Orion Group Holdings Inc (ORN) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Second Quarter 2010 Orion Marine Group, Inc. Conference Call. My name is Marcella, and I will be your operator for today. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Chris DeAlmeida, Director of Investor Relations. Please proceed.

Good morning and welcome to the Orion Marine Group second quarter 2010 earnings conference call. Joining me are Mike Pearson, Orion Marine Group's President and Chief Executive Officer and Mark Stauffer, our Executive Vice President and Chief Financial Officer. Regarding the format of the call, we've allocated about 15 minutes for prepared remarks, in which Mike and Mark will highlight our results for the quarter and update our outlook for 2010. We will then open up the call to questions for the remainder of the time. We would ask that you limit your questions to one question and one follow-up each time in the queue.

During the course of this conference call, we will make projections or other forward-looking statements regarding, among other things, our end markets, revenues, gross profit, gross margins, EBITDA, EBITDA margins, backlog, projects in negotiation and pending award, as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margins, gross margins, administrative expenses, and capital expenditures. These statements are predictions that are subject to risks and uncertainties, including those described in our 10-K for 2009, 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.

Also, please note that EBITDA and EBITDA margin are non-GAAP financial measures under the rules of the Securities and Exchange Commission, including Regulation G. Please refer to the reconciliation accompanying this earnings call available on our website at www.orionmarinegroup.com for more comments on the use of non-GAAP financial measures as well as applicable reconciliations to the most comparable GAAP measures. Also please refer to our earnings release issued this morning, August 5, 2010, and our quarterly and annual filings with the SEC, which are available on our website, for additional discussions of risk factors that could cause actual results to differ materially from our current expectations. With that, I'll turn the call over to Mike Pearson, President and CEO. Mike?

Thank you Chris. Good morning and thanks for joining us. During the quarter, we continued to see solid drivers for good long-term growth. Overall revenue and EBITDA continued to perform well, resulting in solid year-over-year growth. As you saw in our earnings release this morning, our second quarter EBITDA margins exceeded our 16 to 18% goal, but our revenue for the quarter came in slightly lower than the $90 to $95 million goal range. During the quarter our revenues were impacted by the timing of certain jobs and as a reminder, project timing can fluctuate based on several factors which as we've said before, can cause quarterly results to sometimes be lumpy. Still we continue to see a good amount of bid activity and we're pleased with our overall results for the quarter.

One special note; the oil spill in the Gulf has not had a material impact on our business or operations either positively or negatively. We've not had any projects delayed as a result of oil or tar balls, nor have we experienced any major delays with regard to shipment of materials. Likewise, we do not expect to have any material negative impacts in the future related to the spill. However, as we look at the long-term restoration aspect of the spill, we could potentially benefit from restoration or protection projects.

Before I touch on our end markets and outlook for the remainder of the year, I wanted to update you on the progress of our acquisitions. During the quarter we continued to liquidate the backlog that we acquired from TW LaQuay Dredging and have been bidding and winning additional work for the acquired assets and the two new dredges that will be coming online this quarter. With regard to the Pac Northwest, we are continuing to identify opportunities and are in the process of bidding on several projects at this time.

Now turning to our end markets and outlook for the remainder of the year. We continue to see solid end markets with good drivers for success. We're bidding and working on port expansion and rehabilitation projects in all our market areas. And we expect to see these opportunities in the future as ports continue to execute their long-term growth plans. Funding for these projects seems stable and attainable by the ports. Additionally, we continue to work on major bridge projects and see good bridge and causeway bid opportunities. As you know, we still need a replacement bill to the now expired Safety Loop program. As we've said before, we do not expect to see any new legislation passed until 2011 and fully expect to see continuing resolutions until a replacement bill is passed. So far, we've not seen a change in the amount of bids or opportunities related to bridge construction and we expect to see these opportunities continue in the future.

We're continuing to see opportunities for cruise-related piers, as the cruise industry looks at new destinations and facilities to handle their larger ships. We expect to continue to see good opportunities for Coastal restoration and protection projects and believe the recent oil spill could further these efforts in the future. Funding for these type of projects has gained support and we anticipate solid funding for years to come.

Additionally, we continue to see bid activity and good funding from the Corps of Engineers. The Corps' 2010 funding remains solid and 2011 is shaping up to be another good year. Many investors have expressed concern over Corps funding lately but we do not anticipate the Corps funding for operation and maintenance budget items will be materially impacted in the coming years. The proposed 2011 budget remains relatively flat as it has been in prior years. Also any resolution to the Harbor Maintenance Trust Fund issue could enhance the Corps funding in future years.

To sum up our end markets, we've not seen a material change in the overall bidding environment or competitive landscape in most of our market areas and we remain optimistic about the road ahead. However, as we noted this morning in our release, we are continuing to see pricing pressure on the East Coast construction opportunities. As you may recall, we've experienced increased competition in our East Coast construction market for some time now. However, during the second quarter we did not sustain our historical win rate in the East Coast construction market as a result of increased pricing pressures.

That's not to say that the market's gone away, in fact, our bid activity level in the East Coast construction market has actually increased year-over-year. However, our success rate has declined in this region, as we have not wavered on our bid pricing discipline. Additionally, material prices have been showing a downward trend. As a reminder, materials are largely a pass through item, so while declining material prices may not affect the job's overall profitability, it may affect the total revenue generated from future big opportunities.

Therefore as a result of the continued pricing pressure on the East Coast construction market and overall lower material prices, we're lowering our full year 2010 revenue growth goal to between $360 million and $370 million. Despite this decrease, we remain optimistic about the road ahead and expect to post solid revenue growth for the year with continued organic growth. In fact, we already have $350 million of potential revenue for 2010 when you include the actual revenue that we realized in the first two quarters of the year, plus the amount we expect to liquidate during the remainder of the year from backlog and low bid projects.

Of course we still need to execute the work in backlog and sign contracts for low bid work, but this level of activity plus the continued strong market we're tracking gives us confidence for our revised goals and future.

On the EBITDA margin side we expect to continue to be able to manage bottom line results and expect EBITDA will remain in the 16 to 18% range for the full year 2010.

In closing, despite the lower top-line goal for the year, 2010 should be another record revenue year with good organic growth and additional growth as a result of the acquisitions earlier this year. Our bid markets remain strong, funding appears solid and there continues to be good drivers for long-term growth. In fact, we're already building a nice backlog for 2011 and we expect to see continued growth next year. We'll monitor the East Coast construction market and make operational adjustments where necessary so we can drive our top-line growth while maintaining good bottom line performance.

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

Thanks Mike, and thanks again for joining us. Net income for the second quarter of 2010 was $7 million or $0.26 per diluted share, which compares with $6.3 million, or $0.28 per diluted share in the prior-year period.

As Mike mentioned, second quarter revenues fell short of our second quarter 2010 goal range of $90 to $95 million due to changes in the timing of certain jobs. Our second quarter 2010 EBITDA was $15.7 million, representing a 18.1% EBITDA margin, which compares to second quarter 2009 EBITDA of $15.2 million, or a 21.4% EBITDA margin.

Just to remind investors, there can be fluctuations in quarter-to-quarter results due to the timing and mix of projects. For this reason, we encourage investors to focus on the long-term and annual results rather than quarter-to-quarter fluctuations.

Turning to backlog; as of June 30, 2010 we had a backlog of work under contract of $218.1 million. In addition, the recently announced large project awards, including the announcement made this morning, add approximately $40 million to backlog. Including these projects, the company has approximately $258 million of backlog. As a reminder, our backlog consists of project that are under contract that have either not been started or are in-progress and not yet complete. We cannot guarantee that revenue projected in our backlog will be realized; or if realized, will result in earnings.

In addition to our current backlog, we are tracking potential bid opportunities of $4.5 billion to $5 billion. As we look at the remainder of the year, our backlog indicates revenue continuing to build into the back half of the year, with full-year EBITDA margins in the 16 to 18% range. As Mike mentioned earlier, our revised revenue goal is $360 to $370 million.

For third quarter of 2010, we expect revenue will be in the $90 million to $95 million range, with an EBITDA margin of between 16 and 18%.

Turning to the balance sheet, we believe it is important to have a strong, stable balance sheet, low leverage, and a solid cash position. As of June 30, 2010 we had cash on hand and availability under our revolving line of credit of approximately $115 million. As a reminder, during the quarter, we closed on a new debt facility which provides us with a $75 million revolver and $25 million additional that is available at the discretion of our lenders. We currently have no debt; however, this is not to say that we will remain debt-free in the future. As we have said before, while we want to keep our leverage low, we are comfortable with an appropriate amount of debt.

In closing, while we saw some revenue move around during the second quarter, we are still pleased with our overall results and our strong bottom line performance. As Mike mentioned, we have reevaluated our full year top-line goals as a result of the pricing pressures on the East Coast construction market and declining material prices. Despite these pressures, we continue to have a healthy bid market and good drivers for long-term growth. While our full year top line is less than initially anticipated. We still expect 2010 to be another record revenue year with solid bottom line performance.

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. Marcella, would you please review the procedures for placing a question?

(Operator instructions) Our first question is from Fred Buonocore with CJS Securities.

First question, I just wanted to see if you could elaborate a little bit on the projects in Q2 that appear to have slipped out; is this just kind of normal permitting and things like that or maybe something bigger to be paying attention to?

Fred, it's just kind of the normal ebb and flow, it's just kind of construction. I would characterize it as nothing that's a cause of concern; it's just sort of the normal sloshing around of schedules and nothing more really than that.

Okay. You mentioned that there are some projects that you've been identified as apparent low bidder on and these are being baked into your 2010 guidance. Are any of these larger announceable projects that we should see releases on over the next few months?

Some potentially would be, yes, so stay tuned. Obviously we've announced a couple of them, one just this morning that we talked about in the prepared remarks, but yes, some of them potentially are. And then some of them are smaller ones that we historically have not announced.

Your next question is from Alex Rygiel with FBR Capital Markets.

A few questions. First, the $30 million revenue reduction in your guidance, can you give us a sense as to what the mix between lower materials was as a component of that and lower volume or lower bidding activity?

I'm not real sure on the mix of material, Alex; we'll have to get back to you on that. But primarily marine construction work and we've been very very busy bidding; it's not due to any lack of opportunities out there, we've just taken a position that we're not going to chase margins down. We have a pretty strict discipline about having profitable work and we're very comfortable that our backlog is a good healthy backlog.

I know you haven't provided it historically, but I think I'm going to keep asking you every quarter, any sense as to what the mix is between your construction and dredging was in the current quarter?

As you know, we don't break that out. The dredging has been increasing because of the acquisition we did earlier in the year, but we're not really going to break that down.

Mike you mentioned that you were bidding on a lot of opportunities in the Pacific Northwest for your two new dredgers coming online. Have you actually won projects in that market for those assets yet or are things just still outstanding?

We continue to pick up some small projects there but not anything announceable and I'm very pleased that we're getting our arms around the market or actively bidding opportunities of all various values, from below a million to $25-$30 million projects we're seeing in the area that are coming around. I think it's just a matter of time and we just need to continue to be diligent in our pricing philosophy. And we've not grabbed a big one yet, but I'm encouraged that there's a number of opportunities next year that we'll have the opportunity pretty soon to get something good.

Alex, with respect to the dredges coming on line, those we have been bidding and we've secured work and those will be going to work upon coming out.

Your next question is from Trey Grooms with Stephens.

First question is on the margins. You guys self-performed it looked like 85% of the work in the quarter but you put up over 18% EBITDA margin which is obviously pretty strong. What drove the high margin there in the quarter? Also, with the mix of more dredges coming on, do you see the long-term margin range moving up over time with the addition of these additional dredges?

Well, I think our range of 16 to 18% is where we're going to stick on the EBIDA margins. We've certainly done better than that some quarters in the past but that's just a range we would, as far as guidance goes, feel comfortable with. We'll do everything we can to beat it; sometimes we do, but long-term I think that's a good range.

I think for the quarter, again, we had good mix of projects involving dredging, other projects, self-performance was kind of at the lower end or subcontracting at the higher end of what we sort of normally see but still we had good execution and of course an up-tick in some of the projects involving dredging services as well.

Okay. My last question; looking long-term, you guys have always kind of had a long-term goal of 15% top-line growth. Where we sit today, as we kind of look into 2011, are you guys seeing anything out there that could cause you to not realize that kind of growth next year, from where we stand today?

No, everything that we can see about 2011 that we've identified, we feel very good that that's going to be another growth year for us. So I'm real pleased with the way it's shaping up.

Your next question is from Matt Tucker with KeyBanc Capital Markets.

My first question pertains to the revenue guidance revision. You missed the bottom end of your second quarter guidance by only $3 million and you're indicating you've got pretty good visibility on about $350 million including the first half, so I'm just curious, it seems like you wouldn't have to book and burn very much additional work at all to get to the lower end of your revised guidance range. I'm curious, are you building in some cushion there for the potential of projects getting pushed out into next year or maybe could you dive a little deeper into that?

I think the Q4 bookings will be interesting to watch. There's a mix of projects out there of all type sizes and it just boils down to which one will we be successful in getting awarded. Some book and burn this year, we're seeing quite a few design build opportunities for next year which are nice size projects, some of the bigger projects that we pursue, but they don't generate a lot of revenue for this year. So depending on what we're successful on will determine whether or not we can improve on that. But we just thought this was a prudent time to take a good look at the balance of the year and make sure that we're comfortable with what we're going to deliver.

That's helpful. Then I guess just thinking about the awards outlook for the rest of the year, you've already one you indicated 40 million thus far in the third quarter, so the pace has certainly picked up quite a bit. Do you think that's somewhat sustainable for the rest of the year? Is it going to continue to be pretty lumpy? Are you identifying more opportunities away from that East Coast market and able to maybe shift some resources towards the Gulf Coast?

Well, we'll certainly look at shifting where we think the opportunities are. We're not going to abandon the East Coast by any means; there's too much work out there and that's going to be a very very active market going forward. It's just right now there appear to be a number of contractors that are trying to get work. I think the highway work has been under pressure and we're seeing a lot of players pursuing anything they can find. But we're going to pursue opportunities in that area as well as other areas where we see opportunities to get our utilization up.

Your next question is from Rich Wesolowski with Sidoti & Company.

How much of your revenue typically comes from the East Coast, what share?

We don't break it down. We don't report it out publicly by regions. Obviously as Mike said, that's a significant area for us. We don't intend to abandon it and we've just gone through a patch here where a lot of the competitors are happy to get loaded up on cheap work and as Mike said, we're just not interested in chasing them down. So we're being selective over there. We're maintaining our pricing discipline and again, as Mike said, we'll look for opportunities to sort of shift resources around where it makes sense to go where we can get work at the margins we want to work at.

I appreciate the bidding discipline. Just looking at where your subsidiaries are placed, I can't imagine more than 15 or 20% of your revenue comes from the East Coast and if that is the case, then I would suggest that it's down by as much as half of what you had expected. Are those numbers in the ballpark?

I think you're a little low on what we generate from the East Coast; it's more than 15%, but again, we bid more work over there this year than we did all of last year. So again, we think the market's there, the market's robust. We just got a lot of pressure with competitors over there right now, but again, our view is if we maintain discipline, that eventually people are going to get filled up on the cheaper work and we'll be able to get work at our margins. And then secondly, as we said, we have the opportunity and the flexibility that a number of our regional competitors don't have and that is to shift resources around. So we'll be looking for those opportunities as well.

Okay. Secondly, you expanded your headcount and your equipment fleet pretty rapidly over the last couple of years. Did your backlog ever reach the level in the early summer that would require you or at least tempt you to reduce the bid margin in order to stay level with the backlog and keep your labor force occupied?

Well, every area that we operating in has different market pricing pressures and we evaluate those individually and we don't just have one number that goes out as an edict. Our people are astute enough to understand what the market will bear and that's kind of the way we look at it, we try to go seek out opportunities that will give us the best chance of success with a reasonable margin.

Look, we always evaluate where our price points ought to be. We will make decisions for strategic reasons to deviate. As Mike said, we don't have a one size fits all philosophy; we look at the areas, we look at the reasons why we would want to price at a certain level and we evaluate each area and each bid on its own merits and we'll make decisions for strategic reasons to go lower or higher than what we normally would be a "normal range."

Just as a follow-up to that. It would be an easy thing just to chase the top-line up but if you can't get a healthy backlog margin, you've just given up your resources and prevented yourself from some opportunity that might come along that could give you a better margin. So you've got to think about that when you lower your prices too low and somebody that bids below their cost is just getting themselves in trouble. We don't intend to follow that type of bidding.

I think that's evident in your margins. Thanks.

Your next question is from Steve Dyer with Craig-Hallum.

A lot of them have been asked and answered already. With respect to backlog, where would you expect that to be ending this year relative to sort of the number you're sitting at today, which I think is a similar level to where it was at the end of last year? Would you expect directionally to be up, flat, down?

All of the above. It's very tough to say, because again as a reminder, the backlog number is a snapshot in time. As you know, we do not announce or include items in backlog that are not under contract or awarded, so it's all a timing thing. And I guess the other thing is, again, backlog is one data point that we look at, the other data point is what's the bid market opportunity and as we said, we're tracking $4.5 to $5 billion of opportunity. We're excited about what's in that number and that tracking system. And so again, a lot of it at the end of the day is going to depend on what the timing is of when work is bid and when it's actually awarded or put under contract and that can deviate from the snapshot that we take at the end of the quarters.

I guess I'm less interested in what it is on exactly December 31st but I'm trying to get some sense for directionally maybe what gives you the confidence to suggest that coming off of this year, which was a pretty robust growth year, you can grow again by double digits organically next year?

Well, we're already starting to build backlog for next year. As we are getting, especially some of the work that we've recently announced, we're starting to build a nice backlog for 2011 and again, with the opportunities that we see out there, we're looking at 2011 being another growth year for us. To your point, I think we've kind of said this before, we sort of expect backlog to sort of look more like a stock graph that's going to go up and down, but we do expect it to trend upward as it has been over the last couple of years. We expect that trend to continue upward.

Okay. Final question and I'll hop back in. CapEx, where are we on that relative to sort of the plans and what do you expect to spend maybe later this year and maybe in broad brushes next year?

Well, we're about halfway through our plan, as you know, this year. We had some carryover CapEx from last year related to the secondary offering for some heavy lift capability, offshore tug and things of that nature. And then also we had additional CapEx related to the LaQuay acquisition. We previously indicated 30 to 35 million; we're about halfway through that program at the end of the quarter. Of course we constantly evaluate that and we'll continue to do so in terms of the back half of this year and do what makes sense. We haven't made any change in our plans for the balance of 2010. But if you strip out the LaQuay and the carryover CapEx, that would sort of get us in the high teens as a run-rate for next year and barring anything being different, which is in line with where we were last year, 2009, that would be where we would expect our run-rate for 2011 to be at this point.

Your next question is a follow up question from Alex Rygiel with FBR Capital Markets.

Mark, could you give us a little bit of guidance for SG&A as a percent of revenue for the full year 2010?

Well, I guess I would answer it this way. I think that where we are for Q2 in terms of dollars, not percentage, but in terms of dollars, we would expect to be up slightly from that for the quarters, for Q3 and Q4.

Your next question is from Matt Tucker with KeyBanc Capital Markets.

I have follow-up question regarding the Pacific Northwest expansion. You mentioned you had already won some small projects up there. My understanding was that you didn't really expect to start performing work until I believe you said 2011; can you give us an update on the timing of when you actually expect to start executing work up there?

Well, we've been carrying out dayrate charter work ever since the acquisition took place, finishing up a project on a Navy project for the former owner and we expect that to come to a close here this quarter and we're bidding on numerous contract values, anywhere from 1 million to 25 million for opportunities that have been identified in the Seattle area and the Alaska area.

Matt, just as we said before, it's possible we would get some of that work churning in 2010 but as we've said before, we're not really expecting a lot of contribution for the current year and really are looking at more to set us up for 2011. But we could see some of that generate this year.

Do you expect that when you provide 2011 guidance or maybe when you start reporting in 2011, are you going to give us some indications of how much revenue is coming from out there?

Probably won't split that out. As we've said, we'd like to get that up to a decent run-rate but as we don't do in our previous market areas, we don't break out revenues by region.

(Operator instructions) Your next question is from Rich Wesolowski with Sidoti.

Clarification; do you have a $258 million backlog today, implying some $70 million of awards in July and August less whatever revenue you recognize in July or did you add $40 million of work and not take into account the revenue for July?

The latter. That's basically saying hey, if we'd gotten these that's what our backlog would have been and we're not announcing what our backlog is as of today.

Okay. From what we've read, there are two ports in your general area that have the largest expansion plans are Port of Virginia and Port of Savannah. Do you have designs on establishing a bigger business on the East Coast and the Mid-Atlantic, is that the next big investment for Orion or is there something in your mind that's more pressing?

We certainly are enthusiastic about the potential for growth over there. We bid on some very large projects and we're waiting for the outcome and that's certainly going to be an important port. We picked up a nice dredging project over there and we'll have our dredging arm mobilized there to carry out work over a three-year period and we've already got a marine base established there and there are some very nice jobs there. It's just a question of what are we going to be successful on and we're certainly bidding on some of the bigger projects.

As Mike said, we have no intention of abandoning it. That's a key market area, as you said, there's a lot of work going on in that port in particular. There's a lot of waterfront in the Virginia area and a lot of Navy infrastructure in that area and as Mike just said, we have a base established there, an area office established there and we intend to be there and be active in the work that you're talking about.

Care to comment on the utilization of the LaQuay dredges and maybe if you had your pick, would you rather have the new dredges commissioned today or a few quarters down the road?

We'd like to have had them commissioned the day we bought them. I think our dredging fleet has been very well utilized and we're looking forward to christening the new big dredge here at the end of the month, followed by the other dredge the next month. And we already have work lined up for both the new dredges and the two major dredges that have been in operation since the quarter has been busy the whole time. So we feel pretty good about the demand for dredging work continues to look very good.

Lastly, how much of your current backlog is set to be worked off in 2011?

We're going to carry over just over 70 million for next year in our backlog for 2011.

Your next question is from Nigel Franklin with Brown Advisors.

I'm struggling to understand what precisely changed in the market to cause the pricing pressure that you're now seeing?

We had a number of very nice size jobs that we had bid on during the second quarter that we weren't successful on and that is really the primary driver for reevaluating our top-line goals and it's just simply a matter of we saw some competitors that got very aggressive and you're going to see that from time to time. But particularly now I think this year there's a lot of uncertainty out there with some of these smaller companies that are showing pricing levels that we're just not going to try to match. We would rather get backlog that has good quality margins in it. We have taken this approach since day one and it's fared well for us. It causes some up and downs on your backlog but at least when you're equipment is tied up, you're getting good margins on it.

Understood, but why now, why is the pricing pressure happening now, what changed?

What's changed is, as we have talked about for some time is there has been an increased number of bidders that we've seen so that's nothing new, but what's changed in the last couple of months is that the competitors have just been dredging down the pricing and in some cases we bid on work and the successful bidder has been at below our cost.

Why are they driving down pricing now?

I can speculate. My speculation is that they're continuing to see -- what we've seen is land based competitors coming into the market and we've seen traditional competitors sort of defending their territory and I guess there's just been a little bit more desperation on some of the land based guys coming in and some of the competitors choosing to get filled up on work, regardless of what pricing they have on it. So again, I'd be speculating but I think that's what we've seen has changed. As we've said, towards the tail end of last year we were hopeful that some of this pressure would alleviate as we got into 2010 and midyear 2010 and of course we're not seeing that. I would attribute that to sort of the way some of these guys are feeling about the overall economy, is all I can speculate on.

How do we know if or when these guys are going to get full, because I'm thinking a land based competitor could potentially be very big in their individual size and very big in the total number of them. So maybe they're not full by year-end 2010, maybe they don't get full until 2012 or 2013; how do we know? What gives you the confidence to think that this pricing pressure will go away at some point?

Because the market we're looking at for next year is continuing to grow greater than what we expected it to be. I think the opportunities for us to get our equipment utilized at a better margin is enhanced if we continue to bid reasonably. We have the benefit of having a strong balance sheet. We have no debt. We're not like the smaller companies that's worried to death about paying their notes and they'll go out and take work on a cash basis just to keep the doors open. We've got a very strong balance sheet and we just don't intend on deteriorating on our margin.

We have the flexibility that the regional players do not and that's to move around. We at least have the option of shifting resources to where we think we can get the margins we want to work at. Again, this is not some sort of new philosophy on our part; this is how we've operated historically. So again, we see the opportunities out there. We feel good about the opportunities we see out there in the aggregate.

Is there any reason to believe that deal sizes at some point in the next year or two years, three years on the average are going to get bigger?

Contract sizes?

Yes.

Sure, just as we've grown in size and capability, as we've teamed up with other players to tackle larger projects on a line out and joint venture basis, we are able to go after larger projects and we have been.

I'm under the impression that you're the third largest port construction company in the market, so if you guys can't do it, no one can. So who's winning these bigger contracts that you're hoping to be able to get in the future?

In many cases it's not the top three.

Your statement is correct, however, there are many projects that touch the water that are large enough size of projects that also involve land based type work combined with it, so there's other players than can participate in that, both the larger guys and some of the smaller regional players can take on certain sizes of projects and be competitive in that work and get it. So that's who we're competing against.

My concern is that as the Panama Canal expansion draws nearer that your industry attracts more attention from these larger land based competitors and the barriers for entry for what you do may not be there and the growth rates and margins don't materialize. So to the extent that you can provide myself and the rest of the investor community with any assurances that that is not the case, it would be greatly appreciated. That's basically the thrust of my questioning. Thank you.

We've got a fleet of 400 vessels and pieces of equipment; that's a lot of capital to invest to get into this type of business and it's just not going to take place overnight. We certainly see new players every year that come in; some succeed, some don't and we've got the assets, the personnel and the business model that is succeeding in delivering superb results in an E&C industry that is not delivering these good of profits. We like our business model. We like the market that's in front of us and we believe that we will certainly be one of the successful companies that will benefit from this port expansion. We are increasing the size of projects that we take on every year and I think we're on the right track.

Your next question is from Chris Mattoni with Paul Partners.

I missed what you said the second quarter mix was with regard to government versus private sector business and then also if you could comment on it going forward and also any margin trends with regard to government versus private?

The mix was 58% from federal, state and local government and 42% from private industry and that compared to 60-40 in the same period last year and I believe Q1 was 36% private sector, so it's shifted around a little bit from Q1 to Q2. What was the second part of your question?

Going forward for the next coming quarters how you envision that changing, is it random and also the margins.

The margins are driven more by what the service is versus who the customer is. So if it's dredging services or diving or construction, it's sort of irrelevant who the end customer is. The margin is driven more by the service offering. And as far as how we see it moving, it's going to move around in kind of that 60-40 split one way or the other. At the end of 2008 we were 50-50, so it's going to kind of move within that band. I would say somewhere in the 60-40 split ish is probably where we're going to be for the next half of the year.

Your next question is a follow up question from Fred Buonocore with CJS Securities.

Kind of circling back more from a near-term perspective as it relates to margin. Is it reasonable to assume that with these East Coast projects kind of pausing or being absent in your revenue mix at least for the foreseeable future and these being construction jobs that that should have at least a positive impact on your overall margin, even increasing the weight of your dredging business and your revenue mix even further from where it has been?

Fred, I think we'd still be comfortable saying that we would expect gross margins to be in sort of the low 20s. I think to the extent we do have sort of a gap, if you will, in deploying some of the assets, certainly we've got an up-tick in dredging assets so we'll have an up-tick in projects involving dredging services. But to the extent we have gaps in some of the other assets working, that kind of factors into that as well, so I think the answer is we're comfortable with saying we would expect gross margins to sort of be in that low 20 range and that obviously we've said for both the quarter and the full year, the 16 to 18% EBITDA margins and we're comfortable with that. And of course as always we look for ways to try to outperform those at all times.

Got it. We look forward to seeing you at our conference in a couple of weeks.

Your next question is from Scott Billadeau with 53 Asset Management.

One question; historically I think you had mentioned that the bigger projects tended to be less competitive because of bonding requirements and so forth and now it seems like we're hearing the opposite, that the big projects are being more competitive; is that a big change here?

No, I don't think that's what we're saying. We've seen a high level of competition on projects that are $1 to $5 million and as you go up the chain in revenue value, the number of bidders generally decreases. It depends on whether it's dredging work or construction or highway work and certainly the highway work, bridge related, has gotten some pressure on it. There are more bidders that we're seeing on DOT type work. I think that's why our portion of revenues coming from state is a little bit lower than it has been in prior years. We like the opportunities that just have a handful of bidders on them, because most of the larger players are bidding responsibly and not trying to buy work.

You had mentioned that there were a couple of big projects that if you get outbid was that regional guys trying to protect or some other guys coming in the highway business?

I would characterize it more as sort of the highway mix. When we're looking at bridge work, we always have some of the players in there that have that land based highway mentality and generally those guys work for lower margins traditionally than we do anyway. Of course we look for ways to team with people, to team with land based people to sort of split the marine and the land based portion of that work. But again, I think we've seen some of the pricing pressure there and just some of that land based mentality if you will, feed over into some of the bridge projects that we bid on, in the last couple of months.

At this time we have no more questions. I would like to turn the conference back over to Mr. Chris DeAlmeida.

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

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.