Orion Group Holdings Inc (ORN) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Orion Marine Group, Inc., third-quarter 2014 earnings conference call. My name is Jasmine and I will be your operator for today. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Drew Swerdlow, Investor Relations Manager. Please proceed.

Good morning and welcome to the Orion Marine Group third-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 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 in 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 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, October 30, 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.

Before I turn the call over to Mark and Chris to discuss our results, Mike Pearson would like to say a few words regarding his retirement. Mike.

Thank you, Drew. I wanted to take a moment just to thank the entire Orion team for all they have done over the past nine years during my tenure at Orion.

We have had solid growth in our operational assets and capabilities, broadened our talented workforce, expanded our permanent presence into new markets, and managed through a significant downturn in the economy.

It's been an honor to be part of a company that provides such essential services to a variety of clients to maintain and improve our nation's waterways infrastructure and I look forward to my continued involvement with Orion Marine Group as a Board member.

Additionally, it's been a pleasure working with and getting to know our many shareholders. Orion Marine Group is a strong company with a solid team, who do a tremendous job every day. I am confident Orion is well positioned for the future and I believe we're on the right path for continued growth in the future.

With that, I'll turn the call over to Mark and Chris to discuss our market outlook and financial results in more detail. Mark.

Thanks, Mike. Before I begin, I wanted to take a moment to publicly wish you well in your retirement and say that it's truly been an honor and a privilege working with you these last nine years, and I know Orion will benefit by having you continue to serve as a Board member.

Thank you, Mark.

Turning to my remarks, I would also like to thank our more than 1,200 co-workers for all their hard work and dedication. During the third quarter, higher asset utilization and solid project execution led to a profitable quarter and year-to-date positive bottom-line results.

Additionally, we continue to see a healthy bid market, which should bode well for the fourth quarter and for 2015. Overall, we are pleased with our results for the quarter and the amount of work we bid on and won.

Regarding our market outlook, as a heavy civil marine contractor our business is rooted in facilitating the movement of goods and people along and over waterways. We believe the efficiencies of waterborne transportation will continue to drive solid demand for our services with improving industry catalysts. This should lead to continued demand for improved and expanded waterside infrastructure, as well as high levels of maintenance that is required to keep the channels, ports, locks, and docks operational.

This demand is being driven by several key factors. First, private sector energy-related clients and recreational customers continue to be a solid driver of bid opportunities as they expand, repair, and refurbish waterside infrastructure. We expect this high level of bid opportunity to remain strong for the foreseeable future.

Within the private sector, we are also seeing a trend toward design-build projects, which in the long term could provide us more turnkey opportunities.

Earlier this year, we continued to expand our turnkey service offerings with the purchase of the Dredge Material Placement Area. The DMPA allows us to provide a much needed service to our private sector clients in the upper portion of the Houston Ship Channel, particularly those undertaking capital expansion projects.

Additionally, local port authorities should also continue to provide a steady source of bid opportunities as they undertake capital expansion plans in anticipation of larger ships and increase cargo volumes, primarily due to the Panama Canal expansion. 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 deepening projects, infrastructure improvements, and associated maintenance services.

As discussed last quarter, we are pleased that the WRRDA bill was passed and signed into law, which we believe is a positive step forward for the nation's waterway infrastructure. Among the benefits of this act are the authorization of projects to be let in the future, once funds are appropriated, and the resolution on the Harbor Maintenance Trust Fund, or HMTF, issue, which will provide increased funding for the maintenance of the nation's waterways.

Beyond improving and maintaining waterside infrastructure, we also expect to see bid opportunities for coastal restoration projects. Specifically, we continue to monitor the progress of the fines to be assessed as a result of the 2010 oil spill in the Gulf of Mexico. Under the RESTORE Act, once these fines are assessed, which currently is expected to occur sometime in 2015, we should see additional bid opportunities related to coastal restoration in the five Gulf Coast states.

Additionally, we expect to continue to see bridge-related opportunities as a result of a continued focus on US infrastructure improvements.

Finally, with regard to the federal government, while uncertainty still remains in terms of the pace of U.S. Army Corps of Engineers lettings for fiscal-year 2015, we are pleased with the list of projects we're tracking. If this list of projects is fully and timely let by the Corps, it should provide opportunity for continued asset utilization.

Also, we expect to continue to see opportunities from the U.S. Navy and the U.S. Coast Guard for additional waterside infrastructure repairs and improvements.

In closing, we continue to see a healthy bid market with solid long-term drivers. We believe we are poised to capitalize on these opportunities with our specialized workforce, fleet of equipment, and geographic coverage. Additionally, we continue to build backlog for 2015 and remain optimistic we will see bottom-line and EBITDA growth in 2015.

That being said, our business can be lumpy. However, we're optimistic that 2015 will be an improvement over 2014. That said, I will turn the call over to Chris to begin the -- to discuss our financial results in more detail.

Thank you, Mark, and again, thanks for joining us.

For the third quarter of 2014, we reported net income of approximately $3 million, or $0.11 per diluted share. These results compare with a net loss of $0.9 million, or a loss of $0.03 per diluted share, in the prior-year period.

Third quarter of 2014 contract revenues increased 20% year over year to $107 million, of which 40% was generated from federal, state, and local government agencies, while 60% was generated from the private sector. This mix is comparable to the prior-year period.

Third quarter of 2014 gross margin was 12.1%, or $12.9 million, which compares to gross margin in the prior period of 6.3%, or $5.6 million. Looking ahead, we expect fourth-quarter gross margin and revenue to remain at similar levels to the third quarter.

SG&A expense for the third quarter of 2014 was $7.9 million, which compares to $8 million in the prior-year period.

During the third quarter of 2014, we bid on approximately $237 million of opportunities and were successful on approximately $67 million. This resulted in a 28% win rate for the quarter and a book-to-bill ratio of 0.63 times.

Overall, we are pleased with both the amount and type of work we bid on and won during the quarter. While our book-to-bill ratio fell below 1 times, this is the result of normal fluctuations and the timing of bids. For the year to date, our book-to-bill ratio is approximately 1 times and we continue to have a positive market outlook.

As of September 30, 2014, we had backlog of work under contract of $242 million, of which 16% is for federal projects, 19% is for state projects, 21% is for local projects, and 45% is in the private sector. Additionally, we currently have over $159 million worth of bids outstanding, including approximately $37 million on which we are the apparent low bidder.

Finally, we continue to see pockets of improvement in bid pricing. This has resulted in some improvement in backlog margins. Additionally, we continue to test margins upward when appropriate.

Now turning to the balance sheet. As of September 30, 2014, we had approximately $46 million of cash on hand, which compares to approximately $41 million of cash on hand at the end of the year. At the end of the quarter, we had access to $7.9 million under our revolver and total debt outstanding of $33.4 million.

During the third quarter, debt increased by $3.2 million, related to financing for the purchase of a replacement dry dock to be used in the maintenance of our equipment. We expect the financing of the dry dock to move from the revolver to the term loan component of our credit facility during the fourth quarter.

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.

As we have noted before, we are always looking at our capital allocation strategy. Along those lines, the Board of Directors has authorized a share repurchase program under which we may repurchase up to $40 million of the Company's stock over the next five years. The specific timing and amount of future share repurchases, if any, will vary based on our capital needs, market conditions, security law limitations, and other factors.

In conclusion, we are excited about the opportunities for growth in 2015. Continued strength in the private sector, opportunities from local port authorities to expand their waterside infrastructure, and an encouraging project list from the Corps of Engineers should provide opportunities for improved asset utilization in 2015.

Beyond 2015, 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 opportunities for continued growth for years to come.

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

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

(Operator Instructions). Veny Aleksandrov, [SIT].

My first question is on your outlook and on the energy-related customers. You are very upbeat about the demand that is about to come from these kind of customers, but the energy sector has been under pressure. Apparently, you don't see that pressure. Can you talk a little bit more about it?

Yes, well, there is a lot of infrastructure-related projects. We are obviously well aware of what the price of oil has been doing, but we continue to see a lot of activity domestically in terms of the whole energy revolution that's gone on here domestically.

Certainly, we could in the long term be impacted by macroeconomic conditions, but right now what we are seeing is we continue to see opportunities. This stuff is being produced. It has to go somewhere. There is the whole infrastructure-related efforts that are ongoing, and so, we expect to continue to see these opportunities for the foreseeable future.

Thank you. It sounded like you are seeing some pockets of pricing improvements. You are trying to push margins up here and there. Can you spend a little bit of time talking about the backlog? The backlog has decreased slightly in the quarter and it's probably seasonal effect, but just to give us a little bit more details?

Yes, absolutely. We did see a little bit of pullback in the backlog. That is in relation to, one, our strong demand for our services, and then general seasonality -- or strong execution on our projects and our general seasonality. We are not alarmed by that at all. We continue to have a great, robust bid market ahead of us.

Like I talked about, we are seeing pockets of pricing improvement. That is flowing into our backlog, so we are seeing a little bit of improvement there in our backlog. Again, it's not completely widespread, but we are starting to see those pockets pull through and come into both our backlog and will start going into our results.

Thank you so much. Appreciate it.

Trey Grooms, Stephens.

Great quarter. On the pockets of improving bid pricing, is that more on the dredging side of the business or on the construction side of the business? Can you talk a little bit about that?

I think it's both. Really, it's just -- again, we are seeing pockets of pricing improvement on the various projects that we are going after. Again, it's not widespread yet. We are hopeful that it will improve as we move through into 2015.

As I've said on the calls for the last several quarters, we think that it should be more widespread. There is demand out there. There is wage pressure that we have seen for quite some time. All the ingredients seem to be there for a more widespread pricing improvement.

We are certainly going to try to do our part to, as Chris said, push that up when we see the opportunities. Again, I think we are making steady progress in terms of market improvement, and at this point, we just need to keep looking for opportunities to get the market where we think it should be and look for opportunities to keep the utilization levels high.

On the topic of utilization levels, as you look at your backlog, you are talking about a healthy bid market. Would you expect to see similar type utilization in the 4Q as we did in the third quarter or any expected change there?

Yes, given where the backlog is and the projects we have, we would expect our utilization in the fourth quarter to be similar to the third quarter.

Great. I am going to sneak one more in here. On the DMPA, can you talk about the contribution from that in the quarter, how that's going?

Then, lastly, would also like to congratulate you, Mike, on the retirement and best wishes as you enjoy your retirement years ahead. Thanks.

Thank you very much, Trey.

With regard to the DMPA, we don't specifically break that out. We feel that's part of our included and an extension of our total services that we offer. What I can say is it's performing as we expected.

Okay, thanks a lot. And again, great quarter and good luck, guys.

Jack Kasprzak, BB&T.

Best wishes to you, as well, Mike. I appreciate your generosity with your time over the years.

Jack, thank you.

I just wanted to ask about pricing again because that's obviously important. Is there a way to -- and your comments seem incrementally a little bit more encouraging, if that's the word, than what we have heard in recent quarters. Is there a way to frame out a little bit on the amount of your business that is seeing a little bit more price improvement?

Not necessarily asking for percentages, but just some kind of more granular look. Are people finishing projects and realizing there is more work coming? They are just feeling a little bit more bold? What's your feeling there?

I think that it's -- again, it's obviously with a very severe recession, arguably at least in 30 some years and maybe even 80 years. I think, again, as I have said on the calls the last several quarters is I think the thing that has been lacking is business confidence, if you will, in terms of all the ingredients being there.

I guess that's a tough question to answer, Jack, but I would say that, again, incrementally, I think you phrased it correctly. We are seeing steady progress on that front. We expect that to continue. We feel good about 2015 being an improvement over 2014 and think we are making -- continue to make steady progress along those lines.

I think, yes, we certainly have said barring any kind of macro breakout in the economy of sustained higher GDP growth, we certainly could see it accelerate, but we are not talking about that in terms of our remarks in terms of a hockey stick for next year, if you will, but we do think we will see steady improvement and that full-year 2015 results should be an improvement over 2014.

Yes, great. That's very helpful. Thanks a lot, Mark. That does it for me.

Scott Levine, Imperial Capital.

Maybe a little bit more color on the public sector bid pace that you expect. As you indicated, you are hopeful that the pace of awards can improve. Maybe just a little bit more color on recent budget trends, what they mean, and your level of conviction that the pace of Army Corps lettings and public sector lettings in general at the federal level have improved and will continue to improve from here?

Good question. In some respects, I think we are set up a little bit better than previous years, for the most recent previous years, partially just the movement we have seen with the WRRDA Bill and the correction of the HMTF issue. That's all very positive.

There is a lot of -- one of the things we have consistently said is with respect specifically to the Corps, that demand does not go away. It may get deferred, but it doesn't go away. That's just one overall comment there.

But I think we still are in a continuing resolution situation versus having a full-year appropriations, which we would have preferred to see. I think the good news is, though, that we seem to have made progress on that in the last 12 months. There was a budget framework in place that was put in place almost a year ago. The House did pass an appropriations bill. I think the appropriate Senate committee passed an appropriations bill and it got bottled up there, so we wound up in a continuing resolution mode.

But I think, again, we're moving in the right direction. It does remain to be seen how we are going to be impacted by what they're going to do with this CR. Of course, as everybody knows, the midterms are next week. I think that is going to have an impact on this in some way, shape, or form, no matter how it turns out.

We will have to wait and see. The current CR ends up on December 11, I believe, so what we would prefer to see is a CR that carries us all the way through to September 30 next year. I am not sure that's going to happen. I think that's going to largely depend on do we see a change in the Senate or not and I think that's going to impact what happens in the lame duck, so we're just going to have to wait and see that.

I do think with respect to our backlog, I think we are set up a little bit better going into 2015 than we were coming into 2014, but the question is going to be that pace of lettings and, again, there is a good, solid list of work there. We are pleased with what we are tracking.

Again, as I said I think in my remarks, we hope to see that let and let timely and consistently, and if that occurs, that will give us the opportunity for keeping the asset utilization up.

I think the encouraging thing there, Jack, is that the CR that was passed did allow increased spending with the Corps for the first time in many years.

The only other thing I would point out is we do have the Harbor Maintenance Trust Fund, Scott, that we can -- that should add a little bit -- hopefully, it will add a little bit to the flow for 2015.

Got it. Thanks. Then as a follow-up, maybe, you guys have traditionally been pretty conservative with the balance sheet, but you are introducing a buyback program here. Maybe some color with regard to your comfort levels, whether you plan to lever up to repurchase shares, thoughts around expected activity, and just general comfort with the balance sheet.

Generally speaking, as I said, as part of our allocation strategy, we did want to put a stock buyback in place. I won't comment specifically on the timing or thoughts around any repurchase at this time. Again, that is going to vary based on our capital needs, the market conditions, any security law limitations, and other factors.

We did feel it was prudent, though, to have a plan up there. It's a five-year plan.

Specifically with regard to debt in general, I think overall our philosophy remains the same. We are comfortable with about a 2.5, 3 times leverage ratio on EBITDA. We remain comfortable with that. We are below that today.

Whether -- I don't know that would specifically go into stock repurchase. However, that's generally where our debt level feeling is. We remain comfortable with that and that's where we want to be.

Got it, thank you.

Jon Tanwanteng, CJS Securities.

Nice quarter and congrats again, Mike.

Thank you.

Just on top of the previous caller, could you help us bracket what kind of utilization or margins you could see if the Army Corps projects are either awarded or if they get delayed, and maybe what specifically in the new CR in December would cause them to push out?

On the last part first, just as a reminder, when the Corps operates under a CR, particularly when they are very short term or shorter term, it's just very inefficient for them to execute their program.

Obviously, what we'd like to see is a full-year appropriations. That's a much more efficient way for them to let their program.

Again, that's why I said a minute ago we would like to -- since we're in a CR situation, what we would like to see is the longer, the better. The shorter, we don't like that because that just brings less visibility for them to execute their program and less visibility, therefore, to the marketplace.

On the utilization front of things, keep in mind we have been backfilling some utilization with private-sector opportunities. We saw that in the third quarter. Really what we are looking at from the Corps of Engineers standpoint is that provides better continuity in between jobs so we can maintain that utilization over the full-year period, not see fits and starts.

Like, for example, go back to the first quarter of this year, we had less utilization. We had some gaps in between some of the projects, which caused less utilization. It would be nice to see -- to have the opportunity to go bid on some Corps work that would fill in that, provide better continuity and maintain the higher levels of utilization that we are seeing more in the third and fourth quarter of this year.

Okay, thanks. Then regarding the share repurchase, are you intending to reduce the share count in total or just limit the creep over the next five years?

Again, we really don't want to get specific on that at this time. At this point, we have just -- the program is up there. It's in place and we will evaluate that continuously as to what and how much of a repurchase we do.

Along with, again, just all other uses of capital, that's just one to be considered, and having the plan in place just lets us be more efficient should we choose to do something in the future.

Okay, got it, and just one housekeeping question. Just seeing depreciation/amortization jumped up sequentially, I'm wondering what went into that and maybe what should we expect going forward.

Overall, a little bit of that was the additional equipment. Keep in mind, like we noted, we did buy a dry dock. That really hasn't gone into service yet. That won't go into service until the fourth quarter.

Generally speaking, that's just the equipment. There was nothing specific that made it jump up. I would think about it, Jon, in probably the mid-20s -- lower the mid-20s, call it $22 million to $24 million of depreciation and amortization on a full-year basis, and that should be fairly consistent as we head into 2015.

Okay, thanks. And then, finally, one quick one on the flip side of the energy prices question. Are you seeing any benefit from lower fuel costs?

There is some benefit from lower fuel costs, so again, long term, obviously, there is a lot of macro things that go into that and there is short-term benefit there.

As I said earlier, we still expect to see these bid opportunities from the private sector in the energy sector with the projects they have ongoing, but, yes, there is -- we do see some benefit in lower energy costs.

And one point to that, do keep in mind, most of our engines we run are diesel engines. We are, of course, getting into the fall and winter season, which heating oil will start to take effect and that can have some fluctuation on the price of diesel versus the price of unleaded.

Got it. Thank you very much, guys.

(Operator Instructions). Alex Rygiel, FBR Capital Markets.

Mike, I as well want to say thank you for your time and all the best going forward.

Thank you very much, Alex. I appreciate that.

Absolutely. Mark, could you update us on the status of the Bayport project, how it proceeded during 3Q, and how it's going to proceed over the next handful of quarters?

That project is underway. I think, as we may have said in our mid-period update, that did get -- I guess we referred to that by inference. That did start during the quarter. We are in the early stages of that project, very glad to be doing that project.

It's meeting our expectations and we expect to be working on that for the next several quarters as we undertake that deepening project.

Then, Chris, I think you mentioned that fourth-quarter revenue and gross margin expectations should be similar to the third-quarter level. That would imply flattish sequential revenue. How do I reconcile that with Bayport contributing on a full-quarter basis in the fourth quarter versus probably only a partial basis in the third quarter?

The job got kicked off in the July timeframe, so it did contribute to the third quarter, I would say, much more than partial, so that job is ongoing.

As Mark talked about it, it will be ongoing in the fourth quarter, and then, again, it's just a matter of looking at our total backlog and all the jobs we have to execute across the Company. We think it is a reasonable assumption to assume revenues and gross margin will be similar to the third quarter into the fourth quarter.

Perfect, thank you.

There are no remaining questions at this time. I would now like to turn the conference back over to your host for closing remarks. Mr. Drew Swerdlow, please proceed.

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, so you all have a great day.