Shimmick - Q4 2023

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neil Sikka, with Investor Relations at Shimmick. Thank you. You may begin.

Neil Sikka (Investor Relations)

Good morning, and thank you for joining us on today's conference call to discuss Shimmick's fourth quarter and fiscal year 2023 results. Slides for today's presentation are available on the Investor Relations section of our website, www.shimmick.com. During this conference call, management will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect. We identify the principal risks and uncertainties that may affect our performance in our reports and filings with the Securities and Exchange Commission, which can also be found on our Investor Relations website. We do not undertake a duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures.

You should refer to the information contained in the company's fourth quarter press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, it is my pleasure to turn the call over to Steve Richards, Shimmick's CEO.

Steve Richards (CEO)

Good morning, and thank you all for joining us on today's call. I'm joined by Devin Nordhagen, Shimmick's CFO. As a reminder, and for those of you who are new to our story, Shimmick is a leading water infrastructure company that provides solutions across the entire water spectrum. We focus on two key areas: water treatment and water resources, which include dams, reservoirs, flood protection, and other infrastructure. Shimmick operates in a strong, vibrant, and underserved market. Infrastructure construction saw a nearly 20% year-over-year increase in spending during Q4 2023. The strongest spending increase was in the combined water and sewer segment of a 23% year-over-year gain. Healthy growth remained consistent, signaling that the Infrastructure Investment and Jobs Act funds are flowing and are having an impact.

Spending on infrastructure construction is expected to strengthen further as funds from the IIJA continue to flow through to projects, which is expected to provide significant stimulus to the infrastructure construction segment over the next decade. The water segment specifically is benefiting from the allocation of federal funds. Nearly $15 billion was set aside to assist with lead pipe removal and replacement, and billions more were set aside for water storage, sanitation, and clean water drinking water grants. In February 2024, the Biden administration announced an additional $5.8 billion in funds from the IIJA to be split among 22 states for water infrastructure projects. Shimmick's pipeline reflects this growth in the infrastructure market. We have identified approximately $4 billion in priority opportunities through the end of 2024.

We believe that while double-digit growth is likely not sustainable, the overall demand for water solutions will remain high over the long term due to water scarcity and other macroeconomic drivers. For the fiscal year 2023, we delivered revenue of $633 million, a net loss attributable to Shimmick Corporation of $3 million, and an Adjusted EBITDA of $30 million. To provide a better perspective on our financial results and how the strategy we have implemented is progressing, we'll be speaking to results today on a bifurcated basis between Shimmick Projects and Legacy Projects. Shimmick Projects are projects that Shimmick started after the AECOM Sale transaction.

Since becoming an independent company, Shimmick has shifted our focus to water infrastructure and other critical infrastructure, which you will see is reflected in our backlog portfolio. Legacy Projects are projects that started prior to the AECOM Sale transaction and that we assumed in the sales transaction.

Several of these are large, complex, multi-year projects that have experienced cost overruns. Longer term, these projects will decline as a significant portion of our business and be replaced by newer strategic projects. With that context, in 2023, Shimmick project revenue grew to $434 million, a 24% increase compared to 2022. Importantly, we grew Shimmick gross margin by $5 million for the year. Legacy project revenue decreased by $114 million to $199 million, reflecting a 37% decrease when compared to 2022. Our backlog, which we view as a key differentiator versus our competitors, continues to be strong. Shimmick finished 2023 with a backlog of $1.1 billion. We've reported an 18% increase specifically in Shimmick projects backlog during fiscal year 2023. We continue to have a robust pipeline of future work, which we expect to grow alongside increases in federal funding and a growing demand for water.

More than 75% of our work is generated from repeat customers. Public customers and associated public funding allow for a predictable, long-term flow of programs and projects. We secured several notable water projects for state and federal governments in 2023. Turning to the next slide as an example, Shimmick won a major $217 million water treatment plant expansion for the Elsinore Valley Municipal Water District in Southern California, where Shimmick will expand the facility's capacity from $8 million to $12 million per day to meet the area's growing water demand.

The project includes two new aeration basins, a membrane bioreactor facility, and a UV disinfection facility, among other work. Shimmick is self-performing more than 80% of this project, including the electrical work required to bring the expanded facility online. We have since installed the dewatering system, relocated conduit, and conducted mass excavation to prepare for the critical facility expansion. With that, I'd like to turn the call over to Devin, who will discuss our financial results.

Devin Nordhagen (CFO)

Thanks, Steve. All comparisons made today will be on a year-over-year basis compared to the same period in 2022. For the fourth quarter, we reported revenue of $138 million compared to $186 million for the prior year period, with a net loss of $17 million, approximately flat as compared to the prior year period. Fourth quarter adjusted EBITDA was a loss of $9 million compared to a loss of $11 million in the prior year period. For our fiscal year 2023 results, revenue was $633 million compared to $664 million for 2022. As Steve mentioned, it is important to look at the trends in executing on our Shimmick strategy as compared to the wind-down of the legacy projects. As you can see in the top-left chart, Shimmick projects revenue was $434 million, a 24% increase compared to 2022.

The Shimmick Projects revenue for the quarter was down slightly compared to last year due to the conclusion of some projects in 2023. Given the timing of project starts and completions, quarter-to-prior-year quarter comparisons will sometimes show some lumpiness. Shimmick Projects gross margin increased by $5 million due to the higher revenue and was consistent at 7% as compared to last year, primarily driven by management shift in job bidding strategy towards higher-margin, lower-risk jobs. On the Legacy Projects in the bottom half of the slide, revenue decreased 37% to $199 million. Legacy Projects gross margin was a negative $7 million, primarily due to projects winding down and an unfavorable settlement on a Legacy Project.

The Legacy Loss Projects with negative gross margins are over 75% complete at the end of fiscal year 2023, with the cash used in operating these projects was approximately $65 million and $96 million for the fiscal years ended 2023 and 2022, respectively. We continue to actively pursue all opportunities to offset these costs. In total, fiscal year 2023 gross margin was $22 million compared to $23 million in 2022. Fiscal year 2023 net loss attributable to Shimmick was $3 million compared to net income attributable to Shimmick of $4 million in 2022. Fiscal year 2023 diluted net loss per common share was $0.11 compared to net income per common share of $0.17 in the prior year period.

Fiscal year 2023 adjusted net income was $11 million compared to $30 million in the prior year period, and adjusted diluted earnings per common share was $0.48 as compared to $1.35 in the prior period. Fiscal year 2023 adjusted EBITDA was $30 million compared to $47 million in the prior year period, in part due to a large equity-method project settlement in 2022. With that, I'd like to turn it over to Steve for some additional remarks.

I'd like to provide our view of our portfolio and backlog. Backlog is awarded work still to be completed. We are continuing to burn off the Legacy Projects portfolio, which will, in turn, lead to improving margins over time. At the end of 2023, Legacy Projects only accounted for 18% of the backlog. We plan to continue to grow our Shimmick Projects backlog and bid on high-margin water infrastructure projects. We have a robust pipeline of bids that is expected to increase with further federal funding. We are well-positioned to capitalize on America's water infrastructure renaissance, which will be taking place for the coming decade. As a newly public company and given the sizable ongoing impact of Legacy Projects, we are introducing limited guidance for 2024 covering only revenue and gross margin.

For the fiscal year ending December 27, 2024, we expect Shimmick project revenue to grow 7% to 13%, with gross margin between 7% to 13%. Legacy projects revenue to decrease by 45% to 55%, with negative gross margin of 5% to 10%. The guidance reflects our execution on our strategy, our robust pipeline, the improving quality of our backlog, and our continued operational execution, as well as our efforts to work off our legacy projects. We believe that our results will be back half-weighted in 2024, with further strong momentum for the growth in 2025. In conclusion, Shimmick continues to be favorably suited to take advantage of the sizable market opportunities ahead. Our vertical integration minimizes risk, and our strategic shift towards a higher-margin portfolio, coupled with potential M&A activities, positions us well for enhanced margins and growth.

Lastly, I want to thank all the Shimmick employees for their tireless dedication and support. Operator, you may now open the line for questions.

Operator (participant)

Thank you. We will now 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 that your line is in the question queue, and you may press star two if you would like to move 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 pull for questions. Thank you. Our first question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Good morning, Steve and Devin. Thanks for taking my call.

Steve Richards (CEO)

Morning, Gerry.

Gerry Sweeney (Managing Director and Senior Research Analyst)

I wanted to touch upon the new Shimmick projects. They appeared to underperform my expectations in the quarter. Margins came in, I think, lower on a year-over-year basis. Can you discuss what is driving some of that margin impact in the quarter? I think margins on the new Shimmick projects were about almost 3% versus last year at 7.4%. Just curious of some of the dynamic that's going on there, if you could. Thank you.

Steve Richards (CEO)

Devin, you want to take that, or I can?

Devin Nordhagen (CFO)

Yeah, I can. Thanks for the question, Gerry. Yeah, I think for our Q4, specifically for the Shimmick projects, you have a little bit of timing going on where you have some projects winding down in that quarter period that weren't replaced by Shimmick project backlog, so you have some timing aspects in the quarter.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Were there any challenges or projects that aren't going as well as desired?

Devin Nordhagen (CFO)

No, I think all the assets I mentioned in the call and our financials will show that our Shimmick projects are the projects that are the right size, duration, and scope that we've been looking for in that water infrastructure space. And so they are the projects that we're looking to bring on more of.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Gotcha. So in other words, Shimmick is executing well or as desired on the new projects that you've brought into the pipeline, into the backlog, and are operating on currently. Is that a fair justification?

Devin Nordhagen (CFO)

Correct.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Got it. And then let me see here. As we look out to Q1, obviously, last year, I think you guys got hit by some weather impacts and things like that. There was some rain as well in Q1. Just curious how that's going to play into the first quarter, if similar challenges are arising in 2024 as they did in Q1 2023 because of weather?

Steve Richards (CEO)

Yeah, we're not seeing the same impacts as last year, Gerry. We do have some projects that have seasonal nature to them, but those are as planned as well.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Gotcha. Well, that's good to know. And then also, you provided guidance, which we're very appreciative. It's rather wide, but completely understandable given the nature of the industry. But could maybe provide us some of the puts and takes, especially on the new Shimmick projects, on not just the revenue side, but more on the margin side? Just curious, 7% to 13%, what needs to go right to get towards the 13%, and what would be some of the challenges if they came in closer to 7% given that you feel as though you're executing well on those new projects that have entered the revenue stream?

Steve Richards (CEO)

Well, as we've talked in the IPO, the go-right answer would be we're very smart about the way we kick off projects. We make sure that we buy out subcontractors and key material providers, for example, early in the project so that we kind of minimize any escalation impacts, pass that along to the vendors and subs who can manage that risk best. Go wrong would be, as you mentioned earlier, sometimes weather may step in and see a little bit of impact, but that kind of slows progress and pushes work possibly to the right more than anything. But overall, the margin should be okay. So I'd say those would be the main things of good, strong project startup activities.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Gotcha. And then one more from me that I'll jump in live. I think Aaron's probably behind me. But when you—how does the margin profile work, right, in terms of you have mobilization, ramp, then you get into the meat of the project. So is it early in the process, very low margins, if not costs associated with the project as you're mobilizing and getting ready for the project, and then you hit the meat of the project, the margins are chugging along, and then the similar maybe costs or lower margins as you do mobilization? Is that the way of thinking of how Q4, Q5, even Q1, we're seeing some of this demobilization and mobilization into new projects impacting margins? Is that a fair way of thinking about it?

Steve Richards (CEO)

I'll let Devin or Devin jump in as well. But we use a percentage-of-completion accounting methodology. And so if your cost is right and you're completing your work with actual costs over an anticipated completed cost, we should be earning progress and earnings as we go. Devin, you want to supplement that?

Devin Nordhagen (CFO)

Yeah. I mean, to your point, Steve, you can have some changes in how that job is ramping up. So you're going to earn your revenue not always completely when you're in the job. It depends on the cost that you're incurring in the job over the cost that you expected for the life of the job. And so you could have some peaks and valleys in certain points in time.

Gerry Sweeney (Managing Director and Senior Research Analyst)

Gotcha. Okay. I'll jump back in line. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Aaron Spychalla with Craig-Hallum. Please proceed with your question.

Aaron Spychalla (Senior Research Analyst of Industrials & Clean Technologies)

Yeah. Good morning, Steve and Devin. Thanks for taking the question. First, for me, can you maybe just touch on the pipeline and how that's been trending? I think you called out a $4 billion opportunity. And then just a little bit on the funding, it sounds like that's mostly gotten out to a state level from some of the funds. Do we start to see that kind of flow to projects in 2024, 2025? Is that kind of your expectation?

Steve Richards (CEO)

We do. We're really pleased with the pipeline. We're, as we mentioned, tracking $4 billion. It's the pipeline that fits how we look at the new Shimmick. We're looking for jobs that are in that 50 to 150 range, average kind of three-year duration. So the pipeline is filling up like that. I mentioned during the call that we're kind of back half-weighted. That would include our bidding activity as well, but we feel really good about it. To your question about where is the funding coming, we are still continuing to see the IIJA funding coming. Some of the leading indicators that we watch would be the major designers and how they are seeing that funding coming through their programs and seeing an increase in activity there, which we'll see as those design products come out in the form of RFPs for clients.

We'll see more and more opportunities for us as well.

Aaron Spychalla (Senior Research Analyst of Industrials & Clean Technologies)

All right. Thanks for that. Can you just kind of touch on the supply chain and kind of the labor market as you kind of try to balance that growth that you're expecting with kind of what you're seeing there from a supply chain perspective?

Steve Richards (CEO)

Yeah. The craft labor that we're seeing still, we've got a strong following with Shimmick, especially in our regional areas of Southern Cal and Northern Cal where we've got strong market presence for years. And so we've got good continuity of craft staying with us from a staff standpoint. It is a challenge out there. We are doing a great job of recruiting top talent onto our new projects and filling in some areas. We've got some initiatives going on for chasing new work and bringing in additional estimators to chase new work and to add to the efforts on this attractive pipeline we have. So definitely out there, a war on talent that flees with how Shimmick is addressing that.

Aaron Spychalla (Senior Research Analyst of Industrials & Clean Technologies)

Understood. And then can you just kind of talk about the legacy projects? Just how much is left there to go? It looks like it might be $200 million. I know you called out 75% complete. On the rest of what you didn't guide to for this year, should we expect a similar margin profile, or just maybe talk about that a little bit on what's left on the legacy side?

Steve Richards (CEO)

Yeah. I'll start, and then Devin will fill in some information there as well. A couple of years left is what we've got on those, about 18 to 24 months. Good line of sight on the project completion from a margin standpoint. I'll note, and I think we've talked before, that we do not carry margins on those legacy projects. And there may be some additional cost increases, especially as related to legal-type expenses. But Devin, you want to add on there?

Devin Nordhagen (CFO)

Yeah. So you can see in the charts there, Aaron, where the legacy backlog was at the end of 2022, it's 39%. And now at the end of 2023, it's at 18%. So we're pleased with how that's kind of burning off, and we'll burn off the rest of it in that time period that Steve had mentioned.

Aaron Spychalla (Senior Research Analyst of Industrials & Clean Technologies)

Okay. Thanks. And then maybe last for me, can you just kind of touch on, give an update on the M&A, what that market's looking like, how valuations might be trending versus your expectations, and just areas of focus moving forward?

Steve Richards (CEO)

Definitely an area of focus for us as we move forward. We're still watching and seeing M&A opportunities coming through. We continue to evaluate those as we go. I'd say that from our standpoint, as it fits into our strategic vision, looking forward to future quarters of seeing more activity there. But right now, I'd say that's where we're at. Definitely continues to fill the vision that we have for Shimmick.

Aaron Spychalla (Senior Research Analyst of Industrials & Clean Technologies)

All right. Thanks for taking the questions. I'll turn it over.

Steve Richards (CEO)

Thanks, Aaron.