Shimmick Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 12, 2024

Key Takeaways

  • Positive Sentiment: We reached a $97 million settlement on the Golden Gate Bridge project, resolving our last major legacy claim and strengthening liquidity before year-end.
  • Neutral Sentiment: Steve Richards announced his retirement and Yirael Yau will become CEO on December 2, 2024, ushering in new leadership for the next strategic phase.
  • Positive Sentiment: Q3 delivered an adjusted EBITDA of $30 million and Schimmick project margins improved to 6%, building on sequential gains from Q1 and Q2.
  • Positive Sentiment: At quarter end we held $26 million in cash (with total liquidity of $59 million) and an $834 million backlog comprised 85% of higher-margin ship projects.
  • Positive Sentiment: With legacy projects winding down, we now expect flat core revenue in fiscal 2024 and are positioned for growth in 2025 as our water infrastructure focus accelerates.
AI Generated. May Contain Errors.
Earnings Conference Call
Shimmick Q3 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good day, and welcome to the Shemik Corporation's Third 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. I'd now like to turn the call over to Anthony Rasmus, Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us on today's conference call to discuss Schimmick's Q3 2024 results. Slides for today's presentation are available on the Investor Relations section of our website, www.shimic.com. During this conference call, management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.

Speaker 1

We do not undertake a duty to update any forward looking statements. Today's presentation also includes references to non GAAP financial measures. You should refer to information contained in the company's Q3 press release for a definitional information and reconciliations of historical non GAAP measures to comparable GAAP financial measures. With that, it's my pleasure to turn the call over to Steve Richards, Shemik's CEO. Good morning, and

Speaker 2

thank you all for joining today's call. I'm joined by Amanda Mobley, Shemik's Interim CFO. Earlier this month, we announced the settlement of our last major outstanding claim of our legacy loss projects. Under the terms of the settlement in our Golden Gate Bridge project, we will receive $97,000,000 before the end of the year as reimbursement for costs incurred on the project. We're pleased to have reached the resolution of this claim and I will provide more details in a minute.

Speaker 2

With the large legacy settlements behind us, I felt it was time to hand off Shemik to a new leader. I'm proud of what we've accomplished at Shemik and over my 43 year career. 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. As we look forward to the next chapter, I'm pleased to announce Yirael Yau as Shemik's new CEO. Yirael has extensive knowledge of both the California and the water and critical infrastructure market.

Speaker 2

He is well qualified to lead Chemek, and I'm excited for what the company can offer in the future. Yirael will officially step into the role of Shemex's new CEO on December 2, 2024. I thank everyone who has supported me over my career. I'm excited to introduce Yirael and working with him over the next few months to ensure a smooth transition. Turning back to the business results, we delivered Q3 2024 revenues of $166,000,000 and experienced a net loss of $2,000,000 with an adjusted EBITDA of $30,000,000 Stimix projects revenue totaled $101,000,000 in the Q3 versus $110,000,000 a year ago.

Speaker 2

CEMEX project gross revenues were 6% for the quarter, a decline of 15% gross margin in the Q3 of 2023, driven by wind down and completion of projects partially offset by new work. We remain encouraged by the margin performance trend in 2024 as this is the 2nd straight quarter with sequential margin improvement compared to 5% in the Q2 of 2024 and negative 1% in the Q1. As we did on our last call, we'll provide a breakdown of results between Schimmick projects, projects that began after the EECOM sale transaction and legacy projects, those that started before the EECOM sale transaction. Amanda will provide more details specifically related to the breakdown of those results. Finally, I want to address briefly the recent election, which we don't expect to have a material impact on our business.

Speaker 2

Infrastructure typically has bipartisan support. In California, we expect to see additional opportunities from the recently passed California Proposition 4, which authorizes funding for $10,000,000,000 for infrastructure related projects that address climate change with the largest allocation of nearly 40% focused on water projects. Turning to the next slide. Shemex, through its consolidating joint venture with Gannys Construction Company, LLC, the Shemex Gannys joint venture, will receive $97,000,000 before the end of this year as a result of our settlement agreement on the litigation of our Golden Gate Bridge project. Under the terms of the settlement, there will also be a contract change order for reduced scope of work of $6,000,000 and a contract change order for extension of project completion and costs incurred on the GGV project.

Speaker 2

After paying subcontractor pass through claims, we plan to use the remaining proceeds for ongoing operations, including completion of the Golden Gate Bridge project. We are expected to reach substantial completion of this on-site portion of the project in Q3 of 2025, with the remaining work after that related to a subcontractor's off-site equipment fabrication activities. 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. It's a difficult working environment with the heights, the weather and the traffic control. Our team has done an exceptional job on the project.

Speaker 2

We're pleased to have settled the claim as another step forward in our transformation plan. We look forward to being able to further focus our efforts and financial resources on advancing our core projects. Turning to the next slide, I'd like to highlight our recently completed project at the Smith Canal Gate. We began work on this project in July 2020 to address critical flood protection needs for the San Joaquin area. Shemic Solutions included constructing a fixed cellular speed pile floodwall along the San Joaquin River, a miter gate structure with temporary in water works ensuring, improvements to Dads Point and enhanced access to the Stockton Gulf and Country Club.

Speaker 2

These elements protect the canal from high water bins while allowing essential access for borders during normal conditions. 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. Again, this is just another project that exemplifies Chemed's commitment to delivering sustainable infrastructure solutions that benefit both communities and the environment. With that, I'd like to turn the call over to Amanda, who will discuss our financial results.

Speaker 3

Thanks, Steve. On behalf of the company, I want to thank you for your leadership in 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. I look forward to working with you and Yorel on this smooth transition, and I'm excited to have him join us.

Speaker 3

Turning back to the financials. All comparisons made today will be on a year over year basis compared to the same period in 2020 3. For the Q3, we reported revenue of $166,000,000 compared to $175,000,000 for the prior year period, which includes the impact of the GGB project settlement, which I will discuss in a minute. Moving on to the Shemik projects. Revenue recognized on Shemik projects that focus on water infrastructure and other critical infrastructure was $101,000,000 in the Q3 2024 compared to $110,000,000 a year ago.

Speaker 3

The decrease was primarily the result of a decrease from lower activity on existing jobs and jobs finding down, partially offset by revenue from new water infrastructure job. Gross margin recognized on Schimmick projects in the 3rd year was 6% compared to 14% a year ago. As Steve mentioned, we had our highest reported gross margin percentage of the year. Revenue recognized on foundation projects was $11,000,000 in the Q3 2024 compared to $12,000,000 a year ago, driven by the result of timing of jobs winding down. Gross margin recognized on the foundations projects was slightly lower at $2,000,000 loss in the Q3 of 2024 compared to $1,000,000 loss a year ago.

Speaker 3

Logistics revenue was flat at $54,000,000 compared to a year ago. Included in the quarter is a $31,000,000 adjustment to revenue to reflect the GGB project settlement amount. Without that adjustment, the legacy project revenue would have declined by $31,000,000 reflecting the continuing wind down of the legacy projects. Legacy projects gross margin was $8,000,000 in the 3rd quarter compared to $3,000,000 a year ago. The increase in gross margin was primarily a result of the GGB project settlement, partially offset by continued impact of the legacy projects winding down as well as additional legal fees to pursue contract modifications and recoveries and additional cost overruns on other legacy loss projects.

Speaker 3

As a reminder, 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 be recognized in the period. We continue to actively pursue all opportunities to offset these costs. This quarter, we also recognized a one time primarily non cash expense of $16,000,000 relating to our decision to enhance our current ERP system rather than implementing a new platform. We believe this decision will reduce overhead expenses in future periods.

Speaker 3

Our net loss for the Q3 2024 was $2,000,000 compared to a net income of $35,000,000 for the prior year. The decline is largely related to the ERP impairment and a decrease in gain on sale of assets of $13,000,000 The gain on sale change is a result of the $30,000,000 gain on sale of our O and M business at Q3 last year that did not reoccur, offset by $17,000,000 gain in the sale of the equipment yard this year. 3rd quarter adjusted EBITDA was a gain of $30,000,000 compared to $42,000,000 in the prior year period, again primarily due to the change in gain on sale. And over to the balance sheet. Unrestricted cash and cash equivalents at September 27, 2024, totaled $26,000,000 and availability under the revolving credit facility and the credit facility totaled $18,000,000 $15,000,000 respectively, resulting in a total liquidity of $59,000,000 The liquidity position will continue to strengthen in 2024 with the proceeds from the GGB project settlement.

Speaker 3

Our backlog remains strong and was $834,000,000 at the end of the 3rd quarter. The mix of our backlog continues to improve as shipment projects represent 85% of the backlog at the end of the 3rd quarter versus the 80% a quarter ago. 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. For the fiscal year ending January 3, 2025, after excluding non core foundations projects, we now expect that Schimmick projects revenue to remain generally flat with gross margin between 4% to 7%. Legacy projects revenue of $90,000,000 to $95,000,000 with negative gross margin of 40% to 50%.

Speaker 3

Due to the legacy loss project settlement, additional costs recorded for legacy loss project relating to pending change orders and other cost overruns. The guidance reflects our execution on our strategies, our robust pipeline, the improving quality of our backlog and our continued operational excellence as well as our efforts to work off our legacy projects. As we work to close out these jobs and with the transformation plan efforts, we believe we will show growth in 2025. And with that, I'd like to turn it over to Steve now for some additional remarks.

Speaker 2

Thanks, Amanda. In conclusion, we are pleased to have resolved the last major outstanding claim and are encouraged to move forward by putting these distractions behind us. 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. We want to once again thank our team for their tireless efforts as we work to transform Chemek into one of America's best water infrastructure companies. Operator, you may now open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Gerry Sweeney, ROTH Capital Partners.

Speaker 4

Hi, good morning. Thanks for taking my call.

Speaker 2

Good morning, Gerry.

Speaker 4

Just want to start on the Schimmick revenue side, right? So gross margin 6% heading in the right direction. Should we all things being equal, I understand projects are all different, but as we move through the rest of this year into next year, should we see this gross margin increase? My sense would be the backlog is contains, I guess, higher margin or higher bid margin projects. Is that a fair assumption?

Speaker 2

I can start and jump in. Yes, Jerry, I think that as we get through the backlog and especially as we add new backlog, higher margin work, I think, yes, the math would tell you that we should see improvements. Amanda, anything?

Speaker 3

Yes, that's exactly right. We'll continue to see the legacy projects wind down in 2025 and replace that with higher margin work to increase the margins.

Speaker 4

How is bid activity progressing? I believe a lot of work out there, but maybe some bids have been pulled on occasion because there are only single bidders, etcetera. That work is not necessarily going away, but I think people were looking for additional bidders per se, but or larger amount than just one. But could you give us an idea as to how the opportunities are sort of amassing in the background?

Speaker 2

Yes. The continues to increase. We are loading up our estimating resources. We've hired more estimators and that's a reflection of the number of opportunities out there. And I'd say to your point, we still see as we filter the projects through our system of what's best for CEMIC, we still see a lot of good water projects, for example, that are in the 1, 2, 3 bidders.

Speaker 2

And with our increased estimating resource, to see that absolutely we'll capitalize on our opportunities.

Speaker 4

Got you. And are those projects sort of fitting your criteria? I know historically, I think you mentioned looking around for 15% gross margin, but I just want to see if those projects are meeting that criteria.

Speaker 2

Yes. When we sell through jobs to make a go decision on the bid, certainly, we're looking at those that have the best margin opportunity and definitely seeing projects that are still in that upper teens from an opportunity standpoint.

Speaker 4

Got it. Shifting gears a little bit, legacy projects, great to see the Golden Gate Bridge settled. The question I had was just I think just doing the math, there's about $125,000,000 left on legacy projects. How much of that is Golden Gate? How much of that is the Delok project?

Speaker 4

And maybe how much of that is maybe some other loose tag ends of other projects?

Speaker 2

Go ahead, Amanda.

Speaker 3

Yes. Currently, we're about 80% done on GGB. There's about $40,000,000 of backlog remaining. We'll reach substantial completion this year in 2025, and continue to be on there with a little running through 2026 as well.

Speaker 4

Okay. And is the remainder so that would be about $85,000,000 for the lock project give or take?

Speaker 3

Yes, that's correct.

Speaker 4

Got it. Okay. Got it. And then will those projects carry the sort of that 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, etcetera?

Speaker 4

I think some of the margins are getting hit by period costs that sort of updated within that update cost within a specific quarter, but I think you understand what I'm asking.

Speaker 3

Yes. But there are loss jobs that currently have 0 margin on them. And you're right, we do recognize period comps, primarily legal as we've been incurring those costs to go after these claims. And so going forward, we shouldn't we won't have those high legal costs with the settlement that gets behind us.

Speaker 4

So that should help improve that sort of negative gross margin?

Speaker 3

We would estimate that would be 0 margin on those lost jobs going forward.

Speaker 4

Okay, great. Got it. 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 or recorded?

Speaker 3

That was received during the quarter and those proceeds were used to pay down some of the debt on the credit facility.

Speaker 4

Perfect. Okay. I'll jump in. Excuse me, I'm sorry, I'll jump back in line. Thanks.

Speaker 4

Thanks, Steve.

Operator

Thank you. Our next question comes from Aaron Spalla, Greg Hallum.

Speaker 5

Yes. Good morning, Steve and Amanda. Thanks for taking the questions. First for me, just 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 with the ERP system costs? It sounds like the legal costs are more on the cost of goods sold line, but just talk about how that could trend as we look towards 2025?

Speaker 2

You're talking to the SG and A and how we look at that?

Speaker 4

Yes.

Speaker 2

Yes, we still see more efficiencies coming. 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 and A as a percentage will go down. Other we do have other transformation items as the other backlog of work burns off some of the legacy projects burn off, our foundations business will burn off soon.

Speaker 2

And so we should see some margin or some SG and A improvements with that as well.

Speaker 5

All right. And then appreciate the commentary on the election and kind of regulatory environment. Can you just talk a little bit about on that pipeline? I know you've hired some estimators, but just how are you kind of thinking that transitions into backlog here moving forward? Can we do you expect some projects later this year?

Speaker 5

Is it kind of more first half of 'twenty five? Or just curious if you can kind of elaborate a little bit on kind of the pipeline dynamics?

Speaker 2

Yes, we really don't see work being seasonal for us. And so we definitely have some nice projects that we're bidding in Q4 that are in the pipeline right now. And so look to see when our share would be the theme as we finish off the year. And definitely the projects continue to come in at a nice rate in early 2025 as well. So don't see any decline in bidding activity for sure.

Speaker 2

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 5

All right. Thanks for that. And then maybe last for me, just on the balance sheet with getting the Golden Gate proceeds by year end. Can you just kind of talk about how you're thinking about capital allocation in 2025? It sounds like there's some that goes to that project, but just what are some of the priorities for that kind of large cash balance that you should see by year end?

Speaker 2

I'll start and then Amanda can jump in. But definitely the GGB settlement is fantastic for the company. It takes a load off of the liquidity needs that we have to finish the job. I want to point out that the job, it will largely finish the work in the field, the suicide nets themselves and the access work to the suicide nets will be completed in late 2025. And then from then on, it's a contract activity off-site to complete the fabrication of the travelers.

Speaker 2

The installation of that work has been eliminated from the contracts through the settlement agreement with the district. So it's a positive from the company as far as the risk going forward on the GGB. But Amanda, you want to address Erin's question on use of funds?

Speaker 3

Yes. So it's positive on the liquidity for the company as well too. 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 5

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

Speaker 5

Thanks, Aaron.

Operator

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.

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