Argan, Inc.

Good evening, ladies and gentlemen, and welcome to the Argonne Inc. Earnings Release Conference Call for the third fiscal quarter ended October 31st, 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 Bellido of IMF Investor Relations. Please go ahead.

Thank you. Good evening, and welcome to our conference call to discuss Argan's results for the third fiscal quarter ended October 31, 2024. On the call today, we have David Watson, Chief Executive Officer, and Josh Baucher, 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 that could cause or contribute to such material differences have been described in this afternoon's press release and in Argan'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 third quarter fiscal 2025 financial results and filed its corresponding Form 10-Q 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 everyone for joining today. I'll start by reviewing some of the highlights of our operations and activities today. And Josh Bacher, our CFO, will go over our financial results for the third fiscal quarter ended October 31st, 2024. Then we'll open up the call for a brief Q&A. Our third quarter results were the second highest in company history, and I'm very proud of our team's accomplishment. We are looking forward to continued success in the coming years. We delivered strong execution in the quarter, as evidenced by consolidated revenue growth of 57%, to $257 million with gross margin of 17.2%, substantially improved net income of $28 million or $2 per diluted share in EBITDA of $37.5 million. Our power services segment had a particularly strong quarter as evidenced by revenue growth of 75% to $212 million with a gross margin of 18.3%, demonstrating our ability to drive enhanced profitability on our renewable as well as on our natural gas projects. TRC has delivered a solid quarter with revenue growth of 8%. And our telecommunications segment recorded revenue performance consistent with last year's third quarter. Project backlog of $0.8 billion at the close of the quarter represents an increase of 6% compared to backlog at the beginning of the year and includes $470 million of renewable projects reflecting the market appeal of our energy agnostic capabilities and our ability to diversify our backlog mix. Additionally, our balance sheet reflected $506 million of cash and investments, net liquidity of $281 million, and no debt at October 31, 2024. During the quarter, our board of directors approved a 25% increase in our quarterly dividend amount to 37.5 cents per common share or $1.50 annually from the previous quarter dividend amount of 30 cents per common share. This increase comes just one year after our previous dividend raise and reflects our confidence in the business and our favorable view of the growing pipeline of opportunities we're seeing as the industry mobilizes to build the facilities both traditional gas-fired and renewable, that will be needed to meet the anticipated surge in energy demand that has been widely projected. Now on to the operational review. Slides 4 and 5 present our three reportable business segments. Power Industry Services is comprised of our Gemma Power Systems Analytic 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 75% to $212 million for the current quarter as compared to $121.3 million for the third quarter of fiscal 2024. The segment represented 83% of our third quarter revenues and reported pre-tax book income of $36 million. Industrial construction services, which is represented by TRC, had a solid quarter and with revenue growth of 8% to $41.3 million, or 16% of our third quarter consolidated revenues, and pre-tax book income of $2.7 million. TRC primarily provides solutions for industrial construction projects with a concentration in agriculture, petrochemical, pulp and paper, water and power, and has seen a great deal of market interest for our capabilities as a project partner as many companies onshore or expand their U.S. manufacturing operations. TRC has a strong footprint in the southeast region of the US, which is a notably high growth region for its focus industries. Finally, we have our telecommunications infrastructure services group, our smallest segment, which contributed 1% of our third quarter revenues. SMC Infrastructure Solutions is our operating brand in this segment, providing outside construction services for the utility and telecommunications sectors, as well as inside the premises wiring services primarily for federal government locations and military installations requiring high-level security clearance. During the past year, we've commented, and many media and industry publications have noted, that energy demand in the U.S. and around the globe is expected to grow substantially in the near term. In the U.S., as more data centers come online and manufacturing operations are reshored, our power grid is going to need additional energy resources to function reliably and securely in generating high-quality power to meet 24-7 demand. Additionally, EVs are steadily increasing as a percentage of new cars sold, and with that growth, we can expect more homes and commercial spaces to install EV chargers, adding another element of demand to the power grid. With these considerations in mind, is widely acknowledged that energy infrastructure needs to be expanded and strengthened to meet anticipated increased capacity demands. With our energy agnostic capabilities, Argonne is uniquely positioned to facilitate the construction of any type of power facility, so as it has become more evident that the most efficient way to ensure stable grids and reliable power generation is through a combination of traditional gas-fired power plants as well as renewables, We're well-suited for any and all projects that bolster energy generation. We're optimistic about the pipeline of opportunities we're seeing and look forward to playing a leading role in the ensuing build-out of the power resources we need in order to meet the expected significant growth in demand. We have been a longtime leader in supporting the establishment of cleaner power resources. Renewable projects represented approximately $478 million of our $0.8 billion backlog at October 31, 2024, and 92% of our current project backlog supports zero or low carbon emissions. Over the last few years, the company has intentionally diversified our backlog to include an increasing portion of renewable projects. Nonetheless, we expect gas-fired and other thermal power plants to remain the core of our business for many years to come. especially as the industry seeks to provide consistent and high-quality power sources. We are committed to adding additional power plant construction jobs over the next eight months and will focus on executing for our customers while growing our team to ensure we're well staffed for the opportunities ahead. As I mentioned earlier, our team drove strong execution this quarter, and I'd like to provide some project updates. JEMA is at peak construction on the Trumbull Energy Center project in Lordstown, Ohio, where we're 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-fired 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, and we expect to complete it in the fourth quarter of fiscal 2026. A shorter-term project we're currently working on is for the installation of five 90-megawatt gas turbines at a LNG facility in Louisiana. This is a Gemma-run project with collaboration from both TRC and APC and demonstrates our ability to bring comprehensive solutions to the market quickly. We began this LNG project earlier this year and expect completion during calendar 2025. We also have full notice to proceed on a utility-scale solar field in Illinois that will provide 405 megawatts of electrical power and will use preexisting transmission and utility infrastructure from a nearby retired coal power plant. Spanning more than 2,000 acres, this is our largest solar project to date. Given the current energy demand environment, it is an opportune time to be an established, well-regarded, full-service construction partner with proven expertise for both traditional and renewable power projects. We're excited by the pipeline of opportunities we're seeing and optimistic about what the future holds for Arcan. With that, I'll turn the call over to Josh Bacher to take us through the third quarter financials. Go ahead, Josh.

Thanks, David, and good afternoon, everyone. On slide 11, we present our consolidated statements of earnings for the third quarter of fiscal 2025. Third quarter revenues increased 57% to $257 million, reflecting particularly strong performance in our power industry services segment and solid growth in our industrial construction segment as compared to the third quarter of fiscal 2024, as David detailed earlier. Project-wise, the increase in revenues primarily related to increased quarterly construction activities for the Midwest solar and battery projects, the Trumbull Energy Center, the 405-megawatt Midwest solar project, and Louisiana LNG facility. For the three-month period ended October 31, 2024, Argonne reported consolidated gross profit of approximately $44.3 million, which represented a gross margin of approximately 17.2%, and reflected contributions for all three reportable business segments. Consolidated gross profit for the comparative quarter ended October 31, 2023, was $19.2 million, representing a gross margin of 11.7%. The increased gross profit and improved gross margin percentage for the current year quarter reflects the changing mix of projects, including increased U.S.-based revenues, strong execution, and certain positive job closeouts. During the prior year third quarter, gross profit was negatively impacted by a loss on the Kilvert project, which reduced gross profit by approximately $10.7 million. Selling general and administrative expenses of $14 million for the third quarter of fiscal 2025 increased as compared to the SG&A of $11.4 million for the comparable prior year period. But these expenses decreased as a percentage of revenues to 5.4% for the third quarter of fiscal 2025, as compared to 6.9% of the third quarter of fiscal 2024. Net income for the third quarter of this fiscal year was $28 million, or $2 per diluted share, compared to $5.5 million, or 40 cents per diluted share, for the last year's comparable quarter. EBITDA, earnings before interest, taxes, depreciation, and amortization, for the quarter ended October 31, 2024, was $37.5 million, compared to $12.2 million reported for the same period of last year. Other income for the three months ended October 31, 2024, was $6.6 million and included investment income of $4.8 million compared to other income of $3.7 million in the prior year period. Looking at our year-to-date performance, revenues for the first nine months of fiscal 2025 increased by 57% to $642 million as compared to revenues of $409 million for the prior year period. The overall improvement in revenues was due to increased revenues in all three of our reportable segments. Our consolidated gross margin of 14.6% for the first nine months of the fiscal 2025 increased as compared to gross margin of 14% in the first nine months of fiscal 2024, primarily due to the same reasons described for the quarter. Gross margins in our power industry services, our industrial services, and our telecommunications infrastructure services segments for 14.8%, 12.5%, and 26.8%, respectively, for the first nine months of fiscal 2025, as compared to 14%, 12.8%, and 25.1%, respectively, for the first nine months of the prior fiscal year. SG&A expenses increased to $37.8 million for the first nine months of fiscal 2025, as compared to $32.5 million for the first nine months of fiscal 2024. but decreased 25% as a percentage of revenues. Net income for the first nine months of this fiscal year was 54.1 million, or $3.91 per diluted share, compared to 20.3 million, or $1.50 per diluted share, for the first nine months of last fiscal year. EBITDA was 74.2 million for the first nine months ended October 31, 2024, compared with EBITDA of 33.8 million for the first nine months of fiscal 2024. With that, I'll turn the call back to David. Thanks, Josh.

Turning to slide 12, our consolidated project backlog was $0.8 billion at October 31, 2024, representing growth of 6% compared to the prior fiscal year end. As expected, backlog is down slightly sequentially from the $1 billion recorded at July 31, 2024, due to the conversion of backlog into revenue and the timing of new project contracts and starts. Nonetheless, as I've said in the past, while the project pipeline continues to strengthen, it takes some time to win and negotiate the contracts for the large and complex projects we compete for. Our backlog includes a healthy group of longer-term, fully committed projects in both the power industry services and industrial services segments, and as I mentioned earlier, approximately $478 million of the backlog is comprised of renewable projects. On slide 13, we show certain major projects currently included in our project backlog. Earlier, I discussed the Trumbull Energy Center in Ohio, and we continue to make progress at the three Solar Plus battery projects in Illinois, which have full notices to proceed. Additionally, we have the full notice to proceed on a utility-scale solar field in Illinois that will provide 405 megawatts of electrical power. On this slide, you'll also see our full notice to proceed on a subcontract to install five 90 megawatt gas turbines to provide dedicated power to an LNG facility in Louisiana. We've included here a 1.2 gigawatt natural gas project in Texas that is currently under letter of intent, and we've listed two separate water treatment plant projects being performed by TRC. Over in Ireland, the three ESB FlexGen peaker power plants and the Shannon Bridge thermal plants are complete. There's undoubtedly growing urgency around standing up the infrastructure we need to meet the forecasted growth in energy demand, and as a result, the industry is seeing strong demand, particularly for natural gas projects. We believe our backlog illustrates the scope of our expertise and capabilities and the ongoing demand for our services around traditional gas-fired builds and renewable projects. Our balance sheet remains strong. At October 31, 2024, We had approximately $506 million in cash, cash equivalents, and investments generating meaningful investment yields. Our net liquidity was $281 million, and we had no debt. Stockholders' equity was $329 million at October 31, 2024. This liquidity bridge demonstrates that our business model ordinarily requires a low level of capital expenditures. Our net liquidity of $281 million at October 31, 2024 has increased $36.1 million compared with net liquidity at January 31, 2024. Since November 2021, we have returned a total of approximately 101.6 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 $37.67 per share. Additionally, in September 2024, we increased the company's quarterly dividend 25% from 30 cents to 37.5 cents per share, reflecting the strength of our business and increasing our annual run rate to $1.50 per share. This increase comes just a year after we raised our dividend to 30 cents per share in September of 2023. Together, these two dividend increases represent an aggregate 50% increase in our annual dividend run rate in less than two years. Our company 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, our pipeline is stronger than it has ever been, and 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. This is a very exciting time for our company. With the forecasted significant growth in energy demand, Argan is one of only a few companies with the capabilities and experience to build all types of power facilities. GEMMA is well known as a partner of choice for not only complex combined cycle natural gas plants, but also for its expertise with renewable projects. Both types of energy resources will need to be built in the coming years to meet the projected demand for reliable, high-quality power, and we stand ready to help our customers build them. To close, we remain focused on our long-term growth strategy, leverage our core competencies to capitalize on existing and emerging market opportunities, 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 allocations. To date, in fiscal 2025, we have delivered strong execution across our business segments, and we remain focused on driving the momentum we're seeing in our industry and our business. We are energized to continue leveraging our core skill set and proven track record to maximize the opportunities we're seeing across our pipeline of traditional natural gas-fired and renewable power projects. Additionally, as the restoring and manufacturing operations continue to gain traction, We're also seeing a robust project pipeline for our industrial segment. I'd like to thank our employees for their dedication to executing each job on time and on budget, and to thank our shareholders for their continued support. With that, operator, let's open it up for questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star 1 on your phone if you wish to ask a question. One moment, please, while we poll for questions. The first question today is coming from Chris Moore from CJS Securities. Chris, your line is live.

Good afternoon, guys. That was an impressive quarter, that's for sure. Thanks, Chris. All right. Maybe we can start with gross margins. The overall gross margin was probably 300 basis points higher than I was thinking about. Power industry services, 18.3%. It's early for Trumbull to be getting excess margins. So can you break down a little bit further where that 18.3% in power industry came from?

Yeah, I mean, in short, Chris, strong execution across the board, certain positive project closeouts, the project mix and the shift towards domestic revenues and economies of scale. You've heard me say this before, but we are first and foremost focused on project success and success for our customers is the number one way to get repeat business in future gross margins. So, you know, based on our, you know, Historically, I've told you we fluctuate between 13% and 20% based on our 1031 project backlog, which is a significantly larger portion of T&M and renewable work than we normally have. Gross margins would like to be more in line with the average of the last two quarters we just completed, meaning kind of in that 14% to 16% range or slightly higher over the next couple of quarters. But this quarter was really strong, and it really came down to strong execution.

Got it. That makes sense. I appreciate that. You have previously discussed being able to handle, you know, perhaps four to five, you know, good-sized natural gas projects simultaneously, you know, at different stages of construction. Just what's the limiting factor? Is it skilled labor? And how much of a crossover is the labor pool between, you know, the natural gas projects and your renewable projects?

Yeah, I mean, we've been – making headway by adding headcount to the business in anticipation of this natural gas build out in addition to maintaining our renewable footprint and continuing to execute really strongly there. Is there some crossover between gas and renewable? The answer is yes, but primarily we're trying to keep the renewable teams together and the gas teams together, but we do have certain labor that has the skill set to do both including project managers so the number of projects that we can do at any given time holistically is kind of that probably that 10 plus range if you kind of blend the gas and renewables and of course it depends on the size of projects as well that makes sense backlog 800 million down about 200 million you had indicated that likely after q2

I know you're looking for some big projects in calendar 25. Expectations for Q4, probably down a little bit further before coming back in calendar 25 or just any thoughts there?

Yeah, if you recall last quarter, I kind of gave some guidance of five to 10 months as kind of the general timeline. And we're now sitting here in the beginning of December and the guidance that I said earlier in my prepared remarks was, you know, we're expecting to start multiple gas fire jobs over the course of the next eight months and expect our backlog to be significantly in excess of a billion by early next year and beyond. So as you can Note, I've dropped the lower end of the floor, so we're working really hard, but you've got to remember, we don't control the start of these new projects, but we really remain bullish as to our ability to convert a number of these opportunities in the jobs again over the course of the next eight months.

Got it. I'll leave it there. Appreciate it. Absolutely.

Thank you. And once again, it will be star one if you wish to ask a question today. The next question is coming from Rob Brown from Lake Street Capital. Rob, your line is live.

Good afternoon. Congratulations on a strong quarter.

Thanks, Rob.

You talked a little bit about the pipeline kind of over the next eight months, but how has the sort of activity level changed since you last updated things? Is it the same projects you're working on and timing is always hard to predict, or are there new things kind of coming in and and is activity sort of increasing in terms of bidding and work and such?

There continues to be new opportunities that come in, and the opportunities are throughout the United States with a large nexus in Texas, as you can imagine. A lot of the jobs that we have been tracking and or negotiating continue to progress through all their development hurdles, and so we remain really excited about what things look like for us over the coming eight months and then looking out further. So I would say that the, I guess in short, the level activity remains extremely elevated.

Okay. And then in the Texas gas plant in particular that you have an LOI for, what's the timing of that and is that at 2025, one of the 2025 opportunities?

Yeah, and I guess as a reminder to all the callers, I mean, we will, if there is a new job, we will always kind of put out either a press release and or an 8K because we want to provide updates since these jobs are meaningful. So as for that Texas job that we have the letter of intent on, again, they continue to meet their developmental milestones and And we have been working closely with them to help them with that and hope to have an executed EPC contract and start at least doing some work on that job over the next couple of months.

Okay, great. And then maybe on the kind of the backlog burn rate on the solar projects versus the gas projects, what's kind of your average or typical quarterly or if you have so much

backlog in solar how long does it take to burn off versus a gas job yeah we've um that's that's a tough question to answer because we have different sized solar jobs and and they tend to burn at different rates typically though uh the the more small the medium-sized solar jobs and small solar jobs for us are still relatively meaningful uh they're going to typically be completed within a year, a little bit longer than that. But for our larger solar jobs, they can last a couple of years, if not a little bit more. So yeah, I think that their consistency of revenue, backlog converting into revenue is a little bit more even versus the more peakishness of a gas job, since gas jobs are really reflected bell curve of revenue. solar jobs are a little bit more consistent.

Okay, great. Thank you. That's helpful. Let me maybe on the industrial business a little bit. I know that'll jump around each quarter, but how is that looking in terms of the pipeline and the industrial side, and can that kind of continue to grow into a, you know, call it $200 million annual revenue business? Does the environment, you know, support that sort of direction?

Yes. I mean, they've Generated 41 million of revenues this past quarter and they've generated 175 million of revenues on a TTM basis. But to what you're pointing out, their backlog has dropped down to about 66 million or so. And based on current visibility, I do kind of expect revenues to come down some for the next couple of quarters for the segment. And that backlog may continue to reduce some before rebounding in Q1 and Q2 of fiscal 2026. And that's really based on the expected timing of future project awards. I just had a long call with my team there this morning, and they're super excited about the number of opportunities that they're seeing and have already bid right now. And so we do expect for there to be a meaningful rebound there.

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

Thank you. If there were no other questions at this time, I would now like to hand the call back to David Watson for closing remarks.

Well, thank you all for participating in today's call, and I hope everyone had a great Thanksgiving. We wish everyone a happy and healthy holiday season and look forward to speaking with you again when we report our fourth quarter fiscal 2025 results. Have a great evening.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.