Williams Industrial Services Group Inc. (NYSE:WLMS) Q2 2022 Earnings Conference Call August 12, 2022 10:00 AM ET
Company Participants
Chris Witty – Investor Relations
Tracy Pagliara – President and Chief Executive Officer
Damien Vassall – Vice President and Chief Financial Officer
Randy Lay – Executive Vice President and Chief Operating Officer
Conference Call Participants
Julio Romero – Sidoti & Company
Theodore O’Neill – Litchfield Hills Research
John Deysher – Pinnacle
Operator
Greetings and welcome to Williams Industrial Services Group Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the call over to, Chris Witty, Investor Relations Advisor. Thank you. You may begin.
Chris Witty
Thank you and good morning, everyone. Welcome to the Williams second quarter conference call. With me on the call today are Tracy Pagliara, President and CEO; Randy Lay, Executive Vice President 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 second quarter results were issued yesterday afternoon and a slide presentation is available on the company’s Web site at www.wisgrp.com. If you now turn to slide two in the presentation, I’ll review the Safe Harbor statement. This call includes 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 the other documents filed with the SEC. You can find all these documents on our Web site 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 for results prepared in accordance with GAAP. Where applicable, we have provided a reconciliation of non-GAAP measures with comparable GAAP results in the tables that accompany today’s press release and slides.
Please note that our conversation today will be about continuing operations unless otherwise noted.
Starting with slide three, I’ll now turn the call over to Tracy Pagliara. Please go ahead, Tracy.
Tracy Pagliara
Thanks, Chris, and good morning, everyone. We appreciate you joining our call today. Williams posted second quarter revenue of $56.1 million, as compared to $91.6 million in 2021. The lower sales, year-over-year, reflect the impact of previously announced customer losses, delayed projects, and the fact that fiscal 2022 did not benefit from — by annual outage work in a nuclear utility. The lack of outage work for 2022 and the customer losses were assumed in our original earnings guidance for 2022. However, we did not convert pipeline to revenue at the rate previously anticipated for the second quarter primarily due to project delays.
Accordingly, our overall revenue outlook for the year has been reduced, but we remain optimistic about the second-half as well as 2023. I’ll speak to this more in a moment. We achieved gross margin of 4.1% for the quarter, reflecting the runoff of certain previously disclosed contracts in our Florida water business and nonrecurring startup costs associated with new locations to serve our transmission and distribution customers. Damien will discuss these items in greater detail, but we consider the startup costs to be critical investments regarding the company’s improved future growth and profitability.
Operating expenses were $6.7 million in the second quarter, which include roughly $300,000 of litigation expense. As previously discussed, these legal fees are tied to an action being taken against a former employee and competitor relating to the wrongful loss of Williams’ business. Reflecting all these factors, adjusted EBITDA was negative $3.2 million for the quarter. We finished the period with a backlog of $234 million, which was also lower than anticipated due to delayed orders. However, we currently have approximately $400 million of active pipeline opportunities, versus approximately $360 million at the end of March.
Now turning to slide four, I’d like to further discuss the state of the business and current outlook. As outlined on August 4, when the company’s earnings guidance was adjusted, we remain optimistic about the second-half of 2022 and future for Williams even as recent events dampened our overall expectations for the current year. Williams is a strong business with solid end markets, near-recession-proof demand, and several robust macroeconomic trends. As mentioned in the past, the $550 billion Infrastructure Investment and Jobs Act includes over $50 billion of new investments in Williams critical end markets, energy delivery, water, and nuclear. Moreover, nuclear energy also continues to gain attention as a core source for clean energy.
And estimated $3 billion of production credits designed to keep existing nuclear facilities operating, and $700 million to support the development of [HALEU] [Ph] fuel for use in advanced nuclear reactors are in the $370 billion Infrastructure Reduction Act, expected to be signed shortly in Washington. This stacks up nicely for a very bullish Williams’ future. Importantly, the decisions we’re making today, including new investments in key markets, are based on a strategic plan focused on driving accelerated top line growth and underlying performance, taking advantage of favorable industry trends that will benefit Williams in the near-future and years to come.
After Damien speaks, I’ll come back to provide some more commentary and thoughts about the future of the company. Damien?
Damien Vassall
Thank you, Tracy, and good morning, everyone. If you turn to slide five, we posted revenue of $56.1 million for the quarter, as Tracy mentioned, versus $91.6 million in 2021. Sales declined year-over-year due to reduced nuclear business reflecting project timing and some delayed work, along with fewer decommissioning contracts and generally slower award activity. While certain projects have been pushed out to the second-half, the award delays impacted our overall outlook for 2022, as Tracy discussed. However, we fully expect contract award activity to pick up shortly and anticipate healthy backlog growth heading into 2023. This is based on pent up demand and overall projections of spending by the federal government, utilities, industry, and municipalities in our target markets.
Slide six shows our operating trends for the company. We posted gross profit of $2.3 million or 4.1% of revenue for the second quarter, versus $9.4 million or 10.2% of revenue last year. The lower margin reflects project mix, including less nuclear project work along with the ongoing impact of certain contracts in Florida, as previously announced. We also incurred additional startup costs tied to the company’s expansion into the energy delivery market. Excluding the aforementioned gross margin compression associated with our entry into the transmission and distribution business, of $1.6 million, and the negative gross margin impact of $1.2 million from the company’s Florida water projects, adjusted gross margin would have been 10% of revenue in the fiscal ’22 second quarter.
A reconciliation of this impact is provided in our Q2 earnings release. We expect gross margins to improve in the second-half, and that the Florida business will substantially complete by the end of the year. Operating expenses were $6.7 million for the second quarter, including $300,000 of litigation expense versus $6.6 million last year. While making progress bringing down expenses, we continue assess ways to further streamline our overhead and improve bottom line results going forward.
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 seven sets forth to revise 2022 guidance that we issued last week. As previously mentioned, our outlook changed due to several near-term and nonrecurring issues that impacted Q2 results. We now envision revenue to be between $275 million and $295 million for the year and expect to post gross margins between 9% to 9.5%. We anticipate SG&A to be 8.25% to 8.75% of revenue, reflecting some ongoing investments and upgrading our IT systems.
Without which, SG&A is expected to be between 8% to 8.5% of revenue. Our adjusted EBITDA is forecast to be between $5 million and $7.5 million. None of the near-term headwinds that dampened the outlook for 2022 diminished our long-term trajectory nor for that matter the prospects we see for the second half of the year. The company remains a strong competitor in robust end markets with numerous opportunities on the horizon.
We consider the first half of 2022 to have been a transition period caused by many factors. First, the company is pursuing litigation in response to actions taken by a former employee who left after reorganization of our management team. The purpose of which was to drive better execution of our strategic plan. This legal matter is crucial to protecting and advancing the interest of both our business and shareholders.
Second, new operations management is addressing cash project process and execution problems in our Florida Water business. We fully anticipate the run-off the identified Florida contracted we wrapped up this year and are actively managing execution to ensure no further issues emerge. Finally, Williams has been funding prudent start-up businesses in the transmission and distribution space, which has negatively impacted our results thus far in 2022.
However, we are turning the corner. And with such investments largely complete, anticipate a positive impact to gross margins in the second half. Overall, we are building an organization with sustainable top line growth and progressively improving operating results driven by among other things a better mix of higher margin businesses with blue chip customer relationships, continuous improvement of our operating systems and risk management processes, substantial spending expected through government funding and utility and municipality capital budgets supporting favorable industry turns, and continued population growth particularly in our southeast territories with corresponding demand for more and better power grid and water infrastructure facilities.
In addition, nuclear energy currently provides about 50% of the carbon-free base load of electricity in the U.S. While the median age of existing reactor is about 40 years means that they will require major capital expenditures from nuclear utility customers just to keep operations up and running.
To reiterate, as a supplement to the brilliance of capital budgets for these customers, the Infrastructure Investment and Jobs Act and Inflation Reduction Act will provide over $30 billion to incent the continued operation of existing nuclear facilities. For our shareholders, this means that we remain upbeat about the future and confident in Williams’ ability to get back on track and provide the performance you have previously come to expect. To that end, we anticipate the following. Revenue rising sequentially in the third and fourth quarters with the last quarter expected to be the strongest of the year. And gross margins to improve in the second half of the year consistent with our normal target range of 11% to 13% during the third and fourth quarter.
We are also planning for the company to return to double-digit growth and adjusted EBITDA margins of 5% or better in the future as was the average for 2019 to 2021. Our investments will prove accretive to earnings. And we continue to have the strong support of our lending partners during this transition period. Our mix and volume of business will improve going forward, resulting in greater EBITDA, cash flow, and bottom line results. We remain excited by the prospect for new orders and better operating performance over the rest of 2022, positioning us for an even stronger rebound and the results thereafter.
With that, operator, we can open the line for questions.
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Julio Romero with Sidoti & Company. Please proceed with your questions.
Julio Romero
Hey, good morning. I guess to start off on the guidance, it implies a pretty strong second-half compared to the first-half. And Tracy, I know you did mention you expect the last quarter of the year to be the strongest, but just hoping for a little more color on the cadence of revenues and gross margins and how should we kind of think about the magnitude of the third quarter versus the fourth quarter?
Tracy Pagliara
We — well, as we said there, the fourth quarter will be the largest. The third quarter would be consistent with what we’ve experienced in prior third quarters. And our — we’re looking at a big pickup of work in nuclear, particularly at Vogtle 3 and 4 as that project moves forward toward the actual commissioning of Unit 3 and the plans, in earnest, to try to get Unit 4 done by the year-end of 2023. Our T&D business is also picking up. We’re getting to a point where we’re actually having positive margins. So — and in the water business we are seeing the end of the bad contract. So, when you combine all that together that gives us confidence that the second-half can be much more positive than the first-half. But we will have to have a big fourth quarter which we think is based on where our pipeline go get and backlog and run rate are we think is achievable.
Julio Romero
Okay, that’s helpful. Maybe just thinking about the Florida side, I know you guys said you expected to be substantially completed by end of ’22, what are you baking in, in terms of potential 2023 impact and what could happen that results in running further into 2023 than you’re currently expecting?
Tracy Pagliara
I’m going to let Damien talk about that.
Damien Vassall
Yes, so as we look at the work we’re performed through June, and what’s left on those contracts, we have a high level of confidence these projects will be completed in Q4. A few of them actually will get completed this quarter. So, there will be minimal to no run off effect going into 2023 just based on the schedules and the estimated completion dates of those contracts.
Julio Romero
Okay, that’s helpful. And then, while understanding that at least the first-half and maybe all of ’22 might be a transition year, maybe getting ahead of ourselves, but talk about the — how much capacity you have to take on additional sales dollars in terms of 2023, 2024, and beyond? Just looking to see how much capacity you have to potentially grow the business with two fiscal kind of stimulus bills coming down the pipe?
Tracy Pagliara
Yes, that’s — our ability to do that is purely a function of our ability to get talented craft and staff into the company. On our union side, we’ve — we feel very confident in our ability to do that. The non-union is a little bit more challenging, but the key is to hire talented leaders that bring crews with them. And we’ve had pretty good success thus far with the Eversource and TECO customers. That’s the model we’re following, and it’s working for us. So, certainly, we live in the same labor market that everyone else does, but I think we have competitive advantages over some of our peers in terms of Williams being a preferred place to work. And we feel as good as we can about our ability to staff up and meet the challenges that — and opportunities that are going to come with more work. But it’s definitely coming, so we’re excited about it.
Julio Romero
Understood. Appreciate you guys taking the questions, and I’ll circle back with any follow-ups.
Tracy Pagliara
Thank you.
Operator
Thank you. [Operator Instructions] Our next questions come from the line of Theodore O’Neill with Litchfield Hills Research. Please proceed with your questions.
Theodore O’Neill
Thanks very much. Could you just give us a little more detail on what the transmission and distribution investments costs were in the quarter that are not going to be repeating going forward?
Damien Vassall
Yes, to Theo, we provided in our earnings release, last night, we provided a table to itemize what those costs were. So, if you look in the quarter, we had approximately $1.6 million of negative impact to our gross margins, so that that really [dampered] [Ph] the results in Q2. As we look forward to Q3 and beyond, we’ve turned the corner, as we’ve seen increased activity in the T&D business, so — which will significantly improve our gross margins going forward. So, it’s — one, it’s the volume that is increasing, which will be able to cover the fixed costs. And that will drive the remainder of ’22.
Theodore O’Neill
Yes, I understood the numerical part; I was just looking for some detail on what was causing it. But it sounds like it was just sort of an overhead issue.
Damien Vassall
That’s correct.
Theodore O’Neill
Okay, thank you very much.
Operator
Thank you. [Operator Instructions] Our next questions come from the line of John Deysher with Pinnacle. Please proceed with your questions.
John Deysher
Good morning, everyone. Thanks for taking our questions. Just as a follow-up on the prior question, the T&D business, what exactly were those costs associated with? Were there new offices being opened or what exactly was the composition of the $1.6 million of costs?
Damien Vassall
Yes, so there’s a combination of standing up new offices in Norwalk, Connecticut, as well as Tampa, Florida. But in addition to that, we have experienced costs as it relates to standing up equipment and other materials as we opened, particularly a warehouse in those two locations. So, you have office costs, you have warehouse costs for storage of equipment, fuel, other types of tools and consumables. So, just the standard costs that you would expect to incur when you start a new business, particularly in the T&D space. It’s more equipment-intensive relative to the rest of our business which is primarily labor.
John Deysher
Okay. But I would guess there’s some labor as well, you had to hire people to man those offices and warehouses, correct?
Damien Vassall
Yes, that’s correct, however that’s not really the driver between — for the negative margin impact, it’s those equipment costs.
Tracy Pagliara
Yes, most of the people are billable.
Damien Vassall
That’s right.
John Deysher
Okay. And you’re suggesting that those costs have been sunk, the revenue that’s coming in from those new facilities is now covering the additional expenses, and you’re on the road to profitability in the second half?
Damien Vassall
On the average Eversource side, yes because the Eversource it’s a bit more mature. We are about a year — 15 months into that business. Within the Tampa T&D business, we started to — we stood that business up in the first month of this year. So, there is a little bit more – there’s a little bit more runway to go there, but based on our experiences in Norwalk, Connecticut, we have a better understanding as to how to drive the economic model. So, there are some lessons learnt from Eversource that we could apply to the Tampa business.
John Deysher
Okay, so you — I am just trying to get a feel for how certain you are that there is not going to be operating losses associated with the startups in the second half.
Damien Vassall
Overall between the two businesses, we believe the startup cost issues are behind us. And given the uptick in volume, there will be enough volume to cover those overheads to minimizing any negative impact to gross margins.
John Deysher
Okay, good. Are there any other offices planned for that business to be opened over the next year or so?
Tracy Pagliara
Yes. We have plans to opening more offices in the southeast and the northeast where we are gauging the market looking at where the [IIJA] [Ph] monies are being appropriated. But it will be next year and year after, nothing for this year.
Tracy Pagliara
Okay, so no more of 2022. Okay, good. And on the Vogtle side, I think you indicated Vogtle 4 will startup or be commissioned December? When is it? December of 2023, is that right?
Tracy Pagliara
That’s the current – that’s the most current position of southern nuclear on that.
John Deysher
And what about Vogtle 3?
Tracy Pagliara
Either later this year or early next — they just got approval from the NRC that began fuel loading which is a pretty significant milestone for Unit 3. So, there is a lot of work there that’s going to be going forward in the next six months.
John Deysher
Work that benefits Williams you are saying?
Tracy Pagliara
Yes. I mean that benefits Williams and our joint venture with Bechtel.
John Deysher
Okay, all right, good. Well, that’s an optimistic picture. And we wish you good luck going forward.
Tracy Pagliara
Thank you. Thanks, John.
Operator
Thank you. At this time, there appear to be no further callers in the queue. So, I will turn the call back over to Mr. Pagliara for any closing remarks.
Tracy Pagliara
Thank you everyone for participating today, and for your patience with Williams as we’ve had our share of challenges in first half of the year. But as we’ve indicated, we believe the business is on the upward swing for the remainder of 2022. And we have a very strong future beyond that. So, again, we appreciate your time and interest in Williams. And look forward to talking next quarter. Take care and be safe.
Operator
This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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