Orion Group Holdings, Inc. (ORN) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Preliminary Q3 2018 Orion Group Holdings Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Shane Martin. You may begin.

Good morning, and welcome to the Orion Group Holdings Third Quarter 2018 Update Conference Call. Joining me today are Mark Stauffer, Orion Group Holdings President and Chief Executive Officer; Chris DeAlmeida, Executive Vice President and Chief Financial Officer; and Robert Tabb, Vice President of Finance. Regarding the format of the call, we've allocated about 10 minutes for prepared remarks, in which Mark will provide an update on delays, which occurred in the third quarter that will impact our results. 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 profit, gross margin, EBITDA, EBITDA margin, backlog, projects in negotiation and pending awards 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 uncertainties, including those described in our 10-K for 2014 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 developments or otherwise. Also, please refer to the press release issued this morning, October 18, 2018, and our quarterly and annual filings with the SEC, which are available on our website for additional discussions of risk factors that could cause actual results to differ materially from our current expectations. With that, I'll turn the call over to Mark Stauffer, President and Chief Executive Officer. Mark?

Thank you, Shane, and thanks for joining us this morning. We're holding this call this morning to discuss the press releases we issued this morning regarding our preliminary third quarter results as well as the change in the CFO role. I'll discuss the third quarter preliminary results in a moment, but first, I'd like to cover several items related to our strategy and market outlook. First, we have a solid strategic plan, which we believe will deliver long-term shareholder value. We believe we will continue to see strong demand for our services across both current business segments with solid bid opportunities for profitable growth in the future. We believe we have solid opportunities to expand our addressable market with industrial sector opportunities. At the end of the second quarter of 2018, our trailing four quarter results produced $46.2 million of EBITDA, demonstrating our ability to generate positive results. During the third quarter of 2018, we bid on approximately $871 million of work and were successful on $210 million, representing a win rate of 24.1%. We currently have $1.1 billion of bids outstanding. Additionally, we are currently tracking over $9 billion of opportunities. Now looking at the third quarter in more detail. During the quarter, we experienced delays in new project awards and customer schedules. As a reminder, we are a quick-turn business, with the average job only lasting 3 to 9 months. As such, we head into any given period with only a portion of the total expected revenues in backlog, the remainder coming from the short cycle, quick-burn projects or other new awards. During the third quarter, particularly in our Marine segment, we saw significantly less short-cycle, quick-burn projects. However, these types of projects are continuing, and we expect to see a return to normal activity as we head into 2019. Additionally, customer schedules related to the timing of awards in some cases and permitting delays in other cases caused the timing of work burning during the quarter to be different than we originally planned. Also, we experienced significant production delays in our Concrete segment, primarily due to continuous rainfall across our market areas in Texas, particularly during September, which prevented us from executing our work and delayed projects in our backlog. In fact, September was our Concrete segment's lowest volume of cubic yards placed in a month this decade, and we placed only a fraction of the normal average monthly volume of cubic yards. This, of course, impacted cost burn and revenue generation during the third quarter. Going forward, as weather patterns improve, we expect to return to our normal volume of cubic yard placement and all projects impacted will be completed as normal. Unfortunately, customer schedules and weather patterns are outside our control but nevertheless impact our results. Despite delays in the third quarter, we remain confident with our long-term outlook due to our solid bid market, and we ended the third quarter with the second highest backlog in the company's history. We believe the company continues to enjoy strong end markets, with solid drivers for future profitable growth. However, the construction business can and will be lumpy from quarter-to-quarter based on the timing of awards, impacts from weather and liquidation of projects in backlog. As a reminder, we significantly outperformed during the first half of 2018 as a result of solid project execution and favorable working conditions. It's unfortunate that weather delays and some normal fluctuations in the timing of projects affected the third quarter. That said, we encourage you to focus on long-term results as we do and not quarter-to-quarter fluctuations. As we said in our release this morning, we believe our third quarter 2018 results will be a loss in the range of 20% to 25% - $0.20 to $0.25 per share. As a reminder, interest expense increased during the third quarter as we expensed approximately $2.1 million of unamortized loan cost as a result of the renewal and extension of our credit facility. Additionally, we were in compliance with all loan covenants at the end of the third quarter, our balance sheet remains strong and we continue to have positive cash flow. Please note that these third quarter 2018 results are preliminary and therefore, subject to the completion of our normal and customary quarterly closing and review procedures, including potentially performing an interim goodwill test. Also, we will update our EBITDA guidance for the full year of 2018 on the full earnings call, which we expect to hold on November 1. I continue to be focused on moving our company forward, positioning us for success and increasing shareholder value. I'm confident in our strategic plan, our long-term market outlook and our fundamental business drivers. Separately and completely unrelated to the announcement of preliminary results for the third quarter, Chris DeAlmeida has decided to leave the company after November 2, 2018, to start a new opportunity with a private company that is not a competitor. We will consider both internal and external candidates to fill the CFO role. I'm grateful to Chris for helping Orion grow into a strong company it is today and positioning us for future success. Over the past 11 years, Chris has served Orion with strong leadership and integrity, and we wish him well in his future endeavors. As a result of this change, I've named Robert Tabb, our current Vice President of Finance, as Interim Chief Financial Officer upon Chris' departure. Robert has been an integral part of the senior management team for the past four years. He possesses a deep understanding of our business, markets and the company's strategic plan, and I have full confidence in Robert's abilities. With that, we'll turn the call over to the operator to open up the line for questions.

[Operator Instructions]. And our first question comes from Jon Tanwanteng with CJS Securities.

Can you talk a little bit about the split between the weather and the customary issues? And also discuss what the real nature of the customer delays were and whether it's a permitting that has been awarded since the quarter's ended or that - how should we think about that and when will those be resolved?

Well, it's kind of a number of things - so the split - to answer the first part of your question, the split is pretty even. Yes, we're going to see a pretty even pullback in revenue in both segments. Obviously, Concrete was more affected by the weather in the state. Our Marine side was also affected, as you probably are aware. We had an uptick in hurricane activity towards the tail end of the quarter. And while we didn't suffer any direct damage or anything like that, we did have to secure for those storms, and that obviously had some impact. I think more importantly, on the Marine side, just some of the quicker call-out work, quick-burn work, with the - there's temporary lull on that, we expect, as we get into the back half of the year and into next year, we'll - those will be present as they always are. Other things, just related around awards and timing of permits that affected awards, just caused us to alter our schedule. So work that - some of the work that we thought would actually burn during the quarter on the Marine side will burn in future quarters just related to the timing of awards. So I think all in all, again, as I said in my remarks, it's unfortunate, but it is a lumpy business. It - I don't think anything that we're saying today has any - and certainly, I don't - I have full confidence in our end markets, our drivers, our strategy. It's just kind of the timing of when we're able to burn this work and then also, the weather impact.

Okay, great. And then just as you think about heading into 2019, do you think you'll be at a more normalized run rate? Then I know there is another hurricane in October. So I'm just wondering how much of this pushes through until next year?

Well, as you said, yes, again, there's hurricane activity in October. The weather pattern in Texas is still a little funky with respect to weather. I mean - and I want to point out one thing. I mean, obviously, in Q3 '17, we had a severe impact in Texas with weather, but it was concentrated around a specific time. As we saw in - particularly in September, it was just a number of days, just a significant increase in the number of days of weather that prevented us from pouring concrete. And in some cases, you're guessing whether you're or not you're going to be able to get in and pour or not. It's just really affected the operation. To answer your question on going forward, I think, again, over time, we're going to normalize. I think with respect to the project awards and things of that your nature, of course, we've seen some. One of the big projects that we announced in September, the $97 million project, great award for us. We think it's going to have a - be a great project for us. We actually thought we would get that award a couple of months before we did. Didn't have to do with permitting delays, but it did have to do with steel procurement on that project and whether that would be foreign, domestic around the tariff issues. So again, there's just - there's some lumpiness out there that's causing some impacts, but overall, there's a lot of opportunities, which is, as I just said, the backlog, we've got over $1 billion of the work quoted out there. So we feel real confident about everything. But the weather pattern - as to weather pattern, of course, it's going to normalize over time. But what that means in terms of actual rain events and rain days, we'll have to see.

Okay, great. Just one quick one. You called out the earnings impact in the quarter. Do you have any sense of the revenue impact?

The revenue impact will pull back pretty significantly sequentially. And I think we'll be below - year-over-year, it will be below.

And our next question comes from Min Cho with B. Riley FBR.

Mark, you mentioned you're tracking about $9 billion of opportunities. Is that spread pretty evenly between Marine and Concrete? Or do you see more opportunity in Concrete right now?

I think that is probably a little more weighted towards - well, there's a significant amount of Concrete, of course Concrete - our work in - that we track in Concrete as a subcontractor is relatively short. So we have less visibility in terms of that number. So in any tracking number we have given you in the past couple of years, probably 20% or so of that has been in the Concrete segment, but that's not unusual. Again, that's shorter visibility as a subcontractor. And so it's more heavily weighted towards Marine and/or industrial, and it does include the post-Harvey opportunities that we talked about.

Okay. That makes sense. Also, you talked about the $97 million, the combi-wall in Florida. Have you seen any delays there? Are you expecting potential for delays? Or is that still kind of on track for early 2019?

That's still on track. I mean, again, we've been kind of impacted with some of the storm events here, just not directly impacted like taking hits like the Panhandle of Florida did. But we have had to secure our job sites. So we kind of have the normal secured projects. So I call it slight disruptions. That project is in - getting in the start-up phase and procurement phase, so it's on track to move ahead as we get into '19.

Okay. And then given the miss in the quarter and potential impact in the fourth quarter if the weather continues the way it is, can you talk a little bit about your buyback activity, if you're allowed to buy back shares right now? Just any update there.

We are not - I'll let Chris and Robert kind of touch on that - we are not right now just given where the leverage ratio is.

Yes. Keep in mind that once the leverage ratio drops below two, that allows us - 2x, that allows us the opportunity to do buybacks, which we do have a plan that is out there that we could execute under. Unfortunately, with the activity in the second quarter, that's going to push just above that 2x leverage ratio, still well below, of course, the 3x max. But it will push it above, so that will preclude us from doing a buyback right now.

And our next question comes from Marco Rodriguez with Stonegate Capital Management.

Just wanted to maybe talk a little bit about Q4. Obviously, October in Texas is still kind of underwater in terms of all the rain, and expectations is there is more rain for next week as well. Once that weather pattern shifts away, hopefully, in November and December, how quickly can you regain those projects on the Concrete side as far as starting them? Can you pull them all in into Q4? Or does all of that work - some of that work get pushed into '19?

Well, we'll have to see how much work we can get done when we have favorable weather. I mean, in October, we actually started off pretty decently and able to get some concrete on the ground. But then as you said, weather has kind of been a little bit troubling since then. So I think as the rain lets up, as job sites dry out, we can get back to work fairly quickly and we have been. When we can pour, we pour. But we'll have to see how much of that we can get in. There's only a certain amount of that we can recover in terms of just our normal operations. So whatever we don't do, it's not like work is going to go away. Any work that we don't get done in the quarter, we'll just push forward. But our guys are chomping at the bit to get out there and pour concrete. We've got a lot of work in Dallas. We've been hiring folks up in Dallas at a pretty good clip to take care of all the work that we have out there. It's just a matter of having the weather that we can get out there and get it on the ground. So our guys are ready to jump on it, and we'll jump on it as quickly as possible. So we'll just have to see how the weather plays out as we go forward here.

Got it. And any update in terms of your fiscal '18 EBITDA guidance?

We will do that on the earnings call in a couple of weeks.

And we have a follow-up call from Jon Tanwanteng with CJS Securities.

Can you talk about the pricing competition situation? Do you see that abating or easing at all and if the rain and weather has any impact on that?

Well, I'm assuming you're talking about on the Concrete side. It still remains a challenge on bid pricing. As you know, for some time, we had - that we've talked about kind of the pricing compression, margin compression and pricing in that segment. We - kind of the same comment that I had on the last call is that, it's still with us. We hope it will - we think it will abate as we head into '19. We do - we've got a lot of indicators from a macro level and just what we're seeing on the ground that there's a lot of opportunities coming down the road. So we're very, very positive on - that we'll have a lot of work to go after. And we think that, that should bode well for a relief of some of that margin compression. That said, I will say this, it's only a matter of time before we see improvement there. I think our feeling is this is just a part of a cycle where we're seeing some pressure. But we think long term, there's - we're just very bullish on the Texas economy and what that will mean for placing concrete. And we do expect to get back to kind of a normal bid margin profile at some point. Hopefully, that's sooner than later. And again, with indicators we see out there, we're hopeful that, that is sooner rather than later as we head into '19.

Got it. And then just to drill down on the two hurricanes that hit in the past months here. One, how many projects were stopped because of Michael and have they resumed? And two, have you started to see any of the work that comes out of the back side of these events in the Marine side start to come out or to be talked about in the Army Corps and other places?

Yes. And so it was a handful, probably about a half a dozen or so projects that were kind of impacted. Again, the impacts, as I said, were more just - we had to shut down, we had to secure some. Some were impacted not much, maybe a couple of days, others were a little bit longer than that. And so really, it was more around a short-term delay just to sort of secure, make sure we weren't going to have any issues or anything and - as the weather passed. To answer your second part of your question, haven't seen anything yet and really don't expect to near term. We'll see opportunities like we typically do. Our type of opportunities will come down the road. So those - anything that we sort of expect to see out of these events will be opportunities that we'll see - we'll start seeing sometime in '19 and beyond that. Short term, no real benefit in terms of opportunities, if you will.

Okay. Last question, are you seeing your schedules in Q1 of next year change at all due to the recent events?

So far, not changing. Again, we've got work in backlog. We've got a high-level backlog. We continue to work, to pick up work, which we've been doing. And so again, Q1's usually kind of a seasonally weaker quarter. Q3, it's usually a much stronger quarter. Sometimes, that stuff can kind of get a little turned on its head, as it has this year. So we're working very diligently on our schedules and our procurements. We probably, just from a company standpoint, have a very strong business development group and team that is out there hustling up work, both short term and long term, and doing a tremendous job. And so we're doing everything we can to - that we can do, that we can control to make sure that we can get work and execute work. And hopefully, some of these things that are external and have been impacting us will improve. The weather, like I said, the weather will improve. I guarantee it will improve, I just don't know when. And look we're hopeful that some of these customer delays sort of smooth out and that we can get to building their work.

And our next question comes from Blake Hirschman with Stephens.

So most of my questions have been asked, but just wanted to ask on the backlogs. Apologies if I missed it, but did you give any kind of directional sense as to how those trended by segment?

We did not. We'll update that on the earnings call. It's a little bit more than normal weighted towards Marine just with that large project that we booked. But ex that, it's pretty evenly split, but we'll update that specifically in two weeks on the call.

Got it, okay. And then just one more. You guys mentioned that you're hiring people in the Texas market, I think. But across your markets and in general, are you having any trouble finding people and/or has the inflation in your label - or in your labor been ticking up at all?

You bet. Well, labor is always a challenge. It was a challenge five years ago, two years ago. It will be a challenge two years from now or five years from now. Labor is just always a challenge. But our team does a tremendous job out there recruiting. We've worked very, very diligently to be an employer of choice. Our people are our most important asset and it - that kind of always remains something that we're always attuned to. And I think we've been able to find labor as needed. Again, that's always been a challenge, always will be a challenge. But I think we do a really good job of being a place that people want to work. And so we've been able to meet the challenge, and we expect to meet the challenge going forward. With respect to the inflation, again, that's something we always stay in tune on and are in this market. And we're building that through into our cost structures on these projects as we go, so don't anticipate that being any kind of a challenge for us as we move forward.

Thank you. Ladies and gentlemen, that concludes our Q&A portion of the call. I would now like to turn the call back over to Shane Martin.

On behalf of Orion Group Holdings, we would like to thank you for taking the time to talk with us this morning, and we look forward to speaking with you in the future. Also, if you have any follow-up questions, feel free to give us a call. Thanks, and have a good day.

Thank you. Thank you, ladies and gentlemen, for attending our call today. This does conclude the program, and you may all disconnect. Everyone, have a great day.