Argan, Inc.

Good evening, ladies and gentlemen, and welcome to the Argonne, Inc. earnings release conference call for the fiscal fourth quarter and year ended January 31, 2024. 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, Jennifer Belladeau of IMS Investor Relations. Please go ahead, ma'am.

Thank you. Good evening, and welcome to our conference call to discuss Argan's results for the fourth quarter and fiscal year ended January 31, 2024. On the call today, we have David Watson, Chief Executive Officer, and Hank Diley, Chief Financial Officer. I will take a moment to read the Safe Harbor statements. 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 could cause or contribute to such material differences have been described in this afternoon's press release and in Oregon's filings 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. Earlier this afternoon, the company issued a press release announcing its fourth quarter and fiscal 2024 financial results and filed its corresponding form 10-K annual report with the Securities and Exchange Commission. Okay, with that out of the way, I will turn the call over to David Watson, CEO of Argan. Go ahead, David.

Thanks, Jennifer, and thank you, everyone, for joining today. I'll start by reviewing some of the highlights of our operations and activities, and Hank Diley, our CFO, We'll go over our financial results for the fiscal fourth quarter and full year end at January 31st, 2024. Then we'll open up the call for a brief Q&A. Our solid fourth quarter performance closed out a strong fiscal 2024 for Argan, which included a 26% increase in consolidated revenue to $573.3 million, improved profitability and full year EBITDA of $51.3 million. Project backlog grew to $757 million sequentially as compared to the backlog of $730 million at the close of the third quarter. Backlog levels have remained relatively consistent since fiscal 2022, despite significant revenue growth and in the same timeframe. Additionally, we closed fiscal 2024 with more than $400 million of cash and investments, net liquidity of $245 million, and no debt. During fiscal 2024, we repurchased approximately 300,000 shares of our common stock pursuant to our stock repurchase program for a total spend of approximately $12.5 million, or $41.11 per share. As we previously mentioned, during the third quarter of fiscal 2024, we increased our quarterly cash dividend by 20% to $0.30 per share for a total dividend of $1.10 per share for the full fiscal year Slides 4 and 5 present our three reportable business segments. Power Industry Services is comprised of our Gemma Power Systems and Atlantic Projects Company operating units, which focus on the construction of multiple types of power facilities, including efficient gas-fired power plants, solar energy fields, biomass facilities, and wind farms. Power industry services revenues increased 33% to $119 million for the current quarter as compared to $90 million for the fourth quarter of fiscal 2023. The segment represented 73% of our fourth quarter revenues and reported pre-tax book income of $15.2 million. Industrial construction services, which is represented by the Roberts Company, had another significant strong quarter contributing $41.3 million, or 25% of our fourth quarter consolidated revenues, and reporting pre-tax book income of $3.6 million. These numbers represent revenue growth of 64% and a pre-tax net income increase of 155% compared to the fourth quarter of fiscal 2023. We are very pleased with the execution we're seeing at TRC. As many of you know, TRC primarily provides solutions for industrial construction projects with a concentration in the industries of agriculture, petrochemical, pulp and paper, water, and power. TRC is well-positioned to service the southeast region of the U.S., a notable high-growth region for TRC's focus industries, as well as other industries that are onshoring or expanding U.S.-based production facilities. We are energized by the opportunities we're seeing for TRC in the marketplace, and we are committed to capitalizing on the demand for industrial sites as we continue to foster growth in this segment. Finally, we have our telecommunications infrastructure services group, our smallest segment, which contributed 2% of our fourth quarter revenues. SMC Infrastructure Solutions is our operating brand in this segment, providing outside construction services for the utility industry and telecommunications sectors as well as inside the premises wiring services primarily for federal government locations and military installations requiring high-level security clearance. Taking a step back to look at the power industry as a whole, there has been quite a bit of recent news about the increasing demand on power grids worldwide and capacity challenges faced by existing energy infrastructures. With the wider rollout of AI, not only are more data centers being built, those centers are also consuming more energy as AI applications demand increased energy consumption. Likewise, as electrical vehicles see continuous adoption, EV charging, both at home and at public charging stations, is driving increased electricity demand, which is expected to rise higher as EV utilization expands. Finally, existing tax incentives and grants in place to encourage onshoring of manufacturing operations for semiconductors, batteries, solar panels, and other items has resulted in a 50-year high in American manufacturing, and all of that production activity requires a reliable power supply. As a partner in the construction of both traditional natural gas and renewable energy resources, Argan is uniquely positioned to benefit as new energy facilities are needed to support stable grids and reliable power generation. Simply put, without consistent and dependable power, data centers, manufacturing facilities, and the EV charging infrastructure cannot operate. Argan is an established and trusted design and construction partner for the power industry, and our current pipeline of opportunities validates the respect of our capabilities, and our leadership position in the industry. Our pipeline features projects with both new and returning customers, and we anticipate partnering with these customers to construct or upgrade the energy facilities necessary to meet growing and future power demands. In addition to adding reliable power sources to the grid, our industry is also intent on establishing cleaner energy resources. As the industry shifts to new power generation technologies, It's important to note that 83% of our $0.8 billion project backlog represents projects that support low carbon emissions, demonstrating leadership in the transition to cleaner power generation. Now I'd like to provide some project updates. Here we highlight the Trumbull Energy Center project in Lordstown, Ohio, where GEMMA is providing EPC services for a 950-megawatt natural gas-fired power plant. Trumbull is a combined cycle power station that will assist in fulfilling electricity needs as the region phases out several coal fire plants. From start to finish, the project will entail design, procurement, construction, and commissioning. Trumbull is designed to be one of the cleanest and most efficient combined cycle gas turbine projects in the PJM market. In fact, I was just on site yesterday The team is doing great, and the progress is excellent. So this project is expected to be completed in 2026. Last quarter, we announced our limited notices to proceed with solar projects in Illinois. Projects are well underway, with Jimma working on three facilities located throughout the state to provide 160 megawatts of solar power plus 22 megawatts of battery storage capacity. We have now received full notices to proceed with project activities for two of the three facilities. The third full notice to proceed is expected soon. These are exciting opportunities for us to continue to demonstrate our capabilities in the renewable energy space. Now I'd like to make a few remarks about our killroot project in Northern Ireland. As we previously disclosed, during fiscal 2024, our international subsidiary, or APC, encountered significant operational and contractual challenges associated with the 660 megawatt gas-fired Killroot power plant. Challenges included weather-related work interruptions, COVID variants sidelining our workforce, material changes to project scope, the war in Ukraine, and global supply chain delays, among others, that impacted our ability to execute as expected. As a result of these challenges, fourth quarter and fiscal year 2024 periods included losses of approximately $2.1 million and $13.6 million, respectively, associated with the Kill Roof project. Despite these difficulties, APC has meaningfully completed the project and has turned over one of two power units to the owner, one of which has achieved first fire in March. We expect to fully complete the project during the first half of calendar 2024. As I said last quarter, we are disappointed to recognize a loss at Killroot. As an organization, we are intently focused on efficient execution and project success, and we do not believe that the developments at Killroot are reflective of our capabilities and our standards. I will also note that we've identified claims related to this project valued at more than $25 million, and we will vigorously pursue those claims. So before I turn the call over to Hank Diley to review our financial performance in detail, I'd like to highlight a significant Q4 achievement by our GEMMA teams, the completion of the Guernsey Power Station. Guernsey is the largest single-phase gas-fired project in U.S. history and was substantially executed during the worst phases of the COVID-19 epidemic and the most severe global impacts of the overall supply chain disruptions. The completed plant was delivered to the project owner successfully, a tremendous achievement by our talented employees and the evidence of our commitment to completing complex projects. Our past performance illustrates the underlying strength of our business and our reputation as a full-service construction and project management partner with extensive capabilities that support both traditional and renewable power facilities. As we move into fiscal 2025, We are focused on leveraging our capabilities to further capitalize on opportunities presented by the increase in demand for reliable energy sources. Now I'll hand the call over to Hank. Go ahead, Hank.

Thanks, David. And good afternoon, everyone. On slide 11, we present our consolidated statements of earnings for the fourth quarter and full year of fiscal 2024. Fourth quarter revenues increased 39% to $165 million, reflecting an increase in revenues from both our power services and industrial services segments as compared to the fourth quarter of fiscal 2023. In the fourth quarter, our power industry services segment achieved a 33% increase in revenues, primarily related to projects overseas, including the Shannon Bridge Power Project in Ireland as well as U.S.-based projects, including the Trumbull Energy Center and the Midwest Solar and Battery Projects. The increase in revenues of these projects were partially offset by decreased activity associated with the Guernsey Power Station and the Maple Hill Solar Facility as those projects reached the final completion stage. In our industrial construction services segment, TRC achieved revenue growth of 64%, driven by a substantial increase in field services, construction projects, and supporting steel fabrication work. For the three-month period ended January 31, 2024, Argan reported gross profit of approximately $23.6 million and which represented a gross profit percentage of approximately 14.4%, and reflected positive contributions from all three reportable business segments. However, these results were adversely impacted by the recorded loss of $2.1 million related to the Killroot project. Consolidated gross profit for the comparative quarter ended January 31, 2023, was $20 million, representing a gross profit percentage of 16.9 percent. Selling general and administrative expenses of $11.9 million for the fourth quarter of fiscal 2024 increased as compared to SG&A of $10.5 million for the comparable prior year period. But these expenses decreased as a percentage of revenues for the corresponding periods from 8.8% to 7.2%. Net income for the fourth quarter of fiscal 2024 was $12 million, or 89 cents per diluted share, compared to $13.6 million, or $1 per diluted share, for last year's comparable quarter. EBITDA, or Earnings Before Interest Taxes Depreciation and Amortization, for the quarter ended January 31, 2024 was $17.6 million compared to $11.2 million in the same period of last year. Looking at our full year performance, revenues for fiscal 2024 increased by 26% to $573.3 million as compared to revenues of $455 million for the prior fiscal year. Revenues in our Power Industry Services segment increased by $70.2 million, or 20.3%, to $416.3 million for the full year fiscal 2024, compared with revenues of $346 million For fiscal 2023, construction activities increased in fiscal 2024 for the Trumbull Energy Center, the Shannon Bridge Power Project, the ESB FlexGen peaker plants, and the Midwest solar and battery projects. The revenue increase was partially offset by decreased construction activities associated with the Guernsey Power Station project, the Maple Hill Solar Facility, and the Equinix Data Center project, as those projects are generally near or at completion. Our consolidated gross profit margin of 14.1% for fiscal 2024 decreased as compared to gross margin of 19% for fiscal 2023, primarily due to the $13.6 million loss recorded in fiscal 2024 associated with the Killroot project. Gross margins in our power industry services, our industrial services, and our telecommunications infrastructure services segments were 14.1%, 12.9%, and 26.5% respectively for fiscal 2024. SG&A expenses decreased to $44.4 million for fiscal 2024 as compared to $44.7 million for fiscal 2023, representing 7.7% and 9.8% of consolidated revenues for the corresponding periods, respectively. Net income for the full fiscal 2024 was $32.4 million, or $2.39 per diluted share, compared to $33.1 million, or $2.33 per diluted share for the prior year period. EBITDA was $51.3 million, compared with EBITDA of $48.1 million for fiscal 2023. Most notably, These consolidated results were tempered by the reduction in consolidated gross profit between periods related to the loss recorded on the kill route contract as discussed above. Our income tax reporting for fiscal 2024 was also impacted by the kill route loss as we did not apply any income tax benefit to the resulting net operating loss incurred by APC in the U.K., which contributed significantly to the 33.9% annual effective income tax rate for fiscal 2024. Our effective income tax rates for the previous two years were closer to 25%, and we believe this rate is a better indicator for future periods. Before turning the call back over to David, I'd like to touch on favorable returns we experienced in fiscal 2024 related to our cash, cash equivalents, and investments that are invested and described in our consolidated financial statements. Other income for the year ended January 31, 2024 included investment income in the proximate pre-tax amounts of $14.1 million compared to $3.4 million in fiscal 2023. With that, I'll turn the call back to David.

Thanks, Hank. Turning to slide 12, our consolidated project backlog of $0.8 billion at January 31, 2024 remains fairly consistent with backlog for fiscal 2023. Importantly, our backlog includes a healthy group of longer-term, fully committed projects in both the power industry services and the industrial services segments. On slide 13, we present certain major projects currently included in our project backlog. I highlighted earlier our activity at the Trumbull Energy Center in Ohio and that two of the three solar plus battery projects in Illinois have received full notices to proceed. Also included in our project backlog are two separate water treatment plant projects being performed by TRC. Over in Ireland, the three ESB flexogen peaker power plants and the Shannon Bridge thermal plants are both in the final stages of construction and are undergoing commissioning. Following the close of fiscal 2024, we have seen a solid increase in projects coming to market. And as I mentioned earlier, there is a growing urgency in the power industry to ensure we have the appropriate facilities and infrastructure to meet the forecasted growth in energy demand. Since year end, we have added to our project backlog as a result of GEMMA and TRC entering into several contract agreements, including certain LNTPs with several customers. These agreements relate to a large solar facility, a planned natural gas firepower plant, and agreements for other industrial facilities. Our backlog is robust with a diverse group of projects that show our range of capabilities and highlights our reputation as an effective and reliable industry partner. Our balance sheet remained strong. At the end of fiscal 2024, we had over $400 million in cash, cash equivalents, and investments, generating meaningful investment yields. Our net liquidity was $245 million, and we had no debt. Stockholders' equity was $291 million at January 31, 2024. As you can see from this liquidity bridge, Our business model ordinarily requires a low level of capital expenditures. Our net liquidity of $244.9 million at January 31, 2024, has increased $8.7 million compared with the end of fiscal 2023. Since November 2021, we have returned a total of approximately $101.2 million to shareholders as we've repurchased approximately 2.7 million shares of our common stock, or approximately 17% of shares outstanding at the beginning of the program, at an average price of $37.60 per share. Additionally, in September 2023, we increased the company's quarterly dividend 20% from 25 cents to 30 cents per share, reflecting the strength of our business and increasing our annual run rate to $1.20 per share. Argan is dedicated to driving long-term value creation for shareholders. While our operating results can vary from quarter to quarter related to the timing of contracts, we remain focused on delivering long-term value to shareholders. Since 2008, we have increased our tangible book value and cumulative dividends per share considerably. As we move through fiscal 2025 and beyond, we believe we are extremely well positioned to expand our leadership role as a partner of choice for the design and construction of the power resources necessary for dependable power grids. With the number of new data centers proliferating, electric vehicle use expanding, and manufacturing facilities ramping up for enhanced production, there will be increased demand for reliable power 24 hours a day seven days a week. With our capabilities, expertise, and proven track record, Argonne has built a strong customer base as a trusted partner for the full-service construction and project management of both traditional gas-fired as well as renewable energy facilities. Our success has driven our ability to capture repeat business and has generated interest from new customers, and our pipeline is strong. We look forward to applying our facility design and construction capabilities to support the establishment of all types of energy sources as the power industry prepares to meet the growing demand for reliable energy. To close, we remain focused on our long-term growth strategy to leverage our core competencies to capitalize on existing and emerging market opportunities to maintain disciplined risk management, the goal of improving our project management effectiveness and minimizing costly project overruns. strengthen our position as a partner of choice in the construction of low and net zero emission power generation facilities as the industry transitions to cleaner energy alternatives while maintaining grid reliability. And last but not least, drive organic growth while also being alert for acquisition opportunities that make sense for our business through thoughtful capital allocation. Fiscal 2024 was a year of many accomplishments and a few challenges. I'd like to thank our employees for their hard work and dedication to operational excellence. And I'd also like to thank our shareholders for their continued support. As we kick off fiscal 2025, we are focused on leveraging our capabilities to increase Argan's leadership position as a partner of choice to the power and industrial markets. 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'd 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. Once again, please press star one if you have a question or a comment. The first question comes from Rob Brown with Lake Street Capital. Rob, please proceed.

Good afternoon, and congratulations on all the progress.

Thanks, Rob.

Let me get a little further color on the pipeline. It sounds like things are starting to loosen up there, and you talked about several things that are coming. I just want to get a sense of sort of the scaling of what those projects could be in terms of size ranges and, I guess, maybe some of the dynamics on loosening the project flow that's happening?

Sure. I mean, as you can tell from my prepared remarks and from discussing a couple projects that were subsequent to year end, we're really excited about where we stand with our project pipeline, both in gas and in renewables. I mean, we received Two full notices to proceed during Q4 on a couple solar battery projects. And based on what we've signed subsequent to year end and based on the current visibility in our pipeline, we expect some additional large projects over the next six plus months. The new work is going to represent a mix of renewable and gas. We're primarily seeing those gas fired plant opportunities in the PJM, MISO, and especially the ERCOT region. which is basically the Midwest, Texas, into Mid-Atlantic and Southeast. Big picture, we ultimately expect to see our backlog meaningfully exceed where we are today. The gas jobs remain relatively large in scale, but we're also tracking a number of peaking opportunities. I'd be remiss not to say to keep in mind that the start of future project wins are controlled by the customer, which makes it really difficult to forecast our backlog given the material size of certain projects. Thermal jobs always take longer than we would like, but getting a development job to the finish line is not easy. PJM auction is delayed till the summer, so ideally that unlocks some additional opportunities and MISO is generally overloaded. The OEMs are really busy, and that's a true sign that there's a lot of developers out there wanting to start new jobs, and we're here to build those jobs for them.

Yeah, perfect. Great. Thank you. And then I guess, are you seeing kind of a renaissance on the gas plant side in terms of the demand environment? I know you cited a lot of the drivers there. but are people sort of realizing gas plants are the solution to those demand drivers?

Yes, I think it's been happening for quite some time now. I mean, we didn't really talk about it, but the demand curve for power has caught a lot of the public utilities and a lot of folks by surprise about the amount of power that's being needed for the foreseeable future between the AI and the EVs and all the other electrification efforts of the overall economy. So there is planning for a lot of natural gas power plants in addition to the tremendous number of renewable projects. And again, we believe we're perfectly situated and positioned to take advantage of both of those tailwinds.

Okay, great. Thank you. I'll turn it over.

Once again, if you have a question or a comment, please press star 1 on your touchtone phone. The next question comes from Chris Moore with CJS Securities. Please proceed.

Hey, congratulations on a nice quarter. Thanks, Chris. Sure. Maybe we'll just follow up on that demand for power that seems to be growing everywhere. From what I've seen, the amount of power generation from zero carbon sources in the U.S. was roughly flat year over year, 39%, I think, in 23. Solar, significant growth. Wind and hydro down a little bit. But The interesting part is that from a natural gas perspective, I think 41% was natural gas versus 19% in 2019. So I guess a couple of questions there is trying to figure out what the level of natural gas as a percentage of power generation that you think would be necessary in order to meet this growing demand. Does it need to stay in this? you know, mid-30s to 40% level, or can you reach, you know, all that demand for AI, EV, et cetera, with, you know, significant increase on the renewable side?

So, Chris, I mean, this is my opinion, but I do believe that it needs to stay in that 30 to 40% range. And to even remain in that 30 to 40% range, not only – Do you need to grow the fleet as the amount of energy being consumed in the country increases? But you also have the dynamic of retirements of natural gas plants, a lot of them that were built in 2000, 2001. In addition to baseload coal plants coming offline, you're not going to be able to replace all of that with renewables given the intermittency of those. 30 to 40% makes sense to me, but you also have the dynamic that I do expect renewables to continue to grow tremendously, but they're not always going. And the batteries are only so long in duration for backup storage. So in a lot of ways, you need to have a number of natural gas solutions as well as others out there to back up the renewables. And so maybe those gas plants aren't running all the time, but they are going to have to run in critical points of time. And so those plants need to be built. And then again, that's what we're here to do, both building gas and renewable. Got it.

That's helpful. I'm trying to find a reasonable number for 2023 in terms of the number of significant natural gas plants that began construction in the U.S. Is it a handful or is it a double digit number? I couldn't find any good statistics there.

Yeah, the EIA, which is the Energy Information Administration in the U.S., tends to have some good information to look at. I think they expect about 20 new natural gas firepower plants to come online in the U.S. kind of in the 2024-2025 time period.

Got it. Last year, though, it was because of PGM and other reasons, it was significantly lower than that, correct? I mean, it was single digits.

Yes, yes. There continues to be significant interconnect challenges, both for renewables and gas. Otherwise, I think the growth in the number of projects kicking off and being built would be more so than what we were expecting to see.

Got it. I'll switch off of gas. So Robert's had another exceptional quarter, exceptional year. Obviously, that growth rate for the year is, you know, I expect that to continue. But can you sustain this $40 million-plus run rate that you did in Q4? Is there anything special in Q4 there that, you know, you wouldn't be seeing moving forward?

Chris, I'm going to continue to challenge my team down there. And they've had a tremendous two- or three-year run there. 40 million in Q4, it was over 30 million in the previous three quarters. And frankly, they exceeded kind of the top ends of my expectations for the year. A really good data point is, frankly, their backlog at year end was 128 million, and it's increased since then. So I do expect them to continue to add very smaller and larger projects. add members to their team, which they've already done, and others, and being able to increase that growth. Again, obviously, everything's subject to the economy continuing to chug along, but they're in a sweet spot right now. Got it.

Last one from me is, obviously, gross margin was impacted this quarter by Killroot. You're done with Guernsey. Congratulations on that. Was there any Guernsey excess margin in the gross margin in Q4?

Chris, for some reason I knew you were going to ask me that question. We are now in the warranty period and the job is effectively complete. Guernsey saw some further improvements during Q4 as items were closed out and remaining risk were reduced and or eliminated. At the end of the day, We're always committed to delivering the best possible project results each and every time. So the Guernsey job is effectively complete.

All right. I will leave it there. I appreciate it.

Of course.

We have reached the end of the question and answer session. I will now turn the call over to David Watson for closing remarks.

Great. Thank you all for participating in today's call. We look forward to speaking with you again. when we report our Q1 fiscal 2025 earnings. Have a great evening.

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