Argan, Inc. (NYSE:AGX) Q2 2024 Earnings Conference Call September 1, 2023 5:00 PM ET

Company Participants

John Nesbett - IMS Investor Relations
David Watson - Chief Executive Officer
Hank Deily - Chief Financial Officer

Conference Call Participants

Rob Brown - Lake Street Markets
Chris Moore - CJS Securities

Operator

Good evening, ladies and gentlemen, and welcome to the Argan, Inc. [Technical Difficulty] Conference Call for the Second Quarter of Fiscal 2024, which ended July 31, 2023. This call is being recorded. All participants have been placed on a listen-only mode. Following management's remarks, the call will be opened for questions. There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast.

It is my pleasure to turn the floor over to your host for today, John Nesbett of IMS, Investor Relations. Please go ahead, sir.

John Nesbett

Good evening, and welcome to our conference call to discuss Argan's results for the second quarter of fiscal year 2024 ended July 31, 2023. On the call today, we have David Watson, Chief Executive Officer; and Hank Deily, Chief Financial Officer.

I'll take a moment to read the Safe Harbor statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include but are not limited to projections or statements of future goals and targets regarding the company's revenues and profits. These statements are subject to known and unknown factors and risks.

The company's actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements and some of the factors and risks that could cause or contribute to such material differences have been described in this afternoon's press release and in Argan's filing with the U.S. Securities and Exchange Commission.

These statements are based on information and understandings that we believe 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 second quarter financial results and filed its second quarter Form 10-Q with the Securities and Exchange Commission.

With that out of the way, I'll turn the call over to David Watson, CEO of Argan. Go ahead, David.

David Watson

Thanks, Jen, 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 second quarter of fiscal 2024 ended July 31, 2023. Then we'll open up the call for a brief Q&A.

We made great progress during the second quarter as evidenced by revenue growth of approximately 20% to $141 million with significantly improved bottom line profitability and continued strength in our balance sheet. We're also pleased during the quarter to see consolidated gross margin improved sequentially as compared to the first quarter of 2024 coming in at 16.8%, which is generally in line with our expectations based on a diversified mix of revenues.

Additionally, we marked our third consecutive quarter, maintaining backlog in excess of $0.8 billion. Our current backlog includes the Shannonbridge Power Project in Ireland, which is a power plant that will ensure reliable electricity supply during critical situations and emergencies and also includes the value of the limited notices to proceed that we received for three solar plus battery power facilities in Illinois with Vistra Energy. And our balance sheet remains strong with $346 million of cash and investments and net liquidity of $240 million at July 31, 2023. Lastly , we carry no debt.

During the second quarter, we repurchased approximately 77,000 shares of our common stock for a total spend of approximately $3 million or $39.24 per share. Reviewing our three reportable business segments, power industry services represented 75% of our second quarter revenues and reported pre-tax book income of $16.3 million. Revenues and income both increased for this segment during the second quarter by 15.3% and 12.3% respectively as compared to the amounts reported for the comparable quarter last year.

This segment is comprised of our Gemma Power System and Atlantic Projects Company operating units and focuses on the construction of all types of power facilities including efficient gas-fired power plants, solar energy fields, biomass facilities and wind farms. As I just mentioned, following the quarter's close, APC received a full notice to proceed on the Shannonbridge project in Ireland and Gemma received limited notices to proceed on the solar and battery projects for Vistra Energy.

The industrial construction services, which is represented by the Roberts Company, had a strong quarter and contributed 23% of our second quarter revenue. It reported pre-tax book income of $3.2 million. Revenues and income both increased for this segment during the second quarter by 42.3% and 81.1% respectively as compared to the amounts reported for the comparable quarter last year.

Roberts provide solutions to mostly industrial and manufacturing clients. They focus on agriculture, petrochemical, pulp and paper, water and power industries, as well as other newer industries adding to or expanding the number of production facilities in the Southeast. The segment focuses on construction projects provides other field services like plant maintenance turnarounds, shutdowns and emergency mobilization, as well as pipe and vessel fabrication.

Lastly, we have our Telecommunications Infrastructure services group, our smallest segment, which contributed 2% of our second quarter revenues. SMC Infrastructure Solutions is our operating brand in this segment, provides outside construction services for the utility and telecommunications sectors, as well as inside the premises wiring services for federal government locations and military installations requiring high level security clearance.

We believe Argan is strongly positioned as the energy landscape transitions from coal power to cleaner alternatives like natural gas and renewables. The anticipated future decline in coal fired power generation is significant with coal-fired power generation in the U.S. expected to drop by an additional 70% to represent only 5% of net electricity generation by 2050. And while the move to more environmentally friendly power resources is important, the ability to provide the liable power generation is paramount.

We have the capabilities and a track record of proven success in assisting our power partners as they address and balance increasing levels of power consumption with the demand for cleaner energy supply. Our business is already playing a leadership role in this transition as you'll see on slide six where we've highlighted the details of our recent limited notices to proceed on a project with Vistra Energy.

[Indiscernible] will work with Vistra to complete three facilities located in Illinois to provide solar power plus battery storage capability, representing 160 megawatts of power and 22 megawatts of energy storage. We're excited to work with Vistra to drive the move to cleaner electrical power generation and specifically the growth of our solar power. We look forward to executing another successful project with another new customer in the renewable energy space.

On slide seven, we provide the details of the Shannonbridge Power Project in Ireland. APC recently received full notice to proceed on EPC services project for a 264 megawatt power plant. We're excited to have the opportunity to combine the expertise of APC and Gemma for oversight of this project's lifecycle including design, procurement, construction and commissioning. This project, for which we began work earlier this year in a limited capacity, demonstrates our ability to dynamically work with our customers on a compressed schedule as we target completion for early next year.

The Shannonbridge project is expected to strengthen the regions' power infrastructure and enhance reliable electricity supply during times of high utilization or merchant fees. As the industry shifts to new power generation technologies, it's important to note that 83% of our current backlog of over $0.8 billion represents projects that support lower carbon emissions demonstrating our commitment and our leadership role in the transition to cleaner power generation.

Now, I'll hand the call over to Hank Deily to go over our financial performance.

Hank Deily

Thanks, David, and good afternoon, everyone. On slide nine, we present our consolidated income statement for the second quarter and the first six months of fiscal 2024. Second quarter of fiscal 2024 revenues increased 20% to $141 million, reflecting an increase in revenues from both our Power Services and Industrial Services segments as compared to the second quarter of fiscal 2023.

In the second quarter, we achieved a 15% increase in revenues in our Power Industry Services segment, primarily related to projects under construction overseas and the Trumbull Energy Center, partially offset by decreased revenues associated with the Guernsey Power Station and the Maple Hill Solar facility as those projects get closer to final completion. In our Industrial Construction Services segment, the company achieved revenue growth of 42% driven by a meaningful increase in field services and fabrication work.

Gross margin in the second quarter was 16.8%, a decline as compared to 20.6% in the second quarter of fiscal 2023 that related primarily to the changes in our mix of revenues. As many of you know, our margins can fluctuate quarter-to-quarter related to the revenues mix, current project risk profiles, commercial terms and associated margin expectations. For example, time and material contracts are less risky than fixed price and therefore generate a lower margin profile, which is acceptable on a risk adjusted basis.

Additionally margins may also be impacted by where we are in the project lifecycle. While margins were down as compared to the second quarter of fiscal 2023, we did see margins rebound sequentially as compared to the first quarter of fiscal 2024, which were 13.7% to generally be more in line with our expectations based on a diversified mix of revenues. Selling, general and administrative expenses of $10.5 million for the second quarter of fiscal 2024 decreased as compared to SG&A of $11 million in the second quarter of fiscal 2023.

Net income for the second quarter of fiscal 2024 improved significantly to $12.8 million or $0.94 per diluted share as compared to net income of $4.2 million or $0.30 per diluted share in the second quarter of fiscal 2023. These results benefited from an increase in earnings on our invested funds as yields increased meaningfully between periods and from a reduction in income tax expense between the periods due to the unfavorable research and development credits adjustment recorded in the prior year quarter. EBITDA, which is defined as earnings before interest, taxes, depreciation and amortization, for the second quarter of fiscal 2024 was $17.9 million as compared to $14.9 million in the second quarter of fiscal 2023.

Looking at our year-to-date performance, revenues in the first six months of fiscal 2024 increased by 12% to $245 million as compared to revenues of $218 million in the prior year period. Revenues in our Power Industry Services segment increased by $10.3 million due to the increase for the second quarter. Construction activities have increased in the current year for the Shannonbridge project, the Trumbull Energy Center, the ESB FlexGen peaker plants and the Kilroot Power Station. The increased revenues were partially offset by the effects of decreased activities at the Guernsey Power Station and the Maple Hill Solar energy facility as those EPC projects wind down.

Our consolidated gross profit margin of 15.5% for the first six months of fiscal 2024 decreased, as compared to gross margin of 20.2% in the first six months of fiscal 2023, primarily due to changes in the mix of our revenues and the reduction of profits on the Kilroot project, which has encountered a number of unanticipated challenges, which are meaningfully impacting the contract cost and schedule.

Gross margins in our Power Industry Services, our Industrial Services and our Telecommunications Infrastructure Services segments are 16%, 13.4% and 22.5% respectively for the first six months of fiscal 2024 as compared to 21.2%, 16% and 23.9% respectively for the first six months of fiscal 2023.

SG&A expenses decreased to $21.1 million for the first half of fiscal 2024, as compared to $21.6 million for the first-half of fiscal 2023. Net income for the first six months of fiscal 2024 was $14.9 million or $1.10 per diluted share compared to $11.7 million or $0.80 per diluted share for the first six months of last year and EBITDA was $21.6 million compared with EBITDA of $25.6 million in the first six months of fiscal 2023.

These results reflect the reduction in consolidated gross profit between periods, offset by an increase in earnings on our invested funds and the reduction in income tax expense between periods due to the aforementioned research and development credits adjustment recorded in the prior year.

With that, I'm going to turn the call back to David.

David Watson

Thanks, Hank. Turning to slide 10, our consolidated project backlog of over $0.8 billion as of July 31, 2023, remains consistent with where we stood at year end of fiscal 2023 and reflects the solid pipeline of opportunities we're seeing and the ongoing momentum in our business. Our backlog continues to reflect longer term fully committed projects in both the Power and Industrial Construction Service segments.

On slide 11, we present certain major projects currently included in our backlog. We have two projects currently winding down, the Guernsey Power Station which is the largest single phase gas-fired power plant project in the U.S. and the Maple Hill Solar facility. Both are substantially complete and nearing final completion. The Kilroot Power Station and the ESB FlexGen peaker power plants are projects that are at or near peak activity.

New to the list of major projects are the Shannonbridge power plant in Ireland and the Vistra solar plus battery projects in Illinois, both of which we've already talked about in detail above.

Finally on this list, you'll see two separate water treatment plant projects that are being performed by The Roberts Company. So our backlog remains strong with a diverse selection of project work, which demonstrates the breadth of our capabilities and the market recognition of our company as a reliable and efficient industry partner here in the US and in Ireland and the U.K.

Our balance sheet remains strong. As of July 31, 2023, cash, cash equivalents and investments totaled $346 million and net liquidity was $240 million with no debt. Stockholders' equity was $285 million at July 31, 2023. As you can see from this liquidity bridge, our business model ordinarily requires a very low level of capital expenditures. Our net liquidity was consistent with year-end and remains robust $240 million as of July 31, 2023.

Since November 2021, we have returned a total of approximately $95 million to shareholders as we've repurchased approximately 2.6 million shares of our common stock or approximately 16% of shares outstanding at the beginning of the program, which equates to an average price of $37.32 per share. Additionally, since fiscal 2017, we have paid $1 per share annually through quarterly cash dividends.

Argan has always been very focused on 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.

During the first-half of fiscal 2024, we've continued to drive momentum in the business and have maintained project backlog at over $0.8 billion for three consecutive quarters. Our project pipeline is robust and diverse contributing to our ability to drive consistency in our revenue performance as certain projects finish up and new projects ramp up.

And as I mentioned earlier, our margin profile, while down slightly compared to the second quarter of fiscal 2023, has rebounded sequentially and is generally in line with expectations based on the diverse revenue mix. We remain focused on driving improved margins. Additionally, we are confident that worldwide demand for reliable energy sources and grid stability will only increase and we believe that our reputation as a reliable partner for construction and project management, plant conversion activities and technology services positions us well to capture the opportunities we're seeing in the marketplace.

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 new low and net zero mission power generation facilities as the industry transitions to cleaner energy alternatives while maintaining grid reliability. And lastly, drive organic growth while also being mindful of acquisition opportunities that make sense for our business through thoughtful capital allocation.

I'd like to thank our shareholders for their continued support and our employees for their dedication and hard work in building Argan to a position as a valued power industry partner. With that, operator, let's open it up for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from Rob Brown from Lake Street Markets. Rob, your line is live.

Rob Brown

Hi, good afternoon.

David Watson

Good afternoon, Rob.

Rob Brown

Just wanted to kind of get a little bit more detail on the pipeline. I think you've talked about it being strong and it's been strong recently. I just wanted to get your update on sort of the timing of the new project pipeline. Are you starting to see more conversions there, more activity kind of in preparation for awards? What are you seeing in terms of the pipeline activity?

David Watson

Yes, we have seen some conversions as demonstrated by the Shannonbridge job that we announced earlier this month as well as the Vistra solar battery jobs. So we do expect some new larger projects towards the end of the year and into the next based on our current visibility into our pipeline. We may see a reduction in our reported backlog over the next quarter as we convert current backlog into revenue, but ultimately do expect to see our backlog meaningfully exceed where we are today.

Keep in mind, the starts of future project wins are controlled by the customer, which makes it difficult to forecast our backlog given the material size of certain projects. Thermal jobs always take longer than we would like to, but given developmental job, it's not an easy job. And given the PJM auctions have been further delayed till the summer 2024, restructuring of the interconnect process, MISO is generally overloaded. So, there's a lot of things that are at play, but at the end of the day, we are very bullish on seeing new jobs later this year and into next.

Rob Brown

Okay, great. Excellent, thanks for the color there. And then on the Vistra project, that's an interesting kind of project and I think it was limited notice to proceed. What's the timeline or how does that play out in terms of full notice to proceed? And I guess how the mechanics of that work.

David Watson

Sure. I mean, similar to the Shannonbridge project and a bunch of number of projects earlier, given the elongated supply chain timeline today that we face, a lot of projects are going with a limited notice to proceed early so that some of that long lead time materials or equipment can be procured to make sure that the schedule is ultimately made. So Vistra is no different than we had LNTP -- or multiple LNTPs on Shannonbridge. So while thermal has historically been our bread and butter and continues to be to this day, we are committed to building the energy transition and Vistra is kind of an exciting step for us. We're really looking forward to working with that customer.

Rob Brown

Okay. My last question is on Kilroot. There you cited some cost challenges or challenges overall. I guess, how would you kind of describe those at this point, feel like those are under control? Are there sort of areas that you see for the risk, has that?

David Watson

Yes, I mean, we're clearly disappointed with where we are in the project. Just to give a little background on the job, Kilroot is a 660-megawatt gas-fired power plant being built just outside of Belfast in an existing structure built in the early 80's to house coal-fired power generation assets. So once it's completed, it will create a significant new electricity generation asset for the island of Ireland. We started the project in late 2021 and are approximately 80 plus percent complete with completion scheduled for early next year.

You think encountered a number of meaningful challenges on the job, including the Omicron variant, COVID-19, the Ukraine war and their impacts on the global supply chains and prices, 50-year rains and building on a Brownfield building site among other factors. So, that -- those challenges have resulted in us having to reverse certain previously recorded profit on the job and we are working hard to achieve the completion of the project in a way that is reasonably acceptable to all stakeholders.

Rob Brown

Okay, thank you. I'll turn it over.

David Watson

Thanks, Rob.

Operator

Thank you. [Operator Instructions] And the next question is coming from Chris Moore from CJS Securities. Chris, your line is live.

Chris Moore

Good afternoon, guys. Thanks for taking a few questions.

David Watson

Good afternoon, Chris.

Chris Moore

Good afternoon. So, Shannonbridge looks like it's going to be a pretty quick turn. So will that start ramping this quarter or Q4?

David Watson

Yes, good question. We started earlier this year pursuant to the limited notices to proceed. And given that this is an emergency or rush job, activity on the job site pursuant to LNTP has been significant. I mean, the schedule is to finish by early next year, so there is a lot of work being performed in a short period of time. And it's -- yes it is already ramping -- or ramped, Chris. I mean, I walked the job site about a month ago and activity was happening everywhere, so really impressive.

Chris Moore

Got it. I assume the margins associated with this project are little bit lower than the bigger U.S. natural gas projects?

David Watson

It all depends on the contractual terms and the risk -- the commercial risks that we take on. And so it's hard to be able to make that differentiation.

Chris Moore

So there is potential for excess margin at the end like a traditional U.S. natural gas contract?

David Watson

It is our goal to have a successful project for everyone that that we do and to account for it as best we can.

Chris Moore

Fair enough. How about -- just in terms of Trumbull, kind of the timing of when you think it will be at kind of peak quarterly revenue and obviously to the timeframe on your sheet? I'm just trying to get a little better sense for the ramp?

David Watson

So we are right on schedule and very happy with the progress of the Trumbull job, another huge job for us in Ohio. I would expect given the cadence of -- well, this schedule and the cadence of any gas-fired power plant job that the peak activity will be reached during the latter half of fiscal year '25 and on into fiscal year '26.

Chris Moore

Got it. Other income was meaningfully higher than I had modeled. That $4.1 million, is that -- is that sustainable for the balance of fiscal '24?

David Watson

It's -- we're pleased to have the strong balance sheet that we have and we've been purposeful in putting that money to work, not only in short-term money market funds and CDs, but also in longer duration treasury bills and the yields that we're seeing, like you're seeing everywhere is north of on average only around 5% or so. So is the $4.1 million sustainable? There were a couple of other things that run through the other income line item, Chris, but the majority of it is the interest and dividend income from our investments. And so it's something that's meaningful.

Chris Moore

Got it. And maybe just my last. Want to follow-up on one to Rob's on the pipeline. So it sounds like you're looking for new projects hopefully later this fiscal year or early next. I guess, the question is are there -- how many significant natural gas slide decks or potential projects in the U.S.? Are there -- many of these days -- I'm just trying to get a sense in terms of kind of what the overall backdrop looks like.

David Watson

Yes, so there's a number of converging forces some, some that are positive, some that are challenging. Some of the positive data points Chris is the OEMs are getting really busy again. And their production lines are basically full speed ahead. So, if some wants to build a thermal or a gas-fired power plant, they need to get a turbine ordered early in the process. So that should be very telling as to where the interest in and is in gas-fired power plants, not just in the U.S., but internationally.

That being said, as I mentioned earlier when I was responding to a question from Rob, there is -- there's the PJM, there is the delays in the capacity auctions. There is the interconnection process that's getting in the middle of restructuring that's been gummed up. So there's a number of in MISO being overloaded. So there's a number of things that kind of go against that. And then in general, they -- gas power plants, there -- we see a number of them being cited developers trying to set up, not just developers that are private, but also public utilities and we're excited about what we're seeing over the next couple of years and on.

Chris Moore

Got it. That's helpful. I will leave it there. Thanks, David.

David Watson

Thanks, Chris.

Operator

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

David Watson

Great. Thank you everybody for joining us for our Q2 fiscal '24 earnings call. I appreciate the participation and the interest in our company. I look forward to speaking with each of you next time we have a call. Take care.

Operator

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.