Orion Group Holdings Inc (ORN) 2008 Q1 法說會逐字稿

Good day everyone, and welcome to the Orion Marine Group Incorporated's First Quarter 2008 Earnings Conference Call. Today's call is being recorded. For opening remarks and introduction, I would now like to turn the conference over to Mr. Chris DeAlmeida. Please go ahead, sir.

Good morning and welcome to the Orion Marine Group First Quarter 2008 Earnings Conference Call. Joining me today are Mike Pearson, Orion Marine Group's President and Chief Executive Officer; Mark Stauffer, our Executive Vice President and Chief Financial Officer, and Cabell Acree, our Vice President and General Counsel.

Regarding the format of the call, we've allocated about 15 minutes for prepared remarks in which Mike will give an update on Orion Marine Group, followed by Mark who will present our first quarter results in more detail. We will then open the call to questions for the remainder of the time.

During the course of this conference call, we may make projections and other forward-looking statements regarding among other things; our end markets, revenue, gross profit, gross margin, EBITDA, backlog, projects in negotiation pending award; as well our estimates and assumptions regarding our future growth, EBITDA, gross margin, administrative expenses and capital expenditures.

These statements are predictions that are subject to risks and uncertainties that may cause actual results to differ materially. 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.

Please refer to our earnings release issued this morning, May 8, 2008; which is 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 Mike Pearson, President and CEO. Mike-?

Thank you, Chris. Good morning and thanks for joining us. I'm very proud of our team's effort in delivering our first quarter 2008 results which were in line with our growth plan. We continued our philosophy of selecting the right projects, bidding with expertise and monitoring project execution with the goal being to exceed our customer expectations.

By doing so, we laid the foundation towards achieving our full-year goals, as we once again continued to grow our revenue and reported solid EBITDA margins.

Just to hit the highlights; we reported revenue of $52.6 million, a first quarter record. And this is an improvement of 37.3% year over year. Additionally, we continued delivering good EBITDA margins with first quarter EBIDTA margins coming in at 15.3%.

As we've said before, our 2008 general and administrative expenses will be fairly constant throughout the year; therefore, our EBITDA margins will fluctuate with revenue quarter to quarter; which was factored into the goals that we previously established for the year.

During the quarter, we continued our expansion plans by completing the purchase of Subaqueous Services assets to enhance our turnkey capabilities on the East Coast. Also, we began the installation of an offshore [outflow] pipeline near Norfolk, Virginia. And we established an office in Charleston, South Carolina; providing an avenue for growth in the future.

Now before I turn the call over to Mark to discuss the quarter's financial results in more detail, I wanted to spend just a moment discussing the current business outlook in the remainder of 2008.

Although certain economic indicators continue to suggest a weaker U.S. economy, we continue to see robust end markets and strong bidding activity. Currently, we're seeing increased bid activity in the Department of Transportation bridge work, the U.S. Navy infrastructure project, port development projects and also private-sector terminal projects.

On the dredging front, we continue to see the U.S. Army Corps of Engineers manage a flat budget and delay the release of bidding on some dredging projects in the first half of the year. However, we expect this bid activity to pick up in the second half of 2008. While continuing such delays could affect our competitive environment in the future, we have been successful in seeking out and obtaining dredging work in the private sector to replace delayed Corps projects.

Looking beyond 2008, we remain encouraged that end markets will continue to remain robust, through sources such as the Water Resources and Development Act, or WRDA, passed last year; also increased domestic military bid opportunities; and other marine infrastructure spending.

So to sum it up, overall our end markets remain strong, our teams remain busy and we're pleased with our view of the road ahead.

In closing, I'm pleased with our first quarter results. Still, there remains work to do and we must be mindful of our ever-changing and challenging marketplace. However, I believe Orion Marine Group continues to be well-positioned to capitalize on the diverse, well-funded end markets that we serve. We remain encouraged about our 2008 goals and our ability to grow the Company in the future. Still, we will keep a watchful eye on our end markets as we continue to work hard to achieve our desired goals.

With that, I'll turn the call over to Mark Stauffer, to discuss the quarter's financial results in more detail. Mark-?

Thanks, Mike. Thanks for joining us. As Mike mentioned, our results for the first quarter fit nicely into our plans to achieve our goals for the year.

Net income for the first quarter of 2008 was $2.8 million or $0.13 per diluted share, as compared with $2.8 million or $0.17 per diluted share in the prior-year period. After adjusting 2007 first quarter net income per share to the current share count, first quarter 2007 net income would have been $0.13 per diluted share or in line with our first quarter 2008 per-share earnings.

I would also like to remind investors that there can be fluctuations in quarter-to-quarter results due to the timing and mix of projects. For this reason, we suggest investors focus on the long-term and annual results, rather than quarter-to-quarter fluctuations.

Contract revenues for the quarter were $52.6 million, which is an increase 37.3% as compared with the first quarter of 2007; and a first quarter record. For the quarter, 58% of revenue was generated from federal, state and local government agencies, with 42% coming from private industry. This compares to 66% for federal, state and local government agencies and 34% from the private industry sector in the first quarter of 2007.

Gross profit for the quarter was $10.1 million, up $0.5 million from the prior-year period; while gross profit margin was down 5.7 points to 19.2%. During the first quarter, gross profit margin was impacted by additional depreciation cost associated with a recent acquisition; higher percentage of direct cost during the quarter, primarily in materials reflecting the nature of contracts in progress; and utilization of certain cost contingencies on subcontracts. We expect to continue to see this pressure on short-term gross profit margin, as we complete projects from the first quarter.

General and administrative expenses for the first quarter 2008 were $5.8 million, which represents an increase of 41% as compared with the prior-year period; primarily due to amortization costs related to the recent acquisition, a full compliment of public-company expenses and increased stock-based compensation expense. Due to the contract amortizations from our recent acquisition, we expect general and administrative expenses to be up year over year for 2008; but as Mike mentioned, fairly constant quarter to quarter.

As of March 31, 2008, backlog was approximately $141.8 million, which is up $12.2 million year over year. Given the typical duration of our contracts which range from three to nine months, our backlog at any point in time usually represents only a portion of the revenue we expect to realize during a 12-month period. Therefore, it's not uncommon to see fluctuations in backlog sequentially or even in year-over-year comparisons.

As we look at the current bid activity and marketplace, we remain encouraged that we can continue to grow backlog long term. As a reminder, we cannot guarantee that revenue projected in our backlog will be realized or if realized, it will result in earnings.

As of March 31, 2008, we had cash on hand and availability under our revolving line of credit of approximately $23.5 million. In addition, we had another $15 million of liquidity available to the Company at the discretion of our lenders.

To sum up, we reported good results for the first quarter of 2008. As Mike said, we are pleased with these results but we'll continue to keep a watchful eye on the marketplace as we work hard to achieve our goals. With that, I'll turn the call back over to Chris to begin the Q&A portion of the call.

Thank you Mark and Mike. We would now like to open up the call for questions. Melissa, would you please repeat the procedures for placing a question?

Thank you. (Operator Instructions). And we will take our first question from [Fred Monicor] with CJS Securities.

Yes, good morning gentlemen; very nice quarter. I just wanted to see if you could give us a sense for the impact of the [SSL] acquisition on the quarter as it relates to revenue and margin as well as the amortization impact from that during the quarter?

We essentially just had one month of compilation of--

We had about-- roughly about a $1.4 million of revenue generated from SSL, again as Mike said, for the one month; and amortization was about 389-390 around in there.

Great. And then turning to the macro environment which you talked about a little bit; as it relates to state budgets-- how has the state budget kind of constrained state budget spending environment impacting the outlook for work for you for the rest of the year?

Well, most of the states that we're operating in are in pretty good shape, particularly the ones that are oil and gas generating and in fact, the Texas legislature now is faced with a real predicament of how to handle a $15 billion surplus for the next two year's budget. So that's a good sign that their economy is thriving.

I think Louisiana is picking up with not only the oil and gas revenue; but just an injection of funds for hurricane restoration is beginning to materialize and we're very active on the East Coast and Florida with the DOT bridge work. So I think we feel good with what we see and of the top-ten [cities] in the United States that are thriving, four of the top ten are Texas cities. So that's a good indicator to us.

Excellent. And then finally, I just wanted to see if you could give us a sense for how weather in Houston during the quarter impacted particularly your gross margins-- if you could quantify that for us?

Weather really wasn't that much of a factor to us during the quarter.

Okay. Then can you just talk a little bit about gross margins-- you had mentioned that materials or higher raw material component impacted them year over year. Was that a function of higher raw material prices, or just the mix of projects or both?

It's really more a function of the mix of projects that we have; just the nature of the projects that [burned] in the first quarter just had higher material components to them. And as we've talked about before, just in generalities-- that you're not going to mark your materials up as much as you would in other components that make up our costs. So that certainly impacted it.

Great. Well, thanks very much and we look forward to seeing you next week with clients.

Thank you.

And we will take our next question from Alex Rygiel with FBR.

Thank you, good morning gentlemen; great quarter.

Thank you, Alex.

Couple questions; first could you provide us the mix of construction versus dredging in the quarter?

Well, we don't break that out. I think it would be fair to say that it was consistent with historical mix.

Okay. Can you provide a little bit more clarity on the cost contingencies in the quarter?

Yes, as we've talked about before, just as a matter of course-- matter of our project management, built in contingencies; and for various items, as we said weather really wasn't an impact in the quarter but we built in contingencies for other things-- technical challenges or productivity, things of that nature. And we did-- during the quarter on some projects did utilize some of the contingencies.

Okay. You mentioned the Navy picking up. Could you give us a little bit more color on that- how active are you with the Navy right now and how many projects or what does the bidding outlook look like?

Okay. There have been several nice projects for the Navy that are coming out, both in Florida and we missed one job in New Orleans there with the Coast Guard here recently. But all along the East Coast the Navy is picking up several nice projects; dock work that we're real encouraged to see these projects show up. A year ago, we weren't seeing that at all. And I think before the end of last year, we did a little bit of work down in Key West, Florida but those were pretty small projects. And both of the Carolinas and Louisiana and in Florida we're seeing Naval projects materialize now.

That's great. And lastly, you mentioned that you've got confidence that the Army Corps work is going to pick up in the second half. Is there something specific that gives you that level of confidence?

Yes. We've already identified a number of projects that they've come out indicating their roster of intended projects and they seem to be more stacked up in the second half of the year. Our first quarter was pretty busy for us, dredging-wise; there is kind of a lag with Corps work in the next quarter. And it just looks like our second half of the year is going to be much more active than the first half. And I think that not only goes for dredging; it just goes for work in general.

That's great. And that wraps it up right now. I'll get back in the queue. Thank you very much.

And we will take our next question from [Randy Workman] with Baron Capital.

Good morning, guys. Can you give a little flavor in terms of pipeline; I don't know if you kind of look and see the size in terms of the number of dollars behind projects that you think are legitimately up for bid that you think you're going to go in on?

Well, we see a pretty good market in front of us. We've got anywhere from $3.5 to $4 billion of visibility on identified projects; but it's not anything that we publish. It's just something that we monitor and check the trends on. But each division provides input on identified projects that we expect to bid or have prospective work that has been identified and there are also projects we track and we're not sure if they're funded yet or not. But it just looks very good to us that the list is growing and we can see pretty far out with it.

And the other comment I would have there is that we're very-- we're comfortable that the market is there for us to achieve our goals; certainly in 2008.

Okay. Switching gears a little bit; just on the breakout within SG&A for the quarter-- you mentioned a couple of items, including I guess stock comp and amortization from Subaqueous. I think you said amortization was about $400,000 or just under that.

Right.

Is that-- so $1.2 million run rate for that, for the quarter, given that it was a month?

Yes, correct.

And what was the FAS 123 number for the quarter.

It was about 200-250-ish.

Okay. And will that increase dramatically as a result of the acquisition or not so much-- I mean would there--?

No, not so much; no.

Okay. I'm just trying to get to what the run rate SG&A might look like going forward. And I guess the last item there is what do you expect the SG&A component on a run-rate basis would be from Subaqueous? Is that something you break out or what--?

No, we had broken it out but we had said prior to the acquisition was that we expected on a dollar basis that SG&A would be flat, slightly down. If you layer in the-- from '07-- if you layer in the amortization expenses from the acquisition, you can kind of get to where we think 2008 are going to be.

So last year, I don't know you had-- something like $4 million $4-4.5 million run rate in SG&A-

Correct.

If you add in-- I mean you've got some public-company costs as well--

Right.

But if you add 4-4.5 plus 1.2 which is the Subaqueous amortization, and what another million in public-company costs?

Well, I guess if you take 2007, you got one thing. You got the 144A expenses rolling off. You've got public-company expenses rolling on. And so again, flat to down is what we had said prior to SSL coming on line with us. But so-- I think maybe if we could-- that might be something we-- Chris or I could follow up with you on.

Okay, yes. No, I'm just trying to get at what the operating leverage is going forward.

Absolutely.

Great. Okay, thank you guys.

You bet.

And we will take our next question from Jack Kasprzak with BB&T Capital Markets.

Thanks, good morning. I was going to ask I guess, along the same lines of operating leverage- there's already been a lot of questions about some of these cost items. But obviously EBITDA was down a touch year over year, and you talked about a lot of those issues-- some of those issues in the quarter. But looking forward, I mean is there any reason to think that we wouldn't get some EBITDA leverage in 2008- or is this going to be more of a year where it tracks sales growth, because, in part because of the SSL acquisition?

Right, the latter.

Yes. And so I guess I'm just trying to parse this a little bit. There's nothing really in the nature of the projects or what you're seeing on the performance side that would indicate that we might not be getting some leverage here; but rather some of these items that are hitting-- affecting comparisons in the short run?

Well, yes exactly-- and the other thing is, is that again, I would just say, to reiterate-- we're pleased with where we are. We're pleased with how the quarter turned out. I think as Mike mentioned earlier, it's in line with our expectations with respect to achieving our goals for the year.

Okay. I was going to ask too about the project you guys announced last week. Obviously, that's not in backlog as it was in April-- so that's a nice bump to what you reported for your backlog at the end of the year. And that was a private customer. I mean are those types of projects or maybe that one in particular, coming with a little higher margin because it's a private customer? How should we think about that?

Generally, that's the case.

Okay. Good. That does it for me. Thanks very much.

You bet.

And we are moving on to Niladri Mukhopadhyay with Morgan Stanley.

Good morning, gentlemen. Just a very quick question on your 2008 expected revenue growth. A few months ago, you mentioned that your goal was 15% growth for this year. Now including the Subaqueous acquisition, do you have a revised estimate of where you think revenue growth could be this year?

Sure, absolutely. As you know, previously we had said 14 to 16% growth pre-Subaqueous; and if you assume which we had said previously that Subaqueous has projected $40 to $45 million for the full year; so you assume we're going to get 10 months of that. So if you layer that on to our previously announced 14 to 16%, you get-- our expectation is a 28 to 32% revenue growth over '07, factoring in Subaqueous.

Fantastic; thank you very much.

You bet.

And from SMH Capital, David Yuschak has our next question.

Good morning, gentlemen. On the-- in your earlier comments you said you expected some of these cost issues to kind of roll into the second quarter; that you experienced in the first quarter. Could you help us out as far as-- is there just less of an impact on that compared to what you saw in the first quarter or are you going to be using less contingencies in the second quarter than you had to use in the first quarter; could you give us some sense as to how that plays out here in the second quarter?

Actually, we said that probably it'll be about the same as Q1, is what our expectation is. And as we work through those projects and those kind of burn off.

Okay. And then as far as your pipeline of activity, could you give us some sense as to what kind of win ratios you're experiencing now on things you're bidding on and maybe how that bidding process may have-- how many bids maybe you have out against what you may have seen a quarter or two ago-- just to give us a sense as to your wins and the momentum of your quest for bids?

Well, it kind of varies by subsidiary and there's no one answer to that. But-- well it'll range anywhere from 20-25%, something like that.

Yes, historically I think we're in line with sort of where we have been historically and that's anywhere from a quarter to a third kind of win ratio. Nothing's changed there. And I think as Mike touched on, we continue to see-- we're very pleased with the bid opportunities that we see out there.

I mean the case is generally the lower the value of the contract, the higher the bidders that show up and the higher the value- the less amount of bidders. And when you go over $10 million, the threshold is a lot less bidders because of [money] constraints.

Going back to your win that you picked up a few weeks ago; is that something that from our point of view as you look out, you're going to maybe potential for more of that kind of happening as you go through the year because of the robust nature of that? Give us some sense as to what the potential is, for in your case, this'll be kind of an elephant project.

Well, that's a good sized project for us. I mean we've done jobs up to about $45-50 million value. So that's a nice sized project for us. It fits our expertise and we're very comfortable doing those sized jobs. And we have targeted a few bigger projects, but what we're more interested in is an environment where there are very few bidders pursing the work because it requires that right construction expertise that we have.

Okay I think that's if for now. I'll get back in queue if I get anything else, thanks.

(Operator Instructions). We will take our next question from Mario Barraza with Kevin Dann & Partners.

Good morning, guys. For the most part, all my questions have been answered. Just a quick housekeeping on-- just on the tax rate in the quarter; it was lower than I guess what you guys have been historically. Is that, I guess a good run rate for the rest of the year?

No. No, that's not a good run rate. That's just- it kind of was weak. We're assessing where we were with respect to particularly the domestic production tax impact. It's kind of a true up, if you will. And so that's not a good run rate.

We essentially accumulated too much deferred taxes--

Okay. Alright, well, thank you very much.

And we will take a follow-up question from Alex Rygiel with FBR.

Thank you. Did you take any of your dredgers offline during the quarter to do some maintenance work?

We're doing that now. We're starting the first turf overhaul of one of our dredges this quarter. So it will come out of service. And then we'll put it back on line and in the third quarter, do another one right behind it.

So that activity is going to have somewhat of a negative impact on your gross margin and obviously that's already sort of embedded into your thinking, correct?

Yes. Our dredges were pretty active in the first quarter, so it does take one off line in the second quarter.

And on the cost contingencies in the quarter; how many projects were associated with that- what type of projects and how far through those projects on a percent of complete basis are we?

Well, it was primarily three jobs that were affected but we did have some issues with productivity on encountering more trash than we anticipated which drew down on our contingencies. Having said that, we do intend to try claim full recovery of some that lost time and that's in progress. But our accounting procedure is to take the cost when it occurs and we'll continue to pursue any (inaudible).

The one that you're referred to as having more trash; I suspect that was dredging project?

Yes sir; that's right. There were three dredging jobs.

Three dredging jobs. And in any of those three, did you actually end up losing money on the project or is it just less profitable than you anticipated?

It just eroded our margin.

Perfect. Thank you.

You bet.

And we will take another follow-up question from Fred Monicor with CJS Securities.

Yes, hello again. I just wanted to follow up on Randy's questions related to SG&A and trying to get sense for a run rate there. If I'm not mistaken, you also had some charges-- last year you had a one-time impact from some transaction-related bonuses. Is that correct?

Yes, that's correct. And essentially that's why-- let me just kind of go back. The reason why it's bigger-- that stuff is not going to repeat; the public-company expenses are going to layer on, which we'll have the full year of those. Previously-- that's why said previously we expected on a dollar basis, SG&A to be flat to down for '08. So if you start with that premise, and then layer on the impact of the amortization due to the acquisition, that's where we'll wind up we think for the full year, with Subaqueous on top. So you figure we're going to take the bulk of the amortization expense related to that acquisition during 2008.

Okay; got it. And then just one other item that I guess has been impacting SG&A for the last couple of years has been self-insurance claims. Can you tell me a little bit about-- are you seeing any trends there as it relates to regulations; particularly in Texas, helping to bring the level of those claims down going forward?

Yes, absolutely. We're cautiously optimistic that we're seeing some impact with respect to a lessening of the rate of claims against dredgers in general, and us in particular. The recent-- or I say recent, it was a year ago-- statute change in the state of Texas appears to have slowed down the rate at which claims are being filed. So again, we're cautiously optimistic that that's having an impact as well as a number of other things.

Our Vice Chairman of King Fisher, Waymon Boyd, has been very active in representing the industry in front of the state legislature on several occasions. He was just down there a couple of weeks ago and has just done a stellar job in conveying this message to the lawmakers about how important it is to have that venue changed like it was.

Very good; thank you very much.

And there are no further questions at this time. Mr. DeAlmeida, I will turn the conference back over to you for any further or closing comments.

Alright, well I think that wraps it up for the quarter. We thank you for participating. We look forward to talking to you in about three months.

Thank you.

And that does conclude today's conference. We thank you for your participation and have a great day.