Orion Group Holdings, Inc. (ORN) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Orion Marine Group’s First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Casey Stegman with Investor Relations. Sir, you may begin.

Thank you, Kali. Good morning, everyone and welcome to the Orion Marine Group first quarter 2016 earnings conference call. Joining me today are Mark Stauffer, Orion Marine Group’s President and Chief Executive Officer; Dwayne Breaux, our Executive Vice President and Chief Operating Officer; and Chris DeAlmeida, our Vice President and Chief Financial Officer. Regarding the format of the call, we have allocated about 15 minutes for prepared remarks in which Mark and Chris will highlight our results and update our market outlook. We will then open the call for sell-side analyst questions for the remainder of the time. [Operator Instructions] During the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our end markets, revenues, gross profits, gross margin, EBITDA, EBITDA margin, backlog, projects in negotiation and pending award as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margin, gross margins, administrative expenses and capital expenditures. These statements are predictions that are subject to risks and uncertainty, including those described in our 10-K for 2015 that may cause actual results to differ materially from those statements. Moreover, past performance is not necessarily an indicator of future results. By providing this information, we undertake no obligation to update or revise any projections or forward-looking statement, whether as a result of new development or otherwise. Also, please note that EBITDA and EBITDA margin are non-GAAP financial measures under rules of the Securities and Exchange Commission, including Regulation G. Please refer to the reconciliation accompanying this earnings call, available on our website at www.orionmarinegroup.com for comments on the use of non-GAAP financial measures as well as applicable reconciliations to the most comparable GAAP measures. Also, please refer to the press release issued this morning, May 5, and our quarterly and annual filings with the SEC, which are available on our website for additional discussion of risk factors that could cause actual results to differ materially from our current expectations. And with that, I would like to turn the call over to Mark Stauffer, President and Chief Executive Officer. Mark?

Thank you, Casey and thanks for joining us this morning. I’d like to begin by thanking our 2,400 coworkers for all their hard work and dedication. It’s through their efforts that we will achieve our goals as we move ahead. As I said this morning in our earnings release, the first quarter in our Heavy Civil Marine Construction segment has historically been our slowest quarter of the year and this year is no different. During the first quarter, we experienced slightly slower productivity as a result of specific adverse weather on certain jobs, primarily on the East Coast as well as customer-directed delays and changes related to the completion of the three remaining troubled Tampa projects. This caused the timing and mix of jobs at our Heavy Civil Marine Construction segment to be slightly different than initially anticipated. However, excluding these items, the Heavy Civil Marine Construction segment had solid performance during the quarter and our overall results would have been in line with expectations. Our Commercial Concrete segment performed very well during the first quarter, with top line gains in Dallas and continued solid market drivers with good bid of opportunities across our market. Overall, excluding the Tampa issues, our business is performing well and we are seeing some improved margins in our backlog. We anticipate improvements in our bottom line results during the second half of 2016, and we are targeting $70 million of EBITDA for 2017, while maintaining overall EBITDA margins in the 10% to 12% range. In our Heavy Civil Marine Construction segment, we are focused on completing the remaining troubled Tampa projects, pursuing our claims on these projects and resuming profitable operations at our Tampa office. As we have mentioned before, we have and continue to take steps to strengthen our management in the Tampa office. Specifically, we have brought in a seasoned Senior Vice President to oversee these operations and have made further changes to strengthen the top three levels of management in this office. We are currently pursuing claims in excess of $5 million related to this – specifically to the five troubled Tampa projects and we believe we will have resolution on these claims before year end. We have also reassessed our markets in customers served by our Tampa operations and we are confident in the demand for our services in these areas. With the steps we have taken and the demand we see ahead, we are confident in our ability to resume profitable operations in our Tampa office. Now, turning specifically to our 2016 outlook, we continue to experience a high level of demand for our services across both operating segments. Our Heavy Civil Marine Construction segment continues to see solid demand to help maintain and expand infrastructures that facilitates the movement of goods and people on and over waterways. Specifically, we continue to see bid opportunities from both our private sector and public sector customers as they expand, refurbish and repair their marine facilities. We expect to continue to see opportunities from the energy sector, including terminal operators, petrochemical-related customers, energy exporters and LNG facilities. We also believe we will continue to see opportunities from recreational customers as cruise lines seek new destinations and more robust infrastructure. The funding outlook for the public sector has shown improvement with the enactment of the FAST Act, resolution of the fines related to the 2010 Gulf oil spill, which will fund the RESTORE Act and the recent action on the budget framework. The budget deal should lead to approval of appropriations for the fiscal year beginning October 1, 2016 under regular order, which we believe would allow the U.S. Army Corps of Engineers to lead maintenance dredging projects at a more consistent and predictable pace. We also continue to see a strong market in 2016 for our Commercial Concrete segment. We continue to see solid bid opportunities in the Houston market for educational, medical and retail facilities. The Dallas market continues to be a strong source of growth. In fact, the Commercial Concrete Construction segment continues to maintain its highest level of backlog for the Dallas market in its history. Just a couple of weeks ago, we poured the most weekly cubic yards of concrete in the Dallas market in the company’s history. We believe solid demand for our commercial Concrete Construction segment will continue in our current operating markets and support our expansion in the Dallas market. We are also exploring other markets to expand the TAS brand and its geographic footprint. We have remained confident both in our Marine Construction business and our Commercial Concrete business. While the challenges of ramping up the remaining troubled Tampa projects has taken longer than originally expected, we will get these projects completed in the near term, and I’m confident the actions we’ve taken will lead to a resumption of profitable operations in Tampa. Our underlying Heavy Civil Marine Construction business is sound with continued opportunities at our various end markets. Our Commercial Concrete business has continued to perform very well, and we are confident in the long-term outlook in our markets. We’re focused on making significant improvements in 2016 and focused on achieving our target of $70 million of EBITDA for 2017. With that, I will turn the call over to Chris to discuss our financial results in more detail. Chris?

Thank you, Mark and thanks for joining us. For the first quarter 2016, we reported a net loss of $1.2 million or a $0.04 loss per diluted share. These results compare with a net loss of $258,000 or a $0.01 loss per diluted share in the prior year period. First quarter 2016 contract revenue was approximately $130 million, of which our Heavy Civil Marine Construction segment generated approximately $63 million and our Commercial Concrete Construction segment generated approximately $67 million. Within the Heavy Civil Marine Construction segment, approximately 35% of revenue was generated from federal, state and local government agencies, while 65% was generated from the private sector. This compares to 53% being generated from federal, state and local government agencies and 47% from the private sector in the prior year period. For our Commercial Concrete segment, nearly 90% of revenue was generated from the private sector. Consolidated EBITDA for the first quarter 2016 was $8.1 million or an EBITDA margin of 6.3%, which compares to pro forma combined EBITDA of $13.1 million in the prior year period or an EBITDA margin of 9.4%. For the first quarter, we have bid on approximately $535 million worth of opportunities and were successful on approximately $157 million, which resulted in a 29% win rate for the first quarter and a book-to-bill ratio of 1.2x. Overall, we are pleased with the level of opportunities we have and we remain optimistic given the level of bid opportunities we see for the remainder of 2016. As of March 31, 2016, we had total backlog of work under contract of $385 million, of which $199 million was attributable to the Heavy Civil Marine Construction segment, while $186 million was attributable to the Commercial Concrete segment. We currently have approximately $613 million worth of bids outstanding, of which $263 million are related to the Heavy Civil Marine Construction segment and $350 million are related to the Commercial Concrete segment. Currently, we are the apparent low bidder or has been awarded subsequent to the end of the quarter an additional $37 million worth of opportunities. Of that, Heavy Civil Marine Construction segment is currently the apparent low bidder on approximately $19 million and the Commercial Concrete segment has received awards subsequent to the end of the quarter on approximately $18 million worth of jobs. SG&A expense for the first quarter 2016 was $15.5 million, an increase of $6.8 million as compared to the prior year period. This increase is primarily a result of the addition of TAS. With this in mind, we continue to expect full year SG&A expense for 2016 to be approximately 10% of revenue. Now, turning to the balance sheet, as of March 31, 2016, we had approximately $1.6 million of cash on hand after making unscheduled payments of $10 million during the quarter on our credit facility. As of March 31, 2016, we had access to approximately $32.9 million under our revolving line of credit, with approximately $117 million in total debt outstanding. We continue to maintain an excellent relationship with our lenders and I am confident that our cash position is adequate for general business requirements and to service our debt. As we noted last quarter, we were in discussions with our lending groups to provide additional headroom in our leverage ratios. As a result, the lending group has agreed to amend the credit facility. Specifically, the leverage ratio for the first quarter was raised to 4x, stepping down to 3.7x – 3.75x in Q2, stepping down again to 3.25x in Q3, 3x in Q4, 2.75x in Q1 of 2017 and finally setting at 2.5x for Q2 2017 and beyond. As part of this agreement, we incurred approximately $400,000 in amendment and arrangement fees. These fees will be capitalized over the remaining term of the loan. Additionally, we have added a tranche at the top of our pricing grid, whereby anytime, leverage is 3.25x or greater, the interest spread increases to LIBOR plus 350 basis points. Overall, we are pleased with our financial position and we remain focused on maintaining a strong balance sheet. Additionally, our funding program remains solid and is more than adequate to support our bid activities. While we have to complete the jobs Mark mentioned earlier, we are seeing good results in the rest of our business and we believe the fundamental business drivers remain intact for continued long-term growth in both operating segments. That said, we will continue to monitor our markets closely for any changes in bid pricing and overall opportunities. As Mark said, we are focused on making significant improvements in 2016 and are achieving our target of $70 million of EBITDA in 2017. With that, I will turn the call back to Kali to begin the Q&A portion of the call.

Thank you. [Operator Instructions] Our first question comes from the line of Marco Rodriguez with Stonegate Capital. Your line is open.

Good morning, guys. Thank you for taking my questions. Just really quick, I wanted to kind of come back to the Tampa office, still seems to be kind of giving you guys a little bit of some issues. Can you talk a little bit more about what kind of happened there in the quarter? And then what sort of additional actions you are taking there to rectify the situation?

Yes, absolutely, Marco. Basically as we kind of said in the release this morning in my remarks, specific weather delays and customer directed delays have pushed those projects completion out. At this point, to finish these projects, it’s basically labor and equipment. So everyday, we are there. We have got a spread of the labor and equipment there that’s costing us. So, as we ran into the delays – other customer directed delays, things of that nature, it’s just pushed the completion of those jobs out. We do think we are getting through those. We are – in the near-term, as I said, we will be finished with those. We have to get them behind us. We are focused on getting them behind us. But also, we have made significant changes in – to strengthen the management over there. I will let Dwayne kind of touch a little bit on that and provide a little more color.

Yes. Thank you, Mark. The important thing on – that we recognize is that on bad jobs, they tend to stay bad and so we took a very logical and stepwise approach on addressing the issues. We started with the deep dive on those projects some months back. We did independent audits on those projects. Those audits revealed that we had some fundamental management issues, which we suspected but we verified. As Mark highlighted, we made wholesale changes at the top of the Tampa management, which we are extremely pleased with and very excited to see the turnaround, but the last step of those projects is, quite frankly, just working through the mess. And as Mark said, it’s strictly labor and equipment to get through it. We have got a solid plan to walk through it and pending the unforeseen like the weather that hit – whether we are going to get through those projects and be done.

Got it. And so just to clarify, the East Coast weather issues were specific to Tampa or were there other areas on the East Coast that were also impacted?

Really specific to Tampa and actually specific to some of the troubled Tampa projects as well that are on the East Coast and again, localized, they are not widespread in other areas of the business. And again as we said we kind of expect some of that in Q1 anyway. That’s one of the factors on the Heavy Civil Marine side that impacts Q1 as being our seasonally weakest quarter, but it was a little more unusual this year that impacted some of those projects and in particular some of the remaining troubled Tampa projects.

Got it. And last quick question, I will jump back into queue. Just talking about your guidance here for EBITDA in the $70 million range, a bit higher than what is out there from a consensus standpoint. Can you talk a little bit about the specific or major sort of assumptions you have that are kind of driving that? And how we should be thinking about the progression of that EBITDA as the quarters progress?

Sure. Well, again, we are saying $70 million, 2017. We think that’s a reasonable target for it. Again, keep in mind that we are focused on getting in the near-term, the troubled Tampa projects behind us. As Dwayne has said just a minute ago, I mean, we have taken some significant steps to fundamentally strengthen the management team over in Tampa. As he said, we are very excited with the team we have in place and the changes we have made. So, we are focused on resuming profitable operations over there, that in and of itself will have a significant positive effect on the Heavy Civil Marine Construction side. We certainly think that long-term we would like to see margin improvement even greater than what we are talking about on a go-forward basis here in the – on the Heavy Civil Marine side. But we think with the level of activity that we see in both segments, with the EBITDA margins that we are achieving on the Commercial Concrete – in the Commercial Concrete segment and a reasonable improvement on our Heavy Civil Marine Construction segment EBITDA margins, again largely driven by the resumption of profitable operations in the Tampa office. But maintaining and strengthening that even in the other offices that, that target is very achievable in 2017. As we kind of said this morning, we have got to get through these projects in the Tampa office. That’s obviously having an impact on the first half of the year here. We do expect significant improvements in the back half of the year. As I said though, we are focused on achieving those improvements, getting these projects behind and seeing those improvements in the back half of the year and setting us up for a very nice run-rate in 2017 and then working to improve it from there.

Got it. Thanks a lot guys. I appreciate the time.

Our next question comes from the line of Matt Duncan with Stephens. Your line is open.

Hey, good morning guys. This is Will Steinwart on for Matt. So back on guidance, it sounds like trends remained strong in 2016 for each of your segments this year, but you didn’t mention your prior 2016 official guidance for sales and earnings. Should we assume you are reiterating those projections at this point?

Yes, we are focused on maintaining or achieving the previously stated guidance. Obviously, we have – as I said earlier, we have got to get through these troubled projects. We’re focused on that. We do think we are close to getting these wrapped up. We will have them wrapped up in the near term. As I said earlier also, we have got significant claims related to these projects that we are expecting to have resolution on by the end of the year. Somewhat depending on the timing of all of that could impact, but we are focused on being within the range previously provided, but we are – broader than that, we are focused on getting these projects behind us, getting Tampa back on a profitable run-rate, which we are confident in our team and getting us setup for $70 million run-rate on EBITDA in 2017.

Okay. And on those claims, would you say you need those to come through in 2016 to get to those prior expectations or can you do it regardless of...

No. As we said regarding – and obviously, there is a lot of moving pieces and just as a reminder, as you know, we have got a lot of backlog that will burn off. We have got other backlog that goes into next year. We have got work that we will have to secure and go get. So, I mean nothing is new there. That’s typical given the shorter duration of the vast majority of our projects. But we are confident in the markets that we see out there. We have got lot of work out there quoted as Chris mentioned. We are hopeful in the days ahead that we will see some clarity and see some of those moving into the win column. We are focused on the utilization of our dredges as we have talked about before regardless of what the pace of the Corps lettings are. We have – so we – as I have kind of mentioned in the remarks, in the underlying business is we are very pleased with, remained strong and the opportunities we see out there are strong. We have just got to get these projects wrapped up and we will in the short-term here. I mean, again, there maybe push here or there, but again as we said it’s labor and equipment at this point. It’s – so that – it also represents sort of an opportunity cost, but we are focused on getting those resources redeployed on profitable work as quickly as we can and so we are confident in our program, our plan, the changes we have made, have strengthened our team over there, we are very confident in our leadership in the Tampa office and the other changes that we have made over there. So, we are focused on moving ahead.

Okay, great. It was helpful. So, I want to move over to the Commercial Concrete segment. It looks like growth there – it sounds like it’s largely driven by the Dallas market. I am wondering how Houston is performing right now. Have you started to see a slowdown in the market or are you seeing any signs that a slowdown might be coming there?

Well, Houston remains very strong. We have seen a rotation in the types of the projects that we are bidding on and the work that’s coming out. As I said in my remarks, we have seen kind of a rotation and more strength in educational, medical and retail opportunities. We have seen a little bit of a gap in structural opportunities. Overall though, I think that we are pleased with the backlog. It’s remained steady in Houston. Houston is still the bigger driver of revenue and we have got a bigger footprint in Houston historically, that’s where we have originated from. But we are very pleased with what’s going on in the Houston market – the opportunities we see. Again, there has been a change in the mix of the type of opportunities that we are seeing in Houston, but we are maintaining the backlog. We are seeing continued strength in the Dallas market though, which is as we knew going into – when we acquired TAS last year that Dallas was an area of growth for us. There is just a tremendous amount of activity going on up there and we have seen that in the – our bid activity up there. Our backlog as I said we have been maintaining a historically high level of backlog up there. We have seen a very nice increase in backlog even since the end of the year, which at the end of the year was a historic level of backlog. We are pouring a lot of concrete up there, very pleased with the effort that the – our Dallas team has been making and as well as the Houston team. Obviously, the Dallas has been an area of target growth for us, but we are doing well in Houston as well and the guys are working hard to keep that pace going ahead.

Okay. Then last thing for me, you noted that margins and backlog for both segments are slightly improving, is this – is the pricing environment strengthening throughout the market or what would you say the primary drivers for those improvements within each of your segments?

Well, overall, on Heavy Civil side overall, yes we are seeing some strengthening there, a little more widespread than before. As you know, as we have talked about before, we have been seeing pockets of pricing improvement. I don’t want to get too far ahead of myself here, but we are starting to see some improvements there. As I talked about, we have seen some solidification of some of the – on the government sector, some of the funding sources. So, I think that’s having a positive effect as it works through kind of the market psyche, if you will. The Florida economy has been improving. Obviously, with the discussion points that I have talked about before, as we kind of wrap up these troubled Tampa projects and replace them with new work that is profitable, that has an impact. But we are generally seeing a slight improvement, a little more widespread than we had before as we talked about pockets of pricing improvement. On the Commercial Concrete side, at the beginning of the year as I think I mentioned on the last call, we saw a little bit of tightening of the bid margins in the – in Houston at the first of the year, particularly in January. We have seen opportunities continue though in Houston as I just talked about. So, that I think is something we are watching, but we are still pleased with our backlog and our margins in Houston. In Dallas, as I said, there is just a lot of opportunities up there and we have been able to see as a result some improvements in bid pricing in the Dallas market.

Great. Thanks a lot, guys.

You bet.

Thank you. [Operator Instructions] Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open.

Good morning, guys. Thank you for taking my questions.

Hi, Jon.

How are you doing? Can you just talk about the recent weather in Houston and the floods there? And does that impact the current quarter at all? I remember last year, the rains were pretty – were pretty big issue.

Right. I will say right now today, it’s been a minor impact obviously. If you guys have seen the news, there is pretty significant flooding in the Houston market. I will say this is that – to-date it is much different than last year. The issue that we had last year in the same period 2015 was it was widespread rain across the entire state and it was – but it was kind of daily. We couldn’t go a couple of days last year in the second quarter without having rain events, which impacted both segments last year. Obviously, that’s pro forma comment for the Commercial Concrete side. But this year, I think while we have had a lot of rain, we have had some significant flooding in Houston, it’s been more – there has been breaks in it. So, I think there has been – obviously, on a day-to-day basis, there has been some impacts. But from a widespread day in, day out, over the whole entire length of the quarter, it’s different this year. It’s improved this year from where we were sitting last year. And we have got a beautiful day and we have had a beautiful week here this week in Houston. And so I think it’s much different this year than last year.

Okay, great. Thanks. And just based on the $5 million you have outstanding in claims on these projects, can I conclude that the remaining, I guess like $12 million to $15 million in difference from where the consensus was versus what you reported, but is that all from the weather and just the changing project schedule?

You are talking – you are talking top line?

Yes, top line.

I think part of that – well, it’s kind of all related. Some of it is related to the weather and the push-outs. But also keep in mind that on the troubled path of projects, because they are in a loss position that has – and because that kind of stretched out there, that has a depressing effect on the revenue. So if you look at the comparable year-over-year revenues pretty significantly down, but largely that is driven by the push-out in the work, in particular the troubled projects, because of the way we are just basically recording cost there. We are not earning any revenue on those projects at this point. So once we get those projects behind us, with the work we have got in backlog and the opportunities that we see ahead we are confident in the results.

Okay, got it. And I am just wondering if the delays are causing any of your other projects to push-out, out of 2016 and into 2017 at all?

Not – no, not at this point. I mean again, keep in mind, it was the weather comments we made specific to the East Coast and further specific to the troubled Tampa projects. So to the extent that we get these projects behind us, the troubled Tampa projects will be able – which we will in the near-term here. I mean that we are getting close to the end here and we will get them behind us. And then we will redeploy those people and equipment on profitable work. And again, we are in the process of that which we don’t have in backlog already for those folks getting pursuing work to get that, which again is normal course of business. So, we are again focused on significant improvement for 2016 and achieving our target for 2017.

Got it. And then just going back to the ‘17 target that you put out there, do margins need to improve significantly from a bid standpoint to get there or was that just high utilization? And along with that, do you need a regular appropriations order for that target to be ahead from the Army Corps?

No. To your last question, no, I think two things is, one, we are pleased with the performance of our Commercial Concrete segment and I think if we see continued performance like we have seen that’s basically what we are basing that component of the target on. With respect to the Heavy Civil Marine Construction side of that, again, we think that getting the troubled Tampa projects behind us, which have been a drag on earnings for the last couple of quarters getting that behind us resuming profitable operations in Tampa with the activity we have got going on in the other offices in the – on the Marine Construction side and just with a – not even a historical, but a reasonable EBITDA margin, we would get there. So, we are still – that doesn’t mean we are going to be satisfied with that. We are not going to try to improve that and get beyond that, but I think it’s a reasonable target for us based on everything that we see now and what I have talked about in terms of getting the step behind us and resuming profitable operations in Tampa. With respect to the – specific to your last point about the Corps, as I have said before when we talked about in the last couple of quarters, we have been focused on getting dredge utilization increased regardless of the pace of the Corps lettings. Certainly, we would love to see an appropriations bill in place before October 1 for the Corps. We think that will be good for the industry, good for the country to see that occur, but with other opportunities we see out there, we are focused on and other steps we have taken as you know, from our call a couple of quarters ago, we are focused on driving higher dredge utilization regardless of what that pace of Corps lettings is. So certainly, we would view that as very big positive, as I said in the remarks, but we are focused on higher dredge utilization regardless.

Great, thank you very much.

Thank you. I am showing no further questions at this time. I would like to turn the call back to Mr. Stegman for closing remarks.

Yes, thanks, Kali. On behalf of Orion Marine Group, we would to thank you for joining us this morning and look forward to speaking with you in the future. If you have any follow-up questions, do not hesitate to give us a call. Thanks and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.