024 compared to $12 million a year ago, driven by the result of timing of jobs winding down.
Speaker Change: Gross margin recognized on a foundation project was slightly lower at two million dollar loss in the third quarter 2024 compared to one million dollar loss a year ago.
Speaker Change: The latest project revenue was flat at $54 million compared to a year ago.
Speaker Change: Included in the quarter is a 31 million dollar adjustment to revenue to reflect the GGB project settlement amount. Without that adjustment, the legacy project revenue would have declined by 31 million dollars, reflecting the continuing wind down of the legacy projects.
Speaker Change: Legacy Project's growth margin was $8 million in the third quarter compared to $3 million a year ago.
Speaker Change: The increase in growth margin was primarily a result of the GGV project settlement partially offset by continued impacts of the legacy projects winding down.
Speaker Change: as well as additional legal fees to pursue contract modifications and recovery and additional cost overruns on other legacy loss projects.
Speaker Change: As a reminder, as these legacy loss projects continue to wind down to completion, no further growth margin will be recognized, and in some cases, there may be additional costs associated with these projects, which will be recognized in the period.
Speaker Change: We continue to actively pursue all opportunities to offset these costs.
Speaker Change: This quarter, we also recognize a one-time, primarily non-cash expense of $16 million, relating to our decision to enhance our current ERP system rather than implementing a new platform.
Speaker Change: We believe this decision will reduce overhead expenses in future periods.
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Speaker Change: Our net loss for the third quarter 2024 was $2 million compared to a net income of $35 million for the prior year.
Speaker Change: The decline is largely related to the ERP impairment and a decrease in gain on sale of assets of $13 million.
Speaker Change: The gain-on-sale change is a result of the $30 million gain-on-sale of our O&M business at Q3 last year that did not reoccur, offset by $17 million gain in the sale of the equipment yard this year.
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Speaker Change: Third quarter adjusted EBITDA was a gain of $30 million compared to $42 million in the prior year period.
again primarily due to the change in gain on sale.
Speaker Change: And over to the balance sheet. Unrestricted cash and cash equivalents at September 27, 2024, totaled $26 million, and availability under the revolving credit facility and the credit facility totaled $18 million and $15 million, respectively.
resulting in a total liquidity of $59 million.
Speaker Change: The liquidity position will continue to strengthen in 2024 with the proceeds from the GGV project settlement.
Speaker Change: Our backlog remained strong and was $834 million at the end of the third quarter. The mix of our backlog continues to improve as Shimmick projects represent 85% of the backlog at the end of the third quarter versus the 80% a quarter ago.
Speaker Change: This reinforces our team's commitment to be selective during the bidding process and focus on more profitable jobs that drive margins higher in our business.
Speaker Change: For the fiscal year ending January 3rd, 2025, after excluding non-core foundations projects, we now expect that SHMIC projects revenues to remain generally flat, with growth margin between 4% to 7%.
Speaker Change: Legacy projects revenue of $90 million to $95 million with negative growth margin of 40 to 50 percent. Due to the legacy loss project settlement, additional costs recorded for a legacy loss project relating to pending change orders and other cost overruns.
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Speaker Change: As we work to close out these jobs and with the transformation plan efforts, we believe we will show growth in 2025.
Steve Richards: With that, I'd like to turn it over to Steve now for some additional remarks.
Steve Richards: Thanks, Amanda. In conclusion, we're pleased to have resolved the last major outstanding claim and are encouraged to move forward by putting these distractions behind us.
Steve Richards: We're excited to enter this next phase in our strategic transformation, and we're confident in our team's capabilities to source water-related projects that fit well into our portfolio.
Steve Richards: We want to once again thank our team for their tireless efforts as we work to transform Chemek into one of America's best water infrastructure companies.
Operator, you may now open the line for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
One moment while you poll for questions.
Our first question comes from Jerry Sweeney, Roth Capital Partners.
Good morning, thanks for taking my call.
Thank you.
The backlog is...
contains.
I guess higher margin or higher bid margin projects.
Is that a fair assumption?
Speaker Change: I can start, jump in. Yeah, Jerry, I think that as we get through the backlog and especially as we add new backlog, higher margin work, I think, yeah, the math will tell you that we should see improvements.
I'm Andy. Thank you.
Speaker Change: Yeah, that's exactly right. We'll continue to see the legacy project going down in 2025 and replace that with higher margin work to increase the margin.
Speaker Change: How is bid activity progressing? I believe a lot of work out there but maybe some bids have been pulled on occasion because they're only single bidders etc.
That work's not necessarily going away, but I think people...
We're looking for additional.
Speaker Change: Unknown Speaker ...but, or a larger amount than just one, but can you give us an idea as to how the opportunities are sort of amassing in the background?
Yeah, it's the...
and the other one.
Speaker Change: Loading up our estimating resources. We've heard more estimators And that's a reflection of the number of opportunities out there, and I'd say to your point
Speaker Change: We still see, as we filter the projects through our system of what's best for Shemek, we still see a lot of good water projects, for example, that are in the one, two, three bidders. And with our increased estimating resources, I see that absolutely we'll capitalize on our opportunities.
And are those projects sort of fitting?
Speaker Change: Your criteria, I know historically I think you mentioned looking around for 15% gross margins, but I want to see if those projects are meeting that criteria.
Speaker Change: Yeah, when we filter jobs to make a go decision on the certainly we're looking at those that have the best.
Speaker Change: and definitely seeing projects that are still in that upper teens from an opportunity standpoint.
Go ahead, Manu.
Speaker Change: Yeah, currently we're about 80% done on GGB. There's about 40 million dollars of backlog remaining.
Speaker Change: We'll reach substantial completion this year in 2025 and continue to be on there.
with a little running through 2026 as well.
Speaker Change: Okay, and if the remainder so that would be about 85 million for the lock project give or take
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Yes, that's correct.
Got it.
Got it and then
Speaker Change: Will those projects carry the negative gross margin that you projected for the rest of this year? Or will that gross margin have a potential to improve in 2025 because some of the costs have been allocated, etc.?
and I'll start to update it.
that they cause within a specific course.
I think you understand what I'm asking.
Speaker Change: Yeah, those are lost jobs that currently have zero margin on them, and you're right, we do recognize period costs, primarily legal, as we've been incurring those costs to go after these claims. And so going forward, we won't have those high legal costs with the settlement fees behind us.
Speaker Change: So that should help improve that sort of negative gross margin.
Speaker Change: We would estimate there would be zero margin on those lost jobs going forward.
Great, got it.
Um...
Speaker Change: And then one last question on the cash on the balance sheet for the end of the quarter. Does that include the lock settlement?
Had that been received?
Thank you. Bye.
Speaker Change: That was received during the quarter and those proceeds were used to pay down some of the debt on the credit facility.
Speaker Change: Perfect. Okay. I'll jump in. Excuse me. I'm sorry. I'll jump back in line. Thanks
Thank you.
Speaker Change: Thank you. Our next questions come from Aaron Spalla, Greg Collum.
Speaker Change: Yeah, good morning, Steve and Amanda. Thanks for taking the questions. You know, first, for me, just...
Speaker Change: You know, as part of the transformation plan and kind of reducing the cost structure, can you just talk about where OPEX could go as you kind of focus on that, you know, with the ERP system costs? It sounds like the legal costs are more on the cost of good sold line, but just, you know, talk about how that could trend as we look towards 2025.
Speaker Change: You're talking to the SG&A and how we look at that.
Yep.
Speaker Change: Yeah, we still see more efficiencies coming, you know, as we focus our work on California. I mentioned earlier, we have made an investment in estimating resources, so that's a positive, if you will, from a cost standpoint, it is negative, but definitely add some resources to gaining new work. As we grow the top line a little bit, SG&A as a percentage will go down. We do have other transformation items.
Speaker Change: As the other backlog of work burns off, some of the legacy projects burn off, our foundations business will burn off soon, and so we should see some SG&A improvements with that as well.
Speaker Change: All right, and then, you know, appreciate the commentary on on the election and kind of regulatory environment Can you just you know, talk a little bit about on on that pipeline, you know, I know you've hired some estimators But just how are you kind of thinking that transitions into backlog here moving forward? Can we you know, do you expect some projects later this year? Is it kind of more, you know, first half at 25 or just
Speaker Change: Just curious if you can kind of elaborate a little bit on kind of the pipeline dynamics.
Speaker Change: Yeah, we really don't see work being seasonal for us and so we definitely have some
Speaker Change: and nice projects that we're bidding in Q4 that are in the pipeline right now. And so look to see, you know, when our share would be the theme as we finish off the year. And definitely the projects continue to come in.
Speaker Change: at a nice rate in early 25 as well. So don't see any decline in bidding activities for sure and with the new money coming in, whether it be Prop 4 or other things that definitely a lot more opportunities in the pipeline.
Speaker Change: All right, thanks for that. And then, you know, maybe last.
Speaker Change: for me, just on the balance sheet with with, you know, getting the Golden Gate proceeds by by year end, can you just
Speaker Change: Kind of talk about how you're thinking about capital allocation in 2025. Sounds like there's some that goes to that project, but just, you know, what are some of the priorities for that kind of large cash balance that you should see by year end?
Unknown Executive, Steven Richards, Devin Nordhagen, Devin Nordhagen, Devin Nordhagen,
Yeah.
Speaker Change: So it's positive on the liquidity for the company as well too, you know, we'd get the cash in and we'd use those to pay down the debt as well as use for just ongoing operations as well as just continuing to close out and finish these legacy jobs.
Speaker Change: I appreciate the color. Thanks for taking the questions. I'll turn it over.
Okay, thanks.
Speaker Change: Thank you. Looks like there are no further questions at this time. We'd like to thank everyone for our participation. This does conclude today's teleconference. You may disconnect your lines at this time.