Argan, Inc.

Good evening, ladies and gentlemen, and welcome to the Argonne Inc. conference call for the fourth quarter in the fiscal year ended January 31st, 2023. This call is being recorded. All participants have been placed on a listen-only mode. Following management's remarks, the call will be open for questions. There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, it is my pleasure to turn the floor over to your host for today, John Nesbitt of IMS Investor Relations. Please go ahead.

Thank you. Good evening and welcome to our conference call to discuss RGAN's results for the fourth quarter in the fiscal year ended January 31st, 2023, which is referred to as fiscal 2023. On the call today, we have David Watson, Chief Executive Officer. I'll take a moment to read the Safe Harbor Statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenues and profits. These statements are subject to known and unknown factors and risks. The company's actual results, performance, or achievements may differ materially from those expressed or implied by these forward-looking statements, and some of the factors and risks that could cause or contribute to such material differences have been described in this afternoon's press release and in Argan's filing with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. Okay, I will now turn the call over to David Watson, CEO of Argan. Go ahead, David.

Thanks, John, and thank you, everyone, for joining today. As most of you already know, this is our first earnings call, and we're pleased to have this opportunity to discuss our results for the fourth quarter and full fiscal year ended January 31st, 2023. I'll start by reviewing some of the highlights of our operations and financial results during the fourth quarter. We'll conclude by opening up the call for a brief Q&A, and for that portion of the call, I'll be joined by Hank Diley, our Chief Financial Officer. With the capabilities of a leading full-service partner to the power industry, Argan is very well positioned to drive long-term growth by capturing more and bigger projects as the worldwide demand for energy sources and alternative power generation continues to grow. We exit fiscal 2023 having achieved solid gross margin performance, a robust and diversified customer base, a strong safety record, and a strong balance sheet, which includes $325.5 million of cash, cash equivalents, and short-term investments with no debt. Furthermore, I'm pleased to highlight that we've increased our share repurchase program during fiscal 2023 to $125 million and that we've returned to shareholders nearly $92 million to date, representing over 15% of our issued shares. Taking a step back, Let me walk you through brief descriptions of our three reportable business segments. First, the Power Industry Services, which is comprised of our Gemma Power Systems and Atlantic Projects Company operating units, focuses on the construction of all types of power facilities, including efficient gas-fired power plants, solar energy facilities, biomass, and wind farms. Power Industry Services represented 76% of our revenues in fiscal 2023. Second, the Industrial Field and Fabrication Services, which is represented by the Roberts Company, provides solutions to mostly industrial and manufacturing clients with a focus on agriculture, petrochemical, pulp and paper, and power industries. This segment offers construction and other field services to its customers, such as plant maintenance turnarounds, shutdowns and emergency mobilizations, as well as pipe and vessel fabrication. This segment contributed 20% of our revenues in fiscal 2023. Lastly, we have our telecommunications infrastructure services group, our smallest segment, which contributed 4% of our revenues in fiscal 2023. SMC Infrastructure Solutions is our operating brand in this segment, providing inside-the-premise wiring services for federal government locations and military installations requiring high-level security clearances, as well as outside construction services for the utility and telecommunications sectors. We are proud of our reputation in the power industry as a reliable construction and project management partner. With our capabilities, we are essentially agnostic in our ability to build power production facilities. As coal-fired power plants continue to be transitions to more environmentally friendly options like natural gas and renewable energy plants, we have a tremendous opportunity to play a large role in the evolution of power generation facilities. Last year's McKinsey Energy Insights Global Energy Perspective estimated that the global transition to net zero carbon emissions by 2050 is anticipated to cost $275 trillion. That is a massive number. Oregon is poised to leverage our experience, capabilities, market recognition, and relationships to capture market share as the energy transition gains momentum. We are positioned to benefit from both the decline of coal-fired power generation as well as the growth of more sustainable alternatives. This slide provides a snapshot of the decline to date and the anticipated precipitous decline in coal-fired power generation. Carbon neutrality is an important environmental goal for the U.S. and many other countries. By 2050, coal-fired power generation in the U.S. is expected to drop by an additional 70% to represent only 5% of net electricity generation. We view this continuing transition as a significant potential tailwind for our business. There are many factors that are driving the shift to new technologies for power generation. I think it's important to note that in our current backlog of approximately 800 million, 85% of those projects support a low carbon emissions economy. So we are already playing a large role in the transition to cleaner power generation with sustained grid reliability and expect our participation to grow with the increasing demand for electrical power. Now turning to our financial performance. On slide nine, we present our consolidated income statements. Fourth quarter 2023 revenues declined 5.4% to $119 million. As is frequently the case, our top line performance for the fourth quarter was impacted by the timing of certain project starts and the variability of project costs incurred in our power industry services segment as certain projects near completion while others are just beginning. The current quarter decrease is primarily related to declining revenues from the Guernsey Power Station, the Maple Hill Solar Energy Facility, and the Equinix Data Center project, as they all neared or reached completion, partially offset by growing revenues at several newer projects, including the Killroot Power Station, the ESB FlexGen Speaker Plants, and the Trumbull Energy Center, our latest major EPC services project award. Gross margins in the fourth quarter were healthy, but down a bit at 16.9%, primarily due to change in our revenues mix. Selling general and administrative expenses declined to $10.5 million for the fourth quarter of fiscal 2023 from $15.5 million for the prior year comparable quarter. This was due to decreased cash incentive expenses and due to certain write-offs and liability accruals associated with business development investments and other activities in the prior year quarter. During the current quarter, we reported an income tax benefit of $3.2 million, even though the consolidated pre-taxbook income was $12 million. This was due to the favorable recognition of tax benefits associated with research and development credits and the reversal of certain deferred tax valuation allowances. Net income attributed to the stockholders of Argonne for fourth quarter of fiscal 2023 was $13.6 million, or $1 per diluted share, up significantly from $2.2 million, or $0.14 per diluted share, for the fourth quarter last year. EBITDA, which is earnings before interest, taxes, depreciation, and amortization, for the fourth quarter of fiscal 2023 also increased significantly to $11.2 million from $3.3 million for last year's comparable quarter. For the full year of fiscal 2023, revenues were $455 million, a decrease of 11% from the level of revenues earned in the prior year. Revenues in our power industry services segment decreased by $52.1 million as the construction activities associated with the Guernsey Power Station project and the Maple Hill Solar Energy Facility are naturally winding down. Like for the fourth quarter, the reduction in revenues was partially offset by increased revenues at several projects, including the Killroot Power Station, ESB FlexGen peaker plants, and the Trumbull Energy Center. Our consolidated gross profit margin, expressed as a percentage of revenues, was 19% for the current year. Gross margin percents in our power industry services, our industrial services, and our telecommunications infrastructure services segments remained relatively consistent at 19.8%, 15.9%, and 18.4% respectively for fiscal 2023 as compared to the prior year's percents. As G&A expenses decreased 5.6% for the year, the decrease was primarily due to the same reasons described above for the quarter, partially offset by the impact of inflationary pressures on our expenses during the current year. So what does this all add up to? Fiscal 2023 net income attributed to our stockholders was $33.1 million, or $2.33 for diluted share, compared to $38.2 million, or $2.40 per share last year, and EBITDA attributed to our stockholders for fiscal 2023 was $48.1 million, compared with EBITDA of $53.8 million last year. Now let's look at each of the operating segments. The Power Industry Services generated revenues of $346 million, representing 76% of consolidated revenues for fiscal 2023 and earned $50 million in pre-tax income. The Industrial Field Services and Fabrication Unit reported revenues of $93 million, representing 20% in consolidated revenues for fiscal 2023 and achieved pre-tax income of $7 million. This is the second consecutive year for this segment to achieve EBITDA margins in excess of 10%. And lastly, the telecommunications infrastructure services reported revenues of $16 million, or 4% of consolidated revenues for fiscal 2023. Our consolidated project backlog, which totaled approximately $0.8 billion as of January 31, 2023, has not only increased from last year, but also reflects a stronger profile with mostly longer-term, fully committed projects in both the power and industrial segments. On slide 12, we present several major projects currently included in our backlog. The Guernsey Power Station, which is the largest single-phase gas-fired power plant project in the U.S., has been a tremendous project for us and that project is wrapping up. Likewise, the Maple Hill Solar Facility, which is a nice representation of our capabilities in the renewable space, is also nearing completion. So from both Guernsey and Maple Hill, we saw reduced revenues in fiscal 2023 as compared to last year when construction on those projects were in full swing. Conversely, we're now seeing increased revenues associated with the Trumbull Energy Center, which is in the early stages of construction and is expected to ramp up over the course of the year. The Kill Rip Power Station and the ESB Flexion Peaker Power Plants are projects that are at or near peak activity. We are also performing certain tasks related to several undisclosed projects in both the traditional gas-fired and the renewable spaces, and we look forward to providing more details on those when we receive full notices to proceed with the projects. We are excited about the amount and diversity of our project backlog, and we believe that execution on these projects will provide a solid base for the revenues that we expect to earn in fiscal year 2024 and beyond. Our balance sheet provides us with a strong financial underpinning to grow the business. As of January 31st, 2023, cash equivalents in short-term investments totaled $325.5 million, and net liquidity was $236.2 million. Furthermore, we have no debt. The $115 million reduction in cash, cash equivalents, and short-term investments during fiscal 2023 reflected the expected cash flow cycle of two significant projects nearing completion, the payment of dividends and the repurchase of shares, partially offset by our net income for the year. However, during the fourth quarter, cash flow trend began to reverse as cash, cash equivalents, and short-term investments increased by $38.8 million. Stockholders' equity was $281 million at January 31, 2023, a solid figure that includes minimal goodwill of $28 million. As you can see from this liquidity bridge, our business model ordinarily requires very low-level capital expenditures. At January 31st, 2023, our net liquidity was a very strong $236.2 million. It was lower than the previous year due to our continuing commitment to return substantial capital to shareholders via opportunistic share repurchases and cash dividends. Since November 2021, we have returned a total of nearly $92 million to our shareholders, and to date, we've repurchased approximately 2.5 million shares. or approximately 15% of shares outstanding at the beginning of the program. All this at an average price of about 37.25 cents per share. As an indication of its continuing commitment to this program, during the fourth quarter of fiscal 2023, our board of directors increased the size of the share repurchase program to 125 million from 100 million previously, which also reflects our confidence in the strength and continued growth of our businesses and project backlog. Additionally, we've regularly paid a quarterly cash dividend of 25 cents per share since fiscal 2019. You should note that our next quarterly cash dividend of 25 cents has a record date of April 20 and a payment date of April 28. Argonne has always been very focused on long-term value creation for shareholders. Quarterly operating results will at times be a bit lumpy due to the timing of contracts, as we all know. That is the nature of our business. But we have and will continue to deliver long-term value to shareholders. Since 2008, we have grown our tangible book value and cumulative dividends per share considerably. We believe that we have positive momentum as we move into the new fiscal year. Our businesses are energized by new leadership, and growing opportunities in our end markets. To reiterate, the project backlog grew to $822 million during fiscal 2023 from $714 million at the beginning of the year, and it's improving in all of our complementary businesses. We are seeing increasing opportunities for our company as worldwide energy demand continues to grow. Moving forward, we anticipate that the global energy transition will create greater demand for our expertise and portfolio construction and technology services. To close, a long-term growth strategy is simple. We will leverage our core competencies to capitalize on existing and emerging market opportunities. Risk management is critical in our business. Our safety record is strong, and we continue to improve our project management effectiveness and thereby minimizing the risk of any costly project overruns. We are strengthening our position as a partner of choice for building new low and net zero emission power generation facilities as the industry transitions to cleaner energy alternatives while maintaining grid reliability. And finally, while organic growth is top priority, we will carefully review acquisition opportunities that make sense for our business, making sure to balance it with other capital allocation options. I'd like to thank our shareholders for their continued support and our employees for their dedication and hard work in building Ariane to our position as a valued power industry partner. With that, operator, let's open it up for questions.

At this time, we will 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 your line is in the question queue. 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 poll for questions. And our first question comes from Chris Moore with CJS Securities. Chris, please proceed.

Good afternoon, David. Thanks for taking a few questions. Absolutely. Maybe we'll start with backlog. Recognizing it's become increasingly difficult to pinpoint when a project will receive funding and notice to proceed, what's the likelihood of an additional significant GEMMA project in fiscal year 24?

Good question, Chris. At the end of the day, we're really excited about our pipeline and our current backlog. As I noted in my early remarks earlier, 85% of it relates to our power segment, and that primarily consists of gas-fired power plants. And 15% of it relates to the industrial segment, which is the largest backlog number in the history of the Roberts Company. So while there is always a risk, we consider this backlog to be really firm, and all major projects in our backlog are under full notices to proceed, which typically means the project owner has already achieved 100% financing, both equity and debt, for the project. So, you know, we're seeing an abundance of opportunities in all markets at this time and are really focusing on which projects are closest to the finish line. As you know, in the past, we've had some contracts that didn't get there. We continue to evaluate the best projects for success regardless of where they are in the development phase to ensure, you know, we have a sustained long-term pipeline. So while our backlog is primarily gas-fired power at this time, we're also seeing a lot of renewable opportunities. And as a reminder, about 10% over the last three years of our revenue has come from the renewable space in the industrial segment. So we're excited about what we're seeing and about potentially what we'll be able to add to our backlog over the next year.

Got it. That's helpful. And maybe we'll just look at it a little bit differently. What would be an optimal level of backlog that you could handle given labor availability, et cetera? I mean, is $2 billion a number that you would comfortably have? Is that too high? Is that too low? Just kind of get your thoughts on that.

You know, my guys would tell me that there isn't a number that we can't achieve. So, you know, my earnest desire is, you know, I think $2 billion is absolutely achievable and executable. Keep in mind that, you know, we've got operations not just at GEMMA, but at APC and Roberts and SMC, and every single one of them are really generating revenue. some robust revenues, and expanding project backlogs. You mentioned labor constraints, and frankly, labor is a key driver in all of our projects. Labor is very localized, and it's not simple. So we strive to use local labor, suppliers and subcontractors in all of our projects we participate in. as we want to be a positive member of that local community. So historically, we've been able to get the labor, though we do recognize there's a war for town. And so, you know, to me, you know, $2 billion isn't a ceiling. $3 billion isn't a ceiling. But it's really got a lot of opportunity in front of us.

Got it. That's helpful. Maybe you switch gears and, you know, talk about cash flow a little bit cash flow generation you know usually picks up early in a project sometimes you little excess at the end of a project how should we be thinking about fiscal year 24 versus 23 cash flow from operations cash that is that is an excellent question because that is largely misunderstood here at with Argan and I'd like to kind of add a little clarity there so

Our cash, cash equivalents and short-term investment balances are currently $325.5 million as of 1-31. And like you pointed out, they do bounce around a lot because they are largely driven by where we are in any given project lifecycle, specifically with our major projects. Each project's cash flows at the end of the day are driven by the terms of the contract. However, as you pointed out, typically prepayments are received at the beginning of the contract in large part because we're making significant commitments on behalf of the customer. But as the project progresses to its later stages, typically our costs and our cash outflows are greater than the cash inflows. And that's kind of what we experienced in fiscal 2023 if you look at our cash and what happened based off the timing of some of our projects during that year. But based on the expected timing of new projects and existing project starts, one might expect for our cash and short-term investments to increase during fiscal 2024. But I'd like to pause for a second and point out a metric that kind of strips out the timing of these payments and presents kind of a conservative view of what we call net liquidity, which is current assets less current liabilities. you'll find that it largely changes due to three items, net income, dividends paid, and shares repurchased. And it currently stands at a conservative $236 million number. I think two other key points to point out there, and I said this in my prepared remarks, we have minimal capital expenditures throughout all of our organization, and we have no debt.

Got it. Very helpful. I will leave it there. I appreciate it.

Absolutely, Chris. Thanks for calling.

Okay. The next question is coming from Rob Brown with Lake Street Capital Markets. Rob, please proceed.

Good afternoon, David.

Evening, Rob.

Thanks for all the color. I wanted to ask a question on sort of maybe a little more characterization on the activity in the project pipeline that you've talked about. You said a number of things are going on. Could you maybe characterize sort of what's the mix of renewables and gas in the pipeline, and is there sort of regional activity, or where are you seeing activity in the pipeline in general? Just characterize it.

Yeah, sure. I mean, as I kind of stated earlier, we're seeing an abundance of opportunities across the board, both in gas and renewables. And our earnest focus is those projects that are closer to the finish line. As a lot of folks are well aware, there's a number of challenges for projects to get there, whether it's interconnect, being able to connect to the grid, and other things that are out of their control. And so we are continuing to focus our energies and our human capital on those projects that we think are closest to the finish line. Clearly, our backlog currently reflects a large chunk of gas, and we are seeing a number of gas opportunities out there from a pipeline standpoint. But there's an abundance of solar between the IRA and the aspirational goals of this country and others. So it's really a balancing act. We believe we can do a lot of work and do a lot of jobs at once, but it's really settling on the best jobs with the best risk-adjusted returns that we can achieve.

Okay, great. Thank you. And then have you seen an uptick in demand since the IRA and just maybe what sort of opportunities that opened up for you?

We do expect the IRA to help facilitate the power generation build out. And frankly, we are agnostic to the IRA. You know, there's a number of requirements that are still being defined by the IRA or, you know, by the folks, the regulators. But we're agnostic. I mean, we're here to meet our customers' needs. And we are a flexible organization in a project success-oriented group. So, yes, there is a lot of activity out there. There's been a number of hiccups between solar panels and other things that have happened in the industry. But, yes, there is an uptick in opportunities out there for us.

Okay, great. And then in the industrial fabrication business, that's come a long way since you first acquired it. And, you know, how is the backlog in that, or how is the end market, I should say, in that business? And are you seeing kind of a project activity pipeline there that's been growing? And how would you characterize that business?

This business has come a long way. We've just achieved, as I noted earlier, two years of robust revenues and 10% plus EBITDA margins. We took on the effort this past year to consolidate our plants into one space to achieve greater cost synergies and be able to be more flexible in meeting our customer needs and We've got a record project backlog, and frankly, it's grown since year end. So there is no shortage of opportunities for that space where it's primarily the southeast of the United States, especially when it comes to doing work in the field. Even if there is potentially a downturn in the economy, we're not seeing that in our bidding activity or our pipeline.

Okay, thank you. And then last question is on, I guess, Trumbull's ramp. I think it started in late last year. How do you sort of see that ramping throughout this year, and what's sort of the cadence of revenue recognition on that project? Not exact numbers, but just sort of percent of how it ramps.

Yeah, this is the beauty of landing large projects and knowing that you have significant revenue to be recorded over multiple years. Being able to identify how much revenue is in any given quarter is more of the challenge. And obviously, you've followed us for quite some time. Our revenues have bounced around a little bit because of the nature of our business. But the ramp takes time as we mobilize you know we're pushing dirt around performing engineering activities and procurement so you know think of a think of a project as a bell curve and you know revenue is recorded when costs are incurred and costs are incurred primarily when you're out of the ground and you've got a lot of labor on staff as you're erecting the power plant and and everything else that comes with that so The Trumbull job has a pretty meaningful timeline schedule, and so it might not have as big of a peak as some of our other jobs that have a shorter timeline, but expect the revenue to be somewhat of a bell curve, and we're in the beginning stages.

Okay, thank you. I'll turn it over. Great. Thanks, Rob. Operator, are there any more questions?

Oh, sorry about that. Can you hear me?

Yes.

We have no further questions. Oh, we actually do have a follow-up from Chris Moore.

Okay.

Chris, your line is live.

Terrific. Yeah, I just meant to ask about Guernsey. I know you're wrapping it up. Can you talk about, you know, kind of the the risks that still exist at this point in time? Is there a possibility for some excess margin as you get this wrapped up?

Yeah, the Guernsey job, as kind of a reminder, that's the largest job in our company's history. It's also the largest single-phase gas-fired power plant job in the U.S. history. And we've been building that throughout the pandemic. and associated supply chain impacts. And we've been building it with a strong customer, a repeat customer, and we've achieved a lot. We've achieved first fire on all three units. We've achieved substantial completion on two of those. We look forward to getting to the finish line over the next couple of quarters with our partners and customer in achieving this project success as this highly efficient power plant adds value I mean, this is 1.8 gigawatts plus of electricity to the grid, which will, as we all know, strengthen the grid reliability and at the same time help replace retiring coal power plants with cleaner power. So we're excited about this job and the success of this job. And again, we think we'll get there in the next couple of quarters.

Got it. Hopefully I'll leave it there. Thanks, guys. Great. Thank you, Chris.

I'd now like to turn the floor back to David Watson for closing remarks.

Well, thank you all for participating in today's call, the first earnings call we've done in quite some time. And we look forward to speaking with you again when we report our Q1 fiscal 2024 numbers. Have a great evening, everybody.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.