Orion Group Holdings Inc (ORN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the quarter one 2013 Orion Marine Group, Inc. earnings conference call. My name is Sue and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Christopher DeAlmeida, Vice President, Finance and Accounting. Please proceed, sir.

Good morning and welcome to the Orion Marine Group first-quarter 2013 earnings conference call. Joining me today 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. We will then open up the call for sellside analyst questions for the remainder of the time. We would ask that you limit your questions to one question and one follow-up before getting back into queue.

During the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our end markets, revenues, gross profit, gross margin, EBITDA, EBITDA margin, backlog, projects in negotiation and pending award, as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margin, gross margins, administrative expenses and capital expenditures. These statements are predictions that are subject to risks and uncertainties, including those described in our 10-K for 2012 that may cause actual results to differ materially from those statements.

Moreover, past performance is not necessarily an indicator of future results. By providing this information, we undertake no obligation to update or revise any projections or forward-looking statements whether as a result of new developments or otherwise. Also, please note that EBITDA and EBITDA margins 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 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, May 2, 2013 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 and thanks for joining us this morning. I'd like to take a moment to thank our nearly 1200 coworkers for their hard work and commitment to the Company. Because of their talent and dedication, we continue to see solid results in challenging market conditions.

Now our first-quarter results reflect a solid year-over-year increase in revenue and EBITDA. We're pleased with the year-over-year improvement. As expected, we had gaps between certain projects that resulted in a decrease in utilization of our dredging assets during the first quarter. However, we continue to see strong utilization of our non-dredging assets, which we expect will continue throughout 2013. This factor combined with solid project execution resulted in sustained improvement and gross margin levels and positive EBITDA margins for the third consecutive quarter.

As we look ahead, we remain encouraged with our long-term end-market drivers and we're confident in our long-term outlook. Today, we are tracking $6.5 billion worth of opportunities over the next few years, of which 17% are federal projects, 34% are state, 23% are local and 26% are in the private sector.

As we've seen over the past several quarters, strong demand from private sector continues for infrastructure improvements, replacements, and newbuilds for multiple types of clients, including energy-related companies and private terminal operators. Additionally, we expect to continue to see multiple opportunities from state governments related to transportation spending and environmental restoration and repairs. Now, today, we are working and bidding on several bridge projects and we remain optimistic about bridge-related opportunities in 2013 and beyond.

Also, we expect to see an increase in environmental restoration and repair related to the RESTORE Act over the long term. Fines related to the RESTORE Act should be set by the end of 2013 and we expect to begin to see bid opportunities at some point in 2014.

Supplemental Hurricane Sandy funding may also indirectly benefit the Company as industry capacity is deployed to the regions that are hardest hit by the storm and as projects are identified and left for dead. We anticipate restoration work related to Sandy could be a multiyear event.

With Army Corps of Engineers funding now secured for the remainder of the federal fiscal year, we are hopeful for a more predictable pace of lettings from the core. If the core districts are able to fully execute their published letting plans for the current fiscal year, we should see an improvement in the amount bid opportunities over the coming months.

The budget proposal that was recently released by the White House for the federal government's fiscal year 2014 was also very encouraging. For the [corest] districts within our operating regions, the President's proposal calls for a 9% increase in operations and maintenance funding. Now while this budget proposal is a long ways from being enacted, it is encouraging.

We are also closely tracking developments related to the Water Resources Development Act of 2013, which was passed by the Senate Environmental and Public Works Committee in early April. The legislation would authorize but not fund the Army Corps of Engineers to construct projects to restore, develop and protect the nation's various waterways. The Senate is expected to act on the bill some time before the August recess.

Now this word of legislation also includes language that's similar to the RAMP Act to correct the funding GAAP that exists between the Harbor Maintenance Trust Fund, receipts and expenditures for dredging projects. We believe there is growing attention being focused on the continued lack of maintenance of the nation's waterways.

Additionally, we expect to continue to see the benefits of increased port infrastructure spending during 2013 as the United States continues to see increases in exports and imports. According to the most recent data from the US Census Bureau, the first two months of 2013 saw exports increase by 2.8%. US Census Bureau, the first two months, I'm sorry, 2.8% and imports increased by 1% as compared to the same period a year ago.

There's no doubt we still face some challenges, particularly with dredge utilization. However, we have demonstrated with the right mix and volume of work, profitable results are achievable. Our specialized workforce, fleet of equipment and market fundamentals give us confidence that we can find success in today's market conditions. We're pleased with our end-market drivers and we believe significant opportunities for continued growth exist.

Over the past couple of years, we've gained valuable experience in operating in this tough environment. And we know what it takes to succeed. Our plan is working and we're seeing benefits from the altered price strategy that we previously implemented. We are eager to see sustained profitable results and get back to the profits that we enjoyed a few years ago. Now while we are not there yet, we are on the right path and hope to see brighter days ahead.

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

Thanks, Mike and thank you for joining us today. For the first quarter 2013, we reported a net loss of $1.1 million or $0.04 per diluted share, which compares with a net loss of $6.3 million or $0.23 per diluted share in the prior-year period. Our first-quarter contract revenue increased 48% year-over-year to $75.1 million, of which 58% was generated from federal, state and local government agencies and 42% from the private sector. This compares to 62% from federal, state and local government agencies and 38% from the private sector in the prior-year period. During the first quarter, we bid on approximately $340 million worth of opportunities and were successful on approximately $41 million. The 12% win rate achieved during the first quarter was down from previous quarters as we attempted to push bid margins higher on certain opportunities, which was met with limited success. Had we been successful, our win rate would've been more in line with previous quarters.

As of March 31, 2013, we had a backlog of work under contract of $150.4 million, of which 17% is for federal government projects, 17% is for state projects, 16% is for local projects and 50% is in the private sector. We remind investors that the timing of awards can affect quarter-end backlog. I would also like to point out that we are comfortable with our current backlog levels. As we noted in our release this morning, we currently have $280 million worth of bids outstanding, including approximately $117 million of work on which we are the apparent low bidder.

As we expected, in the first quarter, dredge utilization fell, which affected our bottom-line results. However, we were able to execute a high enough volume of work, including some dredging to achieve positive gross margin and EBITDA as we continue to execute on a larger volume of work to offset lower job margins.

Turning to the balance sheet. During the first quarter, we maintained a solid cash position and ended the quarter with approximately $46 million in cash. During the quarter, we paid off the outstanding balance on our revolver, which leaves us with term debt at the end of the quarter of $9.7 million and access to $34 million under our revolving line of credit. Also, we've extended the maturity of our credit agreement with our lender for one year to June 30, 2014. Our bonding program remains solid and is more than adequate to support our bid activities. We continue to enjoy excellent relationships with both our lender and surety. Overall, we are pleased with and remain focused on maintaining a strong balance sheet.

We are cautiously optimistic that market conditions will improve as we move through 2013. With the private sector remaining a strong source of bid opportunities and relative stability in federal funding for the next five months, the potential for equipment utilization improvement exists. We will remain focused on project execution and positioning ourselves to take advantage of a return to more normal market conditions. There are positive long-term momentum drivers occurring that give us confidence about the future. We believe our specialized fleet, workforce and supportive facilities position us to be a leader in the market.

The maintenance and improvement of our waterways infrastructure is far too important to the health of our economy to be neglected. We believe that pent-up demand for our services exists in all our operating regions and that we are well-positioned to take advantage of this demand. With that, I will turn the call back over to Chris to begin the Q&A portion of the call.

Thank you, Mark and Mike. I would now like to open up the call for questions. Sue, would you please review the procedures for placing a question?

(Operator Instructions). Trey Grooms, Stephens Inc.

Okay, so in the first quarter, trying to focus on the higher-margin work, trying to bump up pricing. You said it was met with limited success. It impacted your win rate obviously, but since then, your win rate has obviously moved up dramatically. How has your bidding strategy changed since the first quarter and how do we think about -- and what does that mean for margins and how do we balance out kind of any adjustments you've made from a bidding standpoint and then also just with the higher utilization rates that would come with more work here.

Well, I think, I guess to put it in context, we pushed some bid margins in Q1. And of course, the win rate and the award of work, that affects -- the timing of that award of work affects the win rate in any particular quarter. So that's kind of point one. I guess the way I would answer it, Trey, is that we feel comfortable with the margins on the work that we are getting. They're in line with what we've been reporting out. Clearly, I mean we don't give guidance, but I think it's fair to say that some of the work that we went after that we didn't get where we tried to push it, I think the takeaway from that is kind of like we've said before. The pricing is stable, it's not deteriorated. We are constantly probing to see if we can improve bid margins. But I think the work that you referred to that we talked about, the amount of work that we have in low bid is consistent with the type of margins that we've bid at to build the backlog over the last 18 months or so. So again, it's consistent, but we will still look for opportunities to try to push that when we think it's prudent to do so.

Bid margins are not really much different in the current backlog or in what you're currently low bidder on, but the margin enhancement I guess we could anticipate coming from higher utilization rates?

Correct.

Okay, perfect. And then my follow-up with that is the utilization on dredging depressed in the first quarter. You mentioned on the construction side, Mike, that things were better utilization there and you continued to think that was going to remain that way for a while and continue to improve. I guess what is the kind of -- with this low bid work you've got out there now, what does that mean for the utilization on the dredging fleet, which looks to be having the biggest drag I guess with the low utilization there? I guess what's the mix of work there on the low bid and will it improve your dredging utilization?

Right. Well, as you know, we don't give out specific utilization just due to competitive reasons.

Yes, I'm not looking for a specific number, just directionally.

I think in general our dredge utilization in the first quarter of this year compared similar to what we had in the third quarter of last year and our marine fleet continues to be very well-utilized and we expect that to continue throughout the year.

And I guess just to follow up there, Trey, is we do have -- and what we have in low bidder, we do have a good mix of work. It will involve utilization of the dredges. So depending on the timing of that in any one quarter or several quarters, it will impact the utilization of the dredge fleet. So there is a mix. Some of the work that we are low bid on is turnkey type work that will utilize both -- well, basically, all facets of our services and equipment. So we would look for dredge utilization to improve based on some of the work that we have in backlog.

Okay, great. That's all I had and actually I'll jump back in queue and let somebody else have it. Thanks.

Min Cho, FBR.

Great, good morning. Congratulations on a really good quarter, despite the dredging, yes. Just a couple of questions here. Mike, when you talked about the $6.5 billion of opportunities that you are tracking over the next couple of years, the percentage by sector changed pretty dramatically since you reported that information in the fourth quarter. It looks like state is up a lot higher, private is down a little. Can you just talk about what has kind of led to that change?

Well, I think the biggest driver in the market right now is the private sector. We are seeing more private opportunities than in most normal years where it's kind of equally distributed. I think that's going to continue throughout this year and we indicated that the entire $6.5 billion I think had about 26% private overall. So that's kind of bunched up into this year. It's really -- we're pretty excited about the opportunities in that sector. And federal was about 22%, so that just kind of reflects the normal funding of the core that we're tracking. We don't really have anything plugged in there for the RESTORE Act. We are waiting to see what's going to result from that and that will add to our market. So there's a lot of pent-up demand I think coming with the RESTORE Act, but we can't quantify it right now.

Yes, and I would say Min too that that's a very dynamic -- our tracking list is very dynamic and there's a lot of stuff coming on that and there's some stuff going off of it at any one time. So that is going to move around from period to period and I think that's -- I wouldn't read any more into that. As Mike said, in kind of the near-term picture, there's a lot of private sector opportunities, but when we take a look at the overall $6.5 billion, that goes out over several years. So a lot of the private sector opportunities we are seeing are sort of front-end-loaded, if you will, in our tracking system. So other than that, I wouldn't read too much into that in terms of the fluctuation. I think, again, it's just a dynamic list.

Okay, no, that actually makes sense, thank you. Also, can you talk a little bit about your West Construction acquisition, the opportunities you're seeing in Alaska and some of the other markets that brought for you and how the acquisition integration is all panning out?

Yes, well, integration is going well. We picked up some backlog, as you know, when we made the acquisition. We are progressing with integration. I think anybody that's ever done any kind of M&A knows that things don't always go perfectly, but I think this one has gone about as smooth as integration can go. We've got a good group of people up there and we have got -- we've identified a lot of opportunities in that market. We are bidding on work, we're starting to be successful on getting some work in backlog through our group up there and we're looking to continue to focus on leveraging some of our relationships that we already enjoy with the private sector, particularly in the Gulf Coast in that market up there. There's a lot of cross-pollenization, if you will, in terms of customers. So we're very encouraged by what we see so far and look to continue to build on that.

Okay and your balance sheet remains strong. Can you talk about your kind of acquisition pipeline? If we could -- I know it's very opportunistic, but could we see something later this year? Or are you going to focus on what you have and just kind of increasing utilization here?

Well, acquisitions is an ongoing part of our business. We're always looking for opportunities. We intend to continue to grow the Company organic, greenfield and M&A. We are just going to remain opportunistic. West came along last year. We caught that at the right time and if another opportunity presented itself that met our criteria, I think we'd certainly jump on it. But it's just ongoing. You never can pin down on a certain quarter one year from now or nine months from now, we are going to do a deal. It doesn't work like that. It takes time to nurture an acquisition.

And just following on that, I think it's -- as we've continued -- as we've said in the past, in this current environment, we will definitely be practical in this environment. We are looking, we are keeping our finger on the pulse, but definitely be practical in kind of the current environment when we look at these things.

Okay. And just finally in terms of your bidding strategy, I understand that the win rate this quarter was a little bit light because you're trying to increase pricing in certain markets, but, in general, are you seeing an increase in acceptance of price increases? I know that you've tried it and it brings down your backlog for the quarters that you're kind of trying it, but just in general are you starting to see a little bit of a pickup there?

Well, in some areas, yes; in other areas, no. And I think I said this on the last call, it feels like pricing should be better than it is. It seems like with the activity not only for us but others, utilization. I think our sense is -- our opinion is there's just a lot of skittishness, I guess, in general out there in the marketplace to really get too bullish on pricing.

Having said that though, there are pockets of it. We said this last time. There are pockets of pricing improvement, but it does seem like we're positioned for a more broad-based improvement. But when that turn comes, that's hard to pin down, but it just seems like we are on the verge of that. Not sure when that comes, if that comes this year or later this year. It's possible it may come a little bit later than that, but it feels like we are kind of on the verge of that.

Yes. All right, great. That's it for me. Thank you.

Jon Tanwanteng, CJS Securities.

He may be on mute.

Sue, do you just want to move to the next caller? Maybe Jon can jump back in.

Yes, I'll move onto the next one. Rich Wesolowski, Sidoti & Co.

I just have one question in that, from my understanding, at least a few months ago, your larger class of judges, generally speaking, was better utilized than some of the smaller ones. I'm wondering if that's still the case. And can you give us an idea of the timing of the projects that the larger ones are on? Is there a risk that we see a lull, even the ones that are more strongly utilized within your fleet within the next few quarters?

I think we feel pretty good about our bigger dredges continuing to stay heavier utilized than the smaller dredges. There's just a lot of demand for that size, the 24-inch size. There's been kind of a slowdown in Intracoastal Waterways dredging, strictly due to core funding constraints and the activity in the core has just been real slow. I think we only saw about three bids in the first quarter, which is very low. But our focus has been on addressing dredging needs that are in the ship channels near the docks, working with private clients and we've been able to keep the big dredges busy. We also have some big projects that we are working on like the La Quinta channel is one of our biggest projects that engages several assets. But there hasn't been any real change there.

It's just kind of hit and miss when the lettings come out. We're expecting that, in the second half of the year, the core is going to get back to their program of letting out contracts now that they've got the funding for the balance of the fiscal year. We looked at 2014 dredging. For the core's budget, it's gone up, a 9% increase, which should be a good sign, but it's still same old same old, I guess, with core funding. It's all short-term visibility.

Right. Given the outsized utilization for your larger dredges versus the smaller ones, and from what I gather, larger still of competitors versus the limit of what you have. Would the Company consider ever building a larger dredge perhaps as opposed to an acquisition? Of course not in the immediate term, but looking a little further out?

Certainly, that could be a possibility. I think, right now, we feel like we don't need to be building any more dredges until we get a better handle on what the long-term dredging market is going to be for federal spending, in particular. And we've noted that there has been a downtick in activity with some of the dredge companies that own assets that are bigger than what we have. It looks like that activity level has gone down in the short term, but the demand is pent up and the dredging needs for this country are tremendous. And it's got to be addressed at some point. And it doesn't look like it's going to happen this year.

But the Panama Canal widening is coming middle of 2015 and there's 18 ports that are jockeying to get the big ships in. There is seven that have said they're ready. There is others who are saying we can't get ready until the government funds dredging needs. So I just feel like there is a lot of pent-up demand. In the meantime, we've learned how to be profitable in this kind of difficult environment with the federal funding. And we're pretty happy with the way our guys have been bringing to the work in.

Yes, and Rich, just to add to what Mike just said. Just as far as our smaller dredges go, just historically they have been highly utilized. I think we're just in a period of time with the spottiness of some of the lettings, the utilization of those dredges have been impacted, but those are very good tools for us. Again, historically, they've had high utilization. We can see, depending on how budgets come out and needs get impacted and things of that nature, that we would expect there will be times when we get back to higher utilization with those dredges. So that's kind of one point.

The other point is we've talked about this in the past, we will certainly always -- you always consider your options and certainly building bigger is one option, but we want to also be very, very careful. We will analyze industry capacity, not only ours, but industry capacity in terms of -- before we'd go out and add. So you've got a lot of things to factor in there. One of which may be if you add certain size capacity, maybe you retire some other capacity. So that's something that we're continually looking at.

I appreciate your time. Best of luck with the rest of the year.

Thanks.

Jon Tanwanteng, CJS Securities.

Okay, so this is Arnie Ursaner backing up Jon on the call. My first question relates to the fleet that you have. Can you remind us how much of it is non-dredging versus dredging and the margin differential between the two?

Well, we've got 10 large dredges, about the same number of smaller dredges. In terms of just number of pieces of equipment, we've got far more pieces of equipment that are non-dredging assets. In terms of value, the dredging assets are probably somewhere to a quarter to a half of our asset value. So those are -- in terms of margins without getting very specific, because we don't get too specific there for competitive reasons, projects that involve dredging services typically do have margins that are higher than just pure construction projects that are going to have a higher material component or higher subcontracts, which we do have some subcontracting costs. The projects that utilize the dredging assets are typically going to have a higher margin on the project.

Okay, two more quick ones. In your mix of business, you had much greater percentage from private. Can you comment on how much of that work has a construction and dredging component and are you seeing more land-based competition for that type of work?

We are not seeing more land-based competition. This is more the traditional contractors. One thing that we are pleased about is we have turnkey the capability to provide a client all the services he needs to do a marine project -- the engineering, the construction, the dredging, the diving, the whole 9 yards. And that's a very important thing in the private sector where you can go to one contractor and get everything accomplished and meet your end date. And I think that's been a big factor of our success and we're going to continue to pursue those type of opportunities.

And Arnie, I would say that a lot of the work that we've been working on in the private sector is -- some of it has been utilizing all the suite of services. And as I said earlier, several of the projects that we have in low bid are the same way. They are turnkey projects that would utilize our suite of services and so that means a cross-section of our assets, including the dredging assets.

A perfect lead into my final question. Your win rate in Q1 was 12%, $41 million out of $340 million, but yet your apparent low bid rate is $117 million out of $280 million or a 41% win rate. And yet I think you indicated you are not really shifting gears very much on margin. Is the key reason you are winning a lot more of your turnkey capability?

That's part of it, Arnie. The other part is it really is timing. We mentioned that in the remarks, but a lot of it is the timing because, as you know, we do not count things in backlog until they are under contract and for a variety of reasons, there can be a gap in time between being the apparent low bidder and getting the award in terms of the government sector and getting a signed contract in terms of the private sector. So we do feel confident about the number we provided as we always do in terms of what we have in low bid and we do fully expect all of that to be awarded and come under contract, but the timing of that is going to affect when we book that and when we get it in backlog.

Thanks for taking my questions.

Jack Kasprzak, BB&T.

Along those same lines, just on the $117 million of apparent low bids, do you think, in terms of timing, those projects can be awarded and start -- that you will start to work on them as early as here in Q2 or is it pushed maybe out into the second half of the year?

I think the bulk would be in the second half, but there certainly we would expect that there could be some impact in Q2. Again, depending on the timing of getting them awarded and under contract. I think we should see, we could see some impact to Q2, but definite impact to the back half of the year.

Okay. Second question is the state of Texas is probably the best economy among the 50 US states right now. It's your backyard obviously being based there. Texas DOT is going to let $9 billion of work this year. Port of Houston is going to spend tens of billions over the next five years on expansion. Can you just talk about whether you have seen those opportunities yet or how much you think Texas will be important to you guys over the next couple or three years?

Well, I mean Texas, particularly Houston, is very important. It's the center of the energy industry and a lot of our private work has been related to the oil and gas business, which is headquartered here. And when Mark talked about leveraging our relationships in the [PAG] Northwest and Alaska and elsewhere, that's what we mean by that. We have clients here in Houston that manage projects all across the world. And it's very helpful to have our name recognition that we're a reliable go-to contractor.

I don't know if people appreciate it or not, but there's two Gulf coast states, both Texas and Louisiana, that have already surpassed California in both import and export foreign trade zone activity. That's huge. And the top 10 states that are having free trade zone export activity -- Louisiana, South Carolina, Florida, Mississippi and Texas -- are just really, really active and those are the environments we are in. And of the 18 ports that are going to be doing developments over the next five years, we are already serving 13 of those 18 ports, but Houston, in particular, is a huge market here.

Yes, that's great. Thanks, Mike, appreciate it.

Thank you for your questions. I would now like to turn the call over to Christopher DeAlmeida for closing remarks.

On behalf of Orion Marine Group, we would like to thank you for taking the time to talk to 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 Drew or myself a call. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a very good day.