Williams Industrial Services Group Inc. (AMEX:WLMS) Q3 2022 Earnings Call Transcript

Williams Industrial Services Group Inc. (AMEX:WLMS) Q3 2022 Earnings Call Transcript November 15, 2022

Williams Industrial Services Group Inc. misses on earnings expectations. Reported EPS is $0.14 EPS, expectations were $0.16.

Operator: Greetings, and welcome to Williams Industrial Third Quarter 2022 Financial Results Conference Call. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Witty, Investor Relations Advisor. Thank you. You may begin.

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Chris Witty: Thank you, and good morning, everyone. Welcome to the Williams Third Quarter Conference Call. With me on the call today are Tracy Pagliara, President and CEO; Randy Lay, EVP and COO; and Damien Vassall, Vice President and CFO. After Tracy and Damien provide their prepared remarks, we’ll open the call for questions. Our third quarter results were issued yesterday afternoon and a slide presentation is available on the company’s website at www.wisgrp.com. If you now turn to Slide 2 of our presentation, I’ll review the safe harbor statement. This conference call may include forward-looking statements that represent the company’s expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company’s actual performance to be materially different from the performance indicated or implied by such statements.

All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the company’s expectations are disclosed in this conference call as well as with other documents filed with the SEC. You can find all these documents on our website or at www.sec.gov. During today’s call, we will also discuss some non-GAAP financial measures. We believe these are useful in evaluating the company’s performance. However, you should not consider this additional information in isolation or as a substitute results prepared in accordance with GAAP.

When applicable, we will have provided a reconciliation of non-GAAP measures with comparable GAAP results in the tables that accompany today’s release and slides. Please note that our conversation today will be about continuing operations unless noted otherwise. Starting with Slide 3. I’ll now turn the call over to Tracy Pagliara. Please go ahead, Tracy.

Tracy Pagliara: Thanks, Chris, and good morning, everyone. Williams posted third quarter revenue of $56.7 million, which was up slightly from Q2 was down significantly from last year’s comparable period. As I’ll review further in a moment, we have continued to face challenges converting pipeline to revenue in 2022. Our gross margin was 1.3% for the quarter, reflecting the previously discussed issues associated with our Florida Water business as well as costs tied to expanding into the transmission and distribution markets. Without such expenses, our adjusted gross margin was 9.7%. I will discuss these issues near the end of the call when reviewing our current guidance and outlook. Operating expenses were $7 million this quarter, which included professional fees and legal expenses related to matters settled during the quarter.

In addition, the variance year-over-year reflects the fact that in 2021, we reversed approximately $1.2 million of incentive compensation, reducing costs accordingly. Adjusted EBITDA was $6.2 million for the quarter, reflecting the fact that we received net proceeds of approximately $10.8 million related to 2 legal settlements during the period. Without such payments, which are counted as other income, EBITDA would have been negative. At the end of the quarter, the company’s backlog stood at roughly $353 million, up more than $100 million from Q2’s $234 million. This reflects several recent wins, most notably the multiyear extension of business with a large southern utility, providing maintenance and modification services at various sites throughout their footprint.

This work through a long-standing joint venture is estimated to be worth approximately $120 million of revenue over the next 4 years. Now turning to Slide 4. I’d like to discuss the state of the business and current growth outlook. It goes without saying that our results continue to be negatively impacted by several factors, including the slower-than-anticipated award environment, additional losses in our Florida Water business and nonrecurring start-up costs and legal fees. While our top line has been depressed due to delayed customer decisions, we remain optimistic about the long-term prospects for the business. There is strong demand for our services, driven by the large capital budgets of our customers as well as government funding, reflecting bipartisan support and congress for the prioritization of infrastructure spending.

In addition, our recent wins in strengthening backlog give us reason to be more positive about the future. We continue to actively focus on new business development, while concurrently taking measures to streamline the company’s operations and reduce costs. We remain steadfastly dedicated to improving wins, growth and profitability profile. I’ll have more comments at the end of the call, but we’ll now hand it over to Damien to discuss our quarterly financial results. Damien?

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Damien Vassall: Thank you, Tracy, and good morning, everyone. I’d like to review the financials in greater detail. Turning to Slide 5. We posted a revenue of $56.7 million for the quarter, as Tracy mentioned, versus $73.4 million in 2021. Sales fell year-over-year due to lower levels of nuclear and decommissioning work more than offsetting higher revenue across our other core markets. Revenue for Vogtle 3 & 4 was approximately $18.4 million during the period. Given that our backlog grew substantially during Q3, we believe the fourth quarter will show top line improvement, including certain work that has been delayed from earlier in the year. We are optimistic about growth heading into 2023 based on our backlog, pent up utility demand and government budget priorities.

Slide 6 shows operating trends for the company. We posted gross profit of $700,000 or 1.3% of revenue for the third quarter versus $6.8 million or 9.2% of revenue last year. The lower margin reflects project mix along with the ongoing impact from our T&D investments and certain previously announced projects in Florida operating at a loss. Excluding these start-up costs in the Florida work, our gross margin would have been 9.7% for the quarter. We expect reported margins to remain under pressure near term but improve in 2023. Operating expenses were $7 million for the third quarter versus $4.6 million last year. The $2.4 million variance reflects litigation and professional fees, along with the fact that in last year’s comparable quarter, we reversed $1.2 million of incentive compensation expense, reducing it accordingly.

With the litigation now behind us, operating expenses will be lower going forward. And we have identified additional opportunities to cut costs and streamline the business. I’ll now turn the call back to Tracy for a review of our 2022 guidance and his closing remarks. Tracy?

Tracy Pagliara: Thanks, Damien. Slide 7 sets forth the revised guidance that we issued yesterday. While it certainly disappoints us again to reduce our guidance, this reflects several near-term challenges that continue to negatively impact the business this year. We now forecast revenue of between $245 million and $255 million for 2022 and expect to post gross margins between 5.5% to 5.75%. We anticipate SG&A to be 10.5% to 11% of revenue. Our adjusted EBITDA is forecast to be between $2.5 million and $3.5 million, including the impact from recent litigation settlements without which EBITDA would have been negative this year. Aside from the sluggish award environment, the biggest impacts — items impacting our results this year continue to reside with certain Florida projects and our investment in the T&D business.

While the latter issue is a strategic one, which should bear fruit over time, the former that of poorly performing contracts has become larger than previously anticipated. With that in mind, we are focused on executing the remaining legacy Florida Water projects, a substantial majority of which are scheduled to be completed this year with only 4 continuing into 2023. In addition to address negative cash flows in the company’s business, Williams has developed a plan to aggressively reduce costs and improve our working capital management, which is outlined in greater detail in our Form 10-Q report for the third quarter. Our 2022 financial performance has clearly been well below expectations and the management team accepts full responsibility for getting the company back on track.

Our near-term goal is to finish the year with an enhanced projected margin profile for 2023 and to implement meaningful cost cuts to ensure much better results going forward. We also need to position the company for stronger backlog growth by executing well on some key nuclear projects of 2023. We remain bullish about the opportunities in our end markets but need to move past significant headwinds that have dampened our performance for several quarters. We look forward to earning your confidence again in restoring your trust and wins in the very near future. With that, operator, we can open the line for questions.

Q&A Session

Operator: . Our first question comes from the line of Julio Romero with Sidoti & Company.

Julio Romero: To start on Florida, I guess, what’s changed in regards to the Florida Water business over the last 3 months that has led to additional losses?

Tracy Pagliara: Randy, you want to take that?

Randy Lay: Sure. I’ll take it. Fundamentally, we had a series of projects that we talked about in the past that were combination of 2 things: estimates that were not accurate, and project management that was not effective — as effective as it needs to be. So back — as you may recall, back in April, May, we replaced management in pretty much every project manager in the office for the exception of a couple. And that led us to — again, these are, in some cases, projects that are of some size. We have us to go back and then reexamine those estimates, reconfirm spending as well as what would it take to successfully complete the projects. And that’s what — all that’s changed is, we understand better at this point, what it’s going to take to bring those projects to completion.

The good news is, of those projects that we have significant concerns over the bulk of those will be completed this year. We do have a couple of projects of significant size that will complete in 2023 in the — last one in the third quarter. And those are the ones that Tracy mentioned that we’re going to be concentrating on. So it’s really putting a finer point on the cost to complete those projects as well as replacing the management that have been the most significant changes.

Julio Romero: Okay. No, I appreciate the color. And I guess, talk about maybe, what gives you guys the confidence that you have a good grasp on the Florida situation as it stands now?

Randy Lay: No, I think, first and foremost, we’ve put in place some risk mitigation steps to ensure that any work that we do can be completed profitably. And that’s meant that, in many cases, we have, in bidding those projects, we have been high. And so that’s been part of the strategy to mitigate that. Second, it really does come down to making sure that for every operation that we’re going to undertake on those projects that we have — that we’re managing both, 2 things. One, the sort of the legacy of the estimates. Being poor is probably the biggest thing that — biggest area that we’ve had to spend time on. And second, there are still not in considerable supply-chain issues, particularly as it comes to those parts of these projects that require electronic components, control systems and so on.

It require the same chips that go into transformers and everything else that in the supply chain has been disrupted and then working with our customers to make sure that: a, we get it done; but b, that the burden of getting it done and the extension of the schedule is understood, that we need to work together to get that accomplished, so that the weight of the cost of doing that doesn’t sit on Williams. And so far, our customers have been — they see the same things in the marketplace that we do. So those are probably the 2 major things. And probably, I’d add third, maybe it goes without saying, is that we’re in constant touch with our customers on these larger projects as we manage through those sorts of issues.