Shimmick Corporation

Good day, and welcome to SHMIC Corporation's third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the call over to Anthony Rosmus, Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss SHMIC's third quarter 2024 results. Slides for today's presentation are available on the investor relations section of our website, www.shimmick.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 identified the principal risk 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 Reconciliations of Historical Non-GAAP Measures to Comparable GAAP Financial Measures. With that, it is my pleasure to turn the call over to Steve Richards, SHMIC's CEO.

Good morning, and thank you all for joining today's call. I'm joined by Amanda Mobley, SHMIC's Interim CFO. Earlier this month, we announced the settlement of our last major outstanding claim of our legacy loss projects. Under the terms of the settlement in our Golden Gate Bridge project, we will receive $97 million before the end of the year as reimbursement for costs incurred on the project. We're pleased to have reached the resolution of this claim, and I will provide more details in a minute. With the large legacy settlements behind us, it felt it was time to hand off Shemek to a new leader. I'm proud of what we've accomplished at Shemek and over my 43-year career. The projects we do make a difference in people's lives, and I've had the opportunity to work with an outstanding team who is focused on operational excellence. As we look forward to the next chapter, I'm pleased to announce Yarao Yao as GEMEC's new CEO. Yarao has extensive knowledge of both the California and the water and critical infrastructure market. He's well qualified to lead GEMEC, and I'm excited for what the company can offer in the future. Yoral will officially step into the role as SHMIC's new CEO on December 2nd, 2024. I thank everyone who has supported me over my career. I'm excited to introduce Yoral and working with him over the next few months to ensure a smooth transition. Turning back to the business results, we delivered third quarter 2024 revenues of $166 million and experienced a net loss of $2 million with an adjusted EBITDA of $30 million. CIMIC project revenue totaled $101 million in the third quarter versus $110 million a year ago. CIMIC project gross revenues were 6% for the quarter, a decline of 15% gross margin in the third quarter of 2023, driven by wind down in completion of projects partially offset by new work. We remain encouraged by the margin performance trend in 2024 as this is the second straight quarter with sequential margin improvement compared to 5% in the second quarter of 2024 and negative 1% in the first quarter. As we did on our last call, we'll provide a breakdown of results between SHMIC projects, projects that began after the EECOM sale transaction, and legacy projects, those that started before the EECOM sale transaction. Amanda will provide more details specifically related to the breakdown of those results. Finally, I want to address briefly the recent election, which we don't expect to have a material impact on our business. infrastructure typically has bipartisan support. And in California, we expect to see additional opportunities from the recently passed California Proposition 4, which authorizes bonding for $10 billion for infrastructure-related projects that address climate change, with the largest allocation of nearly 40% focused on water projects. Turning to the next slide, CHMIC, through its consolidating joint venture with Dany's Construction Company, LLC, the CHMIC-Dany's joint venture, We'll receive $97 million before the end of this year as a result of our settlement agreement on the litigation of our Golden Gate Bridge project. Under the terms of the settlement, there will also be a contract change order for reduced scope of work of $6 million and a contract change order for extension of project completion and costs incurred on the TGB project. After paying subcontractor pass-through claims, we plan to use the remaining proceeds for ongoing operations, including completion of the Golden Gate Bridge project. We are expected to reach substantial completion of its on-site portion of the project in the third quarter of 2025, with the remaining work after that related to a subcontractor's off-site equipment fabrication activities. We are proud of the work that has been done on this project, which installed life-saving suicide prevention nets on the iconic Golden Gate Bridge. It is a difficult working environment with the heights, the weather, and the traffic control. Our team has done an exceptional job on the project. We're pleased to have settled the claim as another step forward in our transformation plan. We look forward to being able to further focus our efforts and financial resources on advancing our core projects. Turning to the next slide, I'd like to highlight our recently completed project at the Smith Canal Gate. We began work on this project in July 2020 to address critical flood protection needs for the San Joaquin area. SHMIC solutions included constructing a fixed cellular sheet pile flood wall along the San Joaquin River, a mitre gate structure with temporary in-water works and shoring, improvements to Dad's Point, and enhanced access to the Stockton Gulf and Country Club. These elements protect the canal from high-water events while allowing essential access for boaters during normal conditions. With the project now completed, these improvements significantly enhance Stockton's flood resilience protecting homes and business from high water events while meeting state and federal standards. Again, this is just another project that exemplifies Chimix's commitment to delivering sustainable infrastructure solutions that benefit both communities and the environment. With that, I'd like to turn the call over to Amanda, who will discuss our financial results.

Thanks, Dave. On behalf of the company, I want to thank you for your leadership in bringing Chimix to this point. You have been an integral part of establishing a strong foundation for future growth. We are grateful for all your contributions and congratulate you on your 43-year career. I look forward to working with you and Yorel on this new transition and I'm excited to have him join us. Turning back to the financials, all comparisons made today will be on a year-over-year basis compared to the same period in 2023. For the third quarter, We reported revenue of $166 million compared to $175 million for the prior year period, which includes the impact of the GGB project settlement, which I will discuss in a minute. Moving on to the SHMIC projects, revenue recognized on SHMIC projects that focus on water infrastructure and other critical infrastructure was $101 million in the third quarter, 2024, compared to $110 million a year ago. The decrease was primarily the result of a decrease from lower activity on existing jobs and jobs winding down, partially offset by revenue from a new water infrastructure job. Growth margin recognized on SHMIC projects in the third year was 6% compared to 14% a year ago. As Steve mentioned, we had our highest reported growth margin percentage of the year. Revenue recognized on foundation projects was $11 million in the third quarter, 2024, compared to $12 million a year ago, driven by the result of timing of jobs winding down. Gross margin recognized on a foundation project was slightly lower at $2 million loss in the third quarter, 2024, compared to $1 million loss a year ago. Revenue was flat at $54 million compared to a year ago. Included in the quarter is a $31 million adjustment to revenue to reflect the GGB project settlement amount. Without that adjustment, the legacy project revenue would have declined by $31 million, reflecting the continuing wind down of the legacy projects. Legacy projects growth margin was $8 million in the third quarter, compared to $3 million a year ago. The increase in growth margin was primarily a result of the GGB project settlement partially offset by continued impacts of the legacy projects winding down, as well as additional legal fees to pursue contract modifications and recoveries, and additional cost overruns on other legacy loss projects. As a reminder, as these legacy loss projects continue to wind down to completion, no further gross margin will be recognized. And in some cases, there may be additional costs associated with these projects, which will be recognized in the period. We continue to actively pursue all opportunities to offset these costs. This quarter, we also recognize a one-time primarily non-cash expense of $16 million relating to our decision to enhance our current ERP system rather than implementing a new platform. We believe this decision will reduce overhead expenses in future periods. Our net loss for the third quarter 2024 was $2 million compared to a net income of $35 million for the prior year. The decline is largely related to the ERP impairment and a decrease in gain on sale of assets of $13 million. The gain on sale change is the result of the 30 million gain on sale of our O&M business at Q3 last year that did not reoccur. offset by $17 million gain in the sale of the equipment yards this year. Third quarter adjusted EBITDA was a gain of $30 million compared to $42 million in the prior year period. Again, primarily due to the change in gain on sale. And over to the balance sheet. Unrestricted cash and cash equivalents at September 27, 2024 totaled $26 million. and availability under the revolving credit facility and the credit facility totaled $18 million and $15 million respectively, resulting in a total liquidity of $59 million. The liquidity position will continue to strengthen in 2024 with the proceeds from the GGV project settlement. Our backlog remains strong and was $834 million at the end of the third quarter. The mix of our backlog continues to improve as Schmidt projects represent 85% of the backlog at the end of the third quarter versus the 80% a quarter ago. This reinforces our team's commitment to be selective during the bidding process and focus on more profitable jobs that drive margins higher in our business. For the fiscal year ending January 3rd, 2025, After excluding non-core foundations projects, we now expect that SHMIC projects revenue to remain generally flat, with growth margin between 4% to 7%. Legacy projects revenue of $90 million to $95 million, with negative growth margin of 40% to 50%. Due to the legacy loss project settlement, additional costs recorded for a legacy loss project relating to pending change orders and other cost overruns. The guidance reflects our execution on our strategies, our robust pipeline, the improving quality of our backlog, and our continued operational excellence, as well as our efforts to work off our legacy projects. As we work to close out these jobs and with the transformation plan efforts, we believe we will show growth in 2025. And with that, I'd like to turn it over to Steve now for some additional remarks.

Thanks, Amanda. In conclusion, we're pleased to have resolved the last major outstanding claim and are encouraged to move forward by putting these distractions behind us. We're excited to enter this next phase in our strategic transformation and we're confident in our team's capabilities to source water-related projects that fit well into our portfolio. We want to once again thank our team for their tireless efforts as we work to transform Chimic into one of America's best water infrastructure companies. Operator, you may now open the line for questions.

Thank you. We will now be conducting a question and answer session. If you'd 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while you poll for questions. Our first question comes from Jerry Sweeney, Roth Capital Partners.

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

I can start. Yeah, Jerry, I think that as we get through the backlog and especially as we add new backlog, higher margin work, I think, yeah, the math will tell you that we should see improvements. Amanda, anything?

Yeah, that's exactly right. We'll continue to see the legacy project going down in 25 and replace that with higher margin work to increase the margin.

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

Yeah, the continues to increase. We are loading up our estimating resources. We've hired more estimators, and that's a reflection of the number of opportunities out there. And I'd say to your point, we still see, as we filter the projects through our system of what's best for SHMIC. We still see a lot of good water projects, for example, that are in the one, two, three bidders. And with our increased estimating resources, I see that absolutely will capitalize on our opportunities.

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

Yeah, when we filter jobs to make a go decision, certainly we're looking at those that have the best opportunity and definitely seeing projects that are still in that upper team from an opportunity standpoint.

Got it. Shifting gears a little bit, legacy projects, great to see the Golden Gate Bridge settled. The question I had was, I think just doing the math, there's about $125 million left on legacy projects. How much of that is Golden Gate? How much of that is, I think, the Deloitte project? And maybe how much of that is maybe some other loose tag ends of other projects?

Go ahead, Amanda.

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

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

Yes, that's correct.

Got it. And then, you know, will those projects carry sort of that negative gross margin that you projected for the rest of this year, or will that gross margin have a potential to improve in 2025 because some of the costs have been allocated, et cetera? I think some of the margins or get hit by period costs that sort of update costs within a specific quarter. But I think you understand what I'm asking.

Yeah, those are lost jobs that currently have zero margin on them. And you're right, we do recognize period costs are primarily legal. as we've been incurring those costs to go after these claims. And so going forward, we won't have those high legal costs with the settlement fees behind us.

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

We would estimate there would be zero margin on those lost jobs going forward.

Okay, great. Got it. And then one last question on the cash on the balance sheet for the end of the quarter. Does that include the lock settlement? Had that been received or recorded?

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

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

Thank you. Thank you. Our next question comes from Aaron Sparrow, Greg Collin.

Yeah, good morning, Steve and Amanda. Thanks for taking the questions. You know, first, for me, just, you know, as part of the transformation plan and kind of reducing the cost structure, can you just talk about where OPEX could go as you kind of focus on that, you know, with the ERP system costs? It sounds like the legal costs are more on the cost of goods sold line, but just Talk about how that could trend as we look towards 2025.

You're talking to the SG&A and how we look at that? Yep. Yeah, we still see more efficiencies coming. As we focus our work on California, I mentioned earlier, we have made an investment in estimating resources. So that's a positive, if you will, from a cost standpoint, it is negative, but definitely add some resources to gaining new work. As we grow the top line a little bit, SG&A as a percentage will go down. We do have other transformation items. As the other backlog of work burns off, some of the legacy projects burn off. Our foundations business will burn off soon, and so we should see some SG&A improvements with that as well.

All right. And then, you know, appreciate the commentary on the election and kind of regulatory environment. Can you just, you know, talk a little bit about on that pipeline? You know, I know you've hired some estimators, but just how are you kind of thinking that transitions into backlog here moving forward? Can we, you know, do you expect some projects later this year? Is it kind of more, you know, first half at 25? Or just curious if you can kind of elaborate a little bit on kind of the pipeline dynamics.

Yeah, we really don't see work being seasonal for us. So we definitely have some nice projects that we're bidding in Q4 that are in the pipeline right now. And so look to see when our share would be the theme as we finish off the year. And definitely the projects continue to come in at a nice rate in early 25 as well. So don't see any decline in bidding activity for sure. And with the new money coming in, whether it be Prop 4 or other things, that definitely a lot more opportunities in the pipeline.

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

I'll start and then Amanda can jump in. But definitely the GGB settlement is fantastic for the company. It takes a load off of the liquidity needs that we have to finish the job. I want to point out that the job, it'll largely finish the work work in the field, the suicide nets themselves, and the access work to the suicide nets will be completed in late 25. And then from then on, it's a contract activity off-site to complete the fabrication of the travelers. The installation of that work has been eliminated from the contract through the settlement agreement with the district. So it's a positive from the company as far as the risk going forward on the GGB, but Amanda, you want to address Erin's question on use of funds?

Yeah. So it's positive on the liquidity for the company as well, too. You know, we'd get the cash in and we'd use those to pay down the debt as well as use for just ongoing operations as well as just continuing to close out and finish these legacy jobs.

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

Thank you. Looks like there are no further questions at this time. We'd like to thank everyone for our participation. This does conclude today's teleconference. You may disconnect your lines at this time.