Orbital Infrastructure Group Inc (OIG) 2022 Q2 法說會逐字稿

Good day, and welcome to the Orbital Infrastructure Group Second Quarter 2022 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. John Beisler, Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the Orbital Infrastructure Group's Second Quarter 2022 Conference Call. Earlier this morning, the company issued a press release with its second quarter 2022 earnings results. A copy of this release is available in the newsroom under the Investor Relations section of the Orbital website.

Speaking on today's call are Jim O'Neil, Vice Chairman and Chief Executive Officer; and Nick Grindstaff, Chief Financial Officer.

Today, management will review the highlights and financial results for the second quarter as well as recent developments. Following the formal remarks, management will answer questions. I would like to remind everyone that today's call will contain certain forward-looking statements made under the Securities Act of 1933 and Securities and Exchange Act of 1934 as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in these forward-looking statements.

Company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, such as COVID-19, the company's reliance on third-party manufacturers, supply and service -- client service providers, government agency, budgetary and political constraints, new increased competition, changes in market demand and the performance or liability of its products, integrated solutions and services. These factors and others could cause operating results to vary significantly from those in prior periods and to those projected in our forward-looking statements.

Additional information with respect to these and other factors, which could materially affect the company and its operations are included in certain forms the company has filed with the Securities and Exchange Commission. These forward-looking statements are based on information available to Orbital Infrastructure Group as of today, August 11, 2022, and the company assumes no obligation to update these statements as circumstances change.

With that, I would like to turn the call over to Jim O'Neil, Vice Chairman and CEO of Orbital Infrastructure Group. Jim, please go ahead.

Good morning, and thank you for joining us today to discuss Orbital Infrastructure Group's Second Quarter 2022 Results. Before I begin my commentary, I want to thank our employees for their commitment to safely delivering exceptional service to our customers, especially this time of the year when many of our employees are exposed to the risk of heat-related injuries while working in extreme temperatures. Our #1 objective each and every day is for our employees and the stakeholders that we interact with to return home safely to their families. I sincerely appreciate your efforts.

Our name change from Orbital Energy Group to Orbital Infrastructure Group, or OIG, better represents our strategy to build infrastructure across the 3 segments of our business: Electric Power, Telecommunications and Renewables, and supports our goal to provide services that contribute to reducing the world's overall carbon footprint. Our website and other related items will be updated in the next few weeks to reflect this change.

The asset sale of our subsidiary, Orbital Gas Systems, North America to Mangan Inc. is expected next week, and will complete the divestiture of our legacy Orbital Gas operations. The only remaining business in our discontinued legacy gas operations is our VE Technology proprietary sampling growth. We believe there is value in this technology, and we are currently pursuing several avenues to divest this business by the end of the year.

Finally, before I get into my operational commentary, we had stated on our first quarter earnings call that our #1 objective was to restructure our balance sheet, specifically our debt structure. Over the last several months, we have engaged many lenders and equity firms that have presented a wide range of solutions, and we remain deliberate in our actions to achieve the optimum structure for both the company and our shareholders. Nick will provide more details in his commentary.

Now to the developments of the second quarter and our outlook for the rest of the year. Second quarter results continued our solid performance this year with record revenues in the quarter of $93.9 million. Demand for our services continue to be driven by broad-based business strength from utility grid modernization and system hardening initiatives and telecom 5G deployments as well as our reputation for solid and safe execution. We also believe momentum is building for continued profitable growth next year, and we continue to see opportunities for multiyear expansion across our service lines.

Consolidated revenues for the quarter increased 33.6% sequentially compared to revenues for the first quarter of 2022, primarily from the increase in construction activity from our 2 utility-scale solar project awards as well as a ramp in rural digital opportunity fund or RDOF construction under contract in the 5-state area.

Adjusted EBITDA for the quarter decreased 44.7% sequentially compared to the adjusted EBITDA for the first quarter of 2022. This decrease was attributed solely to operating losses experienced on the Black Bear solar project during the quarter. On a consolidated basis, we will increase our revenue guidance for the full year of 2022 to a range of $405 million to $450 million from our previous revenue range of $375 million to $425 million.

Our annual revenue guidance increase is primarily due to the increasing demand for our services in our Electric Power and Telecommunications segments. The increase in revenue is largely under master service agreements and long-term contracts and is offset somewhat by a decrease in uncommitted solar revenue projected in the second half of this year.

Our adjusted EBITDA guidance for the full year of 2022 remains unchanged with a range of $38 million to $43 million as results from our Electric Power and Telecommunications segment operations in the first 6 months of the year were better than expected, and we anticipate these segments will deliver similar results for the remainder of the year, offset by the Renewable segment, specifically margin shortfalls recognized on the Black Bear solar project.

The market drivers and outlook for our business opportunities in our Electric Power and Telecommunication infrastructure segments remain strong. In our Electric Power segment, we continue to experience unprecedented demand from our investor-owned utility customers to provide our skilled workforce to operate electric distribution and substation infrastructure. In our Telecommunications segment, we are experiencing increasing demand for our engineering design and construction expertise to support the rollout of RDOF programs as well as enhancements to 4G LTE and the upgrade of the 5G spectrum.

Also, the synergies we are experiencing from our telecommunication tuck-in companies are bringing opportunities to provide additional engineering design and construction services with existing and new customers.

Last month, the bipartisan infrastructure investment legislation that was enacted will bolster an already prolific market environment in both our Electric Power and Telecommunication segments. This is a historic investment in the nation's core infrastructure and includes $130 billion to upgrade the nation's electric grid and expand broadband access to underserved areas. These funds will be deployed over the next 5 years through 2026.

The utility scale solar market so far this year has been negatively impacted by higher commodity prices and supply chain constraints exacerbated by the Department of Commerce anti- circumvention investigation. These headwinds have been somewhat mitigated through an executive order of President Biden on June 6 and declaring an emergency with respect to the inadequate supply of solar cells and modules, which resulted in regulation for up to 24 months of duty free access to solar cells and modules from Southeast Asia.

Additionally, the recently enacted Inflation Reduction Act will provide tax credits to companies building renewable energy products in America. We believe legislation over the past 2 months is a positive for the renewable industry and will be a catalyst to increase solar project developments in the future.

We remain very confident in the outlook for our business, our Electric Power and Telecommunications segment outlook for the remainder of the year and beyond remains strong. We acquired 2 exceptional platform companies that are performing beyond our expectations.

We've acquired tuck-in companies into our telecom platform or synergies to expand our service offerings and customer base are being realized as well as leveraging synergies in our Electric Power segment to improve our legacy electric power and foundation operation performance and profitability.

In our Renewables segment, we will shift our utility-scale solar strategy away from providing EPC or engineering procurement and construction services to be a specialized contract to providing skilled resources to EPC companies. This strategy reduces the risk profile of being an EPC and margins are enhanced as we don't have to share profits with our joint venture partner. The Jingoli JV will continue to operate. However, Jingoli will take on the EPC role, and Orbital Solar will provide construction services to the JV.

Our JV relationship with Jingoli is not exclusive, and we are currently in discussions with other EPCs to be a contractor on their projects.

I will now turn the call over to our CFO, Nick Grindstaff, for his financial overview. Nick?

Thank you, Jim. Today, we announced record quarterly revenues of $93.9 million for the second quarter of 2022. Loss from continuing operations net of income taxes was $30.1 million with an adjusted EBITDA of $2.1 million. For the second quarter, loss from continuing operations was $0.31 per share.

In the second quarter of 2022, our consolidated revenue increased 33.6% as compared sequentially to the first quarter of 2022. This increase in revenues is the result of our strong backlog and is an indicator of our annual revenue potential from a run rate perspective.

Adjusted EBITDA for the second quarter of 2022 was $2.1 million, a decrease of $1.7 million as compared sequentially to the first quarter of 2022. This decrease is the result of a loss realized in our Renewable segment for the Black Bear project. I will discuss this further with the segment information.

In the second quarter of 2022, the Electric Power segment increased revenues 4% to $41.3 million compared to the first quarter of 2022.

Adjusted EBITDA for the segment was $8.1 million or 19.6% of revenues for the quarter. These results were anticipated as we have experienced steady growth in master service agreement revenues with our investor-owned utility customers since our inception in this market in early 2020, and we expect this upward trend to continue.

Over the same period, the Telecommunications segment increased revenues 26.7% to $20.4 million with adjusted EBITDA of $2.7 million or 13.2% of revenues. This revenue increase was also anticipated as we are experiencing continued ramp in RDOF construction activity throughout the first half of this year.

The Renewables segment had an increase in revenues of 122.8% from the first quarter of 2022 to $32.3 million with an adjusted EBITDA loss of $4.8 million. The increase in revenues can be attributed to both Lightsource BP projects, the Black Bear project in Alabama and the Happy project in Arkansas. The EBITDA shortfall in the renewable segment can be attributed to weather and project execution issues on the Black Bear project. This project will be substantially complete within the next 2 months. The Happy project is achieving cost and schedule targets to date. This project will complete before year-end.

Certain holding company costs exist outside of the defined operating segments. For the second quarter, these costs were $3.9 million.

Also in the second quarter, we incurred some noncash charges that resulted in a loss of $9 million, primarily made up of the following items. We recorded an $11.6 million expense for a fair value adjustment to the derivative related to the frontline power seller finance debt. In addition, we recorded $2.3 million of expense for fair value adjustments on the financial instrument liability related to our syndicated debt. This was partially offset by a gain of $4.9 million for the quarter related to fair value adjustments on warrant liabilities.

Our backlog was $495.3 million at the end of the second quarter of 2022, a slight decrease of 3.5% from the first quarter of 2022. However, it is important to note that backlog increased in both the Electric Power and Telecommunications segments as we continue to build recurring revenue streams under master service agreements with our customers, offset by a reduction in backlog in the Renewables segment due to the realization of revenues against the Renewables backlog.

Improving our capital structure continues to be utmost importance. We continue to evaluate multiple term sheets from lenders with varying structures. We currently have tranches of debt that are due in the next 9 to 18 months. These tranches of debt have high interest coupons and require significant principal payments. The structure of this debt has a material negative impact on our cash flow.

We are being very pragmatic and diligent while considering alternatives available to us to make certain we put the company in the best position possible with regard to capital structure.

Turning to guidance. Although our consolidated adjusted EBITDA guidance remains unchanged, and we are increasing our consolidated revenue guidance, and we are adjusting guidance across the segments with regard to the mix of revenue and adjusted EBITDA. For full year guidance, we expect a consolidated revenue range of $405 million to $450 million and an adjusted EBITDA range of $38 million to $43 million. This reflects year-over-year revenue growth of 412% and an improvement of $67.5 million in adjusted EBITDA for the full year 2022 compared to 2021 from the midpoint of our guidance.

As it relates to the Electric Power segment, we are increasing our expectations for both revenue and adjusted EBITDA and believe 2022 revenues will range between $160 million to $170 million, with adjusted EBITDA margins in excess of 20%. Any storm revenues we might realize in 2022 is not included in this guidance.

In our Telecommunications segment, we are increasing our revenue guidance to a range of $82 million to $92 million with adjusted EBITDA margin expectations for this segment in the mid-teens.

Finally, in our Renewables segment, for the full year of 2022, we are lowering our revenue guidance to a range of $165 million to $185 million, with adjusted EBITDA margins for this segment in the low single digits approaching breakeven for the year. This lower revenue range is primarily due to a reduction in uncommitted work that is now unlikely to produce revenue until 2023.

As a reminder, Orbital Solar provides engineering, procurement and construction solutions to the utility scale solar market through its joint venture with Jingoli Power, where Orbital Solar will consolidate 100% of revenues generated but we'll absorb cost in the project to pay Jingoli for their participation, which contributes to a lower margin profile for this segment.

Certain holding company costs exist outside of the defined operating segments. We continue to estimate these costs to be $15 million for 2022. You will find a reconciliation of EBITDA and adjusted EBITDA, both non-GAAP measures to loss from continuing operations, a GAAP measure as a supplement to our second quarter earnings press release as it relates to our expectations in 2022.

Notwithstanding the loss in the quarter in the Renewable segment, the company continues to improve its financial results sequentially quarter-over-quarter. The Electric Power and Telecommunications segments present organic growth potential at unprecedented levels as is reflected in our backlog and revised guidance for these segments. These improving metrics position us well toward restructuring our debt, and we expect to have this completed in the fourth quarter.

And now I'll turn the call back over to Jim.

Thank you, Nick. In conclusion, we're making significant progress in advancing our infrastructure strategy. We have a very solid foundation in place in our Electric Power and Telecommunication platforms, and we'll continue to build profitable revenues from very stable, long-term master service agreements and customer contracts for years to come.

I'm very confident in our shift to a self-perform model in our solar division, which is expected to derisk our contract structure on future project awards and improved margins. This strategy should reduce potential earnings volatility going forward.

Restructuring our balance sheet remains a top priority. And as Nick detailed, we are moving down several paths to find the best solution to enable the company to profitability and growth and increase shareholder value. The end market dynamics, specifically in our electric power and telecommunication industries remained very strong and dynamic for years to come. We have significant opportunity to increase shareholder value, both organically and through acquisitions once our balance sheet challenges are behind us.

Operator, that concludes our prepared remarks, and we'll now open the call to Q&A.

(Operator Instructions) And the first question will come from Eric Stine with Craig-Hallum.

So maybe can we just talk about solar a little bit? I think good news that you're making a little bit of a shift there given some of the volatility and the challenges. But just curious what -- if you look at a representative project going forward, maybe how would your positioning change? And then maybe just some thoughts on what the margin profile would be for this new stance in that market?

Yes, that's a great question. I mean, look, our solar business has evolved. We started as EPC. We've used subcontractors to some extent on the first 2 projects that we've been awarded this year. We've kind of shifted some of that to take control, if you will, to self-perform and things are going much better, that the margin profile of that business should be 12% to 15% margins. And right now, we're taking on more risk as an EPC and we're delivering mid-single digits.

So as a subcontractor to an EPC, your contract risk is much less. You perform it from more defined scope of work, and certainly, there will be a lot less volatility from the standpoint of earnings streams from those contracts that are derisked.

Do you think that the margins -- you mentioned that your expectation as it stands today, would be 12% to 15%. I mean is that -- with you being more of a subcontractor in that role, would it be in that 12% to 15%? Or is it, I guess, more or less than that level? Or what's your expectation?

No. I mean, that's where the market is right now, it's 12% to 15%. That's what -- that's the margin profile of the subcontractors that we have used almost of our work when we compare it without that as an EPC. And that's about where the market is today for that business.

And then obviously, a lot of it has to do with your ability to be productive, too. But we brought on a good team and we've got a lot of confidence in that has a lot of experience in building solar, specifically the mechanical and some aspects of the civil part of the work that we can be very good at.

Yes. And so I mean, I guess, to sum it up, probably a fair amount less in terms of revenue but hopefully or ideally equal or greater EBITDA contribution? Is that kind of the thought?

I don't think the revenue should be any less. I mean I think there's going to be lots of opportunity. I mean, obviously, it depends upon the market and the market as a whole right now is down, the solar market. But I do think we're going to see some recovery. Our revenue shift for the end of the year was -- we did have some EPC opportunities, but we pulled away from that to more self-perform. And so I believe we've got like net $40 million in uncommitted in solar for the rest of the year, which I think is very reasonable for this new strategy to be a subcontractor.

But next year, I think there's going to be some significant opportunities, but that will evolve and we'll communicate more on that in the future.

Got it. Okay. Maybe next one just on -- I know you obviously, figuring out the balance sheet and restructuring the debt that's top of mind, once that's done, I mean, do you feel like there are still areas that need filled in? I mean, is it more of a need to be filled in or a want to fill in, in Electric and also in Telecom?

It's the market. I mean the market is -- there are significant opportunities for us to grow organically. And there's some acquisitions that we certainly could execute on that would provide us additional services that we could provide to customers better opportunistic, expand our geography and our customer base opportunistically, synergistically with the platforms that we have.

I mean the balance sheet is the big headwind here it's not the market. We've got plenty of opportunities to grow organically. And we've done quite a remarkable job growing organically so far to date. I mean these companies that we acquired and the tuck-ins that have grown at a strong double-digit organic rate so far.

But I would still say that there's opportunities to even increase that organic growth and do some really good synergistic acquisitions once we get the balance sheet challenges behind us, which we're confident we will here in the not-so-distant future.

The next question will come from Jeffrey Campbell with Alliance Global Partners.

First, I'll begin with congratulations on the strong revenue in the quarter. Jim, the MSA remarks seem to refer to the former Orbital Power segment. I was just wondering how is the integration of Orbital Power and frontline progressing, particularly regarding improvement in Orbital Power margins?

So Orbital Power is making great strides every quarter. They're almost like a pseudo tuck-in into frontline now even though they were there before we bought frontline. But the best practices and synergies that frontline brings over the power have been significant, and we're beginning to see that. And obviously, that is part of the increased guidance is not only the better-than-expected results from front line, but the improved performance in Orbital Power has allowed us to raise guidance, I would say, significantly in that segment for the rest of the year.

Yes. Well, that was sort of my thought. And would you say that the tuck-in effort is progressing faster than you might have expected earlier, and that's part of the reason for the increased guidance, maybe had a more conservative view earlier, but now we have more confidence in the improvement?

Yes. I mean I think it's a combination of things, right? I mean I think the biggest headwind to us being conservative was again the balance sheet because we've got untapped potential to grow the business. But yes, I mean, we felt like going into the year with supply chain challenges and everything else that we just needed to be prudent about our guidance in that sector, but those issues seem to be working out. And our investor and utility customers have been fairly active as they have been for the past several years in growing CapEx.

And Telecom as well. So telecom has got similar momentum in the business rolling out infrastructure, specifically on these RDOF projects, which are going really, really well. The guys are doing a really good job.

Okay. With regard to the change in solar strategy, is this going to affect the backlog in the future, meaning will the future business be booked in any different way than it has been in the past?

No. I think, if anything, it will provide more certainty in backlog. And look, it's just a reset, right? I mean we're resetting. So it's kind of like, okay, we're not pursuing these EPC projects anymore. We're going to pursue work as a subcontractor. So -- and this reset just recently happened. So we'll -- we've got -- we're talking to many different EPC players, some that we have relationships with from prior lives. And I think that business will build here in the near term.

We should see some significant progress, I would say, over the next 3 to 6 months on building backlog in that segment with our new approach.

Okay. You mentioned how some of the GTS tuck-ins are leading more work in the field. I'm just wondering if you could maybe provide an example of one sort of illustrates that point.

Yes. I mean we've almost tripled IMMCO's engineering group. We've added several hundred workstations to provide more wireless or 5G type engineering customers directly, which is leading to additional construction opportunities.

The small CFS acquisition that we did that I said would probably be impactful, most likely in 2023, we're seeing opportunity sooner than that. And I think that's part of the increase in the guidance there, is that we're going to become a Tier 1 provider to new customers, which is good.

So that's evolving. I mean the tuck-ins are doing exactly what we expected. And that's really the crux of our strategy, right? I mean we've got 2 really, really good platforms and we want to opportunistically do tuck-in acquisitions that enhance the services that we provide our customers, and we'll bring in new geographies to new customer bases.

Okay. And for my last question, just broadly, on the cost and supply chain front, are you experiencing any meaningful inflationary pressures or are having any issues procuring necessary components or equipment?

I mean, there's inflation that's impacting everybody in all industries. But fortunately, our customers are certainly in the same environment and understand the costs have increased. So it hasn't necessarily impacted the bottom line.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jim O'Neil for any closing remarks. Please go ahead, sir.

Thank you, operator. And this concludes our second quarter 2022 earnings conference call. We appreciate your support and participation and look forward to following up with many of you here in the near future. And have a great rest of your day. Thank you. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.