EarningsCall · SHIM Q4 2023

spk11: Greetings and welcome to the SHMIC's fourth quarter and fiscal year 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neal Sikka, with Investor Relations at SHMIC. Thank you. You may begin.

spk01: Good morning, and thank you for joining us on today's conference call to discuss SHMIC's fourth quarter and fiscal year 2023 results. Slides for today's presentation are available on the investor relations section of our website, www.shmic.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 material 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. 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 fourth quarter 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, Chimix CEO.

spk07: Good morning, and thank you all for joining us on today's call. I am joined by Devin Nordhagen, Chimix CFO. As a reminder, and for those of you who are new to our story, CIMIC is a leading water infrastructure company that provides solutions across the entire water spectrum. We focus on two key areas, water treatment and water resources, which include dams, reservoirs, flood protection, and other infrastructure. CIMIC operates in a strong, vibrant, and underserved market. 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 IOJA 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. Nearly $15 billion 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 $5.8 billion in funds from the IJA to be split among 22 states for water infrastructure projects. CIMIC's pipeline reflects this growth in the infrastructure market. We have identified approximately $4 billion in priority opportunities through the end of 2024. We believe that while double digit growth is likely not sustainable, the overall demand for water solutions will remain high over the long term due to water scarcity and other macroeconomic drivers. For the fiscal year 2023, we delivered revenue of $633 million a net loss attributable to Shemek Corporation of $3 million, and an adjusted EBITDA of $30 million. To provide a better perspective on our financial results and how the strategy we have implemented is progressing, we'll be speaking to results today on a bifurcated basis between Shemek projects and legacy projects. Shemek projects are projects that Shemek started after the EECOM sale transactions. Since becoming an independent company, Shemek 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 EECOM sales transaction and that we assumed in the sales transaction. Several of these are large, complex, multi-year projects that have experienced cost overruns. 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, SHMIC project revenue grew to $434 million, a 24% increase compared to 2022. Importantly, we grew SHMIC gross margin by $5 million for the year. Legacy project revenue decreased by $114 million to $199 million, reflecting a 37% decrease when compared to 2022. Our backlog, which we view as a key differentiator versus our competitors, continues to be strong. CHMIC finished 2023 with a backlog of $1.1 billion. We've reported an 18% increase specifically in CHMIC 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. Turning to the next slide as an example, Senate won a major $217 million water treatment plant expansion for the Elsinore Valley Municipal Water District in Southern California. where SHEMIC will expand the facility's capacity from 8 million to 12 million gallons per day to meet the area's growing water demand. The project includes two new aeration basins, a membrane bioreactor facility, and a UV disinfection facility, among other work. SHEMIC is self-performing more than 80% of this project, including the electrical work required to bring the 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.

spk09: Thanks, Steve. All comparisons made today will be on a year-over-year basis compared to the same period in 2022. For the fourth quarter, we reported revenue of $138 million compared to $186 million for the prior year period, with a net loss of $17 million. approximately flat as compared to the prior year period. Fourth quarter adjusted EBITDA was a loss of $9 million compared to a loss of $11 million in the prior year period. For our fiscal year 2023 results, revenue was $633 million compared to $664 million for 2022. Steve mentioned, it's important to look at the trends in executing on our CHMIC strategy as compared to the wind down of the legacy projects. As you can see in the top left chart, CHMIC projects revenue was $434 million, a 24% increase compared to 2022. The CHMIC 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, Quarter to prior year quarter comparisons will sometimes show some lumpiness. To make projects gross margin increase by $5 million due to the higher revenue and was consistent at 7% as compared to last year, primarily driven by management shift and job bidding strategy towards higher margin, lower risk jobs. On the legacy projects in the bottom half of the slide, revenue decreased 37% to $199 million. Legacy projects gross margin was a negative $7 million, primarily due to projects running 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 million and $96 million for the fiscal years ended 2023 and 2022, respectively. We continue to actively pursue all opportunities to offset these costs. In total, fiscal year 2023 gross margin was $22 million compared to $23 million in 2022. Fiscal year 2023 net loss attributable to SHMIC was $3 million compared to net income attributable to SHMIC of $4 million in 2022. Fiscal year 2023 diluted net loss per common share was 11 cents compared to net income per common share of 17 cents in the prior year period. Fiscal year 2023 adjusted net income was $11 million compared to $30 million in the prior year period and adjusted diluted earnings per common share was 48 cents as compared to $1.35 in the prior period. Fiscal year 2023 adjusted EBITDA was $30 million compared to $47 million 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.

spk07: I'd like to provide our view of our portfolio and backlog. Backlog is awarded work still to be completed. We're 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 Schmidt projects backlog and bid on high margin water infrastructure projects. 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're introducing limited guidance for 2024, covering only revenue and gross margin. For the fiscal year ending December 27, 2024, we expect systemic 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%. 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, Chimic 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&A activities, positions us well for enhanced margins and growth. Lastly, I want to thank all the Chimic employees for their tireless dedication and support. Operator, you may now open the line for questions.

spk11: 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 that your line is in the question queue. And you may press star 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. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Jerry Sweeney with Roth Capital. Please proceed with your question.

spk03: Good morning, Steve and Devin. Thanks for taking my call.

spk14: Good morning, Jerry.

spk03: I wanted to touch upon the new SHMIC 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, the SHMIC, quote-unquote SHMIC projects were about almost 3% versus last year at 7.4%. Just curious of some of the dynamic that's going on there.

spk17: If you could, thank you. Devin, you want to take that or I can? Yeah, I can.

spk09: Thanks for the question, Jerry. Yeah, I think for our Q4, specifically for the SHMIC 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 SHMIC project backlog, so you have some timing aspects in the quarter.

spk03: Were there any challenges or projects that aren't going as well as desired?

spk09: No, I think all the, as, you know, I mentioned the call and, you know, financials will see that, you know, our SHMIC projects are the projects that are, you know, 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.

spk03: Gotcha. So there's a, in other words, you're, SHMIC 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?

spk13: Correct.

spk03: 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 Q1Q. Just curious how that's going to play into the first quarter, if similar challenges are arising in 2024 as they did in Blanque 2023 because of weather.

spk07: Yeah, we're not seeing the same impact as last year, Jerry. You know, we do have some projects that have seasonal nature to them, but those are as planned as well. Gotcha.

spk03: 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. But could you maybe provide us maybe some of the puts and takes, especially on the new SHMIC projects, on not just the, you know, not the revenue side, but more on the margin side, just curious, you know, 7% to 13%, you know, 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?

spk07: 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 to subcontractors and key material providers, for example, who 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. You know, go wrong would be, you know, as you mentioned earlier, sometimes weather may step in and, you know, see a little bit of impact, but, you know, 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, you know, good, strong project startup activities.

spk03: Gotcha. And then one more for me, and then I'll jump in live. I think Aaron's probably behind me. But, you know, when you – how does a margin profile work, right, in terms of, you know, you have, you know, mobilization, ramp, then you get into the meat of the project. So is it, you know, early in the process, very low margins, if not costs low? associated with the project as you're mobilizing and getting ready for the project, and then you hit the teeth of the project margins or 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 projects impacting margins?

spk02: Is that a fair way of thinking about it?

spk07: 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 an anticipated completed cost, we should be earning progress and earnings as we go. Devin, do you want to supplement that?

spk09: Yeah, I mean, to your point, you know, Steve, you can't have some changes in how that job is ramping up. You know, 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're expected for the life of the job. And so you could have some peaks and valleys in certain points in time.

spk16: Gotcha. Okay. I'll jump back in line. Thank you.

spk11: Thank you. Our next question comes from the line of Aaron Spichalo with Craig Hallam. Please proceed with your question.

spk08: Yeah, good morning, Steve and Devin. Thanks for taking the question. First for me, you know, can you maybe just touch on the pipeline and how that's been trending? I think you called out, you know, a $4 billion opportunity. And then just, you know, 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? you know, kind of flow to projects in 2024, 2025? Is that kind of your expectation?

spk07: We do. We're really pleased with the pipeline. We're, as we mentioned, tracking $4 billion. It's the pipeline that fits how we look at the new SHMIC. We're looking for jobs that are in that 50 to 150 range, average kind of three-year duration. So the pipeline is filling up like that. 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 you know, 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.

spk08: All right, thanks for that. And then can 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?

spk07: Yeah, the craft labor that we're seeing still – You know, we've got a strong following with Chemex, especially in our regional areas of Southern Cal and Northern Cal, where we've got a strong market presence for years. And so we've got good continuity of craft staying with us from a staff standpoint. You know, it is a challenge out there. We are doing a great job of recruiting top talent onto our new projects and, you know, filling in some areas. 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 SHMIC is addressing that.

spk08: 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 hundred million bucks. 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?

spk07: Yeah, 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, 24 months. A good line aside on the project completion from the margin standpoint, I'll note and I think we've talked before that We do not carry margins on those legacy projects, and there may be some additional cost increases, especially as related to legal type expenses, but Devin, you want to add on there?

spk09: Yeah, so you can see like in the charts there, Aaron, where 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 burn off the rest of it in that time period that Steve had mentioned.

spk08: Okay, thanks. And then maybe last for me, can you just kind of touch on, give an update on the M&A, what that market's looking like, how valuations might be trending versus your expectations and just areas of focus moving forward?

spk07: Definitely an area of focus for us as we move forward. We're still watching and seeing M&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. Definitely continues to fill the vision that we have for Schumann.

spk08: All right. Thanks for taking the questions. I'll turn it over to

spk17: Thanks, Aaron.

spk10: Thank you.

spk11: We have reached the end of our question and answer session. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

spk15: Thank you. © transcript Emily Beynon Thank you.

spk11: Greetings and welcome to the SHMIC's fourth quarter and fiscal year 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neal Sikka, with Investor Relations at SHMIC. Thank you. You may begin.

spk01: Good morning, and thank you for joining us on today's conference call to discuss SHMIC's fourth quarter and fiscal year 2023 results. Slides for today's presentation are available on the investor relations section of our website, www.shmic.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 material 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. 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 fourth quarter 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, Chimix CEO.

spk07: Good morning, and thank you all for joining us on today's call. I am joined by Devin Nordhagen, Chimix CFO. As a reminder, and for those of you who are new to our story, CIMIC is a leading water infrastructure company that provides solutions across the entire water spectrum. We focus on two key areas, water treatment and water resources, which include dams, reservoirs, flood protection, and other infrastructure. CIMIC operates in a strong, vibrant, and underserved market. 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 IOJA 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. Nearly $15 billion 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 $5.8 billion in funds from the IJA to be split among 22 states for water infrastructure projects. CIMIC's pipeline reflects this growth in the infrastructure market. We have identified approximately $4 billion in priority opportunities through the end of 2024. We believe that while double-digit growth is likely not sustainable, the overall demand for water solutions will remain high over the long term due to water scarcity and other macroeconomic drivers. For the fiscal year 2023, we delivered revenue of $633 million a net loss attributable to Shemek Corporation of $3 million, and an adjusted EBITDA of $30 million. To provide a better perspective on our financial results and how the strategy we have implemented is progressing, we'll be speaking to results today on a bifurcated basis between Shemek projects and legacy projects. Shemek projects are projects that Shemek started after the EECOM sale transactions. Since becoming an independent company, Shemek 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 EECOM sales transaction and that we assumed in the sales transaction. Several of these are large, complex, multi-year projects that have experienced cost overruns. 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, SHMIC project revenue grew to $434 million, a 24% increase compared to 2022. Importantly, we grew SHMIC gross margin by $5 million for the year. Legacy project revenue decreased by $114 million to $199 million, reflecting a 37% decrease when compared to 2022. Our backlog, which we view as a key differentiator versus our competitors, continues to be strong. CHMIC finished 2023 with a backlog of $1.1 billion. We've reported an 18% increase specifically in CHMIC 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. Turning to the next slide as an example, Senate won a major $217 million water treatment plant expansion for the Elsinore Valley Municipal Water District in Southern California. where SHMIC will expand the facility's capacity from 8 million to 12 million gallons per day to meet the area's growing water demand. The project includes two new aeration basins, a membrane bioreactor facility, and a UV disinfection facility, among other work. SHMIC is self-performing more than 80% of this project, including the electrical work required to build an 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.

spk09: Thanks, Steve. All comparisons made today will be on a year-over-year basis compared to the same period in 2022. For the fourth quarter, we reported revenue of $138 million compared to $186 million for the prior year period, with a net loss of $17 million. approximately flat as compared to the prior year period. Fourth quarter adjusted EBITDA was a loss of $9 million compared to a loss of $11 million in the prior year period. For our fiscal year 2023 results, revenue was $633 million compared to $664 million for 2022. Steve mentioned it's important to look at the trends in executing on our CHMIC strategy as compared to the wind down of the legacy projects. As you can see in the top left chart, CHMIC projects revenue was $434 million, a 24% increase compared to 2022. The CHMIC 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, Quarter to prior year quarter comparisons will sometimes show some lumpiness. Projects gross margin increased by $5 million due to the higher revenue and was consistent at 7% as compared to last year, primarily driven by management shift and job bidding strategy towards higher margin, lower risk jobs. On the legacy projects in the bottom half of the slide, revenue decreased 37% to $199 million. Legacy projects gross margin was a negative $7 million, primarily due to projects running 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 million and $96 million for the fiscal years ended 2023 and 2022, respectively. We continue to actively pursue all opportunities to offset these costs. In total, fiscal year 2023 gross margin was $22 million compared to $23 million in 2022. Fiscal year 2023 net loss attributable to SHMIC was $3 million compared to net income attributable to SHMIC of $4 million in 2022. Fiscal year 2023 diluted net loss per common share was 11 cents compared to net income per common share of 17 cents in the prior year period. Fiscal year 2023 adjusted net income was $11 million compared to $30 million in the prior year period and adjusted diluted earnings per common share was 48 cents as compared to $1.35 in the prior period. Fiscal year 2023 adjusted EBITDA was $30 million compared to $47 million 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.

spk07: 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 Schmidt projects backlog and bid on high margin water infrastructure projects. 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're introducing limited guidance for 2024, covering only revenue and gross margin. For the fiscal year ending December 27, 2024, we expect systemic 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%. 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, Chimic 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&A activities, positions us well for enhanced margins and growth. Lastly, I want to thank all the Chimic employees for their tireless dedication and support. Operator, you may now open the line for questions.

spk11: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. And you may press star two 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. One moment please while we pull for questions. Thank you. Our first question comes from the line of Jerry Sweeney with Roth Capital. Please proceed with your question.

spk03: Good morning, Steve and Devin. Thanks for taking my call.

spk14: Good morning, Jerry.

spk03: I wanted to touch upon the new SHMIC 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 quote-unquote SHMIC projects were about almost 3% versus last year at 7.4%. Just curious of some of the dynamic that's going on there.

spk17: If you could, thank you. Devin, you want to take that or I can?

spk09: Yeah, I can. Thanks for the question, Jerry. Yeah, I think for our Q4, specifically for the SHMIC 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 SHMIC project backlog, so you have some timing aspects in the quarter.

spk03: Were there any challenges or projects that aren't going as well as desired?

spk09: No, I think all the, as, you know, I mentioned the call and, you know, financials will see that, you know, our SHMIC projects are the projects that are, you know, 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.

spk03: Gotcha. So there's a – in other words, you're – SHMIC 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?

spk13: Correct.

spk03: 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 Q1Q. Just curious how that's going to play into the first quarter, if similar challenges are arising in 2024 as they did in 1Q 2023 because of weather.

spk07: Yeah, we're not seeing the same impact as last year, Jerry. You know, we do have some projects that have seasonal nature to them, but those are as planned as well.

spk03: Gotcha. 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. But could you maybe provide us maybe some of the puts and takes, especially on the new SHMIC projects, on not just 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 there? 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?

spk07: 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 to subcontractors and key material providers, for example, who 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. You know, go wrong would be, you know, as you mentioned earlier, sometimes weather may step in and, you know, see a little bit of impact, but, you know, 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, you know, good, strong project startup activities.

spk03: Gotcha. And then one more for me, and then I'll jump in live. I think Aaron's probably behind me. But, you know, when you – how does a margin profile work, right, in terms of, you know, you have, you know, mobilization, ramp, then you get into the beginning of the project. So is it, you know, early in the process, very low margins, if not costs, associated with the project as you're mobilizing and getting ready for the project, 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 projects impacting margins?

spk02: Is that a fair way of thinking about it?

spk07: 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 an anticipated completed cost, we should be earning progress and earnings as we go. Devin, do you want to supplement that?

spk09: Yeah, I mean, to your point, you know, Steve, you can't have some changes in how that job is ramping up. You know, 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're expected for the life of the job. And so you could have some peaks and valleys in certain points in time.

spk16: Gotcha. Okay. I'll jump back in line. Thank you.

spk11: Thank you. Our next question comes from the line of Aaron Spichalo with Craig Hallam. Please proceed with your question.

spk08: Yeah, good morning, Steve and Devin. Thanks for taking the question. First for me, you know, can you maybe just touch on the pipeline and how that's been trending? I think you called out, you know, a $4 billion opportunity. And then just, you know, 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? you know, kind of flow to projects in 2024 or 2025? Is that kind of your expectation?

spk07: We do. We're really pleased with the pipeline. We're, as we mentioned, tracking $4 billion. It's the pipeline that fits how we look at the new SHMIC. We're looking for jobs that are in that 50 to 150 range, average kind of three-year duration. So the pipeline is filling up like that. 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.

spk08: All right, thanks for that. And then can 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?

spk07: Yeah, the craft labor that we're seeing still – You know, we've got a strong following with Chemex, especially in our regional areas of Southern Cal and Northern Cal, where we've got a strong market presence for years. And so we've got good continuity of craft staying with us from a staff standpoint. You know, it is a challenge out there. We are doing a great job of recruiting top talent onto our new projects and, you know, filling in some areas. 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 SHMIC is addressing that.

spk08: Understood. And then, you know, 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 hundred million bucks. I know you called out, you know, 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?

spk07: Yeah, 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 18-24 months. A good line aside on the project completion from the margin standpoint, I'll note and I think we've talked before that We do not carry margins on those legacy projects, and there may be some additional cost increases, especially as related to legal-type expenses. But, Devin, you want to add on there?

spk09: Yeah, so you can see, like, in the charts there, Aaron, where 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 continue burn off the rest of it in that time period that Steve had mentioned.