Shimmick Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 28, 2024

There are 6 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neil Sikka with Investor Relations at Schimmick.

Operator

Thank you. You may begin.

Speaker 1

Good morning, and thank you for joining us on today's conference call to discuss Schimmick's Q4 fiscal year 2023 results. Slides for today's presentation are available on the Investor Relations section of our website, www.shimic.com. During this conference call, management will make forward looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website.

Speaker 1

We do not undertake a duty to update any forward looking statements. Today's presentation also includes references to non GAAP financial measures. You should refer to the information contained in the company's Q4 press release for definitional information and reconciliations of historical non GAAP measures to the comparable GAAP financial measures. With that, it is my pleasure to turn the call over to Steve Richards, Shymic's CEO.

Speaker 2

Good morning, and thank you all for joining us on today's call. I am joined by Devin Nordhagen, Shymic's CFO. As a reminder and for those of you who are new to our story, Schimmick is a leading water infrastructure company that provides solutions across the entire water spectrum. We focus on 2 key areas, water treatment and water resources, which include dams, reservoirs, flood protection and other infrastructure. CEMIC operates in a strong, vibrant and underserved market.

Speaker 2

Infrastructure construction saw nearly 20% year over year increase in spending during Q4 2023. The strongest spending increase was in the combined water and sewer segment of a 23% year over year gain. Healthy growth remained consistent, signaling that the Infrastructure Investment and Jobs Act funds are flowing and are having an impact. Spending on infrastructure construction is expected to strengthen further as funds from the IJA continue to flow through to projects, which is expected to provide significant stimulus to the infrastructure construction segment over the next decade. The Water segment specifically is benefiting from the allocation of federal funds.

Speaker 2

Nearly $15,000,000,000 was set aside to assist with lead pipe removal and replacement and billions more was set aside for water storage, sanitation and clean water drinking water grants. In February 2024, the Biden administration announced an additional $5,800,000,000 in funds from the IJA to be split among 22 states for water infrastructure projects. CEMEX pipeline reflects this growth in the infrastructure market. We have identified approximately $4,000,000,000 in priority opportunities through the end of 2024. We believe that while double digit growth is likely sustainable, the overall demand for water solutions will remain high over the long term due to water scarcity and other macroeconomic drivers.

Speaker 2

For the fiscal year 2023, we delivered revenue of $633,000,000 a net loss attributable to Shema Corporation of $3,000,000 and an adjusted EBITDA of $30,000,000 To provide a better perspective on our financial results and how the strategy we have implemented is progressing, we'll be sticking to results today on a bifurcated basis between Shemik projects and legacy projects. Shemik projects are projects that Shemik started after the AECOM sale transaction. Since becoming an independent company, Shemik has shifted our focus to water infrastructure and other critical infrastructure, which you will see is reflected in our backlog portfolio. Legacy projects are projects that started prior to the AECOM sales transaction and that we assumed in the sales transaction. Several of these are large complex multiyear projects that have experienced cost overruns.

Speaker 2

Longer term, these projects will decline as a significant portion of our business and be replaced by newer strategic projects. With that context, in 2023, Shemik project revenue grew to $434,000,000 a 24% increase compared to 2022. Importantly, we grew Chenet gross margin by $5,000,000 for the year. Legacy project revenue decreased by $114,000,000 to $199,000,000 reflecting a 37% decrease when compared to 2022. Our backlog, which we view as a key differentiator versus our competitors, continues to be strong.

Speaker 2

CEMIC finished 2023 with a backlog of $1,100,000,000 We've reported an 18% increase specifically in CEMIC projects shipment projects backlog during fiscal year 2023. 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. 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. We secured several notable water projects for state and federal governments in 2023.

Speaker 2

Turning to the next slide as an example, Smith won a major $217,000,000 water treatment plant expansion for the Elsinore Valley Municipal Water District in Southern California, where Schemic will expand the facility's capacity from 8,000,000 to 12,000,000 gallons per day to meet the area's growing water demand. The project includes 2 new aeration basins, a membrane bioreactor facility and a UV disinfection facility among other work. STEMIC is self performing more than 80% of this project, including the electrical work required to bring expanded facility online. We have since installed the dewatering system, relocated conduit and conducted mass excavation to prepare for the critical facility expansion. With that, I'd like to turn the call over to Devin, who will discuss our financial results.

Speaker 3

Thanks, Steve. All comparisons made today will be on a year over year basis compared to the same period in 2022. For the Q4, we reported revenue of $138,000,000 compared to $186,000,000 for the prior year period with a net loss of $17,000,000 approximately flat as compared to the prior year period. 4th quarter adjusted EBITDA was a loss of $9,000,000 compared to a loss of $11,000,000 in the prior year period. For our fiscal year 2023 results, revenue was $633,000,000 compared to $664,000,000 for 2022.

Speaker 3

As Steve mentioned, it is important to look at the trends in executing on our Schimmick strategy as compared to the wind down of the legacy projects. As you can see in the top left chart, Chemek projects revenue was $434,000,000 a 24% increase compared to 2022. The Chemek projects revenue for the quarter was down slightly compared to last year due to the conclusion of some projects in 2023. Given the timing of project starts and completions, order to prior year quarter comparisons will sometimes show some lumpiness. CIMIC Projects gross margin increased by $5,000,000 due to the higher revenue and was consistent as 7% as compared to last year, primarily driven by management shift in job bidding strategy towards higher margin lower risk jobs.

Speaker 3

On the legacy projects in the bottom half of the slide, revenue decreased 37% to $199,000,000 Legacy projects gross margin was a negative $7,000,000 primarily due to projects winding down and an unfavorable settlement on a legacy project. The legacy loss projects with negative gross margins are over 75% complete at the end of fiscal year 2023 with the cash used in operating these projects was approximately $65,000,000 96,000,000 for the fiscal years ended 2023 2022 respectively. We continue to actively pursue all opportunities to offset these costs. In total, fiscal year 2023 gross margin was $22,000,000 compared to $23,000,000 in 2022. Fiscal year 2023 net loss attributable to SHIMIC was $3,000,000 compared to net income attributable to SHIMIC of $4,000,000 in 2022.

Speaker 3

Fiscal year 2023 diluted net loss per common share was $0.11 compared to net income per common share of $0.17 in the prior year period. Fiscal year 2023 adjusted net income was $11,000,000 compared to $30,000,000 in the prior year period and adjusted diluted earnings per common share was $0.48 as compared to $1.35 in the prior period. Fiscal year 2023 adjusted EBITDA was $30,000,000 compared to $47,000,000 in the prior year period, in part due to a large equity method project settlement in 2022. With that, I'd like to turn it over to Steve for some additional remarks.

Speaker 2

I'd like to provide our view of our portfolio and backlog. Backlog is awarded work still to be completed. We are continuing to burn off the legacy portfolio, which will in turn lead to improving margins over time. At the end of 2023, legacy projects only accounted for 18% of the backlog. We plan to continue to grow our Summit projects backlog and bid on high margin water infrastructure projects.

Speaker 2

We have a robust pipeline of bids that is expected to increase with further federal funding. We're well positioned to capitalize on America's water infrastructure renaissance, which will be taking place for the coming decade. As a newly public company and given the sizable ongoing impact of legacy projects, we are introducing limited guidance for 2024 covering only revenue and gross margin. For the fiscal year ending December 27, 2024, we expect CEMIC project revenue to grow 7% to 13% with gross margin between 7% to 13%. Legacy projects revenue to decrease by 45% to 55% with negative gross margin of 5% to 10%.

Speaker 2

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 half weighted in 2024 with further strong momentum for the growth in 2025. In conclusion, CEMIC continues to be favorably suited to take advantage of the sizable market opportunities ahead. Our vertical integration minimizes risk and our strategic shift towards a higher margin portfolio coupled with potential M and A activities positions us well for enhanced margins and growth. Lastly, I want to thank all the Shemex employees for their tireless dedication and support.

Speaker 2

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 the line of Gerry Sweeney with ROTH Capital. Please proceed with your question.

Speaker 4

Good morning, Steve and Devin. Thanks for taking my call.

Speaker 2

Good morning, Jerry.

Speaker 4

I wanted to touch upon the new Schimmick projects. They appeared to underperform my expectations in the quarter. Margins came in, I think, lower on a year over year basis. Can you discuss what is driving some of that margin impact in the quarter? I think margins on the new SHIMMEC projects were about almost 3% versus last year at 7.4 percent.

Speaker 4

Just curious of some of the dynamic that's going on there, if you could. Thank you.

Speaker 2

Devin, you want to take that or I can?

Speaker 3

Yes, I can. Thanks for the question, Jerry. Yes, I think for our Q4, specifically for the Skimmick projects, you have a little bit of timing going on where you have some projects winding down in that quarter period that weren't replaced by project backlog. So you have some timing aspects in the quarter.

Speaker 4

Were there any challenges or projects that aren't going as well as desired?

Speaker 3

No, I think all the as the team that I mentioned in the call and financials will see that our Schimmig projects are the projects that are the right size, duration and scope that we've been looking for in that water infrastructure space. And so they are the projects that we're looking to bring on more of.

Speaker 4

Got you. So there's a in other words, your Chemek is executing well or as desired on the new projects that you've brought into the pipeline into the backlog and are operating on currently. Is that a fair justification?

Speaker 3

Correct.

Speaker 4

Got it. And then, let me see here. As we look out to Q1, obviously, last year, I think you guys got hit by some weather impacts and things like that. There was some rain as well in 1Q. Just curious how that's going to play into the Q1 if that similar challenges are arising in 2024 as they did in 1Q 2023 because of weather?

Speaker 2

Yes. We're not seeing the same impact as last year, Jerry. We do have some projects that have seasonal nature to them, but those are as planned as

Speaker 4

well. Got you. That's good to know. And then also, you provided guidance, which we're very appreciative. It's rather wide, but completely understandable given the nature of the industry.

Speaker 4

But could maybe provide us maybe some of the puts and takes on especially on the new Shemik projects on not just the not the revenue side, but more on the margin side. Just curious, 7% to 13%, what needs to go right to get towards the 13% and what would be some of the challenges if they came in closer to 7%, given that you feel as though you're executing well on those new projects that have entered the revenue stream?

Speaker 2

Well, as we've talked in the IPO, the go right answer would be we're very smart about the way we kick off projects. We make sure that we buy out subcontractors and key material providers, for example, early in the project so that we kind of minimize any escalation impacts, pass that along to the vendors and subs who can manage that risk best. Go wrong with the as you mentioned earlier, sometimes weather may step in and see a little bit of impact, but that kind of slows progress and pushes work possibly to the right more than anything. But overall, the margin should be okay. So I'd say those would be the main things of good strong project startup activities.

Speaker 4

Got you. And one more for me and I'll jump in live. I think Aaron is probably behind me. But when you how does the margin profile work, right, in terms of you have mobilization ramp, then you get into the beginning of the project. So is it early in the process, very low margins, if not costs associated with the project as you're mobilizing and getting ready for the project?

Speaker 4

And then you hit the teeth of the project margins are chugging along and then the similar maybe cost or lower margins as you demobilization. Is that the way of thinking of how 4Q, even 1Q, we're seeing some of this demobilization and mobilization into new project impacting margins? Is that a fair way of thinking about it?

Speaker 2

I'll let Devin jump in as well. But we use the percentage of completion accounting methodology. And so if your cost is right and you're completing your work with actual costs over anticipated completed costs, we should be earning progress and earnings as we go. Devin, do you want to supplement that?

Speaker 3

Yes. I mean to your point, Steve, you can have some changes in how that job is ramping up. So you're going to earn your revenue not always completely when you're in a job, it depends on the cost that you're incurring the job over the cost that you expected for the life of the job. And so you could have some peaks and valleys in certain points in time.

Speaker 4

Got you. Okay. I'll jump back in line. Thank you.

Operator

Thank you. Our next question comes from the line of Aaron Spychalla with Craig Hallum. Please proceed with your question.

Speaker 5

Yes. Good morning, Steve and Devin. Thanks for taking the questions. First for me, can you maybe just touch on the pipeline and how that's been trending? I think you called out a $4,000,000,000 opportunity.

Speaker 5

And then just a little bit on the funding, it sounds like that's mostly gotten out to a state level from some of the funds. Do we start to see that kind of flow to projects in 2024, 2025? Is that kind of your expectation?

Speaker 2

We do. We're really pleased with the pipeline. We're, as we mentioned, tracking $4,000,000,000 It's the pipeline that fits how we look at the new Shemik. We're looking for jobs that are in that 50 to 150 range, average kind of 3 year duration. So the pipeline is filling up like that.

Speaker 2

I mentioned during the call that we're kind of back half weighted. That would include our bidding activity as well. But we feel really good about it. To your question about where is the funding coming, we are still continuing to see the IIJA funding coming. Some of the leading indicators that we watch would be the major designers and how they are seeing that funding coming through their programs and seeing an increase in activity there, which we'll see as those design products come out in the form of RFPs for clients, we'll see more and more opportunities for us as well.

Speaker 5

All right. Thanks for that. And then could you just kind of touch on the supply chain and kind of the labor market as you kind of try to balance that growth that you're expecting with kind of what you're seeing there from a supply chain perspective?

Speaker 2

Yes. The craft labor that we're seeing still, we've got a strong following with Shemex, especially in our regional areas, Southern Cal and Northern Cal where we've got strong market presence for years. And so we've got good continuity of craft staying with us from a staff standpoint. It is a challenge out there. We are doing a great job of recruiting top talent on to our new projects and filling in some areas.

Speaker 2

We've got some initiatives going on for chasing new work and bringing in additional estimators to chase new work and to add to the efforts on this attractive pipeline we have. So definitely out there a war on talent, but pleased with how SHIMMUG is addressing that.

Speaker 5

Understood. And then can you just kind of talk about the legacy projects? Just how much is left there to go? It looks like it might be a couple of $100,000,000 I know you called out 75% complete. On the rest of what you didn't guide to for this year, should we expect a similar margin profile or just maybe talk about that a little bit on what's left on the legacy side?

Speaker 2

Yes. I'll start and then Devin will fill in some information there as well. A couple of years left is what we've got on those, about 18 months, 24 months. Good line of sight on the project completion from a margin standpoint. I'll note and I think we've talked before that we do not carry margins on those legacy projects and we do there may be some additional cost increases, especially as related to legal type expenses.

Speaker 2

But Devin, do you want to add on there?

Speaker 3

Yes. So you can see like in the charts there, Aaron, where we're the legacy backlog was at the end of 2022, it's 39% and now at the end of 2023, it's at 18%. So we're pleased with how that's kind of burning off and we'll

Speaker 1

burn off

Speaker 3

the rest of it in that time period that Devitt mentioned.

Speaker 5

Okay, thanks. And then maybe last for me, can you just kind of touch on or give an update on the M and A, what that market is looking like, how valuations might be trending versus your expectations and just areas of focus moving forward?

Speaker 2

Definitely an area of focus for us as we move forward. We're still watching and seeing M and A opportunities coming through. We continue to evaluate those as we go. I'd say that from our standpoint as it fits into our strategic vision, looking forward to future quarters of seeing more activity there. But right now, I'd say that's where we're at.

Speaker 2

Definitely continues to fill the vision that we have for Schumann.

Speaker 5

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

Speaker 2

Thanks, Aaron.

Powered by Quartr

Key Takeaways

  • IIJA tailwinds: Infrastructure construction spending rose 20% year-over-year in Q4 with a 23% gain in water and sewer, and over $20B in federal funds allocated for lead pipe removal, water storage and clean water grants, supporting a $4B project pipeline.
  • New project growth: Shimmick-started projects delivered 24% revenue growth to $434M in fiscal 2023 with a 7% gross margin, helping to build a record $1.1B backlog of primarily higher-margin water infrastructure work.
  • Legacy portfolio wind-down: Revenue from legacy projects fell 37% to $199M with negative gross margins, and over 75% of these contracts are now complete, reducing legacy backlog to just 18% of total.
  • FY2023 results: The company reported $633M in revenue, a $3M net loss attributable to shareholders and $30M of adjusted EBITDA as the strategic shift offset legacy project over-runs.
  • 2024 outlook: Management expects Shimmick project revenue to grow 7–13% at a 7–13% gross margin while legacy revenue declines 45–55% with negative 5–10% margin, with performance weighted to the back half of the year.
AI Generated. May Contain Errors.
Earnings Conference Call
Shimmick Q4 2023
00:00 / 00:00