Shimmick Corporation

Greetings and welcome to Shemek Corporation's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Anthony Rasmus, Investor Relations. Thank you. You may begin.

Good evening, and thank you for joining us on today's conference call to discuss SHMIC's third quarter 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 risk 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. 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 third quarter press release for definitional information and reconciliation of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Mitch Goldstein, Chimix Executive Chairman.

Good evening, and thank you all for joining us on today's call. I am joined by Steve Richards, Chimix CEO, and Devin Nordhagen, Chimix CFO. To begin today's call, I will be providing an overview of Chimic, followed by Steve, who will walk us through the market opportunity, Chimic's value proposition, projects, and strategy, and conclude with Devin providing an update on our third quarter financial performance. Chimic is a leading water infrastructure company that provides an extensive suite of solutions across the entire water spectrum. We focus on two key areas, water treatment and water resources, which includes dams, reservoirs, flood protection, and other infrastructure. Chimic is nationally ranked by Engineering News Record as a top 10 water solutions provider. Treating and delivering clean water is essential to sustaining communities and public health. Chimic has a long history of delivering both water and wastewater treatment facilities and technologies for public clients. Our solutions also enable efficient maritime transport along our nation's waterways, which of course is essential to our economy. We believe that there's a 50-year spending catch-up that's required in water infrastructure in this country just to ensure and maintain life as we know it. We are extremely excited about the next chapter at Chimek. We believe that as a public company, we will be well-positioned to continue our growth, capitalize on M&A opportunities, and continue to build on our skilled workforce. I'd like to thank our new investors for the support we received in our IPO. In addition to organic growth, we have never seen a better time to focus on M&A, which is why an important part of our growth strategy includes adding complementary services in water. We believe we have a unique vantage point from which to make these decisions and from which to evaluate strategic opportunities. The water infrastructure market, including smart water, data software, remediation, and facilities operation and maintenance, are all evolving and highly fragmented. making them ripe for consolidation. We are excited to be speaking with you today, and now I'll provide an update on our third quarter results. For the third quarter, we delivered revenue of $175 million and expanded our gross margin to 10%, a 260 basis point improvement from a year ago. Adjusted net income increased from 15 million to 37 million in the third quarter. Additionally, adjusted EBITDA grew approximately 63% over the same quarter last year to $42 million in the third quarter. Our backlog, which we view as a key differentiator for us versus our competitors, continues to be strong and finished at $1.2 billion as of the end of the third quarter. Steve and Devin will provide more information on our backlog in a bit. Additionally, there continues to be a robust pipeline of future work which we expect to grow alongside increases in federal funding. With that, I'll turn it over to Steve to discuss the business and the market opportunity in more detail.

Thank you, Mitch, and thanks to everyone joining the call today. As Mitch explained, we are excited to be a public company. The offering was the result of a lot of hard work and dedication, and I would like to thank all of those involved in the process. This was an important milestone for our company, and we look forward to executing it on behalf of our new and existing shareholders. SHIMIC is a water solutions provider with a strong resume of projects. We estimate the water market to be more than $60 billion per year. In addition to market drivers like climate change and aging infrastructure, multiple spending bills like the IIJA have provided billions in supplemental funding to support Chimix growth over the next decade. Climate change has resulted in a sea level rise at our large coastal population centers and caused extreme flooding and droughts from coast to coast. Our country also needs to improve and replace aging water infrastructure, much of it built more than 50 years ago under the Clean Water Act. Additionally, with widespread water shortages, our nation needs resilient water solutions by conservation and reuse. The much-needed recent federal legislation will provide multiple years of investment in this water infrastructure and provide CHMIC with a significant opportunity to grow the business, and we are only now starting to see potential work associated with the funding, such as IIJA. Over the years, we have transformed our portfolio from heavy civil work to water solutions. We're vertically integrated with the ability to better manage risk by self-performing up to 80% of the work on a project. This integration allows us to better manage the risk throughout the complete lifecycle of the project. We deliver most of our work for the highly stable public sector, with over 75% of our work generated from repeat clients. Public customers and associated public funding allow for a predictable long-term flow of programs and projects. Additionally, Chimic is well-positioned in California, one of the nation's largest infrastructure markets, with regional offices in both northern and southern California. We know the labor market and the vendor supply chain. We know the licensing and permitting process, and we know the client base and their unique requirements, which we believe reduces risk on our projects. One of SHMIC's competitive advantages is our long history of delivering water solutions. This resume, which is necessary to pre-qualify for future work, positions us well for growing the business. Eighty-eight percent of our backlog is publicly funded. As I mentioned, publicly funded projects are planned over many years, which means we have a line of sight on projects for several months or even years, enabling sound growth projections and business planning. Our $1.2 billion backlog at the end of the third quarter is CapEx Lite, and our CapEx is under 2% of top-line revenues. As our projects are critical public-funded infrastructure, our backlog is not exposed to project delays due to interest rates. Devin will explain in much more detail, but we have also moved away from a legacy portfolio of large-scale projects with higher risk and lower margin. We now deliver smaller to medium-sized projects. and we do not do commodity work as we focus on complex projects that allow for a greater margin opportunity. SHMIC has a broad resume in water-focused projects. This quarter, I will share the details of a dam safety modification project in Louisville, Texas, performed for the Army Corps of Engineers. This project, funded by the Bipartisan Budget Act of 2018, is an example of the U.S. Army Corps of Engineers addressing our nation's aging infrastructure by making critical improvements to the spillway element of the dam. The $76 million project started in July 2022 and is expected to be completed in just over three years. The project is reflective of Shimmick's strategy for focus on projects of the right size, duration, and importantly, working with repeat publicly funded clients. This project positions us well for future growth in one of the largest infrastructure markets in the United States. As we look to the future, CHMA will grow on an organic and a non-organic basis. We will continue our organic growth, delivering water and other critical infrastructure to meet the nation's growing need for clean water and upgraded infrastructure as a macro backdrop has never been better. We are also entering a period of unprecedented need and will capitalize on the historical federal funding. To maximize shareholder value, as I've mentioned, we are going to continue to transition the portfolio to higher margin work in the water sector. Second, we will continue to implement control to deliver consistent and sustainable results. It starts with project selection and working hard to find the right people to ensure we understand and price risk appropriately before any work begins. Lastly, we will focus on project execution to make sure we manage risk while delivering high-quality work safely and profitably from the beginning to the end. With all that said, Shemek would not be where we are today if it weren't for our most important asset, our people, which we continue to invest in today. We are committed to attracting and retaining the best workforce talent that will support the growth of the company. Our industry relies on having the best talent. We currently have 1,500 dedicated and experienced staff and craft. One of the key pillars of our strategy is people, and we aim to cultivate a great place to work. Our core values guide us as we empower our team to imagine, plan, build, and operate projects that truly impact people's lives. We will continue to provide competitive benefits, a positive work environment, and career opportunities for our current and future employees. With that, I'd like to turn the call over to Devin, who will discuss our financial results for the quarter.

Thanks, Steve. As a reminder, all comparisons made today will be on a year-over-year basis compared to the same period in 2022. For the third quarter, we reported revenue of $175 million compared to $184 million for the prior year period. We continue to work to complete several large legacy jobs from the AECOM acquisition. These jobs, some of which are in a lost position, are recorded with no gross margin. For the third quarter, we recorded revenue of $25 million on these jobs as compared to $29 million in the prior year, all at zero margins. Gross margin increased at $17 million from $13 million in the prior year period due to higher gross margins on our new jobs partially offset by the legacy jobs discussed previously. Our gross margin as a percent of revenue was 10%, a 260 basis point improvement compared to the prior period. Net income increased to $35 million from $18 million in the prior year period. Diluted earnings per common share was $1.58 compared to 81 cents in the prior year period. Net income increased to $35 million and $18 million in the prior year, and diluted earnings per common share was $1.58. Adjusted net income increased to $37 million from $22 million in the prior year period, and adjusted diluted earnings per common share was $1.67. adjusted EBITDA increased to $42 million from $26 million in the prior year period, representing a 63% increase. As Steve explained earlier, we have a CapEx Lite model, and for the nine months ended September 29, 2023, our capital expenditures were $6 million compared to $8 million in the prior year period. Before I turn the call back to Mitch for closing remarks, I'd like to provide our view of our portfolio and backlog and why we believe our margins will expand over the near to long term. Backlog is awarded work still to be completed. To help put this into context, over the last two plus years, we've largely worked off the legacy AECOM portfolio. We started the journey with low or no margin legacy AECOM projects and have since been replacing that portfolio with with a blend of our new strategy of water-focused work. We are continuing to burn off the legacy portfolio, which will, in turn, lead to improving margins. Our future portfolio of new work is focused largely on water infrastructure that we at Chimic are built to execute on. We believe that as we continue forward, we will be positioned to capitalize on America's water infrastructure renaissance, which will be taking place in the coming decades. We plan to continue to grow our backlog and bid on high margin water infrastructure projects. We view our backlog as a competitive advantage. It allows us to be selective about the jobs we bid. As our jobs have that medium duration, it allows us to have that forward visibility to know that we have the majority of next year's revenue already in backlog that we can focus in the years that are further out. With that, I'd like to turn it over now to Mitch for closing remarks.

Thanks, Devin. We're really excited about the future. In conclusion, as a leading water solutions firm with a strong foothold in California, Schimmick believes we are favorably suited to take advantage of the sizable market opportunities that lie ahead. Our vertical integration minimizes risk and our strategic shift towards a higher margin portfolio, coupled with potential M&A activities, positions us for enhanced margins and robust growth. On behalf of our team, I want to thank you for allowing us to share the Schimmick story with you today. Operator, can we now open the line for any questions?

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may 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 key. Our first question comes from the line of Jerry Sweeney with Roth Capital Partners. Please proceed with your question.

Good evening, Mitch, Steve, Devin.

Thanks for taking my call.

You guys touched a little bit on this, but my channel checks indicate stimulus funding, specifically from the JOBS Act, just starting to hit the market, and this is even – the money that's really starting to hit the market is even with front-end engineering. Is this similar to your experience? And if yes, are you seeing a building indication of jobs coming to the market, especially around the water infrastructure type jobs?

Hi, Jerry, this is Steve, and thanks for joining the call. Yes, we're seeing the same leading indicators. The engineering and design firms definitely are seeing Their backlogs build to record levels, a lot of that with the water-based work, and definitely seeing that as bidding opportunities as well, especially in the water market.

Yeah. How long does it take to go from sort of the front-end engineering to maybe you bidding slash starting that type of work?

Well, normally a design project, I mean, of course, it depends on the size of the job, but 12 to 18 months through a design firm, and then when the client puts the project out for bid, another three or four months. And so I would say by the time it enters the engineering phase to out for bid, call it a two-year kind of a timeline.

So there's, what I'm trying to get at here, there's a significant amount of money probably still on the horizon for you for additional jobs and opportunities. Is that correct?

Absolutely. We see the IJA fund was intended to be about a seven- or eight-year stream of funding, and so we see that going on for some time. With the demand in the market, we certainly see more bipartisan support of the infrastructure market, and specifically the water market, even after the IJA funding.

Got it. Switching gears a little bit to projects and maybe margins that you're seeing on it, how are sort of project risk levels or pricing on projects? Let me start over. How is pricing on the projects you're seeing today versus maybe – or bidding today versus 12 to 18 months ago? And the second part of that, with a lot more work potentially coming down the pike – where potentially could pricing go?

Broadly speaking, we're seeing the market opportunities increasing. We're seeing fewer competitors on some project opportunities. When we put a project through our funnel and we look for it that meets all the criteria we look for, including margin opportunity, we're seeing an improvement over a couple of years ago.

Okay. And a final question for me, and I'll jump back in queue, is posted a healthy 10% gross margin print in the quarter, up, I think, 260 basis points year over year. And you touched upon, or I think Devin touched upon, the amount of AECOM revenue in the quarter. Could you maybe go over the AECOM backlog remaining and that there's some AECOM, I think, backlog that's in better condition than others?

if you could provide a little detail, if possible, on that front. Thanks. Hi, Jared. This is Devin.

Thanks for the question. As I kind of mentioned on the call there, we are currently seeing that shift in that portfolio that we have from that adding on our new work as we burn off that legacy ACOM work. We do have some of that left to go, but we're definitely seeing that come through and seeing that as, you know, when we think of backlog, you know, for example, you know, we focus on what is the margin in backlog versus just what the backlog is, because the backlog will go up and down. And so it's good to see that as we add on the new work, it's the work that's a part of our new strategy and that higher margin work that we like to go after.

Got it. I appreciate it. That's helpful. I'll jump back to you.

Thanks, guys. And congrats on a nice, solid quarter.

Our next question comes from the line of Aaron Spachella with Craig Callum. Please proceed with your question.

Yeah, hi. Thanks for taking the questions. You know, first on the pipeline, you kind of touched on it a little bit, but it sounds like, you know, confidence there, that's been trending positive. Can you just talk about how you're kind of managing growth versus margins, you know, within there, given the big opportunity? And then, just broadly, you know, sounds like you're pretty comfortable on project schedules and kind of navigating labor and permitting and kind of broader supply chain.

Hi, Aaron. Thanks for joining the call. Yeah, we're pretty excited about the opportunities out there. To your last question, as we manage our work, we're going to take it on and really focus on margin and backlog. And top-line growth is important, but to Devin's point, we're working off the EECOM project backlog, some of it with no margin, and that creates an opportunity of growth for us as we put new work into the pipeline, new work into backlog, and increasing margin opportunities. People-wise, we've got a great talent base, and it's really been rewarding to see the IPL come through as it has and the opportunities in front of us, so a lot of excitement around that. One of our funneling criteria as we look at new work is that we make sure we have a team set to go from a key management standpoint. So as we take on new work, we feel very comfortable that we've got the staff to run these projects.

All right. Thanks for that, Steve. And then just, you know, kind of broadly, can you talk about just capacity that you've kind of built internally, you know, given the amount of work out there, you know, how much can you handle with what you have in-house today? Just looking at that opportunity over the next couple of years and investments you might need to make at all.

We feel real good about the foundation that we've built from the standpoint of the essential tools that you have for running the work, whether it be an ERP or a legal team or all the support teams necessary. We certainly feel like we've got the growth engine or the foundation to build upon that, and we can take that to good growth projections over the next few years without additional investments.

All right, great. Thank you for taking the questions. I will turn it over. You bet.

There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.