Q4 2024 Argan Inc Earnings Call

Participants

Jennifer Belodeau; Investor Relations; IMS Investor Relations

David Watson; President, Chief Executive Officer; Argan Inc

Richard Diely; Chief Financial Officer, Senior Vice President, Treasurer, Corporate Secretary; Argan Inc

Rob Brown; Analyst; Lake Street Capital

Chris Moore; Analyst; CJS Securities

Presentation

Operator

Good evening, ladies and gentlemen, and welcome to the Argan, Inc., earnings release conference call for the fiscal fourth quarter and year ended January 31, 2024. This call is being recorded. (Operator Instructions)
There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, it is my pleasure to turn the floor over to your host for today, Jennifer Bilodeau of IMS Investor Relations. Please go ahead, ma'am.

Jennifer Belodeau

Thank you. Good evening, and welcome to our conference call to discuss Argan's results for the fourth quarter and fiscal year ended January 31, 2024. On the call today, we have David Watson, Chief Executive Officer; and Hank Deily, Chief Financial Officer.
I will take a moment to read the Safe Harbor statements. 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 could cause or contribute to such material differences have been described in this afternoon's press release and in Argan's filings with the US Securities and Exchange Commission. These statements are based on information and understandings that are believed 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 fourth quarter and fiscal 2024 financial results and filed its corresponding Form 10-K annual report with the Securities and Exchange Commission.
Okay, with that out of the way, I will turn the call over to David Watson, CEO of Argan. Go ahead, David.

David Watson

Thanks, Jennifer, 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 fiscal fourth quarter and full year ended January 31, 2024. Then we'll open up the call for a brief Q&A.
Our solid fourth-quarter performance closed out a strong fiscal 2024 for Argan, which included a 26% increase in consolidated revenue to $573.3 million, improved profitability and full-year EBITDA of $51.3 million. Project backlog grew to $757 million sequentially as compared to the backlog of $730 million at the close of the third quarter. Backlog levels have remained relatively consistent since fiscal 2022 despite significant revenue growth and in the same timeframe.
Additionally, we closed fiscal 2024 with more than $400 million of cash and investments, net liquidity of $245 million, and no debt.
During fiscal 2024, we repurchased approximately 300,000 shares of our common stock pursuant to our stock repurchase program for a total spend of approximately $12.5 million, or $41.11 per share. As we previously mentioned, during the third quarter of fiscal 2024, we increased our quarterly cash dividend by 20% to $0.30 per share, for a total dividend of $1.10 per share for the full fiscal year 2024.
Slides 4 and 5 present our three reportable business segments. Power industry services is comprised of our Gemma Power Systems and Atlantic Projects Company operating units, which focus on the construction of multiple types of power facilities, including efficient gas-fired power plants, solar energy fields, biomass facilities, and wind farms. Power industry services revenues increased 33% to $119 million for the current quarter as compared to $90 million for the fourth quarter of fiscal 2023. The segment represented 73% of our fourth-quarter revenues and reported pretax book income of $15.2 million.
Industrial construction services, which is represented by The Roberts Company had another significant strong quarter, contributing $41.3 million, or 25% of our fourth-quarter consolidated revenues, and reporting pretax book income of $3.6 million. These numbers represent revenue growth of 64% and a pretax net income increase of 155% compared to the fourth quarter of fiscal 2023.
We are very pleased with the execution we're seeing at TRC. As many of you know, TRC primarily provides solutions for industrial construction projects with a concentration in the industries of agriculture, petrochemical, pulp and paper, water and power. TRC is well-positioned to service the southeast region of the US, a notable high-growth region for TRC's focus industries, as well as other industries that are onshoring or expanding US-based production facilities.
We are energized by the opportunities we're seeing for TRC in the marketplace, and we are committed to capitalizing on the demand for industrial sites as we continue to foster growth in this segment.
Finally, we have our telecommunications infrastructure services group, our smallest segment, which contributed 2% of our fourth-quarter revenues. SMC Infrastructure Solutions is our operating brand in this segment, providing outside construction services for the utility and telecommunications sectors, as well as inside the premises wiring services, primarily for federal government locations and military installations requiring high-level security clearance.
Taking a step back to look at the power industry as a whole, there has been quite a bit of recent news about the increasing demand on power grids worldwide and capacity challenges faced by existing energy infrastructures. With the wider rollout of AI, not only are more data centers being built; those centers are also consuming more energy as AI applications demand increased energy consumption.
Likewise, as electrical vehicles see continuous adoption, EV charging both at home and public charging stations is driving increased electricity demand, which is expected to rise higher as EV utilizations expands. Finally, existing tax incentives and grants in place to encourage onshoring of manufacturing operations for semiconductors, batteries, solar panels, and other items has resulted in a 50-year high in American manufacturing. And all of that production activity requires a reliable power supply.
As a partner and the construction of both traditional natural gas and renewable energy resources, Argan is uniquely positioned to benefit as new energy facilities are needed to support stable grids and reliable power generation. Simply put, without consistent and dependable power, data centers, manufacturing facilities, the EV charging infrastructure cannot operate.
Argan is an established and trusted design and construction partner for the power industry, and our current pipeline of opportunities validates the respect of our capabilities and our leadership position in the industry. Our pipeline features projects with both new and returning customers, and we anticipate partnering with these customers to construct or upgrade the energy facilities necessary to meet growing and future power demands.
In addition to adding reliable power sources to the grid, our industry is also intent on establishing cleaner energy resources. As the industry shifts to new power generation technologies, it's important to note that 83% of our $0.8 billion project backlog represents projects that support low carbon emissions, demonstrating leadership in the transition to cleaner power generation.
Now I'd like to provide some project updates here. We highlight the Trimble Energy Center project in Lordstown, Ohio for GMR is providing EPC services for a 950-megawatt natural gas-fired power plant. Trimble is a combined cycle power station that will assist in fulfilling electricity needs as the region phases out several coal fire plants from start to finish, the project will entail design, procurement, construction and commissioning. Crumble is designed to be one of the cleanest and most efficient combined cycle gas turbine projects in the PJM. market. In fact, I was just on-site yesterday and the team is doing great and the progress is excellent. So this project is expected to be completed in 2026. Last quarter, we announced our limited notices to proceed with solar projects in Illinois. Projects are well underway with Jim and working on three facilities located throughout the state to provide 160 megawatts of solar power plus 22 megawatts of battery storage capacity. We have now received full notice to proceed with project activities for two of the three facilities. The third full notice to proceed is expected soon. These are exciting opportunities for us to continue to demonstrate our capabilities in the renewable energy space.
Now I'd like to make a few remarks about our killer project in Northern Ireland. As we previously disclosed during fiscal 2020 for our international subsidiary or APC, encountered significant operational and contractual challenges associated with the 660 megawatt gas-fired Kilroot power plant challenges included weather related work interruptions, COVID variant side lining our workforce material changes to project scope the war in Ukraine and global supply chain delays among others that impacted our ability to execute as expected as a result of these challenges of Fourth Quarter and Fiscal Year 2024 periods included losses of approximately $2.1 million and 13.6 million, respectively, associated with the Kilroot project. Despite these difficulties, APC has meaningfully completed the project and has turned over one of two power units to the owner, one of which has achieved first fire in March. We expect to fully complete the project during the first half of calendar 2024. As I said last quarter, we are disappointed to recognize a loss at Kilroot as an organization. We are intently focused on efficient execution and project success, and we do not believe that the developments at Kilroot are reflective of our capabilities and our standards. I will also note that we've identified claims related to this project valued at more than $25 million, and we will vigorously pursue those claims.
So before I turn the call over to Hank daily to review our financial performance in detail, I'd like to highlight a significant Q4 achievement by our Gemba teams. The completion of the currency power station currency is the largest single-phase gas-fired project in U.S. history and was substantially executed during the worst phases of the COVID-19 epidemic and the most severe global impacts of the overall supply chain disruptions. Yet the completed plant was delivered to the project owner successfully a tremendous achievement by our talented employees and evidence of our commitment to completing complex projects. Our past performance illustrates the underlying strength of our business and our reputation as a full-service construction and project management partner with extensive capabilities that support both traditional and renewable power facilities.
As we move into fiscal 2025, we are focused on leveraging our capabilities to further capitalize on opportunities presented by the increasing demand for reliable energy sources.
Now I'll hand the call over to Hank Domenic.

Richard Diely

Thanks, David, and good afternoon, everyone. On Slide 11, we present our consolidated statements of earnings for the fourth quarter and full year of fiscal 2024. Fourth quarter revenues increased 39% to $165 million reflecting an increase in revenues from both our Power Services and Industrial Services segments as compared to the fourth quarter of fiscal 2023.
In the fourth quarter, our power industry services segment achieved a 33% increase in revenues, primarily related to projects overseas, including the Shannon bridge power project in Ireland as well as US-based projects, including the Trimble Energy Center and the Midwest, solar and battery projects. The increase in revenues of these projects were partially offset by decreased activity associated with the currency power station and the Maple Hill solar facility as those projects reached the final completion stage.
In our Industrial Construction Services segment, TRC achieved revenue growth of 64%, driven by a substantial increase in field services. Construction projects and supporting steel fabrication work.
For the three-month period ended January 31st, 2024, our gain reported gross profit of approximately $23.6 million, which represented a gross profit percentage of approximately 14 4% and reflected positive contributions from all three reportable business segments. However, these results were adversely impacted by the recorded loss of $2.1 million related to the Kilroot project. Consolidated gross profit for the comparative quarter ended January 31st, 2023 was 20 million, representing a gross profit percentage of 16.9%.
Selling, general and administrative expenses of 11 $12.9 million for the fourth quarter of fiscal 2024 increased as compared to SG&A of $10.5 million for the comparable prior year period. But these expenses decreased as a percentage of revenues for the corresponding periods from 8.8% to 7.2% and net income for the fourth quarter of fiscal 2024 was 12 million or $0.89 per diluted share compared to $13.6 million or $1 per diluted share for last year's comparable quarter. Ebitda or earnings before interest taxes, depreciation and amortization for the quarter ended January 31st, 2024 was $17.6 million compared to 11.2 million in the same period of last year.
Looking at our full year performance, revenues for fiscal 2024 increased by 26% to 573.3 million as compared to revenues of $455 million for the prior fiscal year. Revenues in our power industry services segment increased by $70.2 million or 20.3% to 416.3 million for the full year fiscal 2024 compared with revenues of 346 million for fiscal 2023. Construction activities increased in fiscal 2024 for the Trimble Energy Center, the Shannon bridge power project, the ESB. flex gen peaker plants and the Midwest solar and battery projects. The revenue increase was partially offset by decreased construction activities associated with the Guernsey Power Station project that Maple Hill solar facility and the Equinix data center project as those projects are generally near or at completion.
Our consolidated gross profit margin of 14.1% for fiscal 2024 decreased as compared to gross margin of 19% for fiscal 2023, primarily due to the $13.6 million loss recorded in fiscal 2024 associated with the Kilroot project. Gross margins in our power industry services, our Industrial Services and our Telecommunications Infrastructure Services segments were 14.1%, 12.9% and 26.5%, respectively for fiscal 2024.
Sg&a expenses decreased to $44.4 million for fiscal 2024 as compared to $44.7 million for fiscal 2023, representing 7.7% and 9.8% of consolidated revenues for the corresponding periods, respectively.
Net income for the full fiscal 2024 was $32.4 million or $2.39 per diluted share, compared to $33.1 million or $2.33 per diluted share for the prior year period. Ebitda was 51.3 million compared with EBITDA of $48.1 million for fiscal 2023. Most notably, these consolidated results were tempered by the reduction in consolidated gross profit between periods related to a loss recorded on the Kilroot contract. As discussed above, our income tax reporting for fiscal 2024 was also impacted by the Kilroot loss as we did not apply any income tax benefit, the resulting net operating loss incurred by APC in the UK, which contributed significantly to the 33.9% annual effective income tax rate for fiscal 2024. Our effective income tax rates for the previous two years were closer to 25% and we believe this rate is a better indicator for future periods.
Before turning the call back over to David, I'd like to touch on favorable returns we experienced in fiscal 2024 related to our cash, cash equivalents and investments that are invested as described in our consolidated financial statements.
Other income for the year ended January 31st, 2024 included investment income in the approximate pretax amounts of $14.1 million compared to $3.4 million in fiscal 2023.
With that, I'll turn the call back to David.

David Watson

Turning to slide 12. Our consolidated project backlog of $0.8 billion at January 31st, 2024, remains fairly consistent with backlog for fiscal 2023. Importantly, a backlog includes a healthy group of longer-term fully committed projects in both the power industry Services and Industrial Services segments.
On Slide 13, we present certain major projects currently included in our project backlog. I highlighted earlier our activity at the Trimble energy center in Ohio, and that two of the three solar plus battery projects in Illinois have received full notice to proceed Also included in our project backlog or to separate water treatment plant projects being performed by TRC over in Ireland. The three ESP FLEXengine peaker power plants in the Shannon bridge thermal plants are both in the final stages of construction and are undergoing commissioning following the close of fiscal 2024. We have seen a solid increase in projects coming to market. And as I mentioned earlier, there is a growing urgency in the power industry to ensure we have the appropriate facilities and infrastructure to meet the forecasted growth in energy demand. Since year end, we have added to our project backlog as a result of Jilin and TRC entering into several contract agreements, including including certain LTP.s with several customers. These agreements relate to a large solar facility, a planned natural gas-fired power plant and agreements for other industrial facilities. Our backlog is robust with a diverse group of projects that show our range of capabilities and highlights our reputation as an effective and reliable INDUSTRY partner.
Our balance sheet remained strong at the end of fiscal 2024. We had over $400 million in cash, cash equivalents and investments generating meaningful investment yields. Our net liquidity was $245 million, and we had no debt stockholders' equity was $291 million at January 31st, 2024. As you can see from this liquidity bridge, our business model ordinarily requires a low level of capital expenditures. Our net liquidity of $244.9 million at January 31st, 2024, has increased $8.7 million compared with the end of fiscal 2023. Since November 2021, we have returned a total of approximately 101.2 million to shareholders as we've repurchased approximately 2.7 million shares of our common stock or approximately 17% of shares outstanding at the beginning of the program at an average price of $37.60 per share. Additionally, in September 2023, we increased the Company's quarterly dividend 20% from $0.25 to $0.3 per share, reflecting the strength of our business and increasing our annual run rate to $1.20 per share. Our again, is dedicated to driving 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 as we move through fiscal 2025 and beyond. We believe we are extremely well positioned to expand our leadership role as a partner of choice for the design and construction of the power resources necessary for dependable Power Grids with the new the number of new data centers, proliferating electric vehicle use, expanding and manufacturing facilities ramping up or enhance production there will be increased demand for reliable power 24 hours a day, seven days a week with our capabilities, expertise and proven track record are going to build a strong customer base as a trusted partner for the full service construction and project management of both traditional gas-fired as well as renewable energy facilities. Our success has driven our ability to capture repeat business and has generated interest from new customers and our pipeline is strong. We look forward to applying our facility design and construction capabilities to support the establishment of all types of energy sources as the power industry prepares to meet the growing demand for reliable energy to close, we remain focused on our long-term growth strategy to leverage our core competencies to capitalize on existing and emerging market opportunities to 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 low and net zero emission power-generation facilities as the industry transitions to cleaner energy alternatives while maintaining grid reliability. And last but not least, drive organic growth while also being alert for acquisition opportunities that make sense for our business through thoughtful capital allocation.
Fiscal 2024 was a year of many accomplishments and a few challenges I'd like to thank our employees for their hard work and dedication to operational excellence and also like to thank our shareholders for their continued support.
As we kick off fiscal 2025 we are focused on leveraging our capabilities to increase our games leadership position as a partner of choice to the power and general markets.
With that, operator, let's open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) Rob Brown, Lake Street Capital.

Rob Brown

Good afternoon and congratulations on the progress.

David Watson

Thanks, Rob.

Rob Brown

When we get a little further color on the pipeline. It sounds like things are starting to loosen up there and you talked about several things that are that are coming on trying to get a sense of sort of scaling of what those projects could be in terms of size ranges and I guess maybe some of the dynamics on listing the project, but a flow that's happening.

David Watson

Sure. I mean, we're I mean, as you can tell from my prepared remarks and from discussing a couple of projects that that were subsequent to year end, we're really excited about where we stand with our project pipeline, both in gas and in renewables. I mean we received to full notices to proceed during Q4 on a couple of solar battery projects come in based on what we have signed subsequent to year end. And based on the current visibility, our pipeline, we expect some additional large projects over the next six plus months. And the new work is going to represent a mix of renewable and gas work, primarily seeing those gas-fired plant opportunities in the PJM, myself and especially the AirCard region, which is basically the Midwest Texas into Mid-Atlantic and Southeast big picture, we ultimately expect to see our backlog meaningfully exceed where we are today. The gas jobs are remain relatively large in scale, but we're also tracking a number of peaker picking opportunities. And I'd be remiss not to say to keep in mind that the start of future project wins are controlled by the customer, which makes it really difficult to forecast our backlog, given the material size of certain projects, thermal jobs always take longer than we would like, but getting in development job to the finish line is not easy PJM auction is delayed till the summer. So ideally that that unlocks some additional opportunities and meet those generally overloaded. So the OEMs are really busy, and that's that's a true sign that there's a lot of developers out there wanting to start new jobs and we're here to build those jobs for them.

Rob Brown

Perfect, great. Thank you. And then and then I guess are you seeing kind of a renaissance on the gas plant side in terms of the demand environment? And they say a lot of the drivers there on that? Are that are people sort of realizing gas plants or the as a solution to those demand thing and drivers?

David Watson

Yes, I think I think it's been happening for quite some time now. I mean we didn't really talk about it, but the demand curve for Power has caught a lot of the public utilities and and a lot of folks by surprise that about the amount of power that's that's been needed for the foreseeable future with all the between the eyes in the and EVs and all the other electrification efforts of the of the overall economy. So there is planning for a lot of natural gas power plants in addition to the tremendous number of renewable projects. And again, we believe we're perfectly situated and positioned take advantage of both of those tailwinds.

Rob Brown

Great. Thank you, Turner.

Operator

(Operator Instructions) Chris Moore, CJS Securities.

Chris Moore

Hey, congratulations on a nice quarter.

David Watson

Thanks, Chris.

Chris Moore

Sure, Nate. Maybe we'll just follow up on that demand for power. That seems to be growing everywhere. But it looks like from what I've seen, the amount of power generation from zero carbon sources in the US was roughly flat year over year, 39% I think in 23 solar, a significant growth, wind and hydro down a little bit. But the interesting part is that from from a natural gas perspective, I think 41% was was natural gas versus 19 in 2019. So I guess a couple of questions there trying to figure out what does the level of natural gas as a percentage of power generation that you think would be necessary in order to meet this growing demand?
It does it does it need to stay in this low mid 30s to 40% level? Or can you reach all that demand for AIEV., et cetera, with a significant increase on the on the renewable side?

David Watson

And so Chris, I mean, this is my opinion, but I do believe that it needs to stay in that 30% to 40% range, and that even remain in that 30% to 40% range, not only do you need to grow the fleet as the amount of energy being consumed in the country increases. But you also have the dynamic of retirements of natural gas plants are a lot of them that were built in 2021. In addition to baseload coal plants coming off line, you're not going to be able to replace all of that with renewables, given the intermittency of those. So 30% to 40% makes sense to me, but you also have the dynamic that I do expect renewables to continue to grow tremendously, but they're not always going and you can't in the batteries are only so long in duration for backup storage. So in a lot of ways, you need to have a number of natural gas solutions as well as others out there to backup the renewables. And so maybe those gas plants are running all the time, but they are going to have to run in critical points of time. And so those plants need to be built. And then again, that's what we're here to do, both building gas and renewables.

Chris Moore

Got it as helpful as I'm trying to find a reasonable number for 2023 in terms of the number of significant natural gas plants that began construction in the US, is it a handful or was it is it a double digit number? I couldn't find any good statistics there.

David Watson

Yes, the EIA., which is the Energy Information Administration in the US tends to have some good information to look at, I think they expect about in 20 new natural gas-fired power plants to come online in the U.S. kind of in the 2024, 2025 a time period.

Chris Moore

Got it. That was late last year though it was because of PGM and other reasons, it was significantly lower than that.

David Watson

Correct.

Chris Moore

So it was single digit.

David Watson

Yes, yes. There continues to be significant interconnect challenges both for renewables and gas. Otherwise, I think the growth in the number of projects kicking off and being built would be more so than what we were expecting to see.

Chris Moore

Got it. I'll switch off the gas. So so Roberts had another exceptional quarter exceptional year. Obviously, that growth growth rate for the years expect that. But can you sustain this 40 million plus run rate that you did in Q4? Is there anything special in Q4 there that, you know, you wouldn't be seeing moving forward, Chris, I'm going to continue to challenge my team down there and they've just done.

David Watson

They've had a tremendous two or three year run, right, 40 million in Q4. It was over $30 million in the previous three quarters. And frankly, they exceeded kind of the top ends of like my expectations for the year of really good data point is frankly, their backlog at year end was 1,120 million, and it's increased since then. So I do I do expect them to continue to add various smaller and larger projects add members to their team, which they've already done and others and being able to to increase that growth. Again, obviously, everything's subject to the economy continuing to chug along and but they're in a sweet spot right now.

Chris Moore

Got it. Last one for me is, obviously gross margin was impacted this quarter by Kilroot. You're done with currency. Congratulations on that was there any currency excess margin in the in the gross margin in Q4?

David Watson

Chris, for some reason you were to ask me that question. We are now in the warranty period in the job is effectively complete. We currently saw some further improvements during Q4 as items were closed out and remaining risk were reduced and or eliminated at the end of the day. We're always committed to delivering the best possible project results each and every time. So the currency job is effectively complete.

Chris Moore

All right. I will leave it there. I appreciate it.

Operator

We have reached the end of the question-and-answer session. I will now turn the call over to David Watson for closing remarks.

David Watson

Great. Thank you all for participating in today's call, and we look forward to speaking with you again when we report our Q1 fiscal 2025 earnings. Have a great evening.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.