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spk06: Greetings and welcome to the Williams Industrial Services Group second quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. The 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. I would now like to turn the call over to Chris Whitty, Investor Relations Advisor. Thank you. It may begin.
spk03: Thank you, and good morning, everyone. Welcome to the Williams Second Quarter Conference Call. With me on the call today are Tracy Pagliara, President and CEO, Randy Lay, Executive Vice President and COO, and Damian Vassell, Vice President and CFO. After Tracy and Damian provide their prepared remarks, we'll open the call for questions. Our quarter results were issued yesterday afternoon, and a slide presentation is available on the company's website at www.wizgroup.com. If you now turn the slide to the presentation, I'll review the safe harbor statement. This call includes forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainty may cause the company's actual performance to be materially different from the performance indicator or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company's expectations are disclosed in this conference call as well as with other documents filed with the SEC. You can find all these documents on our website or at www.sec.gov. During today's call, we will also discuss some non-GAAP financial measures. We believe these are useful in evaluating the company's performance. However, you should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. When applicable, we have provided a reconciliation of non-GAAP measures with comparable GAAP results in the tables that accompany today's slides. Please note that our conversation today will be about continuing operations unless otherwise noted. Starting with slide three, I'll now turn the call over to Tracy Valiera. Please go ahead, Tracy.
spk01: Thanks, Chris, and good morning, everyone. We appreciate you joining our call today. Williams posted second quarter revenue of $56.1 million as compared to $91.6 million in 2021. The lower sales year over year reflect the impact of previously announced customer losses, delayed projects, and the fact that fiscal 2022 did not benefit from biannual outage work in a nuclear utility. The lack of outage work for 2022 and the customer losses were assumed in our original earnings guidance for 2022. However, we did not convert pipeline to revenue at the rate previously anticipated for the second quarter, primarily due to project delays. Accordingly, our overall revenue outlook for the year has been reduced, but we remain optimistic about the second half as well as 2023. I'll speak to this more in a moment. We achieved gross margin of 4.1% for the quarter, reflecting the runoff of certain previously disclosed contracts in our Florida water business and non-recurring startup costs associated with new locations to serve our transmission and distribution customers. Damian will discuss these items in greater detail, but we consider the startup costs to be critical investments regarding the company's improved future growth and profitability. Operating expenses were $6.7 million in the second quarter, which include roughly $300,000 of litigation expense. As previously discussed, these legal fees are tied to action and action being taken against a former employee and competitor relating to the wrongful loss of William's business. Reflecting all these factors, adjusted EBITDA was negative $3.2 million for the quarter. We finished the period with a backlog of $234 million, which was also lower than anticipated due to delayed orders. However, we currently have approximately $400 million of active pipeline opportunities versus approximately $360 million at the end of March. Now, turning to slide four, I'd like to further discuss the state of the business and current outlook. As outlined August 4th, when the company's earnings guidance was adjusted, we remain optimistic about the second half of 2022 and future for Williams, even as recent events dampened our overall expectations for the current year. Williams is a strong business with solid end markets, near recession-proof demand, and several robust macroeconomic trends. As mentioned in the past, the $550 billion Infrastructure Investment and Jobs Act includes over $50 billion of new investments in Williams Critical End Markets, energy delivery, water, and nuclear. Moreover, nuclear energy also continues to gain attention as a core source for clean energy. An estimated $30 billion of production credits designed to keep existing nuclear facilities operating and $700 million to support the development of HALU fuel for use in advanced nuclear reactors are in the $370 billion Infrastructure Reduction Act, expected to be signed shortly in Washington. This stacks up nicely for a very bullish Williams future. Importantly, the decisions we're making today, including new investments in key markets, are based on a strategic plan focused on driving accelerated top-line growth and underlying performance, taking advantage of favorable industry trends that will benefit Williams in the near future and years to come. After Damien speaks, I'll come back to provide some more commentary and thoughts about the future of the company. Damien.
spk05: Thank you, Tracy, and good morning, everyone. If you turn to slide five, we posted a revenue of $56.1 million for the quarter, as Tracy mentioned, versus $91.6 million in 2021. Sales declined year over year due to reduced nuclear business, reflecting project timing and some delayed work, along with fewer decommissioning contracts and generally slower award activity. While certain projects have been pushed out to the second half, the award delays impacted our overall outlook for 2022, as Tracy discussed. However, we fully expect contract award activity to pick up shortly and anticipate healthy backlog growth heading into 2023. This is based on pence of demand and overall projections of spending by the federal government, utilities, industry, and municipalities in our target markets. Slide six shows our operating trends for the company. We posted gross profit of $2.3 million or 4.1% of revenue for the second quarter versus 9.4 million or 10.2% of revenue last year. Lower margin reflects project mix, including less nuclear project work, along with the ongoing impact of certain contracts in Florida, as previously announced. We also incurred additional startup costs tied to the company's expansion into the energy delivery market. Excluding the aforementioned gross margin compression associated with our entry into the transmission distribution business of $1.6 million and the negative gross margin impact of $1.2 million from the company's Florida Water projects adjusted gross margin would have been 10% of revenue in the fiscal 22 second quarter. A reconciliation of this impact is provided in our Q2 earnings release. We expect gross margins to improve in the second half and that the Florida business will substantially complete by the end of the year. Operating expenses were $6.7 million for the second quarter, including $300,000 of litigation expense versus $6.6 million last year. While making progress bringing down expenses, we continue to assess ways to further streamline our overhead and improve bottom line results going forward. I'll now turn the call back to Tracy for a review of our 2022 guidance and his closing remarks. Tracy?
spk01: Thanks, Damien. Slide 7 sets forth the revised 2022 guidance that we issued last week. As previously mentioned, our outlook changed due to several near-term and non-recurring issues that impacted Q2 results. We now envision revenue to be between $275 and $295 million for the year and expect to post gross margins between 9% to 9.5%. We anticipate SG&A to be 8.25% to 8.75% of revenue, reflecting some ongoing investments in upgrading our IT systems. without which SG&A is expected to be between 8% to 8.5% of revenue. Our adjusted EBITDA is forecast to be between $5 and $7.5 million. None of the near-term headwinds that dampen the outlook for 2022 diminish our long-term trajectory, nor, for that matter, the prospects we see for the second half of the year. The company remains a strong competitor in robust end markets with numerous opportunities on the horizon. We consider the first half of 2022 to have been a transition period caused by many factors. First, the company is pursuing litigation and response to actions taken by a former employee who left after a reorganization of our management team, the purpose of which was to drive better execution of our strategic plan. This legal matter is crucial to protecting and advancing the interests of both our business and shareholders. Second, new operations management is addressing past project process and execution problems in our Florida water business. We fully anticipate the runoff of the identified Florida contracts to be wrapped up this year and are actively managing execution to ensure no further issues emerge. Finally, Williams has been funding two new startup businesses in the transmission and distribution space, which have negatively impacted our results thus far in 2022. However, we are turning the corner, and with such investments largely complete, anticipate a positive impact to gross margins in the second half. Overall, we are building an organization with sustainable top line growth and progressively improving operating results, driven by, among other things, a better mix of higher margin businesses with blue chip customer relationships, continuous improvement of our operating systems and risk management processes, substantial spending expected through government funding and utility and municipality capital budgets, supporting favorable industry trends, and continued population growth, particularly in our southeast territories, with corresponding demand for more and better power grid and water infrastructure facilities. In addition, nuclear energy currently provides about 50% of the carbon-free baseload of electricity in the U.S., while the median age of existing reactors, about 40 years, means that they will require major capital expenditures from our nuclear utility customers just to keep operations up and running. To reiterate, as a supplement to the billions of capital budgets for these customers, the Infrastructure Investment and Jobs Act and Inflation Reduction Act will provide over $30 billion to incent the continued operation of existing nuclear facilities. For our shareholders, this means that we remain upbeat about the future and confident in William's ability to get back on track and provide the performance you had previously come to expect. To that end, we anticipate the following, revenue rising sequentially in the third and fourth quarters, with the last quarter expected to be the strongest of the year, and gross margins to improve in the second half of the year, consistent with our normal target range of 11% to 13% during the third and fourth quarter. We're also planning for the company to return to double-digit growth and adjusted EBITDA margins of 5% or better in the future, as was the average for 2019 to 2021. Our investments will prove accretive to earnings, and we continue to have the strong support of our lending partners during this transition period. Our mix and volume of business will improve going forward, resulting in greater EBITDA, cash flow, and bottom line results. We remain excited by the prospect for new orders and better operating performance over the rest of 2022, positioning us for an even stronger rebound and results thereafter. With that operator, we can open the line for questions.
spk06: 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 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 hold for your questions. Our first questions come from the line of Julio Romero with Sidoti & Company. Please proceed with your questions.
spk04: Hey, good morning. I guess to start off on the guidance, it implies a pretty strong second half compared to the first half. And Tracy, I know you did mention you expect the last quarter of the year to be the strongest, but just hoping for a little more color on the cadence of revenues and gross margins. and how should we kind of think about, uh, the magnitude of the third quarter versus the fourth quarter?
spk01: Um, uh, we, well, as we said, you know, the fourth quarter should, will be the largest. The third quarter would be, um, you know, consistent with, with, uh, what we've experienced in prior third quarters. Um, our, our, uh, We're looking at a big pickup of work in nuclear, particularly at Vogtle 3 and 4 as that project moves forward toward the actual commissioning of Unit 3 and the plans in earnest to try to get Unit 4 done by the year end of 2023. You know, our... T&D business is also picking up. We're getting to a point where we're actually having positive margins. And in the water business, we are seeing the end of the bad contracts. So when you combine all that together, that gives us confidence that the second half can be much more positive than the first half. But we will We will have to have a big fourth quarter, which we think is based on where our pipeline go get and backlog and run rate are, we think is achievable.
spk04: Okay, that's helpful. Maybe just thinking about the Florida side, I know you guys said you expect it to be substantially completed by end of 2022, but what are you baking in in terms of potential 2023 impact and and what could happen that results in running further into 2023 than you're currently expecting?
spk01: I'm going to let Damian talk about that.
spk05: Yeah, so as we look at the work we've performed through June and what's left on those contracts, we have a high level of confidence these projects will be completed in Q4. A few of them actually will get completed this quarter. So there will be minimal to no runoff effects going into 2023, just based on the schedules and the estimated completion dates of those contracts.
spk04: Okay. That's helpful. And then, you know, while understanding that at least the first half and maybe all of 22 might be a transition year, maybe getting ahead of ourselves, but, you know, talk about how much capacity you have to take on additional sales dollars in terms of, you know, 2023, 2024 and beyond. Just looking to see how, you know, how much capacity you have to potentially grow the business with two fiscal kind of stimulus bills coming down the pipe.
spk01: Yeah, that's, you know, our ability to do that is purely a function of our ability to get talented craft and staff into the company. On our union side, we feel very confident in our ability to do that. The non-union is a little bit more challenging, but the key is to hire talented leaders that bring crews with them. We've had pretty good success thus far with... you know, the Eversource and TECO customers, that's the model we're following and it's working for us. So, uh, certainly, uh, we live in the same labor market that, that everyone else does, but I think we have competitive advantages over, uh, some of our peers in terms of Williams being a preferred place to work. And, uh, You know, we feel as good as we can about our ability to staff up and meet the challenges and opportunities that are going to come with more work. But it's definitely coming, so we're excited about it.
spk04: Understood. Appreciate you guys taking the questions, and I'll circle back with any follow-ups.
spk01: Thank you.
spk04: Thank you.
spk06: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your questions.
spk02: Thanks very much. Could you just give us a little more detail on what the transmission and distribution investment costs were in the quarter that are not going to be repeating going forward?
spk05: Yeah. We provided in our earnings release last night, we provided a table to itemize what those costs were. So if you look in the quarter, we had approximately $1.6 million of negative impact to our gross margins. So that really dampened the results in Q2. As we look forward, to Q3 and beyond, we've turned the corner as we've seen increased activity in the T&D business, which will significantly improve our gross margins going forward. So one, it's the volume that is increasing, which will be able to cover the fixed cost, and that'll drive the remainder of 22.
spk02: Oh, yeah, I understood the numerical part. I was just looking for some detail on what was causing it, but it sounds like it was just sort of an overhead issue.
spk05: That's correct.
spk02: Okay. Thank you very much.
spk06: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question has come from the line, John Dasher with Pinnacle. Please proceed with your questions.
spk07: Good morning, everyone. Thanks for taking our questions. Just as a follow-up on the prior question, the T&D business, what exactly were those costs associated with? Were there new offices being opened, or what exactly was the composition of the $1.6 million of costs?
spk05: Yes, so there's a combination of standing up new offices in Norwalk, Connecticut, as well as Tampa, Florida. But in addition to that, we've experienced costs as it relates to standing up equipment and other materials as we open, particularly a warehouse in those two locations. So you have office costs, you have warehouse costs for storage of equipment. fuel, other types of tools and consumables. So just standard costs that you would expect to incur when you start a new business, particularly in the T&D space. It's more equipment intensive relative to the rest of our business, which is primarily labor.
spk07: Okay, but I would guess there's some labor as well. You had to hire people to man those offices and warehouses, correct?
spk05: Yes, that's correct. However, that's not really the driver for the negative margin impact. It's those equipment costs. Yeah, most of the people are billable. That's right. Okay.
spk07: And you're suggesting that those costs have been sunk. The revenue that's coming in from those new facilities is now covering the the additional expenses and you're on the road to profitability in the second half?
spk05: On the Eversource side, yes, because the Eversource business, it's a bit more mature. We're over about a year, 15 months into that business. Within the Tampa T&D business, we've started to, we stood that business up in the first month of this year. So there's a little bit more runway to go there, but based on our experiences in Norwalk, Connecticut, we have a better understanding as to how to drive the economic model. So there's some lessons learned from Eversource that we could apply to the Tampa business.
spk07: Okay. So I'm just trying to get a feel for how certain you are that there's not going to be operating losses associated with the startups in the second half?
spk05: Overall, between the two businesses, we believe the startup cost issues are behind us. And given the uptick in volume, there will be enough volume to cover those overheads to minimize any negative impact to gross margins.
spk07: Okay, good. Are there any other offices planned for that business to be opened over the next year or so?
spk01: Yes, we have plans to open more offices in the southeast and the northeast. We are gauging the market, looking at where the IIJA monies are being appropriated. But it will be next year and the year after, nothing for this year.
spk07: Okay, so no more for 2022. Okay, good. And on the Vogel side, I think you indicated Vogel 4 will start up or be commissioned December, when is it, December of 2023, is that right?
spk01: That's their current, you know, that's the current, the most current position of Southern Nuclear on that.
spk07: And what about Vogel 3?
spk01: Either later this year or early next. They just got approval from the NRC to begin the fuel loading, which is a pretty significant milestone for Unit 3. So there's a lot of work there that's going to be going forward in the next six months.
spk07: Work that benefits Williams, you're saying?
spk01: Yeah. I mean, that benefits Williams and our joint venture with Bechtel. Okay.
spk07: All right, good. Well, that's an optimistic picture, and we wish you good luck going forward. Thank you. Thanks, John.
spk06: Thank you. At this time, there appear to be no further callers in the queue, so I'll turn the call back over to Mr. Pagliara for any closing remarks.
spk01: Thank you everyone for participating today and for your patience with Williams as we've had our share of challenges in the first half of the year. But as we've indicated, we believe the business is on the upward swing for the remainder of 2022 and we have a very strong future beyond that. Again, we appreciate your time and interest in Williams and look forward to talking again next quarter. Take care and be safe.
spk06: This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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