Orion Group Holdings Inc (ORN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Orion Marine Group Inc. earnings conference call. My name is Mark and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Drew Swerdlow, Senior Financial Analyst. Please proceed.

Good morning and welcome to the Orion Marine Group first-quarter 2014 earnings conference call. Joining me today are Mike Pearson, Orion Marine Group's Chief Executive Officer; Mark Stauffer, our President; and Chris DeAlmeida, our Chief Financial Officer.

Regarding the format of a call we have allocated about 20 minutes for prepared remarks in which Mark and Chris will highlight our results and update our market outlook. We will then open the call for sale-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 in the 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 2013 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 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 the press release issued this morning May 1, 2014, 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 Mark Stauffer, President. Mark?

Thank you, Drew, and thanks for joining us this morning.

First, I would like to thank our 1200 coworkers for all their hard work and dedication. It is because of their efforts that we continue to move in the right direction.

We remain focused on executing our strategy by maintaining a high level of backlog through bidding effectively and focusing on opportunities that best suit our specialized marine assets. Given our current fleet of equipment and specialized workforce, I believe our market fundamentals can support significant growth over the long term. We are pleased with our results for the first quarter of 2014 and we believe we are well positioned to meet future growth opportunities.

While we did experience pullback in revenue as expected, we are pleased with the solid year-over-year improvements we saw in the first quarter. Although we still face some near-term challenges, our high level of backlog and improving market drivers give me confidence in our ability to drive positive results for 2014.

Turning to our market outlook, demand from the private sector to repair, expand, refurbish waterside infrastructure continues to be a solid driver of increased equipment utilization. We expect bid opportunities to remain strong in this sector for the foreseeable future.

Local port authorities also continue to be a steady source of bid opportunities as they continue to undertake capital expansion plans in anticipation of larger ships and increased cargo volume particularly as a result of the expansion of the Panama Canal.

While state DOT sponsored bridge projects continue to come out for bid, we are closely monitoring the expiration of the current transportation funding which is set to expire in September and we will continue to monitor developments regarding the passage of a new funding bill. Our preference is to see longer-term visibility from any new bill which we believe could lead to bid pricing improvement.

Additionally, we continue to expect environmental restoration and remediation projects to be a good source of bid opportunities. Specifically the Clean Water Act sign process related to the 2010 oil spill in the Gulf is continuing which will ultimately fund the RESTORE Act. While this process now appears to have extended into January of next year, once signs are collected we are hopeful we could see projects coming out for bid in 2015.

The pace of Army Corps of Engineers lettings continues to be inconsistent; however, we are hopeful for improvement in the second half of the year as published work schedules by the Corps indicate a potentially stronger bid market. Despite this, we believe Corps lettings in the second quarter will remain choppy.

With regard to the WRDA/WRRDA bills, we are closely monitoring the progress as they are currently being reconciled in Conference Committee. We expect the final bill to be approved by the Conference Committee and signed into law sometime in the second quarter. While the bill's authorization of several water infrastructure projects is important for the long term, we believe the fix to Harbor Maintenance Trust Fund expenditures will be the key impact for Orion in the near term.

Turning to our recently purchased dredge material placement area, we continue to execute on site prep work at the location and expect to begin receiving dredge material at the end of June. As a reminder, this property gives us the ability to service our private customers along the Upper Houston ship channel, deploy some of our dredging assets more efficiently and generate additional revenue from disposal fees.

In closing, a record level of backlog, a strong private sector, improving end markets and industry catalysts continue to give me optimism that 2014 will be another growth year. We are poised to capitalize on these opportunities with our specialized workforce, fleet of equipment and geographic coverage. We are pleased with our end market drivers and we believe significant opportunities for continued growth exists and we are eager to see sustained profitable results.

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

Thank you, Mark, and again thanks for joining us. For the first quarter of 2014, we reported a net loss of approximately $200,000 or $0.01 per diluted share. These results compare with a net loss of $1.1 million or $0.04 per diluted share in the prior year period.

First quarter 2014 contract revenues increased 8.3% year-over-year to $81.3 million of which 40% was generated from federal, state and local government agencies while 60% was generated from the private sector. This compares to 58% from federal, state and local government agencies and 42% from the private sector in the prior-year period.

SG&A expense for the first quarter 2014 was $8 million which compares to $7.7 million in the prior year period. During the first quarter of 2014, we bid on approximately $273 million worth of opportunities and were successful on approximately $89 million. This resulted in a 33% win rate for the quarter and a book-to-bill ratio of 1.1 times.

As of March 31, 2014, we had backlog of work under contract of $255.3 million of which 12% is for federal projects, 17% is for state projects, 30% is for local projects, and 41% is in the private sector. Our quarter end ending backlog represents a record level of reported backlog and reflects our continued success with our bidding strategy.

Now turning to the balance sheet. As of March 31, 2014, we had approximately $46 million of cash on hand which compares to approximately $41 million of cash on hand at the end of 2013. At the end of Q1, we had access to $11.8 million under our revolver and total debt outstanding of $31 million of which $22.5 million was related -- was outstanding on a revolving credit facility related to the DMPA purchase in the first quarter and we had term debt outstanding of approximately $8 million.

Additionally, we are currently finalizing the renewal of our credit facility which expires at the end of the second quarter.

Further, 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 our surety. Overall we are pleased with our financial position and we remain focused on maintaining a strong balance sheet.

A solid start to 2014 is an encouraging sign for the year ahead. However, we still face some near-term challenges that will pressure gross margin in the second quarter as a result of underutilization of some of our assets due to gaps between projects. Given this, we expect to see a slight sequential decline in gross margin from the first quarter 2014 to the second quarter 2014. Still with our solid backlog level and the amount of bid opportunities we see for the remainder of the year, we believe we will have a strong second half of this year and 2014 will be profitable.

Overall we remain confident that with the continued improvement in our end market drivers and a continued focus on project execution, significant potential for growth exists over the long term. We also remain excited about the continued strong demand for our services and we are optimistic about the future growth of the Company.

With that I will turn the call back to Drew to begin the Q&A portion of the call.

Thanks, Chris. We would now like to open the call up for questions. Mark, would you please review the procedures for placing a question?

(Operator Instructions). Jon Tanwanteng, CJS Securities.

Good morning. This is actually Jack O'Brien filling in for Jon this morning. I was wondering if you could give us a little more detail on the Houston contract that you guys won in regard to the expected timing of it and whether or not there is more to come from the Barbours Cut?

I think it is publicly out there what the court has published on that. We expect award on that any day but that is as you may know, they put word out on that I think back in January. I believe the issue has been Corps permit issue. I don't want to say issue -- I think it is timing where they have been waiting on their Corps permits for both Barbours Cut and Bayport. They do have the first permit issued, they are expecting the second permit issued momentarily and once that occurs, we will get the award.

Okay, great. And then going over to gross margins, I know you guys are going to experience a little near-term noise sequentially but what do you guys think the upper limit for gross margins are as you look out to the second half of this year and further into 2015?

If we look back to the fourth quarter of 2013, we saw low double-digit gross margin at that point. We definitely think that is possible in this environment as we head into the back end of the year and things get generated. And then given the level of activity we see today and also the addition of the DMPA that we purchased in the first quarter, I think as we look into 2015, we should see that steadily improve from there.

Okay, great. Thank you very much for taking my questions.

Trey Grooms, Stephens.

Can you talk a little bit about pricing, how bid margins are trending and your expectation there? And are we at a point now where we can start to see some improving pricing going into backlog?

I think it has been slow steady progress. As we have mentioned on the last few calls, we have seen pockets of pricing improvement. That continues. We still have some areas or some types of work where while not improving, it is stable but I think overall we have seen steady improvement in bid pricing and what we have been getting in the backlog. And hopefully as we said in the remarks, as we get into the back half of the year if we do see some improvement in the Corps lettings with respect to some of the catalysts that are there, just what they have got published out there plus if we see an appropriations bill in place by September 30, for fiscal year 2015, that could improve that even further.

But I think it is fair to say that steady improvement there, again bid pricing has not been widespread improvement in it but pockets of improvement, that continues and we are making slow, steady progress on that front.

Okay. Just kind of back to Chris's comment earlier about the back half margins, is that improvement driven more by just simply better utilization or is there some pricing in that improvement, margin improvement?

It is actually a combination of both. So we do expect to have better utilization equipment in the back half of the year and that tints the point for the second quarter gap which is just a couple of jobs that have moved out that we will make up as we head into the back end of the year. So we expect to have better equipment utilization in the back end of the year and then also a coupled on top of that what Mark just talked about, we have continued to see the pockets of improvement which is reflected in the backlog.

Just further to that point, the earlier question about the Port project, that is kind of a good example of a little bit of lumpiness that is impacting the second quarter.

Sure. And then one last one and I will move on. All of the energy activity in the Gulf with the large plants expected to be built in 2015, starting in 2015, do you guys see any opportunity there either indirectly or directly?

Yes, absolutely. I mean we are seeing a significant amount of that activity today. You referenced the comments that we made in the remarks about private sector and [spend] through the quarter -- about 60% of the revenues in the quarter were from the private sector. A good bit of that is being driven by the energy sector. We are seeing and working on opportunities today in that regard and we expect that to continue. There is a lot of opportunities out there that we are tracking and we are bidding on today and then there is some that we are working on today as well.

And is it your take that with this increase in activity in the Gulf especially that that will help the competitive environment on both sides of your business where we might could see additional pricing improvement?

Yes, absolutely. I mean again, I have said for the last few quarters at least pricing today to me should be better than it is. There is a lot of activity out there. There is utilization improvements not just for us but we see that for our competitors. Again, we have seen wage pressure for quite some time now.

So again it appears to me that all the ingredients are there and it should be better today than it is. But again, we are optimistic that with all of this activity and in particular if we can see an improvement in the consistency of Corps lettings as an example and increased utilization there that that will lead to more improvement in the bid pricing front.

Thanks for the color there, Mark. I will jump back in queue.

You bet.

Jack Kasprzak, BB&T.

Thanks. Good morning, guys. On the win rate of 33%, I don't want to extrapolate too much from one quarter, but that is on the higher end if you go back in time for you guys often it has been in the teens, low to mid teens even. Is there anything going on there in terms of that number and why might you be winning at a higher percentage? Just curious about that?

If you remember kind of our historical average is about 25%. So while this is a little bit above that, partially that is just a matter of timing but I think we have been as we stated and have stated, we have been focused on maintaining backlog and I guess it is kind of a function of A, focusing on that; B, the level of work that is out there for us to go after; and the a lot -- some of it is just timing of when we get awards.

Okay. Private sector is strong, it has been strong for a little while now and 60% of your revenue as you say in the quarter. Can you talk about what you are seeing there? I know we have mentioned it in previous quarters but is there anything incrementally different on the private sector or is it just kind of more of the same?

I think it is more of the same. It is a combination again as I just responded earlier, there is a lot of stuff going on in the energy sector which has been good. We expect that to continue. We have got work going on down in the Caribbean that is non-energy sector related and we have got a lot of activity there. So that has been good for us.

And again as we mentioned, the DMPA that will be coming online toward the end of this quarter, that again will benefit the private sector and we will see continued revenue and a healthy percentage of revenue coming from the private sector as a result of that. but nothing different from what we have talked about the last couple of quarters.

Okay. My last question is Q1 gross margin 9.4%. Was that above your own expectations or more or less in line with where you thought you would be when you started the quarter?

Generally speaking, we did have some projects that finished a little bit early and they finished with that -- they had some positive improvement to it so it was a little bit above kind of where we thought it would be for the quarter.

Okay, great. Thanks, guys.

Veny Aleksandrov, FIG Partners.

Good morning, guys. My first question is on the backlog, what is the backlog mix right now? Is it close to what it has been historically and how many -- in terms of how many (inaudible) six to 12, three to six, what is the mix right now?

I guess as far as the mix goes, I would say based on historical it is a little bit more in the private sector which I think is a reflection of the remarks I just made with the activity and the buoyancy of the private sector. So that is a little bit more than maybe historical levels keeping in mind that a lot of private sector revenues kind of book and burn within a quarter on shorter-term maintenance work but --.

And then on the term side of things, it stretched out just slightly just as we have gone over some larger projects but we have seen that over the past couple of years anyway. So it is probably more in the six to nine range than the three to six range.

Six to nine, okay. And the follow-up question, you talked about some of the projects coming into the quarter and booking (inaudible) into quarter. If you look at the euro and the fall, how much would you say you have an entry -- like how much do you burn that doesn't really (inaudible) if you look at the backlog?

That is tough to say. That varies from period to period and it is tough to say what that is but there is always some element of that particularly again with these smaller projects. It is tough to give a specific number on that because it varies from period to period. We know it is there. We know it is going to occur, it is tough to say how much that is going to be.

Thank you so much. I appreciate it.

You bet.

[Ludine Scott], Imperial Capital

Good morning, guys. So hoping for a little bit more color on -- because of the choppiness with the Army Corps here, I know they passed the budget for 2014, you have got the water bill potentially here this quarter. Has trends there been worse than you would have expected say six months ago and what do you think might be driving that?

Honestly I am not really surprised on what we are seeing because while we did get the budget bill towards the end of last year, beginning of this year, then we still kind of had the debt ceiling issue that didn't get resolved until February. And again those two things coupled with just the pace of how things work, it is not surprising and if you go back to what we said, we expected choppiness through the first half of the year.

Having said that, it looks as though based off the published work schedule that we should see an uptick as we go into our Q3 and the government's Q4 and that would be driven off of the funding that was put in place as a result of the two-year budget deal back in December and January. So that is not really a surprise.

Then looking forward again, we will be monitoring real closely to see where we wind up with appropriations for fiscal year 2015 which would be under the two-year budget deal. The budget framework is in place. They just need to pass the appropriations bills and clearly if that is in place before October 1, that would be a very big positive we believe.

And then secondarily, again, if the WRDA/WRRDA Bill comes out of committee, get signed into law this quarter then in theory that impact with respect to the Harbor Maintenance Trust Fund could be factored into the appropriations for fiscal year 2015.

So we are going to be watching that real closely but based on that again, we could see an improvement in the choppiness of the Corps lettings as we move through the back half of the year.

That is very helpful. Thank you. Just my follow-up, maybe a little bit more color on the implications of the Ship Channel and the thought process behind that acquisition and I think you had mentioned that in terms of the positive impact from margins. Is that due to the tie-in with some of the dredging work that you have booked in the private sector, is it due to disposal activity you expect to do with third parties? Maybe a little bit more color on that.

It is really a combination of both. I mean again a lot of activity going on in the Upper Houston Ship Channel and we had identified a need of -- a placement area for the dredge material that needed to go to -- in other words, there was more material that we could see upcoming than there was a place for it to go. And so that drove us to look for a solution there and we did that by closing on the property.

So again, it benefits us in a couple of different ways. One, it allows us to get some utilization on this with the dredging assets on some of this private sector work and it solves a problem, provides a solution for our customers who were looking for places to put their material. And then the additional benefit is the disposal fees that we will generate on placing the material on the property which is a -- occurs all the time, it is just that we don't typically participate in that. They are still collected by somebody but now that is a fee for material that we put in that site. We will collect those disposal fees there so that will provide some additional revenue for us on that front. So it helps us in a number of different ways.

Got you. Maybe one last one really quickly on G&A. What are your expectations there? Should we just kind of -- you flatline, you come up a little bit, any thoughts on how the quarters play out from a G&A standpoint in 2014?

Generally speaking, I think you will model in something relatively flat compared to what we saw in the first quarter, maybe a slight uptick in the fourth quarter as we kind of finish out the year and hopefully we are in a bonus payable situation by that point but that is kind of how I would model it out.

Got it. Thank you.

You bet.

Chris Snyder, Sidoti & Company.

Good morning, guys. So my first question is kind of on bid margins. As you guys noted, it seems like with all the activity bid margins should be better than they are. Is this just you guys think that people are afraid to move pricing or do you think there is a couple of catalysts or events we need to happen to get that pricing to improve?

I think it is kind of a combination of the two. I think partially and I've felt this for a while is I think it is a business confidence thing and that is kind of a tough one to measure and a tough to say when I that is going to change -- I mean we certainly have the business confidence and we would be moving pricing ourselves if it was solely up to us. But I think that is some of it.

I think it depends on the sector. I think as we said in the remarks in particular with the DOT work, I think longer-term visibility is what is impacting the bid margin improvement there. To the extent we saw a longer-term funding bill that gave visibility to the marketplace, that would be a positive catalyst we believe to improve the pricing. But again, we are seeing areas and pockets of it.

While it is not widespread, we think it is moving in the right direction. But again, I think one of the bigger things just overall is this is sort of I just chalk it to business confidence. So hopefully as we see some of the things going on in the macroeconomic level and potentially see improvement in general economic conditions, maybe that is the catalyst we need to see the psychology of bid pricing change.

But we are going to be out there slugging away at it, looking for opportunities every chance we get as we have been and so again, we are long term, we are optimistic about returning to historical levels.

Keep in mind that one thing that one thing that can take our margins down is not having the utilization that we would like to have and I think that can have as big an impact to what we deliver for the quarter as what we are bidding. I think on the whole, we are pretty pleased with the bid margins we are giving in today's market.

Yes, that actually kind of leads into my next question. I don't know how much clarity you guys have on this but I was hoping you could give some color on where do you think gross margins could go without any bid margin improvement? Just on getting higher utilization of all of the fixed assets including the dredging?

That is probably a little bit difficult to nail down completely. You know, I think we could easily get into the low to mid double digits or midteens level number. But it kind of depends on what are the types of projects, where are they located, what is the risk factors involved with those so there is a number of different items that play in to getting that done.

But I think just further to that point, if you are talking about absent bid margin improvement, in other words just kind of status quo, I think you have seen flashes of that in the past like if you go back to Q4 of last year, we kind of saw that in Q4 in the prior year where we had an uptick in utilization in particular of the dredging assets. You would see us in kind of that low double digit type range.

So again to the extent we see improvement there and see kind of a smoothing out of this choppiness in Corps lettings in particular, that could lead to better utilization there and we could just see naturally see an uptick in margins to that level absent any further broad bid margin improvement. So bid margin improvement I think would then lead us to more moving on up from there.

Okay, that is very helpful. Thank you for the time, guys.

You bet.

(Operator Instructions). Min Cho, FBR.

Good morning, guys. Just a quick question on the DMPA. Any change to your expectations for revenue for the second half of the year? Do you see any upside to that $7 million?

There is definitely the potential for upside but at this point I think that $7 million is a pretty good number.

Okay, can you talk about just anecdotally what you are seeing in terms of increased bid activities as a result of the DMPA?

There is a number of projects that have been ongoing in terms of where they are in the process or the pipeline. There is certain projects that we have in hand that we will be utilizing the site for. So we anticipated that at the time we went after that work. There's other projects that are continuing to bid or -- they are either in the bid stage or they will bid later on this year that we would be able to utilize that site for.

And of course, then there is just the normal maintenance work that we would expect to see in whatever cycle particular dock is at that we would be able to utilize the site for. So again, we think that once we have that online, that will help get some dredging assets back to work and provide some scheduling ability for us to plan out our schedule and stuff on, getting some of those assets utilized.

Okay. And then just final question on -- to go through the year and if it seems like a long-term transportation bill is not going to happen before the end of MAP 21, do you think there is any risk to your current backlog especially the backlog tied to your bridge work or do you feel pretty comfortable with the funding of what is in backlog?

We feel very comfortable with everything that is in backlog. I think again, I suspect what will occur is -- in the absence of a long-term funding bill, I suspect what would occur would be some sort of continuing funding like they did in between the current highway bill and the one prior. Obviously as you are aware, there was a pretty wide gap between those two bills but yet they continue to fund.

I think the big impact we would see at that point is just not seeing a catalyst for pricing improvement. I don't know that we would say given where we are today, I don't think that just overall that would depress pricing but I don't think it would necessarily help improvement of bid pricing in that eventuality. But in terms of be backlog we have, we don't think that has any impact on the backlog that we have.

Okay, great. Thank you.

There are no further questions. I would now like to turn the call over to Drew Swerdlow for closing remarks.

On behalf of Orion Marine Group, we would 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.

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation and you may now disconnect. Have a good day.