Orion Group Holdings Inc (ORN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Orion Marine Group earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Drew Swerdlow, Investor Relations Manager. Please proceed, sir.

Good morning and welcome to the Orion Marine Group second-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 the call, we have allocated about 15 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 sales 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 risks 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 margins 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 July 31, 2014 and our quarterly and annual filings with the SEC which are available on our website for additional discussion 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 thank you for joining us this morning. First, I would like to thank our more than 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.

In fact, we had good success securing additional work during the quarter and ended with a record backlog of $281.6 million. This backlog along with strong market demand gives us optimism about the road ahead. As expected given our mix of work in the second quarter and the delay in the start of certain jobs, we experienced gaps between projects during the second quarter which pressured margins due to idle labor and equipment. However, these delayed projects have started in the third quarter and along with our backlog in continued solid bid opportunities, we expect to see significant improvement in asset and labor utilization in the back half of 2014.

Turning to our market outlook, overall we continue to see strong demand for our services with improving industry catalysts which should bode well for the long term. Specifically, demand from the private sector continues to be a solid driver of bid opportunities to repair, expand and refurbish waterside infrastructure. We expect this high level of bid opportunities to remain strong for the foreseeable future driven by energy related customers, private terminal developments and recreational dock infrastructure developments.

Local port authorities should also continue to provide a steady source of bid opportunities as they continue to undertake capital expansion plans in anticipation of larger ships and increased cargo volumes as a result of the expansion of the Panama Canal. As you are probably well aware, the current phase of the Panama Canal expansion is expected to be completed in 2015.

While we could see additional delays in the completion of this phase of the expansion, we expect to continue to see opportunities in the US and Caribbean ports for the next decade. Currently there is over $10 billion of planned port expansion in our market areas over the next 10 years. This level of activity will be a driver of opportunities for our services for deepening projects, infrastructure improvements and associated maintenance services.

On the state side, we are monitoring the status of the current highway funding which is set to expire at the end of September. Our preference is to see longer-term visibility for many new funding bills which we believe could lead to bid pricing improvement. However, a shorter-term bill or a continued resolution is more likely given the current political environment. While a shorter-term bill may not help improve the bid pricing environment, we believe even with a shorter-term bill or a continued resolution we will continue to see opportunities to bid on bridge related work.

Additionally, we continue to expect environmental restoration and remediation projects to be a good source of bid opportunities in the future. Specifically the Clean Water Act fine process related to the 2010 oil spill in the Gulf is continuing which will ultimately fund the Restore Act. As we have discussed before, this process has been extended into January of next year. However once the fines are assessed and collected, we are hopeful we could see projects coming up for bid in 2015.

Finally, turning to the federal government sector, during the second quarter the WRDA bill was passed and subsequently signed into law. We believe this is a positive step forward for the nation's water infrastructure. Specifically, the legislation authorizes projects that should be let in the future once funds are appropriated through the normal funding process.

More importantly, we now have resolution on the Harbor Maintenance Trust Fund, or HMTF, issue and expect to see a 30% increase in spending from HMTF funds for maintenance of the nation's waterways in 2015. From there, spending from the HMTF will continue to increase on an annual basis for the next 10 years until the full amount of HMTF funds collected annually goes towards maintenance of the nation's waterways. This additional funding should help the Army Corps of Engineers carry out its mission of maintaining the nation's waterways over the long term.

For fiscal year 2015, our preference would be to see an appropriations bill passed soon after the August recess that allocates funds under the previously approved fiscal 2015 budget. However, the likelihood of a continuing resolution being passed is increasing. Still we view the WRDA and HMTF developments as movement in the right direction. With a solid level of funding for fiscal year 2015, we would anticipate steadier lettings from the Corps next year.

Already we have the opportunity to bid on several projects for the remainder of this fiscal year and we are hopeful that pace will continue as we head into 2015.

A healthier level of bid lettings from the Corps would enable us to maintain better continuity between certain jobs and increase the utilization of some of our assets.

Also I am pleased to report we have successfully completed receiving the first dredge material into our dredge material placement area and we are well underway on additional work. This new service has been beneficial to our customers and we are very pleased with the progress we have seen today at the site. As a reminder, this property gives us the ability to service our private customers along the upper Houston ship channel, deploy some of our 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 us optimism about the remainder of 2014 and beyond. We continue to see a healthy market with solid drivers and we believe we are poised to capitalize on these opportunities with our specialized workforce, fleet of equipment and geographic coverage.

As I said earlier, the back half of 2014 is shaping up nicely and should drive solid results for the full year. Additionally, we are now building backlog for 2015 and remain optimistic about the level of bid opportunities we see.

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

Thank you, Mark, and again thanks for joining us. For the second quarter 2014, we reported a net loss of approximately $1.2 million or $0.04 per diluted share. These results compare with a net profit of $0.2 million or $0.01 per diluted share in the prior-year period.

Second-quarter 2014 contract revenues increased 7.3% year-over-year to $90.3 million of which 42% was generated from federal, state and local government agencies while 58% was generated from the private sector and this breakdown is comparable to the prior-year period.

SG&A expense for the second quarter 2014 was $8.1 million which compares to $7.8 million in the prior-year period. During the second quarter of 2014, we bid on approximately $429 million worth of opportunities and were successful on approximately $117 million. This resulted in a 27% win rate for the quarter and a book to bill ratio of 1.29 times.

As of June 30, 2014, we had backlog of work under contract for $281.6 million of which 9% is for federal projects, 17% is for state projects, 22% is for local projects, and 52% is in the private sector. Our quarter-ending backlog represents a record level of reported backlog and reflects our continued success with our bidding strategy.

Currently we have approximately $205 million worth of bids outstanding of which we are the apparent low bidder on approximately $27 million. From a bid margin perspective, we are continuing to see pockets of improvement in pricing but the trend has not become widespread. However, an increased demand in certain areas continues and we could see upward momentum on bid pricing. Regardless, with the level of backlog and current bid opportunities we see in front of us, we still expect to see some improvement in reported gross margins during the back half of 2014 as our labor and equipment utilization improves.

Now turning to the balance sheet, as of June 30, 2014, we had approximately $34 million of cash on hand which compares to approximately $41 million of cash on hand at the end of last year. At the end of the quarter, we had access to $11.8 million under our revolver and total debt outstanding of approximately $31 million. This debt includes $22.5 million on our revolving credit facility with term debt of approximately $8 million.

Additionally, we have finalized a one-year extension of our current credit facility which now expires on June 30, 2015. Details of this extension will be filed with our Form 10-Q. Further, our bonding program remains solid and is more than adequate to support our bid activities. Also we continue to enjoy excellent relationships with both our lender and surety. Overall, we are pleased with our financial position and we remain focused on maintaining a strong balance sheet.

In conclusion, we are pleased with our outlook and continue to expect 2014 will be a profitable year. Beyond 2014, our market drivers remain strong which should lead to continued high demand for our services. Further, we believe we are well-positioned to meet this high demand with the right talent and equipment to get the job done.

Overall we are excited about the road ahead and we continue to believe Orion has a strong future with ample opportunities for continued growth for years to come.

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

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

(Operator Instructions). Trey Grooms, Stephens.

Good morning, guys. So it sounds like you guys are going to have some pretty high utilization rates in the second half. You said that utilization rates will improve. Just trying to get a sense for how we should be thinking about margins in a highly utilized type of scenario given the pricing currently in backlog. You said some improvement but can you be a little bit more specific there, give us a little bit more color on how to think about that?

We don't want to specifically give guidance on that, Trey, but kind of a way to start to think about it a little bit, if you think about back in the fourth quarter of last year, we had decently good utilization of our overall fleet in that time period as well and you can see we had a gross margin of about 12%. I think that is probably somewhere in the ballpark depending on of course the mix and timing of the jobs.

Okay, that is very helpful, Chris. And then my follow-up, it sounds like you guys are incrementally more positive and incrementally more confident in the back half of this year and looking out to next year. I understand the back half of this year is pretty much in place but as you look into 2015, Harbor Maintenance Trust Fund obviously going to benefit. But is WRDA going to play a role in really helping you guys out with additional bid opportunities in 2015 or is that a little bit longer-term outlook for that?

I think that is a little bit longer-term outlook. That will probably -- obviously those projects are approved so that is the first step of the process which is what WRDA did, it approved, authorized a list of projects. They will have to go through the normal funding process so that will actually be a catalyst for the next several years. It is possible we could see some of those projects start get funding next year in 2015 but I think the more immediate impact that we see out of the WRDA is the beginnings of the utilization of the HMTF funds. So that is the bigger short-term impact.

And yes, with respect to the back half of the year and I mean I don't know necessarily that it is much of a change from what we talked about before when we spoke a couple of months ago on the Q1 call, I think we were kind of thinking the same thing, Q2 came in about where we sort of expected it given the gaps that we saw with certain projects. But we are teed up nicely for the back half of the year and we did have some positive development of the WRDA passing so again the most immediate impact for 2015 there is the HMTF issue.

Keep in mind the Harbor Maintenance Trust Fund is going to increase 30% in 2015 and each year after that it will increase about 4% per year until we get up to the full amount so that is the best news we have heard yet.

Great. I will stick to my two questions and then jump back in queue. Thanks, guys and good luck.

Scott Levine, Imperial Capital.

Good morning, guys. So maybe a little bit more color on the pricing environment. You talked about your operating strategy generically. I am guessing that really hasn't changed much. And maybe I'm over analyzing or misinterpreting but do you guys seem incrementally positive on the pricing environment generally within the business and or maybe a little bit more color with respect to general market trends in competition and whether we can expect things to improve if indeed the award pace from the public sector side of your business improves over the next six to 12 months?

I think again as we have said, it is moving in the right direction. We have seen pockets of pricing improvement, it is not yet widespread. I think I have said specifically in the last couple of calls we feel like -- it feels like we are out there in the marketplace at a tipping point where we should see widespread pricing improvement. I would love to be able to tell you I knew when that was but we continually probe that in terms of testing the market and looking for opportunities to push it.

As we have said before and we will say again today, in our view the table is set for better pricing improvement. All the indicators are there or in queue to be there. We think pricing should be better today than it is but we are pleased with the win rate. We have been consistently for the last several quarters at our kind of historical win rate so that is reflective of we think we have a good handle on where the market is for bid pricing.

But and again, we've got certain areas where we have seen improvement in bid pricing but we are just continuing to test it so we can see that on a more widespread basis. And again, our feel is that it should be there today but we do think over the long term we are moving in the right direction. We have seen improvement certainly over the last 12 months in this regard and expect to continue to see at least incremental pricing improvement. But again, it has kind of been a slower climb out of the trough as expected. That is not really a change from what we have said in the past.

Got it. Thank you. And as a follow-up, can appreciate the implications of the WRDA bill longer-term but if we can assess maybe the -- it sounds like a little bit more of a positive tone on the public sector lettings in the near term. Maybe the relative importance of the highway bill for the bridge side versus the importance of that versus the appropriations bill for the fiscal 2015 budget. Can you help us get a bit better sense of the relative importance of each of those potential developments here going into the back half?

Sure, sure. With respect to the appropriations process, we kind of had said last call that we were teed up nicely with the budget framework in place for 2015 that was agreed to back in last December. The passage of the WRDA bill which released additional funds from the HMTF, it all was kind of lining up nicely. Where we are in that process is the House has passed an appropriations bill to fund the Corps for fiscal year 2015. The Senate Water & Commerce Committee I believe it is, has passed or Energy & Water Subcommittee -- excuse me -- has passed an appropriations bill but it has not had any further action in the full Senate.

As you know, they are breaking camp for their August recess. They come back after Labor Day for a short period of time before they go out campaigning. So the timeframe is dwindling for a passage of an appropriations bill in the Senate. So it is looking a little more and more like we are going to have a CR where they are going to kick the can down probably to the lame-duck session in December which would be unfortunate. I still think it would be an improvement over last year just with the additional funding out of the HMTF but clearly what we would like to see is a full-year appropriations in place on 10-1. There is still a possibility for that. We are going to be watching that very closely but as I said, it still should be an improvement over last year.

With respect to the highway bill, clearly we would like to see a long-term -- like we used to in the old days -- see a five or six year bill which brings continuity to the lending process from the various state DOTs. That doesn't look like that is going to happen either, it looks like again that is going to probably either through a short-term bill or a CR be pushed either to the lame-duck or to the next Congress after the midterms.

So again, we will probably be status quo there which again isn't the end of the world. We continue to see bid lettings come out but we think once we get ultimately we will get -- it will probably be either late this year or next year when we see a longer-term highway bill. That hopefully will again be another catalyst for bid pricing improvement. So that is when we will be watching closely.

Generally speaking, Scott, I mean even with regard to -- important and clearly in the short term we would like to see that appropriations bill occur. We are starting to see some activity from the Corps but we would like to see that continue throughout 2015 or fiscal 2015 or their fiscal 2015, so clearly getting an appropriations bill done quickly will help that pace stay hopefully a little more steady than it has been in prior years.

Thanks. Just to be clear even with some of these uncertainties you would still expect a quicker pace maybe in the back half than what we saw in the first half?

Yes, yes.

Okay, great. Thank you.

Jon Tanwanteng, CJS Securities.

Thank you for taking my questions. Just wanted to clarify on the dredging, can margins reach what you did in Q4 last year with what you have in hand in the backlog and your low bids right now or do you need to win more awards to get there?

There are still a few gaps out there that we would like to fill but generally speaking as we have announced throughout the year and even a couple at the end of last year, those jobs are getting started and they are putting some assets to work. So we feel a lot more comfortable with the back end of the year. Like I said, there's still some pockets but there's still some opportunities to fill those pockets.

Okay. How confident are you in filling those pockets?

There is a pretty good letting schedule right now as we said in our remarks and so we think at least through our third-quarter the government's fiscal fourth-quarter there is a lot of activity out there so we have got a good shot at picking up additional work.

And there continues to be some good private activity as well so those two should balance each other out hopefully.

Plus with the work that we have in hand.

Okay, great. Can you take a stab at 2015 utilization at all? I mean given the two scenarios of either a full appropriations bill or a CR or later appropriations like we had this year?

Clearly if we get a full of appropriations bill and we got that before October 1, we would hope that the pace of lettings would be a lot steadier and we'd have greater continuity in between our jobs. We still feel pretty comfortable on the private sector and the level of activity that is going to be there. At this point in time, we really need to see some of that play out before we can start making better guesstimates of what we think 2015 utilization. I think from our perspective, there is definitely -- the stage could be said where 2015 could be the year we start to see the lettings come out in a little bit steadier fashion which should generally help our utilization levels.

But the flipside of that is we've got a little stall here with the Senate and the appropriations for 2015 so the question will be when they come back from recess will we get that done? Will we see a continued resolution through the end of the year or beyond? So how does that affect the timing and kind of the pace of the lettings for the different District Corps commanders?

Okay, got it. And then finally, we have seen some large projects in the Gulf push out a little bit or have their schedules staggered into smaller pieces. Have you seen this in your own business and does that impact your outlook at all?

I would say from our standpoint, we have not seen anything out of the ordinary. There is the normal ebb and flow of how projects come out. Some get larger, some get broken up. We are pleased with the level of activity we are seeing particularly in the private sector and we've got a lot of as we said, record backlog and we've got a lot of nice things upcoming to bid on so nothing out of the ordinary from that standpoint.

Okay, great. Thank you very much.

Veny Aleksandrov, FIG Partners.

Good morning. My first question is again about margins in Q3 and Q4. Can you talk about some pockets that you have to fill in but only 7% right now of backlog is federal. Do you have more lettings from the Corps of Engineering? Is there an upside to these margins?

It is a little bit too soon to tell to be honest with you, Veny. I think there is always that possibility. I don't know that at this point we really want to kind of count on that. If we saw outside utilization for example if a l lot of jobs happened and we got fully utilized with all of our assets, there is the potential we could see some growth. Keep in mind though that you still have the general pricing pressures that we have talked about and while we are still seeing cost improvement and things are getting a little bit better, we are still working off of the work we have in backlog today that is at lower margin so that will kind of limit the full amount of growth you might see.

Okay. My second question is the dredge material area, you mentioned the first job happened there. How should we think about that? Should we see a significant contribution from margins or should we think more of a revenue contribution and relationships developing?

I kind of go back to what we said when we initially bought it in the first quarter. It is definitely a nice business to have. It is a new revenue stream and as we now are collecting disposal fees that would otherwise be paid to other disposable areas. Generally speaking, we had said that we feel we could get upwards of $7 million of revenue in 2014 related to that. I think that is probably still a good figure to go with. We are pretty much on track with the plan that we had initially and that is flowing nicely.

From a margin perspective, it is definitely a nice margin contributor but I would say think more standard on the margin contributions side with some pickup in revenue there.

That is great. Thank you so much.

(Operator Instructions). Jack Kasprzak, BB&T.

Good morning. So second quarter last year you had about $6 million less revenue but about $2 million more in gross profit. I was just wondering if you could help us understand the change in the mix of projects that affects that difference this year second quarter versus last year second quarter. Were there more closeouts of projects or was it just purely kind of the mix of work that accounts for that kind of difference?

Honestly, Jack, it was really the mix of work so it was the type of services that were brought to bear on the different types of jobs so you did have some work last year that closed out but we have also had work that started up this year and we have had some gaps in between some of the projects and that is going to make an impact on the types of services that are coming to bear at any given time on the project.

So with that, it is really more than anything just a mix of the services that were brought to bear and the types of assets that are used in those services and we had some higher cost assets that were underutilized in Q2 2014 as compared to Q2 2013.

And that is what kind of -- we talked about in the release and the remarks today. That mix and what Chris just touched on in terms of the types of assets utilized and underutilized during the quarter that is what led, we had an increase in idle labor and equipment in Q2 2014 versus Q2 2013.

And one thing just to follow-on to that, we have talked about this before. Sometimes we are able to flex a little bit of the labor side in time periods where we have less utilization but given this time period, we do have a lot of work to go to work on in the back end of the year. We are getting ready for a lot of that work, doing some minor repairs that needed to be done. That also put some pressure on that.

Okay, thanks. Second question is can you tell us your mix of dredging projects in the backlog right now versus this time last year? Is it meaningfully different?

Yes, I think it is fair to say with some of the private sector work, some of the work that we announced earlier this year that will utilize some dredges that we do expect the back half of the year that we would see an increase in those assets being utilized versus the first half of the year.

As we said also, there's some Corps projects on the docket now in this quarter to bid on so we are hopeful there. And we talked about the DMPA coming online and our ability to service our private sector clients and that will also help some utilization in the back half of the year.

Okay, great. Thanks very much.

There are no additional questions at this time. I would now like to turn the presentation back 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.

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