Williams Industrial Services Group Inc.
Q3 2021 Earnings Call Transcript

Published: 18 Nov 2021

[Operator:]

Hello, and welcome to the Williams Industrial Services Group Third Quarter 2021 Financial Results Conference Call and Webcast. . As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Chris Witty, Investor Relations. Please go ahead.

[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, VP and CFO. After Tracy and Damien will 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 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 our 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 for results prepared in accordance with GAAP. When applicable, we 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. Before addressing our financial results, I wanted to spend a few minutes on the rationale for the management reorganization we announced on November 8, 2021. Following the uplifting of Williams to the New York Stock Exchange American earlier this year, we began a comprehensive review of our overall organization to ensure we have the right people and structure in place to advance our values and meet our strategic goals. Based on that, we review, we concluded as follows

[Damien Vassall:]

Thank you, Tracy, and good morning, everyone. I'm glad to be here today and looking forward to getting to know our investors in the coming months. Turning to Slide 5. We posted revenue of $73.4 million for the quarter, as Tracy mentioned, an increase of 11% over 2020. Sales rose year-over-year due to higher activity with various customers, particularly increased decommissioning and fossil work, more than offsetting the $3.2 million reduction in U.S. nuclear services. Revenue from Vogtle 3 and 4 was approximately $16.6 million during the period, slightly less than in Q2. The uptick in decommissioning work primarily relates to our expansion to a new location combined with performing additional services. We expect this trend to continue. As Tracy just discussed, our backlog remains at record levels, and we're continuing to diversify the business to offset lower global requirements going forward. Slide 6 shows our operating trends for the company. We posted gross profit of $6.8 million or 9.2% of revenue for the third quarter versus $8.7 million or 13.1% of revenue last year. The lower margin reflects project mix, including less Vogtle work and the negative impact of cost overruns on some fixed price contracts, as Tracy mentioned. In addition, we have yet to receive an incentive payment related to a multiyear contract. Going forward, we expect margins to remain under pressure and are thus reducing overall guidance in this regard. However, we are using our best efforts to mitigate these issues, including cost controls and pricing adjustments and anticipate an improvement in the fourth quarter. Operating expenses were $4.6 million for the third quarter versus $6 million last year, with the decrease primarily due to lower general and administrative costs tied to reduce bonuses and other factors. Our operating margin was 3% versus 4% last year. SG&A is expected to remain relatively flat going forward, although we are assessing the areas for further spike overhead. I'll turn the call back to Tracy for a review of our 2021 guidance and his closing remarks. Tracy?

[Tracy Pagliara:]

Thanks, Damian. Turning to Slide 7. As I stated earlier, we are revising our guidance to reflect our current operating environment. We now envision revenue of between $300 million and $310 million down from prior guidance due primarily to the delayed order I mentioned. In addition, we expect gross margin between 10.2% and 10.6%, largely reflecting project mix, delayed incentive payments and cost overruns. We anticipate SG&A to be 8% to 8.5% due to lower revenue guidance and our adjusted EBITDA is now forecast to be between $12.5 million and $13.5 million. Cost overruns unfavorable project mix and delayed decision-making will negatively impact us through year-end. However, the team and I are dedicated to having Williams reach its full potential. The work we're undertaking is laying the foundation for greater days ahead. We stand firm in our belief that we will get through the current challenges and set the stage for a stronger 2022 while providing the returns our shareholders have come to expect. We have a solid backlog, a reorganized more effective management team and blue chip energy and industrial customers who have high demand for our industrial services which should increase even more when the infrastructure bill is implemented. With that, operator, we can open the line for questions.

[Operator:]

Our first question today is coming from Theodore O'Neill from Litchfield Hills Research. Your line is now live.

[Theodore O'Neill:]

Thanks very much. I have two questions, really just about gross profit in the quarter. Reading the Q, it says the decrease was primarily driven by cost overruns on uncompleted fixed price projects in the industrial markets that you serve in Florida. And I was wondering if that's the water project and if you could give us some more granularity on that one. And the second part of this is you've incurred start-up costs associated with the expansion in Northeast transportation and distribution of natural gas. Can you talk -- give us a little more granularity on what that's about? Thank you.

[Tracy Pagliara:]

Sure. Damien or Randy, you guys want to take that.

[Randy Lay:]

Let me take a first crack at this. So in terms of the Florida projects, we characterize it, it's not a bid issue. It's not a customer issue per se. The work is continuing with the customer, and we'll get the project completed. We believe that the issues here have to do with the management of the project on the ground and potentially some of the estimating work that probably could have kind of sharper pencil on it to say the least. In terms of the Northeast gas distribution, these are relatively modest start-up costs. What we're doing there is working with Eversource as a customer as they repair the natural gas infrastructure primarily in the New England area, and that requires us to put in place work crews to do this work. So again, relatively modest, you need a building, place your tooling and so on and so forth, but that is a piece of the expenditure in the quarter.

[Theodore O'Neill:]

Is that Eversource work? Is that from, I guess, the explosion of fires they had in residential area a couple of years ago?

[Randy Lay:]

Yes. It's the old Columbia gas infrastructure that's being upgraded.

[Theodore O'Neill:]

Okay, thanks very much.

[Operator:]

Our next question today is coming from Julio Romero from Sidoti & Company. Your line is now live.

[Julio Romero:]

Yes. Can you hear me now?

[Tracy Pagliara:]

Yes.

[Julio Romero:]

Hey, good morning, Tracy, Damien, Randy. Thanks for taking the questions. So to start on the revenue, in the quarter, you did see higher decommissioning work. But just given the backlog in hand, the backlog conversion of revenue, I think 11% seems low on the surface. Any additional color there? And did the decommissioning work maybe start later than expected in the quarter?

[Tracy Pagliara:]

Damien, do you want to get that one?

[Damien Vassall:]

Yes, I'll take that. So the decommissioning work, it did not start later in the quarter. We're continuing to perform at the sites that we have been providing services. As you may know, we've expanded to the Indian Point site, for which we're currently doing work. That's part of what's driving the revenue higher in decommissioning space on the quarter. As far as the backlog conversion, in the period, it was slightly lower than we expected, but we fully expect that, that will recover in our Q4 going forward.

[Julio Romero:]

Okay. Great. And I guess for my follow-up, just looking at the cash flow, it looks like you had about a $9 million rise in receivables. Any color there? What does your receivables balance look like at year-end? And then secondly, what are your expectations for cash flow in the fourth quarter?

[Damien Vassall:]

Yes. So as far as receivables, yes, you're right, it did increase from where we were expecting. There's no issues as far as the collectability on those receivables. As you know, we have a very strong, robust customer base financially. It's also evidenced by the low levels of bad debt reserves that we maintain on our books. So the increase was primarily related to some delays in customer collections. We've since collected on those receivables subsequent to quarter end. As far as receivable balances to the year, we expect that to come down in anticipation of reducing our debt levels.

[Julio Romero:]

Okay, great. I’ll hop back in the queue. Thanks very much.

[Operator:]

Our next question is coming from Dick Ryan from Colliers. Your line is now live. Dick, perhaps your phone is on mute.

[Dick Ryan:]

Sorry about that. Can you talk about the overruns of how much that did impact gross margins in the quarter?

[Tracy Pagliara:]

Randy, do you want me to take?

[Randy Lay:]

Yes, I'd say that the impact, not on the bottom line, but in the quarter on gross margins, it was about a $3 million impact.

[Dick Ryan:]

Okay. And what's the time line for that project? I mean do we -- does some of that overrun stretch into Q4?

[Randy Lay:]

No. No, we think, Dick, we've captured all of the impact, what we're -- as you'd expect at this point. I mean some of the -- there is one major project -- one major water project that's of concern that drives a good deal of that issue. The other projects are much smaller in scope and they're much earlier in state of completion. So A, we've captured the entire impact; and B, obviously, where we have runway on all of these projects because these are changes to the estimate of completion. We are working to mitigate that -- this loss in the reestimate over the next quarter. Nothing to report at this point. But as we work through the quarter, we expect that will identify some mitigation either in managing the projects or in working with the customers.

[Dick Ryan:]

Okay. On the Vogtle 3 and 4, how should we look at that revenue over the next couple of quarters?

[Randy Lay:]

There's two -- I guess, there's two ways of looking at that. One is we fully anticipated, and I think we've been talking about for some time that we would expect. As that work moves to completion and as those projects come into service, according to the schedule that our customer has published, which is a little bit later than we've seen previously, we would expect that -- we still expect activity from a historic levels to be reduced. But because of the current schedule, we would expect that at least in the near term, we would pick up some volume that we had not put into our budgeting or forecasting. So sort of we're looking at this sort of in two different ways.

[Dick Ryan:]

Okay. And Tracy, can you provide a little detail on the delayed customer order? Is that something that's on their end on your end? Or can you provide more detail on the reasons for the delay and maybe the size of the opportunity?

[Tracy Pagliara:]

I would say it's more on the customer and they're trying to work through their processes, and it's a competitively bid order. It was -- we had said that we had between $100 million and $200 millions of highly probable pipeline. So I would think of it in terms of those -- that range.

[Dick Ryan:]

So this individual -- this contract is in the $100 million to $200 million range?

[Tracy Pagliara:]

If awarded, yes. As originally contemplated, that's where it would have been, yes.

[Dick Ryan:]

Okay. Thank you. One last one for me, labor issues. Are you getting the labor portion need to move forward with your growth strategy or any impact on that?

[Tracy Pagliara:]

We haven't had any significant impact so far, although as we look to scale the business in the future, it's certainly something that we're planning for. And we just need to be smart about going out and finding the best resources we can as we grow.

[Dick Ryan:]

Okay, great. Thank you.

[Operator:]

Our next question is a follow-up from Julio Romero from Sidoti & Company. Your line is now live.

[Julio Romero:]

Can you speak to how your business will benefit from the recently passed infrastructure investment and Jobs Act? I know you called out in the prepared remarks the $125 billion of funds towards water and power grid. How does that benefit your wastewater and energy delivery businesses?

[Tracy Pagliara:]

Well, it should. We don't know the specifics yet. It's going to be -- the appropriations are spread out over five years or more. So the first step is to -- after the bill is enacted, which has now been signed by the President, the Head of the relevant departments have to prepare a report of their needs and planned expenditures, and that's when we'll know where. But we would expect -- we are doing work right now on water. We're doing work on energy grid, on the power grid, to strengthen the grid. So we would expect given our geographic footprint with offices in Connecticut, New York, New Jersey or other facilities Georgia, Texas, Florida and Washington that we would be in a position to certainly benefit from those funds when they're appropriated.

[Julio Romero:]

Understood. Thanks very much.

[Operator:]

Your next question today is coming from John Deysher from Pinnacle. Your line is now live.

[John Deysher:]

Good morning everyone. Thanks for taking my questions. First of all, on the cost overrun situation, did you make any changes to people who are on the ground or in the estimating department as a consequence of that?

[Randy Lay:]

Yes, let me take that. We are reviewing the way the organization is structured and we under the circumstances, there was some local autonomy. And we are -- we've essentially made that aligned organization now with accountability to direct up the line to the folks we have -- that are heading the control -- the project control functions and the estimating functions. There was a little bit of a hybrid model there with some local content. So we've decided it makes sense to make that particular change. We're evaluating as you'd expect. We're evaluating the aspects of this that go to the management of the project. Again, a lot of things on the -- from a commercial standpoint and risk management upfront in terms of the bidding that are, well, I would say, well controlled, and we look at the spread of bids, for example, to make sure that we don't want to be in a position where there's some reason that you would need to be anything other than competitive on the bidding in order to win the projects. So yes, we are making some changes. There will likely be some more in terms of how we organize this, but we're putting in place the I think, the appropriate changes to deal with what is an isolated issue in this particular area.

[John Deysher:]

Okay. And customer was Florida Power & Light for that contract?

[Randy Lay:]

No. And we're not going to disclose the customer per se, but it was one of our customers down in Florida.

[John Deysher:]

Okay. And on the delayed customer order, I think you indicated $100 million or so, are you assure that it's a delay and not a possible cancellation?

[Tracy Pagliara:]

No, we're not at this point. We -- the outcome is uncertain. So we're not -- it's not just a delay, there's a possibility we won't get the contract.

[John Deysher:]

Okay. I mean you won't get the contract because it won't be delayed or you perhaps might lose it to someone else? In other words, I'm trying to get a sense in terms of what...

[Tracy Pagliara:]

It would more likely be the -- it's not -- it's led to someone else or the customer chooses to not awarded in the original length and duration and magnitude that was contemplated at the beginning. So it could be a combination of factors.

[John Deysher:]

Okay. That's helpful. And finally, Vogtle 3 and Vogtle 4, my time line has Vogtle 3 wrapping up in March of '22 in Vogtle 4 in December '22. Has that changed at all?

[Tracy Pagliara:]

Yes. I think it's now November '22 and March of '23. But let me see if Damian are Randy, you have any different information than that. They just changed it recently.

[Randy Lay:]

Yes, I think that's right, Tracy.

[Damien Vassall:]

That's right.

[John Deysher:]

So November '22 for 3 and March '23 for 4.

[Tracy Pagliara:]

Right.

[John Deysher:]

Okay. Very good. Thanks a lot.

[Operator:]

Thank you. We’ve reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

[Tracy Pagliara:]

Thank you, everybody, for participating today. We appreciate your time and interest in Williams and look forward to talking to you again next quarter. Again, we are disappointed by the quarter, but we remain optimistic about Williams' future, and we are working hard to ensure that, that future is positive as our recent past. Thank you.

[Operator:]

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.