Orion Group Holdings Inc (ORN) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Orion Marine Group, Incorporated's Second Quarter 2008 Earnings Conference Call. Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. Christopher DeAlmeida. Please go ahead, sir.

Good morning, and welcome to the Orion Marine Group's Second 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 this 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 second quarter results in more detail. We will then open the call up 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, revenues, gross profit, gross margin, EBITDA, backlog, projects in negotiation and 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 risk 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, August 7, 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. Despite some challenges in the second quarter, we did achieve good overall results, and we improved our EBITDA margins over 2007's second quarter results.

We're very pleased with our performance on projects that involve bridge construction, marine docks, outfall pipelines, and maintenance of marine facilities during the quarter. Additionally, we continue to be pleased with the integration of Subaqueous Services and its contribution to our results.

For the quarter, we reported revenue of $67.1 million. This is an increase of 30.3% year over year, while delivering good second quarter EBITDA margins of 13.8%, which were up slightly year over year. As we previously announced, our second quarter EBITDA was impacted by cost overruns associated with production issues that we identified on two dredging projects on the Western Gulf Coast, which we did complete during the second quarter. Still, our team worked hard to overcome these challenges and continued to deliver good EBITDA margins.

Overall, I feel we had a good quarter, and I'm proud of our team's efforts and focus.

Before I turn the call over to Mark to discuss the quarter's financial results in more detail, I want to spend a minute updating you on what we're seeing in the current competitive environment and our outlook for the remainder of 2008.

Also, I want to say a quick word regarding the weather here in Houston earlier this week. As you know, Tropical Storm Eduardo made landfall east of Galveston, Texas on Tuesday morning, and it brought with it winds in excess of 60 miles an hour and heavy rain. As with any storm, we activated our hurricane plan and secured all our job sites along the Upper Gulf Coast, and while this storm caused a short disruption to these jobs, it did not cause any major damage to the job site or our equipment. All of our jobs are now back up and running, and we do not expect this will have a material impact on our third quarter results.

Now, turning to our outlook, as we've said all along, we have solid end-markets that are well funded. We have good drivers for continued long-term growth. As we look over the next few years, we expect our end-markets will continue to see robust bidding activity as port expansion continues, U.S. infrastructure is updated, and the cruise industry continues to expand.

Specifically for the remainder of 2008, we expect to see continued strength in our end-markets that should provide adequate revenue opportunities to meet our full-year 2008 top-line revenue growth, and the goal was 28 to 32%.

However, while the U.S. Army Corps of Engineers has begun releasing projects in the third quarter, we believe the pace of projects involved in dredge and services to be released and the resulting margin pressure in the Western Gulf Coast market will limit our ability to fully recover the negative margin impacts from the two dredging projects that I'll mention.

As a result, we now expect our full-year 2008 EBITDA to be in the range of 14 to 16%, which is lower than our initial goal of 17 to 19%.

Looking beyond 2008, we believe dredging projects that are being deferred today will become bid opportunities in future periods for the ongoing maintenance of the Gulf Coast infrastructure.

In addition, we expect our end-market strength will continue, and we remain comfortable with our goal of long-term annual top-line revenue growth, averaging 15%, while achieving average annual EBITDA margins of about 18% over the long term.

Of course, as we head into 2009, we'll continue to keep a watchful eye on the competitive landscape and the general economy to see if there are developments which could impact margin or revenues.

In closing, despite the short-term pressure I just spoke to, we remain one of the margin leaders in the industry and continue to have good long-term revenue and margin drivers. Additionally, our business remains solid with a strong balance sheet and solid end-markets, with anticipated opportunities for growth through both organic expansion, establishment of new greenfield offices, and potential acquisition opportunities. As always, we continue to execute our growth while focusing on long-term shareholder value.

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

Thanks, Mike, and thanks for joining us.

As Mike mentioned, we faced certain production challenges in the second quarter that, as previously announced, made an impact on our gross margin and, therefore, our net income.

Net income for the second quarter 2008 was $2.4 million, or $0.11 per diluted share, as compared with $2 million, or $0.11 per diluted share, in the prior period.

Without taking away from Mike's comment about margin pressure, I would 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.

Of the $67.1 million in contract revenues for the second quarter, 45% was generated from federal, state, and local government agencies, with 55% coming from private industry. This compares to 56% from federal, state, and local government agencies and 44% from private industry for the second quarter of 2007.

Gross profit for the quarter was $9.8 million, down $1.2 million from the prior year, while gross profit margin was down 6.8 points to 14.7%, primarily as a result of the two projects we mentioned earlier.

General and administrative expenses for the second quarter 2008 were $5.7 million, which represents a decrease of $1.5 million when compared with the prior-year period, primarily due to one-time 144-A transaction expenses in the second quarter of 2007, partially offset by second quarter 2008 amortization of intangible assets acquired from Subaqueous Services, as well as increased public company expenses.

As we have said before, we expect full-year 2008 SG&A expenses will be up year over year due to contract amortizations from the Subaqueous Services acquisition.

As of June 30, 2008, backlog is approximately $152.1 million, which is up 26.1%, or $31.5 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 is not uncommon to see fluctuations in backlogs sequentially or even in year-over-year comparison.

As a reminder, we cannot guarantee that revenue projected in our backlog will be realized or if realized, will result in earnings.

As of June 30, 2008, we had cash on hand and availability under our revolving line of credit of approximately $22.3 million. In addition, we had another $15 million of liquidity available to the Company at the discretion of our lenders.

To sum up, we continued our solid financial performance during the quarter despite the challenges we faced. Without the impact of the two dredging projects we discussed, our results for the quarter would have been in line with our expectations.

As Mike mentioned, we had strong performance on projects involving bridge construction, marine docks, outfall pipeline construction, and maintenance of port facilities during the quarter. Overall, we remain optimistic about our long-term outlook, while we continue to work hard to deliver long-term shareholder value.

With that, I'll turn the call back 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 to questions. [Cerblan], would you please review the process/procedure for placing a question?

(OPERATOR INSTRUCTIONS)

We'll have our first question from [Fred Bonacore], CNJ Securities.

Yes, good morning, gentlemen.

Morning, [Bonnie].

Just wanted to touch base on the Corps dredging projects. Could you characterize maybe and quantify in some way the projects that actually have come out in Q3, and maybe give us a sense for what these projects represent as the whole of what you're expecting to come out over the next several months and quarters?

Okay. Just, first of all, let me speak to the first half of the year. It was pretty quiet with the Corps the first six months of the year and very slow in Q2, but we are identifying now numerous projects that the Corps has advertised for solicitation, and just in raw terms, just for the Corps alone, we expect about $75 million of Corps projects to be bid on between now and the end of the year, and that's just on the Western Gulf side. I would point out that the Eastern Gulf and Eastern Seaboard has been much more active with dredging prospects, but it's all non-Corps, private.

Got it, got it. And so you said that's 75 million to be bid on between now and the year, and your win rate tends to be -- can you remind us? What's it, the 25 to 30% range?

Yes, we average about 25% to date just this year.

Got it. And you said what's going on in the Eastern Gulf and the East Coast is largely private dredging, and that sounds like it's kind of a good thing. Can you determine at this point if the increase in your private industry as a percentage of your total revenue is actually a trend, or is this just something that's anomalous during the quarter?

Well, we've certainly seen a shift toward the private sector, and one of the good things about having as many end-markets as we have is we go where the work is and where we can obtain the best margins. And with this being a political season, so to speak, it's been much easier to find opportunities in the private sector. The issue with the Corps is the pace at which they put out bids --

Right.

-- and we'd have no control over that. But I'm very pleased with the private sector dredging opportunities that we're now beginning to see as a result of diversifying our equipment mix on the Eastern seaboard for this very reason so we wouldn't be solely reliant in dredging just with the Corps.

Excellent. And just one final one. In terms of the Texas DOT, have you seen any change there? I know that they've been putting on a big budget surplus but hadn't really been letting that out as it relates to projects that you can work on. Has anything changed there?

No, there's not any significant change. Again, refer to the issues going on in Congress right now with this being an election year are causing some apprehension, I guess, as to getting [safety loop] finalized for 2009 and beyond.

But some of the good things that we've seen take place is that the government's now approved a $4.5 billion budget for the highway program, and that's on the bridge side, to study the condition of bridges and prioritize bridges and determine which ones need to be replaced or repaired, and that is a very important thing for us to see happen because it just means that they're going to tee up bridge construction work as a priority over regular road and highway maintenance. So I'm pleased about that.

But getting back to [Textdot] itself, if you just look at it with what's on the table today, it would appear that Textdot's headed for a budget shortfall of about $859 million, but we looked at a recent Textdot commission meeting that took place in June, and from the transcripts that we read, we believe that everyone feels that the U.S. government is going to eventually find a way to fund any shortfalls, especially in light of the 2010 reauthorization, which is basically renewal of the [safety loop].

So I think things are beginning to line up. They will look good for our type business.

Very good. Well, that's very helpful. Mike, Mark, and Chris, we look forward to seeing you at our conference next week.

Thanks.

Thanks.

We'll go next to Jack Kasprzak, BB&T Capital Markets.

Thanks. Good morning, everyone.

Morning, Jack.

I guess Mark sort of -- Mark did allude to this in his comments, but I just want to make sure I understand the impact of those two problem projects in the first half of the year. Basically, without those -- or if those projects had gone according to original design or plan, is it right to say the EBITDA margin in the first half of the year would have been in that original guidance range, you know, 18 or so percent? Is that the sort of impact we're talking about?

Well, Jack, I would answer it this way is -- of course, we didn't give the goal for -- by quarter or for first half of the year. Our goal was stated for the full year. But I would say that if those projects were normalized, and of course, we quantified the impact of those projects earlier in the 8-K, that we would be pleased with first-half results.

And can you tell us or some order of magnitude over time what percent of your backlog now is dredging versus, I guess, two or three years ago, when the Army Corps budget had peaked? How -- can you give us some order of magnitude of how far down it's come?

Well, if you look just at the Army Corps, piece for the quarter, I think our federal -- the federal share of that government -- or, excuse me, the overall was down to about 10%, and of course, the predominant amount of that federal work, although we did have a USDA job going on in the quarter, but the rest of that would have been predominantly Corps stuff. So that's down from historical perspective. But I would say, in general, because we're also looking at private sector projects on the dredging side and also with the addition of Subaqueous, I would still say that it's dredging -- projects involving dredging services are in about the same range as they have been historically. It's just it may be shifting a little bit from federal to local or private, but the make-up is probably about the same.

So does that -- so that implies that you guys thought the percent of -- with the Corps maybe picking up in the second half of this year, the percent of dredging work would go higher than it's been historically?

Well, I think -- I think, yes, what we're saying there is that depending on the pace of the projects that come out with the Corps and the margin pressure that kind of goes hand in hand with the pace, that's where we expect to see the impact.

Okay. The Corps -- these dredging projects from the Corps, I mean do they vary in size widely, or are they generally somewhat similar size? Can you give us some idea there?

They vary in size. I guess, as an average, anywhere from 1 to 5, and there are some that are bigger, 15 to 20, if they're out in the deeper depths, but bread and butter is kind of 1 to 5.

And just another comment I'd like to reiterate. I think we were surprised with the slow pace in Q2 with the Corps. It was -- compared to prior years, it just seemed to be a very quiet period.

And so generally those were smaller projects. You wouldn't announce those individually, and so we wouldn't necessarily know during the quarter if you were winning more Corps dredging work because those aren't projects you would announce.

Well, generally speaking, we wouldn't now, although I would say that that is public information, but --

Right.

-- we wouldn't necessarily announce those.

Well, public from the Corps, right?

Public from the Corps, yes.

I'm just saying from you guys. Okay.

And it's not like we didn't bid anything during Q2. We did bid some Corps projects. We just weren't the low bidder. And --

Gotcha. Okay. Thank you very much.

You bet.

We'll go next to Trey Grooms, Stephens, Inc.

Good morning. Just to touch on your last comment, Mike, saying you weren't the low bidder on some of these dredge jobs, and I think you touched on in your comments, as well, can you kind of update us on are you seeing -- with that, are you seeing more aggressive bidding? Is this -- is it more across the board? Is it more just dredging, or is it -- can you give us an idea and a little color on what's going on there?

Also, with the competitive landscape on the construction side, are you seeing any new entrants coming into that side of the business?

Well, certainly on the smaller bids, we are beginning to see some aggressive pricing, which is not unusual when you have downturns in other sectors, like the commercial sector.

I think on the dredging side, specifically, yes, obviously we had some competitors that for whatever reason chose to get very aggressive and, I assume, just to keep equipment working on their side.

But we have a very disciplined approach to going after work, and we're not going to bid below our cost, and we're all about margins, so we have seen a few, let's just say, irrational pricing in a few sectors, a few regions, particularly the Western Gulf.

And just to follow up on that, Trey, too, is the pace of the projects sort of has -- it drives, if you will, what Mike just talked about. I mean if there's a good slug of work coming out, everybody knows it. They're confident that there's going to be -- people are going to have full plates. It has one dynamic on the pricing. If the pace is sort of slow and, again, we get into sort of an uncertain budgetary process with these continuing resolutions, and if we see sort of what we saw last year, that impacts the pace at which the Corps puts projects out.

And to the extent there's sort of that uncertainty in the pace, I will say, that can put pressure on how people price in the margins, and I think that's what we're sort of speaking to in the back half of the year is that we believe that this could be an issue given that it's a political year, the budget process is -- it's reasonable to believe that it's going to be similar to what we saw last year with a series of continuing resolutions, and so that could impact the way the Corps -- the pace at which they put projects out for the -- particularly in the Western Gulf.

Thanks. That's helpful. You guys had talked about taking some dredges down this year, I guess, in the second half for some heavy maintenance. Did you guys end up doing any of that in the quarter?

And then, also, kind of what are the plans for the rest of fleet? How long will it take to finish up that heavy maintenance you guys have planned, I guess, kind of getting ready for the ramp-up in '09?

Okay, good question.

Well, we had three dredges in the Western Gulf that we planned to take out of service to repower, and one on the Eastern side with Subaqueous, and we completed one repowering on [Leonard Fissure] -- I'm sorry, on the [JM], and we intend to do the [Everett Fisher] this quarter, in the third quarter. And we also did in the second quarter a repowering of the 24-inch dredge, [CK Huggins], over in Florida. So we did have downtime for that.

We will have the 24-inch dredge in Florida up and running here before the end of this month, and that leaves us one dredge to be repowered in Q3, and we're looking at one dredge to be rescheduled for the first quarter of '09 simply because we got a long-term -- I say long-term -- about a four-month project on one of the dredges there. So we're still on track to get our repowering program substantially behind us this year, and that's certainly had an impact on our utilization for the year, as we expected. So I think utilization this year will be down from prior years because of all this repowering.

But having said that, we'll be able to enter 2009 with more efficient dredges, more modern, reduce our NOX emissions, and reduce -- and, most importantly, reduce our diesel fuel consumption.

Okay. And can you give us any sort of idea of what the CapEx is on these type of -- on the heavy maintenance you've got planned and kind of how that's modeled into your CapEx thinking for the year?

Sure. It was [inaudible] about a $5 million program on the repowers. Actually, with the [CK Huggins], probably about a $6.5 million program. About $3 million of that, though, is slated to be paid for by the State of Texas under the TERP program, or the Texas Emissions Reduction Program. So a good chunk of it's factored in to -- or, excuse me, reimbursed by the State of Texas.

So the $3.5 million or so is factored in to the previously announced CapEx numbers, and the original announcement was in the 12 to $14 million range, and of course, with Subaqueous, we bumped that range up $2 million. So those repowers are all -- and that's, of course, net of the TERP reimbursement, but that's been factored into the numbers we've announced.

Okay, and then just one more, and I'll hop back in queue. Mark, could you -- if you've already touched on this, I apologize, but could you give us what SSI was in the quarter?

Well, we don't break that out, but I will say that they did contribute to the quarter. We're pleased with their contribution and where we are with them. I will say that we're also pleased with the year-over-year performance if we -- you know, excluding Subaqueous. But we haven't split that out publicly.

Okay, thank you.

Go next to Mario Barraza, Kevin Dann and Partners.

Hey, good morning, guys.

Morning.

How're you guys doing?

Good.

That's good. Just have a question about your contracts going forward. Are you seeing any contracts being delayed right now that you've already bid on?

And how have you structured them to account for [safety see-a and alltec] in your raw materials pricing? Are you guys able to easily pass those along to your customers?

Yes, we've been very successful at passing that along, and any jobs that have a delayed award, that's the first thing we look to to see if our vendor or commodity quotes the validity of expired and we adjust accordingly but haven't had any material delays on contracts.

Okay. And have you guys seen, just in the bidding process, any more traditional highway construction firms coming into the mix? Or have you seen just more outbidding entries as of late?

The only, I guess, entry we saw was this year one competitor came in and took some port work here at Houston, a major project, and one in -- I think it was Freeport. You know, you're going to see that from time to time. If there is a wharf that can be built from land, it's not unusual to see a land contractor show up. But some of these guys have struggled with it, and we'll wait and see how this competitor does.

But it's not really a concern to me because we're doing exceptionally well on the marine construction side, and I think our construction -- marine construction subsidiaries are really performing well, and we see good markets. You can't win every job, so I have seen on the East Coast not any new bidders showing up, but we have seen the bidders list getting a little bit bigger on a few select bids. But all that does is encourage us to go find an opportunity that has less competition, and we're very proactive in doing that.

Okay, great. Thanks, guys.

You bet.

We'll go next to Alex Rygiel with FBR.

Great. Good morning, gentlemen.

Morning, Alex.

A couple questions. First, how do the margins in the private dredging business compare to the federal business?

You know, it's really not any significant difference. It's a matter of the scope of work and the difficulty and a matter of the amount of competition available at the time makes a judgment. It's not whether the client is private or federal.

Okay. As it relates to acquisitions, what does your pipeline look like today?

We're still actively looking for opportunities, and it's not anything I can comment on today, but we're not idle in that department. It's just a matter of timing, but there are opportunities out there.

Any change in acquisition pricing out there in the market given the credit market turmoil over the last nine months?

Well, I mean we would anticipate that there's -- certainly the environment today is different than it was six months or eight or a year ago, but as Mike said, we sort of intend to be opportunistic in looking at what's out there, and conduct or look at those opportunities in light of the current environment.

Could you quantify your revenue from [safety loop]?

Well, that's kind of a difficult thing. If you -- I mean just because we haven't put that out publicly, but if you look at -- you know, for the quarter, about 12% of our revenue came from the state sectors, and I would say that a good vast majority of that is sort of DOT-type work. And that kind of compares to about 7% in the prior quarter -- prior-year quarter, 2007 Q2.

You know, kind of type of projects we've been doing consistently with [Textdot] has been more on the, I would say, repair and maintenance side. We're doing fender [and] systems where highways get hit by a brick --barge traffic, and we have some projects that we've been doing with them in that regard. And any time a bridge is in danger of getting the foundation struck, that takes a priority. So that's the type work we're looking for. The new-build bridges, it's been more [bulliant], more active, I guess, on the Florida side.

Could you provide us a little bit more color on your end-market or customer mix as it relates to 12% coming from state and continue on from there?

Yes, federal -- for the quarter, federal was 10%, state was 12%, local government, which is predominantly going to be port authorities, 23%. That sort of compares to last year federal -- Q2 '07 federal was 14, state was 7, and local was 35. And then, of course, as we said earlier, the private sector was 55% from the private sector for the quarter, and that compares to 44% same quarter last year.

And any breakdown within the private sector?

Well, generally speaking, I'd say on the private sector, terminal work, both in the oil and gas sector, private development work, and really, those would be the two big categories -- you know, ship docks and related to terminals, and, of course, private development/marine-type work.

Great. Thank you.

[Inaudible].

We'll go next to David Yuschak with SMH Capital.

Morning, gentlemen.

Morning, David.

As far as your history of working the Army Corps of Engineers, can you just give us some sense as to your own experience, having dealt with them for many years, how variable you've seen that revenue stream coming from them as far as commitments and all that versus the kind of environment you're seeing today?

Yes, well, a lot had to do with 9/11 and the war effort that took place. Preparing to go overseas, I think, was a pretty big distraction for Corps infrastructure here and domestically.

And I think now with the whole infrastructure condition being under the microscope now on Capitol Hill, that is beginning to change. The marine waterways have got attention, and the bridge systems have attention.

But Corps activity the last couple of years has been -- I would say last year was more active than this year. We knew this year was going to be about 30% less activity with maintenance dredging. But I think we're about to embark on a very exciting time with the Corps of Engineers going forward. Just to give an example, the New Orleans district has just come out with what's called a Sources Salt document to determine how many companies it can find to draw from because they want to execute about 200 construction projects, ranging in size from 1 million to 750 million. And that plan is to award about 134 contracts next year, which represents 5 to $10 billion of work, and it's the kind of stuff that we do. It's concrete pile driving and dredging and backfill on the flotation channels and so forth. And all this is to support the effort to get a hurricane protection system in place for Southeast Louisiana and New Orleans by mid-2011.

So we are just now beginning to see the effects of the Katrina -- you know, the five hurricanes that hit in '05. That work's going to start getting carried out. And so what's taken place in the past is really about to change significantly, I think, going forward. It's just a question of how soon will they release these contracts.

So the 2007 numbers on the Army Corps, how would that relate as far as level of business you did compared to the last five years? Was that probably one of the best you've had, or have you had years much better than that?

'07 was a great year for dredging, but one of our biggest projects was a cruise [terminal], and we did dredging on the cruise [terminal]. Hey, it's private as [Fort Huston], and had nothing to do with Corps, but I think dredging '06/'07 was kind of flat those two years. In '05, it was very low. And the prior years, it was funded poorly because of the war effort. And now we're beginning to see some shifting of military resources back domestically. The Navy's begun a program of developing projects now to shift their -- the Navy forces.

We're seeing an enormous amount of construction with military base realignment and closure. You know, a lot of military housing has taken place. They're doing all this to get ready to get these troops to come back and get more in a cycle of replacing troops overseas and rotating.

So all this, I think, bodes well that when we do [down them] from Iraq, there will be a shift of emphasis back here.

But I think in looking at the Corps budget for next year, I think what a lot of people are overlooking is, yes, but the operation and maintenance budget for next year is projected to be about $2.4 billion versus 2.2 this year. Well, that's kind of a hold on. Well, it's going to be flat again, but what I think is getting overlooked is that there's 5.8 billion that's been authorized for the New Orleans and Southeast Louisiana Hurricane Protection Effort, and that's really the natives with the Corps. The normal maintenance dredging of the intercoastal waterway continues to be flat and, I think, underfunded, but there are other deep projects coming down the pipe with the Corps, and we're watching that very closely to see how we can participate.

So 2007 Corps business was the best you'd seen in many years and it's just because you're seeing a backing off a bit from that kind of a peak level?

Yes, I would say in term -- [inaudible] I'd say that compared to post-Iraq, that's probably a fair statement. I think the question is for the Gulf intercoastal canal-type dredging, when do we get back to sort of a more normal phase for that? Because it definitely was impacted by the funding shifts and personnel shifts, quite frankly, associated with Iraq because a lot of the -- it's just very disruptive to their process as they had personnel rotated out overseas. So comparatively speaking, that's probably a fair statement.

Now, the -- on the dredging side with repowering these units --

All right?

-- how competitive do you think you've become, and are you seeing others doing that in basically the same strategy because certainly it's going to lower your overall cost of operations. I'm just kind of curious as to how that may affect you competitively, and is -- if everybody's doing the same thing, you're still back to a net-net, no competitive advantage other than that's going to blow your cost of operation.

Well, it does several things for us.

First of all, it extends the life of these vessels. Some of these engines we're taking out are 30 to 40 years old. So we've essentially put new life into a vessel, dry-docked it, and extended the life for another 30 years.

Secondly, the fuel consumption will go down, and that will lower our operating costs, as certainly some of our competitors are doing the same thing, are looking at doing the same thing. Anyone that's paying these high fuel costs, fuel prices that we are right now that doesn't is missing an opportunity. But, yes, I do know some of our competitors are initiating December programs, but what I'm really excited about is having the life of that vessel extended and having it more modernized and new and ready to go for the uptick that we think will take place with dredging latter part of next year.

Now, if -- let me just -- and it will be the last question. As I look at the -- the dredging because of the sustainability of keeping that thing out there and running like it is can act as a good base business for you versus moving into construction activities, like whether it's the bridges and construction over the water and so forth.

[Right].

And you look at both of those because one's kind of a -- it's a different model. It's a higher margin because you're running that thing constantly and getting good cash flow off of it.

Right.

How do you see -- 'cause I kind of see that maybe being base business that can give you good recurring cash flow, the other business being kind of major projects that you can undertake in the marine infrastucture rebuild.

Should we be correct in looking, maybe thinking that other businesses, the major projects and all that, may be more the growth opportunity and the dredging business, maybe more base stuff that grows, say, 8% a year or something like that versus your 15 long-term? Help me out on -- give me a sense of that. 15% give long-term growth. What's the balance between that versus the rest of your business?

Okay, I think what we're about to demonstrate going forward is why we want to do an acquisition like Subaqueous because it helps us get turn-key mooring construction projects. That's our lifeblood. And it gives us a base to build on. You know, the maintenance dredging will always be there. It's not going to go away. It has to be done year in and year out, but we can't control the pace of Corps funding of maintenance dredging.

So having the tools in our hands to go for these larger turn-key projects that do involve dredging, it's been a real plus for us, and I think we're going to reap the benefits of that here in the latter part of this year because we're pursuing those type opportunities as we speak, and I believe we'll get our fair share.

So is it fair to say that that strategy of having turn-key is really going to be where the 15% -- more than 15 because your base business will still be the maintenance stuff that occurs all the time. But --

Yes, David, I --

Your Sub acquisition has given you the kind of power right now from a turn-key point of view that you feel optimistic that that turn-key's going to be the real key going forward because of what they bring and that you really don't need right now any material new acquisitions to get that done?

David, I think you're kind of spot on [inaudible] fair generalization there.

Okay, thanks.

And we'll have our last question from [Jay Rosenhand] with West Park.

Hi. Good morning.

Morning.

Just wanted to clarify, the Corps works. None of this work is going away. It's all just being pushed out, right?

Right, it's pent-up demand, and they've got something like 1.6 billion of projects that have been approved but have never been executed. So that's -- a lot of pent-up demand.

And in the storms you talked about, will those drive any business activity or work for you guys?

They can. Any time there's a tropical storm or particularly a hurricane that causes inland flooding and siltation of waterways, there are opportunities there for two things -- one, eventually more dredging work down the pike, and, secondly, some potential salvage work with marineland cranes.

But I think what we've seen so far this year, the first hurricane that came towards Brownsville could generate something eventually, dredging-wise. What happened with Tropical Storm Eduardo really was -- is really a non-event. It was just a lot of rain and [inaudible] high winds.

Yes, [exactly], and it was a pretty fast mover, so I don't think there was -- there just wasn't a bunch of flooding associated with that from that particular storm.

Okay. And then can you kind of elaborate on your end-market and opportunities in 2009 that give you confidence in your growth goals and your EBITDA margins?

Yes, we're seeing some really interesting projects begin to develop with cruise ship terminal expansions. There are about 10 new ships that are being added to the fleet this year, and there are these real -- some of the largest size ever built, and there's planned to be 12 more cruise ships come on the market by the end of the year. So the cruise ship operators are still optimistic that they've got a good market, and that's going to present some opportunities for more terminals to be built to moor these big ships.

And even though we may be struggling here domestically with the devalued dollar, the Europeans are still going on vacation and not staying at home, so that's still a good market opportunity for us. It continues to develop it, and we're looking throughout the Caribbean region as being a fallback for any shortfalls here with the funding domestically.

I think the other thing that's encouraging to us is we read a recent document that Stephens, Inc. published and identified about 10 billion of planned spending by 34 port authorities over the next six to 10-year period, and that's in eight states that we already operate in, and I think that's the catalyst of the Panama Canal widening. They're making preparations for that. So --

Well, thank you very much.

You bet.

We have no further questions in the queue. I'll turn the conference back over to management for additional or closing remarks.

All right. Well, I think that wraps it up for this quarter, and we look forward to seeing you guys in about three quarters -- three months. Thank you.

That concludes today's conference call. You may disconnect at this time. We do appreciate your participation.