Orion Group Holdings, Inc. (ORN) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2017 Orion Group Holdings, Inc. Earnings Conference Call. Currently at this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] Also, as a reminder, this conference call is being recorded. I would now like to turn the call over to your host, to Shane Martin. Sir, you may begin.

Thank you, Dylan. Good morning everyone and welcome to the Orion Group Holdings Third Quarter 2017 Earnings Conference Call and Webcast. Joining me today are Mark Stauffer, Orion Group Holdings' President and Chief Executive Officer, and Chris DeAlmeida, our Executive 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 will update our market outlook. We will then open the call for sell-side analysts' questions for the remainder of the time. 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, win rates, book-to-bill, backlog, projects in negotiation, administrative expenses, capital expenditures, pending awards, as well as our estimates and assumptions regarding future growth. These statements are predictions that are subject to risks and uncertainty, including those described in our 10-K, 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 statements, 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 Securities and Exchange Commission, including Regulation G. Please refer to the reconciliations and definitions, inclusive of the most comparable GAAP measures, within the press release issued this morning, November 8, 2017. The release can be found on our Web-site at www.oriongroupholdingsinc.com. This Web-site is the principal platform for investor communications. Also, for additional discussion of risk factors that could cause actual results to differ materially from our current expectations, please refer to our quarterly filings with the SEC, which are also available on the Investors section of our Web-site. And with that, I would like to turn over the call to Mark Stauffer, President and Chief Executive Officer. Mark?

Thank you, Shane, and welcome to our call this morning. I'd like to begin by thanking our 2,500 co-workers for their hard work, dedication and commitment to our Company as well as the generous support and outreach provided during the recent hurricanes, as they helped co-workers, family, neighbors, schools and charitable organizations to collectively clean up and move forward. I am extremely proud of the way our team has responded to these devastating events. Excluding the one-time impacts we experienced during the quarter, all operations performed well and we experienced solid drivers for overall growth of the business long-term. As you are aware, during the third quarter we experienced unprecedented impacts from three major hurricanes, Harvey, Irma and Maria, which affected over 85% of our operations. This resulted in ongoing project delays, the delayed start of newly secured projects, and had a significant impact on our third quarter results. Specifically, the impact was approximately $16.5 million in EBITDA during the third quarter. However, because of the destruction caused by these hurricanes, we are experiencing higher demand for our services in the marine segment and we expect to see additional opportunities related to the storm events over the next couple of years. As an example, the rain event in Texas due to Hurricane Harvey brought significant levels of siltation into Texas ports and waterways, driving increased need for dredging services. Today, we are processing and working on multiple emergency callout projects and are ready to meet our customers' needs. While our business this quarter was significantly impacted by the storms, the underlying fundamentals of our business remain healthy and strong and we continue to see great opportunities going forward. Currently our backlog remains at high levels, with some increase in job margins and solid bid opportunities. As we look ahead, we will continue executing on our strategic vision of being the premier specialty construction company, focused on meeting the needs of our customers across the infrastructure, industrial and building sectors, while building our market share and enhancing shareholder value. We will continue to execute this strategic vision through organic growth, greenfield expansion and strategic acquisition opportunities. Specifically, as we increase our service offerings, we will continue to deploy capital to high-return, high free cash flow businesses, with a focus on increasing our return on invested capital. We expect demand drivers to continue to lead to high-quality bid opportunities across the infrastructure, industrial and building sectors. The infrastructure sector, which today our marine segment services, continues to provide both public and private opportunities to maintain and expand marine facilities on U.S. waterways. Throughout our operating areas, market fundamentals remain positive and we are seeing pockets of margin expansion. As I previously mentioned, we anticipate increased bid opportunities in the near-term related to the third quarter weather events. This should provide an additional catalyst for increased asset utilization. Additionally, private sector bid opportunities continue from downstream energy customers as they expand their waterside facilities associated with refining and storage. Also, recreational demand continues from private sector customers as local marinas are being expanded and remodeled, and bid opportunities related to cruise lines remain promising as we track projects related to new destinations or refurbishment of existing destinations in the Caribbean. As we have mentioned before, volatility in the marine segment has been much greater than anticipated and we have and will continue to take the necessary steps to address the idle labor and equipment cost because of this increased volatility. However, the underlying fundamentals of this business remain sound with solid demand drivers, bid opportunities and a solid backlog. Additionally, during the third quarter, permits related to the delayed project we discussed at our prior call were received. This work has commenced as planned and is progressing well. The building sector, which today our concrete segment services, continues to have solid long-term demand drivers as well. The markets we currently serve continue to retain their positions as leading growth areas for business and population. Population growth throughout our markets continues to drive new distribution centers, office expansions, retail facilities, multifamily housing units, educational facilities, and medical facilities. In Houston, we are experiencing some tightening in the market, but we expect to continue to maintain market share. We are focused on expanding our market share in the Dallas-Fort Worth market, including adding structural opportunities. Finally, we expect to continue to see solid growth in the Central Texas market as we continue to expand with fundamentally strong end market drivers. In the industrial sector, we will continue our greenfield expansion by combining talent and resources from the marine segment and concrete segment to continue to pursue foundation work inside the industrial environment. The massive long-term petrochemical-driven opportunities along the Gulf Coast provide significant potential to expand our addressable project opportunities. In fact, the U.S. is on pace to become a net exporter of natural gas by 2018 as a result of the shale revolution, which has led to increased domestic production of natural gas. This will lead to an outpaced growth in the petrochemical industry, which should account for more than half of the construction spending in the manufacturing sector. In closing, our fundamental business drivers remain solid. We are working to reduce the volatility in our business by executing our strategic plan and focusing on complementary services with high returns. While the severity of the third quarter weather impacts were unexpected, we will focus on meeting the opportunities these events create while continuing to right-size our marine fleet and reduce overhead costs. We believe we have a strong business with good long-term drivers and opportunities for solid shareholder returns. Now I'd like to turn the call over to Chris to review the financial results in more detail. Chris?

Thank you, Mark, and thanks for joining us. For the third quarter of 2017, we reported a net loss of $5 million or an $0.18 loss per diluted share. These results compare with a net income of $4.7 million or a $0.17 earnings per diluted share in the prior year period. Excluding impacts from the storms Mark mentioned, the income for the third quarter 2017 would have been $7.3 million or $0.26 earnings per diluted share. Contract revenues for the third quarter of 2017 were $140.2 million, of which 49% came from the marine segment and 51% came from the concrete segment. Third quarter 2017 revenues from the marine segment decreased 17% compared to last year. This decrease was primarily driven by weather events that Mark mentioned earlier. Third quarter 2017 revenues from the concrete segment decreased 12% from the prior year period. This decrease is also primarily driven by the impact of hurricanes, particularly Hurricane Harvey, in the Houston and Central Texas markets. In total, 26% of our consolidated third quarter 2017 revenues were generated from federal, state and local government agencies, while 74% were generated from the private sector. This compares to 28% of consolidated revenues being generated from federal, state and local government agencies and 72% from the private sector in the prior year period. Consolidated third quarter gross profit was $10.8 million, or a gross margin of 7.7%, which compares to prior year gross profit of $24.2 million or a gross margin of 14.7%. During the third quarter 2017, we saw decreases in consolidated EBITDA and EBITDA margin, due to the weather events. Third quarter EBITDA was $2 million or 1.5% EBITDA margin. This compares to third quarter 2016 EBITDA of $18.1 million or 11% EBITDA margin. Excluding the impacts from the weather events, third quarter EBITDA would have been $18 million or a 13% EBITDA margin. SG&A expenses for the third quarter 2017 were $16.5 million, as compared to $15.3 million in the prior year period. SG&A was 12% of revenues, up from 9% in the prior year quarter. This increase is primarily driven by the inclusion of the recently acquired Central Texas concrete company. Going forward, we would expect SG&A as a percent of revenue to decline as revenue growth outpaces SG&A expenses and as we continue to reduce our overhead costs. For the third quarter 2017, we bid on $752 million worth of opportunities and we were successful on approximately $110 million. This resulted in a 15% win rate for the quarter and a book-to-bill ratio of 0.79x. On a year-to-date consolidated basis, our win rate was 19% with a book-to-bill of 0.88x. As of September 30, 2017, we have backlog of work under contract at $383 million, which compares to $388 million or relatively flat as compared to the prior year period. Of our September 30, 2017 backlog, $199 million is related to the marine segment, while $184 million is related to the concrete segment. Additionally, we are the apparent low bidder or have been awarded subsequent to the end of the third quarter an additional $140 million worth of opportunities. Of that, $100 million is related to the marine segment, while $40 million is related to the concrete segment. In total, this means we currently have over $520 million of projects in backlog and low bids. This level of activity gives us optimism about where we are headed for the remainder of 2017 and 2018. Now turning to the balance sheet, after making payments during the quarter of $50 million on our revolving line of credit, we had approximately $2.7 million of cash on hand and access to approximately $49 million under our revolving line of credit. We ended the quarter with approximately $82 million in total debt outstanding. Subsequent to the end of the quarter, we drew $20 million on our revolving line of credit to fund ongoing working capital needs. We believe that our combined liquidity position is adequate for general business requirements and for servicing our debt going forward. Year-to-date, the Company has produced approximately $32 million of cash flow from operations and paid down approximately $22 million of total debt. Since entering into our credit facility, we have reduced our total debt outstanding by $67 million as of September 30, 2017. As we go forward, we will continue to focus on paying down debt with excess free cash flows. As a result of the weather events experienced during the third quarter, we amended our credit agreement to provide more room with regard to our leverage ratio requirement as well as some other minor changes, including an add-back of the weather-related events during the third quarter 2017. Regarding leverage ratio, going forward our leverage ratio cannot exceed 3.0x on a trailing 12-month adjusted EBITDA basis. By making this amendment, we provide adequate cushion within our covenants going forward. We are pleased with the continued support from our lenders and look forward to continuing a long relationship with our bank group. Finally, our bonding program remains solid and is more than adequate to support our bid activities. Turning to our outlook, we continue to see strong demand for our services across our business. As Mark mentioned, while the weather events have caused short-term disruptions during the third quarter, they will provide a catalyst for increased demand drivers in the future. We have seen this increase in demand for certain services now and expect to see additional demand in the future. Our elevated backlog plus low bids remains at near record level and we are optimistic given the sustained bidding opportunities we continue to see. Currently we have $970 million worth of total bids outstanding, of which $295 million are related to the marine segment, $675 million are related to the concrete segment. As we look at full year 2017 guidance, we recognize the volatility our marine segment experienced this year plus the weather events during the third quarter has led to changes in the timing of costs, and therefore has led changes in the goals we've set for the year. We expect the fourth quarter will see increased activity and return to normal profitability levels with higher asset utilization and solid project execution. Our goal is and always will be to deliver profitable returns to our shareholders. The Company is proactively adapting to the changes in our market and we are focused on growing this profitable business line. Orion has a strong future and we are adapting to reduce volatility in our earnings and results. As we look at 2018, we will continue to adjust our business to reduce the volatility. Demand from the weather events plus ongoing strong demand in our end markets will provide a catalyst for some bottom line improvement in 2018. This bottom line improvement should expand more significantly in 2019 and beyond. Overall, we remain optimistic about our prospects for long term profitable growth and we remain committed to delivering improved results as we move forward. Additionally, we look forward to continuing to expand our infrastructure, industrial and building sectors as we adjust the business where necessary to deliver improved shareholder value. With that, I'll turn the call back over to the operator to begin the Q&A portion of the call.

[Operator Instructions] Our first question comes from Jon Tanwanteng of CJS Securities. Your question please?

It's Pete Lukas filling in for Jon here this morning. You had mentioned changes in your goals. You recently filed an 8-K detailing $62 million to $98 million in annual EBITDA potential. Just wondered if there is a change to that and what's the timing in realizing that and what has to happen for you to get there?

So there is no change to that at all. Specifically, when we talked about the goals, we talked about as we walked into 2017, we had higher goals. Through project delays and weather events, those have changed over time and we had to reduce those goals. So, that's specifically what I was talking to about the goals. As we look at the future of the Company and where we are taking it, particularly in the industrial, infrastructure and building sectors, we do believe in that 8-K and that we could reach up to $100 million of EBITDA in this business long-term. We have not put a specified timeframe on that. As we look into 2018, we are still making some adjustments to reduce the volatility, particularly on the marine side of the business. So we do expect some growth over this year, but don't necessarily expect to get necessarily to where we want to be long-term. We're looking at that – from a timeframe perspective, we're looking at that as more of a five-year type of goal to achieve and some of that will depend on where we're at and depending on what we execute as far as growth and expansion opportunities, particularly in the industrial and building sectors, and any potential acquisitions that could assist us as well.

Okay, very helpful, thanks. And you mentioned that you did receive the permits that you had talked about last quarter. But in terms of permitting delays that have plagued you guys for the last several quarters, do you think we are past those issues now or is that still a problem that we're going to face going forward?

I think we're past kind of the little logjam that we had, but I think it's still an issue for us. I don't think it's going to be quite as bad as the first half of the year when we had some additional roadblocks that were thrown up that delayed the permitting process beyond what we've been seeing. So, I think it's improved from what we saw earlier in the year, but I think we're still going to be living with an increase in that process versus what we saw a few years ago as an example. So, again, we're trying to work with our customers to adjust their lead times and we're very much focused on trying to do that so that we can sort of get into a new rhythm. I think some of the events that, again, happened earlier this year are behind us, but I think overall we are working to adjust our customers to sort of the new reality of the duration that it takes on these things, and again, get into a new rhythm with that process.

Great, thanks. And last one for me, you mentioned some of the opportunities and tailwinds from reconstruction and emergency work from Harvey and Irma, but in terms of lingering impacts, do you expect that to last for another quarter or so, or anything you can kind of touch on there, and then how soon before we start to see some of the benefits?

I think we are back up and running as we talked about in the earnings release today and we worked to get safely back to the operations as soon as it was safe to do so, and we are back up and running in all areas. I think, again, this is sort of playing out like we would expect. And certainly this was kind of a very unusual unprecedented amount of impact that we saw, but we've seen hurricane events before where they create opportunities. Short term we see survey work and inspection work, which we've been seeing. We are starting the work on some of the dredging, additional dredging opportunities that have been generated as a result of this. Longer-term, over the next couple years, we'll see additional opportunities as a result of some of the damages that were caused, particularly in the Caribbean. Those will take time, they will be an additional catalyst, but we're starting to see some of the work now, particularly with dredging opportunities. So we expect that as we go into fourth quarter and certainly into the first quarter of next year that those projects will be coming online, and then longer-term some of the construction opportunities.

Very helpful. Thank you very much. I'll jump back in the queue.

Our next question comes from Bobby Burleson of Canaccord. Question please?

So just following up a little bit more on the dredging opportunity, sounds like that's happening now. Can we talk about where your capacity is, where your utilization levels are now in that business, and kind of where you think that can go over the next several quarters, what's with duration of this work and the kind of scope of the potential works that you guys have coming?

I mean I think that we definitely expect to see an uptick in our utilization. We do have capacity that can assist on some of this work where we have been bringing this online. Again, as expected, kind of the first step of that occurred right after the storm events and the several weeks after that where we had inspection and survey work out. The Corps of Engineers has begun modifying some of the contracts that we had with them to take care of some of this. So, just a mass amount – particularly in Texas, a mass amount of siltation occurred as a result of all the rain that we had in the state. So, we expect increased capacity. Obviously we've talked about the volatility in the business, on the marine business, and we still expect that we're going to see some of that related to the permit issue that I just talked about. However, with respect to near-term and utilization, we've been a little bit underutilized within and have had capacity with our dredging operations. We do expect that to increase nicely as we get into the fourth quarter and certainly go into the first quarter. We'll see after that in terms of the additional opportunities there, how long that takes to clear out, that will be additive to other work that otherwise would be going on. So we certainly expect a near-term uptick in utilization.

Great. Then in terms of these industrial jobs, you won your first job there recently and I'm wondering what are the trade-offs in terms of maybe TAS works that you're doing, the sort of legacy business versus going after the industrial jobs in terms of the margins, I think the margins are a lot higher on industrial, and kind of do you have better kind of longer-term projects in industrial where it goes into your backlog and it gives you more stability, kind of comparing and contrasting your concrete segment with industrial?

Yes, good question. I think, again, right now this is a greenfield opportunity for us in how we are pursuing it. We're leveraging skill sets from both segments. Most equipment utilizations that were in the particular job that you mentioned would come from the marine side at this point. But again, we are pursuing this to be additive, to not take away from anything that we've got going on in our concrete segment or our marine segment. And as we stand this business up and we're expanding their greenfield, again, we expect similar attributes that we see in our concrete business, meaning it's not necessarily an asset-intensive business. So, from a cash flow perspective, we expect it to be similar to if not better than we see in concrete over the long-term. And again, we are certainly focused on pursuing this from a greenfield space, the greenfield perspective at this point, but standing it up as its own separate unit and certainly an area that might be a good candidate for M&A opportunity down the road, if we see the right opportunity come along.

And just one last quick one, given the storms and a lot of the damage in some of these Gulf Coast areas, has that changed the number of opportunities you've seen coming on industrial, maybe the willingness, I know some of those are existing customers, but the willingness to have another provider come into the market, is that increased at all because of maybe some of that damage that's happened in and around some of these plants, or is there no impact really from the hurricanes?

I think from the standpoint of kind of our existing operations in our marine segment, certainly that's happened particularly with the dredging opportunities. I think with respect to the industrial stuff, which I think is what your question is, off the water's edge, I don't think it's really, the storm events really haven't had an impact on that. That's being driven by the expansion of these facilities, driven by the energy/shale revolution, and all that. Most of that stuff that's being produced domestically eventually winds up on the Gulf Coast, which is driving those expansions. To the other point of your question, we already – one of the things that we like about pursuing these opportunities, these are already our customers today. So, that's why we referred to this as leveraging our skill set that we have in both marine and concrete, but also leveraging our customer relations that we have existing in our marine businesses. Our marine business essentially [indiscernible] is operating in this industrial space today. So these are by and large mostly customers that we already have, facilities that we're already used to working in. It's just providing additional services for those customers within the plants that are off the water's edge.

Great. Thank you.

[Operator Instructions] I show no further questions in the queue. At this time, I would like to turn the call back to Chris DeAlmeida for closing remarks.

Thank you. We thank you all for joining us on the call today and I look forward to speaking with you next quarter. In the meantime, if you have any questions, please feel free to reach out.

Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect.