Williams Industrial Services Group Inc (OTCQX:WLMS) Q3 2020 Earnings Conference Call November 12, 2020 10:00 AM ET

Company Participants

Chris Witty – Investor Relations

Tracy Pagilara – President and CEO

Randall Lay – Senior VP and CFO

Kelly Powers – President, Operations and Business Development

Conference Call Participants

Theodore O’Neill – Litchfield Hills Research

Richard Ryan – Colliers Securities

Walter Schenker – MAZ Partners

John Deysher – Pinnacle Capital Management

Vishal Mishra – Mishra Capital

Operator

Greetings, and welcome to Williams Industrial Services Group Inc. Third Quarter 2020 Financial Results. [Operator Instructions]. Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Chris Witty, Investor Relations.

Chris Witty

Thank you, and good morning, everyone. Welcome to the Williams third quarter conference call. With me on the call today are Tracy Pagilara, President and CEO; and Randy Lay, Senior VP and CFO. After Tracy and Randy provide their prepared remarks, we’ll open the call for questions. Our third quarter results were issued this morning and a slide presentation is available on the company’s website at www.wisgrp.com.

If you turn to Slide 2 in the deck, I will review the Safe Harbor statement. During this call, we may make forward-looking statements during the formal discussions as well as during the Q&A session. These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release and slides as well as with other documents filed with the SEC. You can find all these documents 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 the presentation of 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 we note otherwise.

Starting with Slide 3, I will now turn the call over to Tracy Pagilara. Please go ahead, Tracy.

Tracy Pagilara

Thanks, Chris, and good morning, everyone. In spite of the continuing uncertain and challenging business climate of 2020, I’m pleased to again report strong operating performance by Williams. In addition, we are not changing our positive guidance for the remainder of this year, which I will discuss in further detail in a few minutes.

We reported Q3 2020 revenue of $66.2 million versus $56.9 million in Q3 of 2019, largely reflecting higher decommissioning and Canada work, as Randy will review. Gross margins rose to 13.1% in this quarter, the highest in 2020. And our operating margin increased to 4% from 1.3% in Q3 2019. While operating expenses rose year-over-year, this was primarily due to $800,000 of severance and stock-based compensation. Our SG&A adjusted for those expenses for Q3 2020 was 8.4% of revenues versus 9% last year. We are maintaining tight controls on costs while growing the business. This, in turn, is helping drive better overall bottom line performance.

Adjusted EBITDA was $4 million in Q3 2020 compared to $1.8 million in Q3 2019, and we generated $3.2 million of cash from operations, which we used to pay down debt. We ended the third quarter with a total backlog of nearly $458 million, which was down from $539 million at the end of the second quarter. We currently anticipate that $167 million of our total backlog will convert to revenue in the next 12 months. Please recall that we added $111 million of new orders in the second quarter, largely for fuel storage and decommissioning.

Now let’s turn to Slide 4. During the third quarter of 2020, economic conditions in our end markets were still tentative and constrained in certain respects. Contract awards were delayed more than usual, and our business development efforts with new customers continue to be curtailed by the COVID-19 pandemic. Nonetheless, we have an active and robust pipeline of high visibility prospects, including delayed awards from Q3 2020, which gives us confidence our growth momentum will progress for the foreseeable future. We currently anticipate some of these awards will likely come to closure before the end of Q1 2021.

With this in mind, to reiterate, our outlook for the company near-term and otherwise remains bullish. Our end markets are still presenting opportunities to significantly increase our backlog, reflecting our success in expanding and diversifying our business to new customers and geographies with a broader range of services.

Since the end of the third quarter, we have added over $25 million of new backlog. Most importantly, that includes U.S. nuclear orders outside of the Vogtle 3 and 4 nuclear construction project. At the same time, we just posted our best quarterly gross margin for 2020, even in the face of certain unfavorable contract modifications during the quarter. This underscores our persistent focus on expanding gross margins across the board. We are also still implementing cost control initiatives and process improvements to ensure steady, attractive operating margins, though top line results sometimes vary quarter-to-quarter. The actions we’re taking now will serve to provide better returns as revenue growth accelerates.

We’re working hard to refinance the company’s credit facilities to provide more capacity as well as lower interest expense. Our original plan was to begin our refinancing process early in the second quarter, after we completed our rights offering in March. However, the turmoil in the capital markets engendered by COVID-19 caused us to alter our plan. During the second quarter, we instead conducted a market review to determine the feasibility of moving forward with the refinancing this year. Based on the findings of that review, we subsequently kicked off our refinancing efforts early in the third quarter. At this point, we anticipate closing the refinancing by the end of the year, barring any unforeseen circumstances. I’d like to thank Randy and his team for leading this effort, and we expect to announce further details in the near future.

Overall, we remain confident about the state of the company and our future. We intend to provide 2021 guidance in January, and are currently more optimistic about next year’s operating environment. Given that our gross margins are good, backlog and pipeline is solid, cash flow is increasing and the refinancing appears close to being completed, everything is coming together to make next year another one of improved results. The fact that we have not changed our guidance this year speaks volumes, about the strength of our operations, the demand for our services and the commitment and skill of our employees.

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I’ll make a few more comments at the end of the call, but will now hand over to Randy to discuss our financial results in greater detail. Randy?

Randall Lay

Thank you, Tracy, and good morning, everyone. Turning to Slide 5. We posted revenue of $66.2 million for the quarter, as Tracy mentioned. Sales rose slightly year-over-year, reflecting continued work on the Vogtle sites as well as $5 million of additional decommissioning work and $3.3 million of higher revenue from Canada. As Tracy indicated, we are not seeing any material disruptions to our operations due to COVID-19.

Slide 6 shows operating expense trends for the company. We posted gross profit of $8.7 million or 13.1% of revenue for the third quarter versus $6 million or 10.5% of revenue last year. The 2020 quarter benefited from improved product mix more than offsetting some costs due to a contract modification, as Tracy mentioned. We expect to continue reporting solid margins in the coming quarters with our 2020 guidance unchanged between 11% and 13%. Operating expenses were $6 million for the third quarter versus $5.2 million last year, with the increase due to a higher G&A related to severance and stock-based compensation. Our operating margin rose to 4% from 1.3% last year. We anticipate operating margins to be in a similar range for the fourth quarter adjusted for severance and stock-based compensation.

Before turning the call back to Tracy, I wanted to reiterate what he said about the status of our refinancing. This has been a priority this entire year, and the process is playing out largely as planned, albeit with some delays due to COVID-19. We’re very close to bringing the process to conclusion in Q4. We will, of course, keep our investors posted as the timing plays out. Our strategy is to ensure maximum financial flexibility, while meaningfully lowering our interest expense burden going forward.

I’ll now turn the call back to Tracy for a review of our 2020 guidance and his closing remarks. Tracy?

Tracy Pagilara

Thanks, Randy. Turning to Slide 7. We are reaffirming our guidance for fiscal 2020. We expect revenue to be in the range of $270 million to $290 million, gross margins of 11% to 13% and SG&A of 8% to 8.5%. Adjusted EBITDA is forecasted to be at the upper end of the $13 million to $15 million range. And as a reminder, we’ve already generated $10.6 million of adjusted EBITDA thus far in 2020.

As I said earlier, we continue to actively bid on a myriad of business opportunities and are confident about the near-term potential to build our backlog heading into 2021. We’re also focused on completing our debt refinancing as soon as possible during Q4 2020.

Overall, the company is poised to bolster its balance sheet, add more backlog, drive improved results and increase returns for shareholders.

With that, operator, we can open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Theodore O’Neill with Litchfield Hills Research.

Theodore O’Neill

I was wondering if you could give us your outlook into 2021 for opportunities in Canada and nuclear business in general.

Tracy Pagilara

The outlook for opportunities in Canada, particularly professional services are strong. And we are — as I indicated, we’ve already in this quarter closed a couple of orders for opportunities with — outside of the Vogtle 3 and 4 construction projects. So we’re feeling good about that as well.

Theodore O’Neill

And you’re talking about refinancing the debt. Is that the new center lane debt or the mid-cap, or both?

Tracy Pagilara

It’s both. Both of them.

Operator

Our next question comes from Dick Ryan with Colliers.

Richard Ryan

So Tracy, on the new awards you’ve booked since quarter end, I think, you said $25 million, outside of Vogtle 3 and 4. Any add-in some of the other markets, like water treatment? And how would you parse that between new nuclear business and maybe some decommissioning work?

Tracy Pagilara

There are other orders that are — the nuclear orders that are outside of Vogtle 3 and 4, probably comprised — Randy, maybe you can help me with this, I’d say, at least 2/3. And then we have some in — scattered among our other end markets.

Randall Lay

Yes. I think that’s right, Tracy. And we also have, in terms of some of the markets that we are working actively to diversify, and we also have some awards in that category.

Richard Ryan

Okay. In the adjustments and cancellations, kind of $27 million. Is there anything to read into that number? Or is that just kind of normal course of business that you just deal with?

Randall Lay

I think I can say, that is normal course. I’ll leave it — go ahead, Tracy, sorry.

Tracy Pagilara

Yes, it’s normal course. It’s maybe a little bit higher than we’ve experienced, but not materially. So we don’t have that many cancellations or adjustments. Normally when we have adjustments, they’re favorable change orders. So — but it’s not — certainly not unprecedented for us to have addressing some cancellations.

Richard Ryan

Okay. On the Vogtle 3 and 4 work, has anything changed with the timing of your expectations there?

Tracy Pagilara

No. The Southern Company is maintaining publicly the other in-service dates of November 2021 and November 2022. I think with respect to the latter, they may — they feel like they can probably get that done a little bit earlier than that. Kelly, is that what — that’s what maybe July or August for unit 4. Is that correct?

Kelly Powers

Yes. That’s what they are currently planning on.

Tracy Pagilara

Yes.

Richard Ryan

Okay. And with COVID still hanging out there, I mean what’s been the ability to get some additional work in Canada? Do you have — obviously, there’s still some travel limitations. But what’s the current state of your Canadian bidding pipeline?

Tracy Pagilara

So the relationship with the utilities is strong. We’ve been able to do very well with our Canadian professional services contract work that we’re doing for Bruce Power. In general, Canada was really impacted probably more than the U.S. in terms of bid activity. The bid activity essentially shut down in 2020, but we do see that starting to come back. I’ll let Kelly comment a little further on that.

Kelly Powers

Yes. They have their — lead unit refurbishment is ongoing, and there’s follow unit, the second unit of 6 refurbishments. The bids have been delayed, but they will be coming out very soon. And we anticipate being able to bid on bid opportunities for their second unit refurbishment as well as additional professional services work. So even though it has not occurred during the third and fourth quarters this year, it looks very good for opportunities still that we would book and burn for 2021 and follow years.

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Richard Ryan

Just a follow-on, Kelly. When the bid comes out, what kind of response time do you have to submit a bid? And then how long is the decision process? Just kind of trying to put a time line together.

Kelly Powers

Yes. We anticipate bidding and being awarded work both in the first quarter — by the end of the first quarter of 2021.

Operator

Our next question is from Walter Schenker with MAZ Partners.

Walter Schenker

I actually have a question that I’ve asked in the past and been curious about the availability of labor as you’ve gone forward. I’m wondering at this point, given COVID, to what extent you are having any issues getting the skilled labor you need? And what you’re seeing in regard to labor costs if you’re starting to see any inflation — wage inflation?

Tracy Pagilara

In general, Walter, we don’t — it’s not a problem per se for us. And we are pretty rigorous about evaluating opportunities on the front end in terms of whether we think we’re going to have the available labor. So if we don’t think we’ll have it, we don’t bid. Kelly, why don’t you elaborate a little bit further on this point because you’re more involved day to day?

Kelly Powers

Yes. Your point is absolutely valid. We don’t bid jobs if we don’t anticipate that we can get the labor. And we have not seen, at this point, any impacts on labor availability or labor cost. As a matter of fact, with a lot of markets being very slowed or delayed during COVID, it has actually increased the labor availability. So at this point, we’ve been unaffected by COVID.

Walter Schenker

Okay. And then a common flash question. This — that the refinancing has taken literally forever, like I don’t — not even much of an exaggeration. Is it possible — and I know you hope to close it shortly, but that’s been the case for some time. Can you just give a little bit of color why it has been taken this long, is so difficult in a world to wash with liquidity? And I am involved in a lot of small companies who’ve had — have not had this type of delays in getting a debt refinancing redone.

Tracy Pagilara

Randy, you want to take a shot at that?

Randall Lay

Sure, absolutely. So I think the short answer is the capital markets in the first part of the year were not very friendly to getting a refinancing done. So we wanted to be very sure that as we went into the market that we had a good prospect of getting something concluded this year before we talked about it. So we did a market test that determined that, that was likely something we could get done. I think that because, in this case, we’re moving from — we’ve had very good financing partners, but there are some opportunities for us going forward that we think as we grow the company, that would justify refinancing our current facilities. And that’s what we set out to do.

So yes, it’s unfortunate that these things take some time. But whenever you’re changing a lending group, I think that you do probably have a higher level of due diligence than you do if you’re just amending a facility with the existing partners. So I think those are the factors that went into getting this done. We’re not a small company. So a lot of the financing that was available, that was specifically targeted against the COVID epidemic really was not open to us nor frankly get that financing solve the problem that we’re trying to solve in terms of providing a platform to grow the company. So all those are factors. Everything takes longer than it should. I don’t disagree with that. But I also think that we’re on a solid path here.

Operator

Our next question comes from John Walthausen with Walthauser & Company.

John Walthausen

First of all, congratulations on a good quarter. The other question, obviously, it’s a disappointingly low level of new bookings in the quarter. But I think we can understand why. But can you talk about what the success rate you had versus your expectation on business that was actually awarded in the quarter?

Tracy Pagilara

Thank you. Well, our typical hit rate is about 25% in terms of what we bid. I’d say, it was — we had a couple of — we had up to $150 million worth of awards that we expected. We’re going to be converted into backlog that for a variety of reasons. One for about $25 million got pushed out into 2022 because of COVID-19 directly, and there’s just been some other — as I indicated, the environment’s been a little bit unusual and abnormal in terms of getting from the point of an award to an actual order. So we don’t put anything on our backlog until we have a purchase order.

But things just are not moving as quickly. Bid processes are much more methodical and technical. And — so that definitely brought our hit rate down below our typical 25%. And I say it’s — it wasn’t — it was probably more like 10% to 15%. So that’s the reason for why we weren’t able to get the backlog to where we would have liked it to have been. But the good news is that we have the visibility of those awards. They weren’t canceled. They’re still — the work’s still going to get done, and we’re still in a good position to try to win the awards when the customers are ready to move forward with the work.

John Walthausen

Okay. That’s helpful. And to some extent, the circle. Are some of the competitors also being very aggressive on pricing just to keep busy and that’s an impediment or is pricing in the market…

Tracy Pagilara

There — certainly, competitors are being competitive on pricing, but that wasn’t why the awards were not made. There were technical issues with bids, some of the projects got rescoped, some of the renewal got — we thought we had one contract that was going to get renewed for a certain period of time. The renewal period changed and then the scope of that renewal got bigger. So we’re not — these are things that we didn’t lose due to competitive pricing. It’s just a myriad of issues that in an uncertain business environment just seem to be more prevalent than what we’d normally expect.

Operator

[Operator Instructions] Our next question comes from John Deysher with Pinnacle Capital Management.

John Deysher

Just curious. In terms of this whole bid request for proposal process, how are we now versus at the beginning of the pandemic? I realize it’s still probably less than those levels prepandemic. But are we seeing any rebound at all in terms of RFPs at this point?

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Tracy Pagilara

Certainly, for instance, in New York. New York close to a standstill. So we’re seeing more bid work in New York. We’re seeing more bid work in Florida. Canada is still slow, as Kelly indicated, although we’re expecting it to come back. We’re certainly seeing some more bids. We saw some more bids on — with some of our nuclear customers.

But again, our — where we’ve been constrained, John, is the new customer development. So that’s still where we would have expected to be able to put more bids in for new customers. That’s been curtailed by COVID-19 still. So that hasn’t picked up. Kelly, do you have any other perspective on this, you’d like to add? You see the bids more than I do.

Kelly Powers

No, no, I think that’s pretty accurate. It’s actually been a little bit lower volume, but steady through COVID at that lower volume. We’ve not seen a big increase yet. Where we’re going to see the big increase, I anticipate, is coming up in Canada. And as soon as travel restrictions go away, we will see an increase with new customers. But we’ve — with existing customers and with a few new customers in the government industry, FP&L, Florida Power & Light, we’ve actually still been able to get new bids, new customer bids. And it’s been a fairly steady volume with a few these government entities and FP&L and our existing customers through COVID. So we anticipate it will be Canada, opening up their bids and travel restrictions being lifted and being able to go visit new customers to increase it from the current volume.

John Deysher

Great. That’s helpful. The other question is, where are we with the relisting of the shares on NASDAQ? I think you have to have a minimum market cap of $50 million. We’re pretty close to that now. Kind of what’s the status of that?

Tracy Pagilara

We have to — our share price has to be above $2 or above for 90 consecutive trading days. So we need to get the share price above $2, and then we’ll be good to go.

John Deysher

Okay. You’ve got a little bit…

Tracy Pagilara

It’s got to be fixed. Yes, I mean, we’re ready to move forward. We just — we’ve got to get the share price above 90 — it’s got to be above 90 for — excuse me, not 90 — above $2 for 90 consecutive trading days, and then we can file the paperwork, and it won’t take us that long to get listed after that.

Operator

Our next question comes from Vishal Mishra with Mishra Capital.

Vishal Mishra

Good quarter, so good results. And then good to hear the news on refinancing. My question was, a couple of questioners have already alluded to it, being decline in backlog. And Randy — Tracy, you had mentioned that you are bullish about the future. So I was wondering which areas do you expect new orders? And is it decommissioning? Is it — Canada nuclear has been talked about, U.S. nuclear — which — what do you think — when you’re so bullish about the future, what did you mean?

Tracy Pagilara

We expect in — really, we’re bullish about all of our end markets. We wouldn’t be in them. But decommissioning next year, we’ve got a big opportunity there to grow backlog. Canada nuclear and on the professional services side, very bullish there that we’re going to do. We’ve done a good job on the professional services contract we have. We think that we’ll have a good chance to get that renewed. As Kelly indicated, we think we’re going to have projects and maintenance work to actually bid on in Canada next year. We haven’t had anything this year. We continue to do good work at Vogtle 3 and 4, but we are now starting to see — in the last 2 years, we’ve won projects for 3 nuclear customers that we had not done work for, one, it’s been 4 years. I think one had been 5 or 6 years. Another one had been 7 years.

So we’re breaking back into nuclear customers, which is a function of the great work we’ve done at Vogtle and the fact that our balance sheet is improving. And we think based on doing that project work, we should be able to win long-term maintenance agreements, which again was something that was — we were unable to do as a result of our balance sheet. The other 2 areas we’re very excited about are Florida. We have a great wastewater business that’s growing down there because of the amount of just wastewater infrastructure that has to be replaced. And then the Florida storm water or storm hardening legislation that’s been put into effect. There’s $20 billion of work that’s going to need to be done in Florida over the next 10 years. We think that about $8 billion of that is right in our sweet spot in terms of the work we already do for wastewater.

And then up north, there’s a natural gas distribution infrastructure. We’re working with a new customer called Eversource, who is going to bring us on, give us work in 2021, to start working on helping them replace their natural gas infrastructure. They’re going to have to spend $1.5 billion to $2.5 billion a year for the foreseeable future to replace that infrastructure because it’s — you may recall, there was an explosion in Massachusetts with a utility called Columbia. Eversource bought Colombia, and so there’s a need — definite need to upgrade and replace that natural gas infrastructure.

So we’re really excited about our — sort of our core business, what’s been our core business in the adjacent markets that we’re able to go into here in the near future. And a couple of years ago, we didn’t have any business in decommissioning or Canada. And now, I would expect in the next 6 months, we’re going to have big backlog build in those areas. So we’re — we’ve proven an ability to go into adjacent markets and do well. So that’s why I’m bullish.

Operator

At this point, there appears to be no further questions in queue. I’d like to turn the call back over to Mr. Pagilara for closing remarks.

Tracy Pagilara

Thank you, everyone, for participating today. We appreciate your time and interest in Williams, and look forward to talking again next quarter. In the meantime, I hope all of you have a very happy Thanksgiving and happy holiday season, and take care of your families and be safe. Thank you very much.

Operator

This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.



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