Argan - Q1 2025

Transcript

Operator (participant)

Good evening, ladies and gentlemen, and welcome to the Argan, Inc. earnings release conference call for the first fiscal quarter ended April 30, 2024. This call is being recorded. All participants have been placed on 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 Belodeau of IMS Investor Relations. Please go ahead, ma'am.

Jennifer Belodeau (Head of Investor Relations)

Thank you. Good evening, and welcome to our conference call to discuss Argan's results for the first fiscal quarter ended April 30, 2024. On the call today, we have David Watson, Chief Executive Officer, and Hank Deily, Chief Financial Officer. I will 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 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 first quarter fiscal 2025 financial results and filed its corresponding Form 10-Q report with the Securities and Exchange Commission. All right, with that out of the way, I will turn the call over to David Watson, CEO of Argan. Please go ahead, David.

David Watson (CEO)

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 Deily, our CFO, will go over our financial results for the first fiscal quarter ending April 30, 2024. Then we'll open up the call for a brief Q&A. Fiscal 2025 is off to a strong start, as demonstrated by a 52% increase in consolidated revenues to $157.7 million, improved profitability, and EBITDA of $11.9 million.

Our growth was driven by significantly strong performance from both Gemma and The Roberts Company, or TRC. We were especially pleased to deliver this profit growth despite incurring a loss of $2.6 million in the quarter associated with continued challenges at APC's Kilroot project in Northern Ireland, and I'll provide an update on that project in a moment.

Project backlog at the close of the first quarter was $824 million, which includes approximately $300 million in renewable projects. First quarter 2025 backlog reflects both sequential growth compared to backlog of $757 million at the end of the fourth quarter of fiscal 2024, and year-over-year growth compared to backlog of $806 million in the first quarter of fiscal 2024.

Additionally, at April 30, 2024, our balance sheet reflected $416 million of cash and investments, net liquidity of $247 million, and no debt. Before we move on to the operational overview for the first quarter, I'll provide an update on some developments with APC's Kilroot project.

As we've discussed on the last several earnings calls, Kilroot encountered significant operational and contractual challenges as we moved towards completion, including supply chain delays, material changes to the project, and work stoppages related to COVID, among others. During the first quarter, APC turned over two power units, one of which has achieved first fire. Following the close of the quarter, on May 3, 2024, as previously disclosed, APC's project and construction teams vacated the facility site, having served a termination notice to the customer.

Given the situation, I'm limited in the details I can share at this point, but as we've previously mentioned, Argan has identified and submitted claims in excess of $25 million related to this project, and we will vigorously pursue those claims. Now, on to the operational review. Slides four and five 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 57% to $110.3 million for the current quarter, as compared to $70.2 million for the first quarter of fiscal 2024.

The segment represented 70% of our first quarter revenues and reported pre-tax book income of $9.2 million. Industrial Construction Services, which is represented by TRC, had another significantly strong quarter, contributing $43.7 million or 28% of our first quarter consolidated revenues and reported pre-tax book income of $4 million.

These numbers represented revenue growth of 44% and a pre-tax net income increase of 73% compared to the first quarter of 2024. We're seeing consistently strong demand for TRC's services. TRC primarily provides solutions for industrial construction projects with a concentration in agriculture, petrochemical, pulp and paper, water and power, and TRC is ideally suited as a project partner as many companies onshore or expand their U.S. manufacturing operations.

Likewise, in addition to its capabilities, TRC is well-positioned geographically to service the southeast region of the U.S., which is a notably high-growth region for TRC's focus industries.... We are determined to drive continued growth at TRC as demand for new or refurbished industrial sites intensifies. Finally, we have our Telecommunications Infrastructure Services group, our smallest segment, which contributed 2% of our first 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 premises wiring services, primarily for federal government locations and military installations requiring high-level security clearance. It would be hard to ignore the many recent reports citing the actual and expected significant increases in energy demand and power consumption.

Energy infrastructure worldwide needs to be expanded and strengthened to meet anticipated increased capacity demands, particularly as more data centers come online to support AI applications, which consume very high amounts of energy. Additionally, with more electric vehicles hitting the road, more homes and public locations will install charging infrastructure, further taxing the available power supply. Finally, we are seeing a 50-year high in the onshoring of manufacturing operations for semiconductors, batteries, solar panels, and other items, driven by federal grants and tax incentives.

All of that production activity requires a reliable power supply. Argan is uniquely positioned to expand its leadership role as new energy facilities are needed to support stable grids and reliable power generation. With our proven and comprehensive capabilities in the construction and management of complex power facility projects for both traditional natural gas and renewable energy resources, we can support the build-out of the consistent and dependable power resources necessary for the efficient operation of new data centers, manufacturing facilities, and EV charging infrastructure.

Our pipeline of opportunities is robust, with both new and existing partners who recognize our expertise and demonstrated success as a trusted design and construction partner for the power industry. We believe our diverse capabilities provide a competitive advantage as the industry moves to establish reliable energy resources in the face of unprecedented demand.

Our industry remains focused on the shift to cleaner and more reliable power resources, and with our energy-agnostic capabilities, we are a proven partner as the industry embraces alternative resources. At the end of the first quarter, approximately $318 million, or 39% of our $824 million backlog, was renewable projects, with 86% of our project backlog being comprised of projects that support zero or low carbon emissions.

The significant increase in our renewables backlog reflects the effectiveness of our growth and diversity plan. However, we still believe and expect gas-fired and other thermal power plants to remain the core of our business for many years to come as we grow our overall power revenues. Now I'd like to provide some project updates.

We continue to make excellent progress as we roll into peak construction on 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-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 2026. As you know, we have three solar and battery projects underway in Illinois, and at our last update in April, we had received full notices to proceed on two of the three facilities.

I am pleased to report that around the end of the first quarter, we received a full notice to proceed on the third facility. So just to recap, Gemma is working on three facilities located throughout the state on an EPC basis to provide 160 megawatt of solar power, plus 22 megawatt of battery storage capability. These projects are exciting opportunities for us to continue to demonstrate our capabilities in the renewable energy space.

We are energized by the opportunities we're seeing in the marketplace and in our expanding potential new business pipeline. We are optimistic about the growing urgency to reinforce energy infrastructure to ensure consistent and reliable power supply in the face of anticipated, unprecedented consumption levels.

With our experience as a full-service construction and project management partner, with extensive capabilities that support both traditional and renewable power facilities, we believe our Argan is very well positioned to benefit as the industry transitions aging facilities and builds new facilities to meet surging demand. With that, I'll turn the call over to Hank Deily to take us through the first quarter financials. Go ahead, Hank.

Hank Deily (CFO)

Thanks, David, and good afternoon, everyone. On slide 10, we present our consolidated statements of earnings for the first quarter of fiscal 2025. First quarter revenues increased 52% to $158 million, reflecting an increase in revenues from all of our operating segments as compared to the first quarter of fiscal 2024. In the first quarter, our power industry services segment achieved a 57% increase in revenues, primarily related to

U.S.-based projects, including the Trumbull Energy Center and the Midwest Solar and Battery projects, as well as projects overseas, including the Shannonbridge Power Project in Ireland. In our industrial construction services segment, TRC achieved revenues growth of 44%, driven by a substantial increase in field services, construction activity, and supporting steel fabrication work.

For the three-month period ended April 30, 2024, Argan reported consolidated gross profit of approximately $17.9 million, which represented a gross profit percentage of approximately 11.4% and reflected positive contributions from all three reportable business segments. Consolidated gross profit for the comparative quarter ended April 30, 2023, was $14.2 million, representing a gross profit percentage of 13.7%.

The decline in the gross profit percentage at our power industry services segment during the current period was primarily due to the unfavorable gross profit adjustment on the Kilroot project in the amount of $2.6 million, but also due to the change in the mix of projects, including increased time and materials and renewable energy projects.

Selling, general, and administrative expenses of $11.4 million for the first quarter of fiscal 2025 increased slightly as compared to SG&A of $10.6 million for the comparable prior year period. These expenses decreased as a percentage of revenues for the corresponding periods from 10.2% to 7.2%.

Net income for the first quarter of fiscal 2025 was $7.9 million, or $0.58 per diluted share, compared to $2.1 million, or $0.16 per diluted share for last year's comparable quarter. EBITDA, or earnings before interest, taxes, depreciation, and amortization, for the quarter ended April 30, 2024, was $11.9 million, compared to $3.6 million reported for the same period of last year.

Before turning the call back over to David, last but not least, I'd like to mention that other income for the three months ended April 30, 2024, included investment income in the approximate pretax amounts of $4.5 million, compared to $2.4 million in the same period of fiscal 2024. With that, I'll turn the call back to David.

David Watson (CEO)

Thanks, Hank. Turning to Slide 11, our consolidated project backlog of over $0.8 billion at April 30, 2024, increased approximately 9% as compared to year-end fiscal 2024. Our backlog includes a healthy group of longer-term, fully committed projects in both the power industry services, industrial services segments, and as mentioned earlier, approximately $318 million of the backlog is comprised of renewable projects.

On Slide 12, we show certain major projects currently included in our project backlog. I highlighted earlier our activity at the Trumbull Energy Center in Ohio, and that all 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, three ESB FlexGen Peaker Plants and the Shannonbridge thermal plants are both in the final stages of construction and are undergoing commissioning. We have certainly seen an increase in projects coming to market related to the growing urgency to the power industry to ensure we have the appropriate facilities and the infrastructure to meet the forecasted growth in energy demand.

For example, in April 2024, Gemma executed a limited notice to proceed with a customer to construct a utility-scale solar field in Illinois that will provide 405 MW of electrical power and will use pre-existing transmission and utility infrastructure from a nearby retired coal power plant. This project represents the largest solar project to date for us and the continued expansion of our renewable business.

In addition, subsequent to quarter end, we have a letter of intent and expect to enter into a subcontract with a full notice to proceed imminently to install five 90-megawatt gas turbines for an LNG facility in Louisiana. This project, led by Gemma, will be a collaboration with TRC and APC, representing our ability to bring comprehensive solutions to market in a short period of time.

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 remains strong. At April 30, 2024, we had over $400 million in cash, cash equivalents, and investments, generating meaningful investment yields, as Hank mentioned previously. Our net liquidity was $247 million, and we had no debt. Stockholders' equity was $293 million at April 30, 2024.

As you can see from this liquidity bridge, our business model ordinarily requires a low level of capital expenditures. Our net liquidity of $246.7 million at April 30, 2024, has increased $1.8 million compared with the end of fiscal 2024. 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 our 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 $0.25 to $0.30 per share, reflecting the strength of our business and increasing our annual run rate to $1.20 per share. Our gain 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. Our capabilities, expertise, and proven track record have established us as a trusted partner for the full service, construction, and project management of both traditional gas-fired as well as renewable energy facilities. We are focused on leveraging our strong reputation to win new opportunities from both new customers and legacy partners, as the industry intensifies its efforts to ensure the availability of reliable energy resources moving forward. Our pipeline is strong and diverse.

As we continue to move through fiscal 2025, 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 needed to address the increasing consumption demands driven by data centers, manufacturing facilities, and EV adoption.

To close, we remain focused on our long-term growth strategy, leveraging 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 by also being alert for acquisition opportunities that make sense for our business through thoughtful capital allocation.

We have delivered a strong start to fiscal 2025, and we're focused on building on the progress achieved in the first quarter. As always, our success relies on the hard work and dedication of our employees as they make operational excellence a priority. And as always, I'd like to thank our shareholders for their continued support.

And as a reminder, please don't forget to vote your shares for our upcoming annual meeting of stockholders on June twentieth, and I look forward to seeing folks there. In summary, the current power demand environment is presenting tremendous opportunities to Argan, and we are intent on leveraging our capabilities and growing our relationships as a partner of choice to the power and industrial markets. With that, operator, let's open it up for questions.

Operator (participant)

Certainly. At this time, we'll 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. Once again, please press star one on your phone at this time if you wish to ask a question. Please hold while we pull for questions. Once again, that is star one if you wish to ask a question. Your first question today is coming from Chris Moore from CJS Securities. Chris, your line is live.

Chris Moore (Senior Analyst)

Hey, good afternoon, guys. Thanks for taking a couple questions.

David Watson (CEO)

Sure thing, Chris.

Chris Moore (Senior Analyst)

Congrats on another nice quarter. I know you're limited on Kilroot. Sounds like, you know, you're hopeful that there's, you know, $25 million in potential recovery out there. You took the $2.6 million charge in Q1. Are there likely or possible additional charges coming?

David Watson (CEO)

Sure. That's a good question, and before I answer that, I did wanna quickly note to folks, I wanna apologize if the folks are trying to get onto our website right now. It appears that we're having a surge in traffic, and my team is actively trying to resolve the issues as soon as possible. But back to your question, Chris, on potential more losses on Kilroot.

I mean, we have recorded $12.7 million loss on the project, which is significant and disappointing. We consider all things and make it our best efforts, and make our best efforts to get the accounting right based on the information available. I mean, as we disclosed additionally, after quarter end, the customer pulled our letter of credit in the amount of $9.2 million, which we believe was inappropriate.

APC has significant unresolved contract variations and extension of time claims, among others, related to this project, in amounts exceeding $25 million, and this is expected to increase materially. The project owner has asserted counterclaims that we dispute. Again, we'll continue to pursue all of our rights under the contract, and we will do so through legal means if possible. So to answer your question, you know, yes, there is a possibility of downside, but there's also a possibility of upside.

Chris Moore (Senior Analyst)

Oh, fair enough. I will leave that one there. Looks like Trumbull is starting to make good progress. Can you talk a little bit about the, the cadence of the project? I mean, do, do you expect that over the balance of the current fiscal year, you'll be approaching, you know, kind of peak quarterly revenue or just, you know, kind of how you, how you see this ramping?

David Watson (CEO)

We do. This project remains right on schedule. We're excited about it and executing well on it, and we do expect to be in peak activity throughout the year, and as it gets into startup commissioning later next year.

Chris Moore (Senior Analyst)

Got it. It looks like the, the, the project pipeline is remaining in good shape. The, the, the 405-megawatt solar project that you have limited notice to proceed, what, what has to happen to begin construction in fiscal 2025 on that?

David Watson (CEO)

It's really just a matter of getting the full notice to proceed. I mean, the limited notice to proceed has already enabled us to start doing a number of things. All limited notices to proceed are different. Some we are already mobilizing, others we're just doing procurement activities. But the goal with the limited notice to proceed is to be able to start executing the project right away for the customer. So that's a project, since it's a renewable project, that we expect to start to be actively in a full notice to proceed this summer.

Chris Moore (Senior Analyst)

Got it. And maybe just the last one from me. You referenced a letter of intent on a looks like a significant gas project. At the end of Q4, you talked about a gas project. I thought that one was in Texas. This is Louisiana. Is this a different project that we're talking about?

David Watson (CEO)

It is a different project. The Texas project is, you know, we're still continuing to work with the customer to get to the finish line on that job and get the EPC contract and the notice to proceed. As you know, the timing of those are always challenging, but I think it's worth noting that there were over 40 gigawatts of gas-fired power units that submitted into the Texas Energy Fund to get low-interest loans.

So there is a significant appetite and support from Texas for gas-fired projects in the Texas area. As it relates to this other opportunity, where we have the letter of intent to part of a subcontract to install five 90-megawatt gas turbines within an LNG facility. We're excited about that project and believe it's a project that has a very quick start and significant ramp, somewhat like an emergency job where it's a quick one.

Chris Moore (Senior Analyst)

Got it. That's helpful. I will leave it there. I appreciate it.

David Watson (CEO)

Sure thing, Chris.

Operator (participant)

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

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Good afternoon.

David Watson (CEO)

Good afternoon.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Just, just wanted to follow up a little bit more on the pipeline of activity. And could you kind of characterize how the pipeline is at this point, how active it is, and maybe the changes in the new project pipeline that you've seen over the last, you know, six months or so?

David Watson (CEO)

Sure. I mean, we're thrilled with our pipeline. I mean, since January, Rob, we've received 3 full notices to proceed and 1 limited notice to proceed on renewable jobs totaling 565 megawatts of solar power and 22 megawatts of battery storage. We do expect to receive a full notice to proceed, as I was speaking with Chris earlier, on that subcontract for installing those gas turbines in Louisiana.

And based on what we have signed and based on current visibility, we expect to add some additional large projects over the course of the year, which will represent a mix of both renewable and gas. And as you can see, you've already seen a meaningful increase in our renewables relative to gas, with $318 million of backlog as of 4/30.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Okay, great. Thank you. And then on the Louisiana project, you just talked a little bit about timing, but is how would that compare to a traditional gas plant project in terms of the cycle that revenue flows through your business once it's launched? It sounds like it's gonna launch fairly quickly, but just some color and timing compared to a regular gas plant.

David Watson (CEO)

Yeah, I mean, it's a totally different project. With our fixed price EPC contracts, where we're doing combined cycle projects that are 3-3.5 years long, you know, and we do that from start to finish and control all aspects of the job, that has that bell curve revenue flow, similar to Trumbull being at the peak of the bell curve right now. This job is more surgical and, you know, is a subcontract. So it's one of those jobs that should be a relatively quick burn over a shorter period of time.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Okay. Okay, great. And then on the battery and solar projects that you do, could you remind us again how you—how those work in terms of what you flow through your revenue and how much of that project that you take on? Is that a fully EPC project?

David Watson (CEO)

Yeah. So some of these projects are full EPC jobs, and others are, you know, lesser. A lot in some projects, the project owner buys the solar panels, and others we buy the solar panels. At the end of the day, you know, we're already, you know, piling, you know, putting in piles and bolting solar arrays together on a number of these jobs. So, you know, from a cash revenue standpoint, they are typically less than a year long. But, you know, the 405-megawatt job is gonna be much longer than that, just given the sheer size and scope of it. So I don't know if that answered your question or not, Rob.

Rob Brown (Founding Partner and Senior Equity Research Analyst)

Yeah, that, that was what I was getting at. Thank you very much. I'll turn it over.

Operator (participant)

Thank you, and that does conclude our Q&A session for today. I would like to hand the call back to David Watson for closing remarks.

David Watson (CEO)

Well, thank you all for participating in today's call. We look forward to speaking with you again when we report our second fiscal quarter, ending July 31, 2024, and have a great evening. Thanks, everybody.

Operator (participant)

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