Orion Group Holdings Inc (ORN) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2013 Orion Marine Group Inc. earnings conference call. My name Annette and I will be your operator today.

At this time all participants are in listen-only mode. (Operator Instructions) I would like to turn the call over to Mr. Chris DeAlmeida, Vice President Finance and Accounting. Please proceed, sir.

Good morning and welcome to the Orion Marine Group second-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 have allocated about 15 minutes for prepared remarks in which Mike and Mark will highlight our results for the quarter and update our market outlook. We will then open the call for sell-side 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 risk 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 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 comments on the use of non-GAAP financial measures as well as the applicable reconciliations to the most comparable GAAP measures.

Also, please refer to our earnings release issued this morning August 1, 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 will turn the call over to Mike Pearson, President and CEO. Mike?

Thank you, Chris, and thanks for joining us this morning. Before we begin I would like to take a moment to thank our nearly 1,200 coworkers for all their hard work and dedication to the Company. Because of their talent and commitment we continue to see improving results in challenging market conditions.

Now our second-quarter results again reflect significant year-over-year increases in revenue, gross margin, and EBITDA. As we look ahead, we remain encouraged with our long-term end-market drivers and we are confident in our long-term outlook.

Today we are tracking over $6 billion worth of bid opportunities over the next few years. And of that 22% are federal projects, 29% are state, 19% are local, and 30% are in the private sector. We continue to experience strong demand for our services from the private sector as we continue to bid on projects that involve infrastructure improvements, replacements, and new builds 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. Today we are working and bidding on several bridge projects and we remain optimistic about bridge-related opportunities in the second half of 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.

Despite the passage of a continuing resolution in March, the Army Corps of Engineers lettings have remained uncertain. As we get near the end of the fiscal year there have been some developments from Washington on the passage of a full-year Corps' budget. Last month the House of Representatives passed an energy and water appropriations bill for the upcoming fiscal year and this included increased funding for the Corps' operations and maintenance budget, and that is where we see the majority of our bid opportunities arise from.

The bill has been placed on the Senate legislative calendar and it awaits action there. Now while the bill is still a long ways from being signed into law, we are hopeful that the Corps may operate under a full-year budget for fiscal year 2014.

We are also closely tracking developments related to the Water Resources Development Act of 2013 and this was passed by the Senate in May. 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 bill now awaits action in the House of Representatives where it will require broad bipartisan support in order to be passed.

This worded legislation also includes language similar to the RAMP Act to correct the funding gap between the Harbor Maintenance Trust Fund receipts and expenditures for dredging projects. Now while the Harbor Maintenance Trust Fund legislation may or may not be additive to the Corps' budget, we believe it is a very important step towards achieving self funding of the maintenance of the nation's waterways. Additionally, we expect to continue to see the benefits of increased port infrastructure spending during 2013 and beyond as the United States continues to see sustained increases of levels in both exports and imports.

In closing, the gradual improvement in both market conditions and financial results gives us confidence in the future. Our plan is working and we are seeing benefits from the altered pricing strategy that we previously implemented. Our [specialized] workforce, our fleet of equipment, and market fundamentals give us confidence that we can find success in today's markets.

We are pleased with our end-market drivers and we believe significant opportunities for continued growth exist. We are eager to see sustained, profitable results and get back to the profits that we enjoyed a few years ago.

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

Thanks, Mike, and thank you for joining us. For the second quarter 2013 we reported net income of $230,000, or $0.01 per diluted share, which compares with a net loss of $5.4 million, or $0.20 per diluted share, in the prior-year period. Our second-quarter contract revenue increased 25% year over year to $84.1 million, of which 42% was generated from federal, state, and local government agencies and 58% from the private sector. This compares to 52% from federal, state, and local government agencies and 48% from the private sector in the prior-year period.

During the second quarter we bid on approximately $440 million worth of opportunities and were successful on approximately $177 million. The 40% win rate achieved during the second quarter was higher than our historical average due to the timing of the award of several large private sector jobs.

This high success rate pushed our backlog to $243.9 million, which is our highest level of reported backlog since the first quarter of 2010. Of our June 30, 2013, backlog 19% is for federal projects, 7% is for state projects, 16% is for local projects, and 58% is in the private sector. Additionally, we currently have $180 million worth of bids outstanding, including approximately $67 million worth of work on which we are the apparent low bidder.

Our results in the second quarter improved as compared to the first quarter of 2013 due to improved asset utilization, including in the dredging fleet, and solid job execution. This led to a gross margin percentage improvement from 7.8% in the first quarter of 2013 to 9.3% in the second quarter.

Turning to the balance sheet. During the second quarter we maintained a solid cash position and we ended the quarter with approximately $40.6 million in cash. At the end of the quarter we had term debt outstanding of $9.3 million and access to $34 million under our revolving line of credit.

Additionally, our bonding program remains solid and is more than adequate to support our bid activities, and 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.

There are positive long-term momentum drivers occurring that gives us confidence in the future. As we have mentioned previously, we are seeing some pockets of pricing improvement. That being said the pricing improvement is not widespread and it will take some time to see the full impact in our results.

Additionally, some of the recent backlog we have booked extends beyond 2013. Also, Corps lettings continue to be choppy as we near the end of the government's fiscal year and await clarity on fiscal year 2014. As a result, we believe gross margin improvement from the second quarter through the remainder of 2013 will remain minimal.

That said we are pleased with the results for the second quarter and expect to continue to see positive results this year. We are optimistic that the bidding environment will continue to be strong as we move through 2013 and into 2014. With the private sector remaining a strong source of bid opportunities, the potential for continued solid equipment utilization exist.

2013 has shown that our plan is working and we are on the right path. We are excited about the opportunities in front of us and we are confident that thanks to the dedication of all our hard-working employees we can succeed and meet the demands of our customers while returning value to shareholders. We believe our specialized fleet, workforce, and support facilities position us to be a leader in the market for the foreseeable future.

With that I will 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 for questions. Annette, would you please review the procedures for placing a question?

(Operator Instructions) Scott Levine, Imperial Capital.

Good morning, guys. So very nice bookings in the quarter, and as you pointed out, your win rate higher than normal. It sounded like you were pushing the envelope on pricing here and there in the first quarter and met with some resistance.

Wondering if you could comment on the win rate and whether you guys changed your strategy at all in accordance with market conditions, or does the win rate really just reflect circumstance and some of these large project wins. And whether your bidding strategy going forward remains relatively consistent with what it has been looking backwards the last few quarters.

Scott, we always look for opportunities to push that as you pointed out. We pushed bid margin in the first quarter and we had met with limited success. But again, as we said, we are seeing pockets of improvement so I think it is fair to say that we are constantly adjusting the pricing strategy.

In areas where we did meet resistance we did readjust to kind of levels that we think it takes to win work. But there are pockets where we are able to improve bidding margins and where we see those we take them, so I think overall we are pleased with the progress that we have seen. Again, as we said, it is not widespread at this point, but we are going to continue on with testing where we can and keeping it where we think it needs to be in areas where we are not seeing as much improvement.

Scott, just to follow on to that. We haven't seen bid margins push any lower than they previously have. We just haven't been able to uptick them like we would like to see at this point.

Got you. Then maybe as a follow on. With regard to the back half of the year, I think you had indicated that you didn't expect to see gross margins improve much from here and that some of your recently won work has a 2014 burn rate on it.

Maybe if you could elaborate; is that a function of utilization rates that you expect there? And maybe just a little bit more color on the margins in your work and backlog, so I can get a sense of whether margins likely move up in 2014 based on the terms of work that you have recently won with a longer tail.

Sure. I think again, given the fact that some of the work that we have recently booked moves into 2014, we do still have some equipment utilization that we need to book for the balance of 2013. Again, I think, going back to the answer to your first question, we are hopeful that we can continue to see improvement. We are hopeful that we can see more -- kind of the pockets of improvement in pricing that we have seen expand as we move into 2014. Obviously we will have to continue to monitor that.

And I think the other key thing too that we will be looking to see is how does this budget process work out for the Corps of Engineers. Obviously, what we would like to see is a budget for them in place by October 1; that is the ideal circumstance for us. If we start getting into short-term continuing resolutions that is more problematic.

So that is another thing that we will be watching for. We commented on that in the remarks. But given that if we see improvement there -- again we continue to see a lot of activity to bid on. We are hopeful that we can improve in 2014 over what we are doing this year.

Sounds good. Congratulations on the quarter.

Thank you.

Jon Tanwanteng, CJS Securities.

Good morning, guys. Thanks for taking my questions. Just a clarification; are you seeing any acceleration in the bid margin improvement at all? It seems the language is a little bit better in the press release than previously. Or was it that that same steady, slow pace that you have kind of experienced in the past three or four quarters or so?

Well, it has been steadily improving. The important thing is we believe last quarter we kind of bottomed out on seeing unreasonable pricing from some of our competitors. It is important to realize it is going to take some time for these improved bid margins that are in our backlog to show up in the financial results. It is going to be phased out going forward, but margins for the remainder of the year should be similar.

Okay, thanks. Then can you provide a little bit more insight to the percentage of the backlog that you expect to fall in 2014 and maybe how that compares to a year ago?

As we look out there it is a significant portion of the backlog that does move into 2014. We don't want to give necessarily specific guidance, but it is fair to say that over 40% of that backlog kind of moves into next year.

Okay, thanks. Then on the dredging side, we have been picking up news that there is some projects out in the Northeast that aren't even getting any bids. Presumably because they are doing Sandy repair work. I am just wondering how that impacts your fleet utilization and perhaps pricing and margins in the second half on the dredging side and maybe even to next year.

It is really not any impact for us. We are not in that area right now with our equipment, but we have been monitoring the bids that have come out so far. There haven't been that many bids hit the street.

It takes time for those post-hurricane funds to get dispersed. I have seen maybe half a dozen projects in varying sizes come out so far, but I don't think that is going to have any real impact on us, the pace of that.

Where that could -- where that potentially could and will be monitoring in this, and we kind of had said this before, is that to the extent that pulls capacity that otherwise might be in areas that we would be looking at. That would be the impact on us and we will continue to monitor that.

Okay. Have you seen any evidence of that so far?

Not so far.

Pulling capacity away?

No, I think it is just absorbing capacity that is in the region up there right now.

Okay, got it. Then one final one. How long do think this cycle for I guess oil and gas spending in the private sector will last? I think there seems to be even more derivative projects being started up now on the petrochem side and in manufacturing. Any color on that would be appreciated.

I think oil and gas demand is going to continue for quite some time in the long term. I mean all the fundamentals are in place. The price of oil has been holding strong and there is just a lot more demand that is going to go up the growth curve, both internal consumption, domestic, and now exports, particularly with the gas. I think exports in the LNG and CNG we are going to see take hold.

Okay, thank you very much.

You bet.

Min Cho, FBR.

Good morning, guys. Just a couple of quick questions here. In terms of the 58% of backlog that is tied to the private sector, can you talk about what percentage of that is from kind of larger turnkey type of projects and what the general trend is on your turnkey kind of opportunities and implications to our overall business and to margins?

Then secondly, if you could just talk a little bit about the integration of the West acquisition. Was there any backlog from Alaska this quarter? Maybe just talk about the opportunities you are seeing there as well.

In the 58% -- taking them kind of in order -- the 58% of private sector work there are turnkey, a significant amount of turnkey opportunities in there. Well, they are not opportunities at this point. They are booked work.

But that is something that we have seen with the demand of the private sector and what we have talked about there. A lot of these projects are sort of the turnkey type opportunities that include all lot of our services, including the construction assets, dredging assets. And so those clearly are things that we look for.

We believe that the more services that we have kind of in our portfolio that we can bring to bear on a project, the more competitive it makes us in winning the work. And we think that it provides the opportunity for us to have better results than if they were not turnkey. Just bringing all that stuff together and doing it ourselves and executing it ourselves should provide better margins for us than a project that is piecemealed out, so to speak. So that is a fair point there.

With respect to the West integration, that is going well. And, yes, included in the backlog that we reported out are a number of projects that we have picked up out of that office.

I think it has been very important with the oil and gas part of the private sector that they are more accustomed to dealing with one contractor handling big jobs. And that is, I think, one of the things we have an advantage on that there is very few companies doing our type work that can provide all the services in one contract. So you can count that just on a hand.

I think it puts us in a great position and we have been able to leverage that.

Okay. In the past, Mike, I believe that you have talked about opportunities in Canada, especially on the oil and gas side. Can you just give any type of update there and maybe any potential timing on some awards there?

Yes, we have been actively pursuing projects up there. There is a lot of discussion about using the British Columbia seaboard as a means of exporting Canadian oil sands.

I know Kinder Morgan has been very active in that. They are building some pipelines as we speak over towards Vancouver and up in Kitimat. We have certainly been following that and providing quotations where requested.

It is going to take a few years for that to really materialize. A lot of permitting issues, environmental issues that have to be overcome, but there is no doubt that there is great support up there for export of those type products as opposed to the difficulty we have seen with like the Keystone Pipeline here in the States. So I think that could be an important area for us.

We do have Canadian flag vessels that could go in there and do some of that work. And I think between our Pacific Northwest operation in Tacoma and the Anchorage operation up in Alaska we are well-suited to participate in some of those bids. So we are following that very closely.

And I might also add a lot of those projects are overseen right here in Houston in the oil and gas industry.

All right, great. Thank you.

(Operator Instructions) Cory Mitchell, D.A. Davidson.

Good morning. I am curious to what you guys are seeing on federal spending, especially relative to what you were seeing last quarter and what your expectations were. Then also to follow-on the oil and gas questions; have you guys seen any benefit from the LNG/GTL chemical build out yet, even if it is just tighter capacity?

Okay. Let me take the last one first, because LNG right now there is about 14 applicants trying to get LNG export facilities approved. So far Chesapeake is at the top of the list. They have a facility in place that has been importing and they are just looking at reversing flow. That permitting process is going to take some time to get through, but it is underway.

You know, 14 LNG terminals is a heck of a lot of work. Now how many of those succeed, I can't say at this point, but it is one that we are watching. We are certainly interested in bidding on those type projects. We have the capacity to do that.

On the federal spending, I think a lot rides around what Congress is going to do here with this September 30 deadline. Are we going to see a continuing resolution or are we going to get a full year's federal funding for dredging work? That is really the thing that we are sitting on the edge of our seats waiting to see.

It was nice to have a six-month continuing resolution, which kind of pumped up our activity a bit, but we really need a year at a time as a minimum for some stability. All I can say is that I am very encouraged with the WRDA bill, the Harbor Maintenance Trust Fund, and the RESTORE Act. Those are great drivers for our business, but we are fixing to undergo a pretty hot debate over the budget it looks like here in the next couple of months.

Great, thank you.

Thank you for your questions. There are no further questions in the queue at this time. I would like to now turn the call over to Chris DeAlmeida for closing remarks. Thank you.

Thank you, Annette. On behalf of Orion Marine Group, I would like to thank you for taking the time to talk with us this morning. We look forward to speaking with you next quarter.

Also, if you have any follow-up questions, please feel free to give Drew or myself a call. Thanks and have a good day.

Thank you for your participation in today's call. This concludes the presentation. You may now disconnect. Good day.