Orion Group Holdings Inc (ORN) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Orion Marine Group earnings conference call.

My name is Mark, and I'll be your operator for today.

At this time, all participants are in a listen only mode. (Operator Instructions).

I would now like to turn the conference over to your host for today, Drew Swerdlow, investor relations manager.

Please proceed, sir.

Good morning, and welcome to the Orion Marine Group fourth quarter and full year 2014 earnings conference call.

Joining me today are Mark Stauffer, Orion Marine Group's president and chief executive officer, and Chris DeAlmeida, our vice president and 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 out 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 into queue.

During the course of this conference call, we will make projections and other forward looking statements regarding, among other things, our in-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 10k 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 applicable reconciliations to the most comparable GAAP measures.

Also, please refer to the press release issued this morning, February 26, 2015, and our quarterly and annual filings with the FCC, which are available on our website for additional discussions and risk factors that could cause actual results to differ materially from our current expectations.

With that, I'll turn the call over to Mark Stauffer, president and chief executive officer.

Mark?

Thank you, Drew. Thanks for joining us this morning.

I would like to first commend the entire Orion Marine Group team for everything they have done to make 2014 another solid year.

We are pleased with our full year 2014 results, including record annual revenues, continued increases in gross margin, and continued improvement in EBITDA margins.

The plan we implemented back in 2011 to drive the company back to profitability by executing on a higher volume of work has continue to show results as seen in our steadily improving bottom line. We will continue to focus on maintaining a solid level of backlog while also focusing on opportunities that help drive EBITDA margins back to our historic, mid-teen levels.

Our fourth quarter results demonstrate the type of gross margin that can be achieved through sustained improvements in utilization and solid project execution despite uneven improvements in bid margin.

As a reminder, this is still a lumpy business and results can fluctuate quarter to quarter based on a timing and mix of projects. Overall, we are pleased with progress we made in 2014 and continue to believe we are headed in the right direction.

As we look ahead, we continue to experience a high level of demand for our suite of services that help maintain and expand the infrastructure that facilitates the movement of goods and people along and over water ways. This demand is being driven by several key factors.

First, despite the significant -- significant decline in energy prices over the past six months, our private sector energy related clients continue to expand their water -- water side infrastructure related to the storage, transportation, and refining of domestically produced energy.

We believe that the dramatic growth in domestic production over the past several years was relatively flat growth, and refining capacity should sustain this demand for expanded storage and transfer facilities for the next several years.

Private recreational customers also continue to be a solid driver in bid opportunities as they expand, repair, and refurbish water side infrastructure throughout the Caribbean. We believe we will continue to see opportunities from recreational customers for the foreseeable future.

We have also continued to see more design build opportunities, particularly from private sector customers, which could provide us more turn key bid opportunities. We believe that design build process helps us maximize our customer's capital expansion dollars and better meet their marine infrastructure needs.

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 increased cargo volumes, many of which are tied to the Panama Canal expansion to be completed in 2016. Larger ships transiting the Panama Canal are requiring ports in the Gulf Coast and Southeast Atlantic to undertake large scale deepening projects, infrastructure improvement, and associated maintenance services in order to service these larger ships.

We are currently working on and preparing to bid on several opportunities related to port expansion.

Regarding the federal government, the Warder bill passed and signed into law with -- with the Warder Bill signed and passed into law, we now await funding by Congress for those projects authorized by the act. We are also pleased to see the increased level of HMTF contributions to the U.S. Army Corps of Engineers operations and maintenance budget for fiscal year 2015 as mandated by the language contained in the Warder act.

While uncertainty still remains in terms of the pace of core lettings for fiscal year 2015, we are please with the list of projects we are tracking. If this list of projects is fully and timely let by the core, it should provide an opportunity for consistent asset utilization.

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

Beyond improving and maintaining water-side infrastructure, we anticipate additional funding for coastal restoration projects from the Restore Act once fines are set for the 2010 Gulf of Mexico oil spill.

Finally, despite the current stop gap transportation funding expiring later this year, we continue to see a healthy bid market for bridge construction opportunities. As we have said in the past, it is our preference to see a long term funding in place for roads and bridges, which may lead to pricing improvement.

Given our market fundamentals, backlogs, specialized work force, and specialized fleet, we are determined to continue the improvement of revenue, gross margin, and EBITDA that we've seen over the last three years.

In 2014, we continued to experience gradually improving market conditions which lead to improved operational results. We now turn our focus to making 2015 another growth year by capitalizing on a strong bidding environment and a continued focus on project execution.

As CEO, I'm committed to delivering a solid bottom line performance, sustainable growth, and returning value to share holders. Given our existing fleet of assets, we have capacity remaining to support continued organic growth. We will also continue to be opportunistic when pursuing strategic growth opportunities via acquisitions.

This growth can be achieved either by capturing additional market share in our existing service lines, diversifying the business through acquisitions that provide complementary services, or a combination of both.

By doing so, we can further enhance our suite of turn key services to meet our customers needs while remaining true to our project management philosophy.

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

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

For the full year 2014, we reported net income of approximately $6.9 million, or $0.25 cents per diluted share. These results compare with a net income of $300,000, or $0.01 per diluted share in the prior year period.

Full year 2014 contract revenues increased 9% year over year to $385.8 million of which 43% was generated from federal, state, and local government agencies and 57% was generated from the private sector. These ratios are comparable to the prior year period.

As Mark mentioned, we are pleased with the success of our plan we put in place in 2011. Since 2011, our revenues have grown 48% with EPS growth in excess of 150%.

While we are not yet back to our historical mid-teen EBITDA margin levels, we are moving in the right direction with solid annual improvements in revenue, gross margin, and improving EBITDA.

For the full year 2014, we bid on approximately $1.3 billion worth of opportunities, and were successful on approximately $354 million, which resulted in a 28% win-rate for the full year and a book-to-build ratio of 0.92 times.

The total amount we bid on declined slightly year over year as a result of the timing of some large opportunities and being more selective on the opportunities we pursued. Still, we saw a nice improvement in our win rate, and we achieved a win rate greater than 25% every quarter in 2014.

Overall, we are pleased with the level of opportunities we had in 2014, and we remain optimistic given the level of bid opportunities we see for 2015.

Additionally, we continue to see pockets of pricing improvement, and we are hopeful this will become more wide spread going forward.

As of December 31st, 2014, we have backlog of work under contract of $215.9 million of which 15% is for federal projects, 17% is for state projects, 23% is for local projects, and 45% is in the private sector.

SG&A expense for the full year 2014 was $34.7 million, an increase of 8%, or $2.6 million, as compared to the prior year period. This increase is primarily a result of increase in bonus expense and some specific bad debt expense during the fourth quarter.

Given the continued improvements in our operating results over the past several years, we have budgeted increases in bonus expense for 2015. This, along with increases in rent, salaries, and equity compensation expense, will result in some additional SG&A expense for 2015.

However, SG&A costs should remain relatively flat as a percent of revenue from 2014 to 2015. Turning to our capital and bonding resources, as of December 31, 2014, we had $39 million of cash on hand, which compares to $41 million at the end of 2013. As of December 31, 2014, we had access to $7.9 million and a revolving line of credit, with $37 million in total debt outstanding.

During the fourth quarter, we completed the current financing of the replacement dry-docks with our lender. The proceeds from the term financing were used in January 2015 to pay off the portion of the revolver drawn down during the third quarter of last year to purchase the replacement dry-dock.

Additionally, our bonding program remains solid and is more than adequate to support our bonding activities. Also we continue to enjoy an excellent relationship with both our lender and our surety.

Overall, we are pleased with our financial position and remain focused on maintaining a strong balance sheet. As a reminder, during the fourth quarter, we established a five-year share repurchase plan where we can execute up to $40 million of share repurchases. As a result, we have been active buying back some shares in the open market when our internal training windows and other regulations would allow.

During the fourth quarter, we purchased approximately 44,000 shares, totaling $435,000. As we go forward, we will remain opportunistic with regard to our share repurchase. However, the specific timing and amount of actual future share repurchases, if any, will vary based on our capital needs, market conditions, security law limitations and other factors.

Overall, 2014 was a successful year for Orion Marine Group and laid a foundation for a strong future. Our fourth-quarter results demonstrate what we can achieve through sustained high levels of asset utilization, even with uneven bid pricing improvement.

For the full year, we saw improvement on our operations and bottom line results. Additionally, we saw operations in our Dredged Material Placement Area in the upper Houston Ship Channel get fully under way with solid progress.

It is our belief that we will continue to see fully improving bid pricing throughout the year with revenue growth in line with what we experienced this past year. Overall, we are optimistic about this year and we look forward to continued growth and meeting our customers' needs.

With that, I'll 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. Mark, would you please review the procedures for placing a question?

(Operator Instructions). Trey Grooms, Stephens.

This is actually [Blake] on for Trey. First off, appreciate the commentary for top-line growth. Similar to this past year on this, can you tell us whether or not this guidance includes the DMPA, which I assume it does. And I know you didn't hash out specific DMPA contribution on the last call, but could you maybe give us a sense as to whether or not DMPA contribution came in ahead or behind of initial expectations for this year and whether or not your thoughts for its contribution in '15 have moved up or down?

Well, first off, we're very pleased with the investment we made in the DMPA. We consider that an extension of our, you know, service lines that we have. We don't -- as you've said, we don't necessarily give specific information on that, but we're pleased with it. I think our performance with that last year was in line with what we laid out, when we made the investment. And you know, we still feel good about what we'll be able to generate, as a result of having that in 2015.

And with that, Blake, that -- the DMPA is fully factored into kind of guidance we gave with regard to revenue looking forward.

OK, great. Thanks. And then as a follow-up specifically on the first quarter, I believe the last two years, the revenues have dropped around 30% on a sequential basis from 4Q to 1Q. Could you guys give any color as to whether or not you'd expect a similar drop-off this year in the first quarter or maybe less severe, more severe, just whatever you guys expect there? And then I'll hop back in queue. Thanks.

Yeah. No, absolutely. You know, generally speaking, is our seasonally weakest quarter. We always see a drop-off in Q1 and then a build back into the future periods. So we would naturally expect to see some decline as we move from the fourth quarter into the first quarter. That being said, I would expect that we'd probably see a little bit of growth year over year in Q1. But again, keep in mind, it will be our seasonally weakest quarter.

OK, great. Thanks.

Jon Tanwanteng, CJS Securities.

Good morning, gentlemen. Thank you for taking my question.

You bet.

And congrats on a very nice quarter.

Thank you.

First, how should we think about the sustainability of the gross margins you just had, heading into Q1 and I guess over the rest of '15?

Well, a lot of what drove the gross margin improvement in the fourth quarter like we talked about previously was better asset utilization. You know, we had some lettings from the Corps of Engineers in our third quarter, the end of their fiscal year, which did help into the fourth quarter. You know, a couple of those will fall out into the first quarter as well.

But again, you know, generally speaking, Q1 is our slower quarter. And Q2 builds in the third quarter and finally the fourth quarter. So I would expect to see some pullback in utilization as we head into the first of the year. And then also, of course, we have less cost burn in general in the first and second quarters, just with daylight hours, normal front movement, things of that nature.

So you know, generally speaking, I think looking at the fourth quarter, that is a testament of not really much improvement in margins, other than what we've seen - the [pox] improvement we've talked about. But it is better utilization of our assets. So I think that shows you what can happen. Now I think over time, of course, you know, we'll still experience weakness in Q1, Q2, the building into the third and fourth quarter. But again, we hope overall we see an improvement of 2015 bottom line results than we did in 2014.

Yeah. And Jon, another thing I would say there is I think, you know, going into 2015, I think we're a little bit better situated than we were going into 2014. As you recall, we had, you know, significant gaps in 2014. We had you know, non-existent lettings from the Corps of Engineers which impacted utilization. We haven't -- you know, a lot of the backlog we had going into 2014 didn't start until later in the year. So I think we're a little bit better situated coming into '15 than we were a year ago.

But you know, as Chris said, you know, Q1 is the seasonally weakest quarter. And we tend to build as go through the year. And then the other thing that, you know, we're looking out for, too, is to see, you know, some of the work that looks like it's teed up from the Corps of Engineers to actually come out and be let.

We've seen a couple of things come out. So you know, we'll have to wait and see what we see out of those guys, but they do have, you know, at least for things that we would go after, it does look like they have a nice program that, you know, we just need to see it come out and have a nice pace of that coming out.

And one other thing I'll throw on top of that, Jon, of course, you know, it is our goal to get back to those mid-teen EBITDA margins. So clearly, that's a focus of ours and will continue to be a focus, as we bid work in the future, as we look at, you know, overall our assets and utilization thereof.

OK, great. That was very helpful. Thank you. And maybe just a little deeper digging on that. Do you expect any or do you see any holes in your utilization over the first half and do you think you can fill them right now?

Well, there -- you know, again, I think we're set up a little bit better. A lot of the work that we have in backlog that we've talked about in the past, some of the core work goes on, you know, comes into the first half -- first quarter in particular. You know, we're working on the big port project here in Houston, which will continue throughout the year. So again, I think we're set up to have -- you know, just going in a little bit better utilization than we did have in the first half of last year. We'd still like to see, you know, the work come out a little quicker from the Corps this year than it did last year. And we're hopeful on that.

Then -- and the other thing, too, is that we've got a lot of private-sector work, design build type work that were pursuing and very excited about. But the timing of that can be, you know, pretty lumpy. And depending on how some of that work comes into play, that can affect the timing of some of the asset utilization as well. So again, we're optimistic about what we see in front of us, in terms of bid opportunities. But you know, again, some of that is going to depend on what the timing of some of this stuff is.

But again, in general, I think we're set up, you know, a little bit better going into 2015, than we were 2014.

OK. Thanks. And I just -- to expand on the bid opportunities you're seeing on the private side, has that opportunity increased significantly in the three months since you last reported or since you gave the investor update?

I think it's about the same. I mean, it's very robust. We're pleased with it. Again, a lot of opportunities in all facets of the private sector for us.

And you know, again, a lot of those are design-build type things in the private sector which, you know, can take on -- you know, can draw out the letting and award process, if you will, particularly when you're in the private sector, you know, realize that oftentimes there are no -- there are no hard bid dates.

And many times, you know, it ultimately winds up in a negotiation-type setting, if you will. So that can -- you know, it's very -- net-net, it's a very positive thing for us. We like the design-build work. We think it provides us with good turnkey opportunities. And asset utilization across our fleet, so we're very pleased with that. But it does, you know, the duration of that letting process and award can oftentimes be a little lengthy.

OK. Thank you very much.

You bet.

(Operator Instructions). Min Cho, FBR Capital Markets.

Great. Good morning, guys.

Good morning.

Congratulations on a good quarter and year. A couple of questions left here. So I understand, Mark, that the first half of -- that you're going into 2015 stronger than you went into 2014, but in the last update call, you talked about a first half gap just given the -- you know, amount of work that you had in hand. And it sounds like outside of this kind of normal seasonality that you're commentary's definitely improved a little bit about the first half. Can you provide any additional details there?

Yeah, I think, you know, kind of what we were referring to there I think largely was focused around the corps of engineers and some of the assets that we would utilize for that type of work. Again, I -- I think better set up for '15 than we were '14, you know, just given the work that we picked up from the corps, some of which bleeds over into this year, and then also some of the -- private sector stuff and -- you know, port work that we're utilizing those assets with.

If we're talking about the first half, we still have some gaps that we need to either fill with some of those private sector design build type work that I talked about, or certainly with some of the core lettings. Again, we're hopeful that the pace of lettings and the timing of lettings will be an improvement over last year. That, you know, again, looking at what we're tracking and what we see -- that we should be able to go after.

We're hopeful that that will occur, that that will be better than what we saw last year, but, you know, we still have to -- to see what happens between those to fill some of the gaps that we talked about.

So, but again, overall feel much better going into this year than last year and I think we've got a lot of good stuff out there that we're tracking, or bidding on, or, you know, in the design build opportunities. And so, you know, remain optimistic about improving 2015 over 2014.

OK. And I know that you've talked about pockets of pricing improvement for several quarters now. Are you seeing additional pockets, like are we -- you know, is there a steady kind of improvement there? And maybe if you can tie that into your comment at the very beginning of the call when you talked about uneven bid margins. Is that something, you know, by geography, by project type, or anything out of the ordinary?

Well, I think it's just of a continuation of -- of what we've seen in the past. I mean, to -- to answer the first part of your question I think we're seeing, you know, steady improvement in all areas.

I think it still remains uneven, it still remains, you know, certain types of projects or, you know, more turn key projects, design build projects where we're able to see some pricing improvement. You know, the -- some of the DOT stuff where, again, we kind of have the uncertainty because we don't have long term funding, remains stable, but not necessarily in an improving environment.

And, you know, with some of the -- even with some of the corps work, you know, the lack of putting work out for a long period of time, you know, gives us some concerns about -- potential bid pricing environment there.

But I -- I think in general, again, we're seeing improvement kind of on a steady basis, but not wide spread. And certainly, as I've said in the last several calls, in our view, bid pricing environment should be much better than it is today, you know, across the board.

You know, again, I think as we kind of went into '14 with the backlog we had, you know, we've tried to use that to be a little more selective in trying to push bid pricing up. I think generally speaking, again, we've seen steady improvement in bid pricing, but, again, to what we'd like to see and what it should be, not as wide spread as we think it should be.

So, but again, you know, continue to kind of see that incremental improvement year over year and quarter over quarter and, you know, we're going to keep trying to -- you know, as I said in the beginning of my remarks, keep trying to push that and keep trying to push forward in terms of bid pricing, execution, getting us back to, you know, our historic level of margins, but at the same time, keeping our focus on, you know, backlog and keeping backlog where we'd like to see it.

OK, and then one final question. This has to do with fuel costs. I was wondering, you know, how much of a benefit you got in the quarter in terms of what your expectations are for 2015?

Some improvement in -- you know, won't necessarily quantify, but there was certainly some benefit in there. You know, just as a reminder with fuel prices as with all of our cost structure -- we can see short term benefits or, you know, otherwise depending on movements.

Generally speaking, though, we try to factor some of this in, whether it's moving up or down, you know, at the time of -- at the time of bids, so we definitely saw some, you know, benefit in the backlog that we had. But generally speaking, you know, as pricing with fuel or any other thing in our cost structure moves, you know, in that next bid we'll factor in that current pricing.

So again, as we kind of move forward, you know, we don't expect to see any kind of windfall or anything like that. We're certainly -- you know, we're pleased with where we are, in terms of pricing that we have in our jobs relative to where fuel costs are. But, again, as time moves on, that's largely a pass through, so, you know, over time it's kind of a non event.

OK, all right. Well, thank you. Good luck.

Adam Thalhimer, BBT Capital Markets.

Hi, good morning, guys. I'd also say congratulations.

Thank you.

Mark, I wanted to follow up something that you -- you just mentioned in response to Min's question. But on the -- on the DOT funding issue, what -- what are your expectations, your thoughts, are a long term bill coming out of Washington?

Well, you know, we can remain hopeful. It's just kind of like going into baseball season, you know, hope springs eternal. But we'll see what happens, You know -- I guess on the plus side, you know, just speaking strictly to the -- not getting into politics, but having, you know, both houses of Congress in -- in one party -- you know, should bode well for trying to get something done there.

Generally speaking, I think a highway transportation bill is -- usual enjoys bipartisan support. But certainly there seems to be this kind of ongoing tension between, you know, the executive branch and the legislative branch. You know, who knows what's going to happen there?

What we'd like to see is -- you know, again, long term funding like we used to see in the past with, you know, a five or six-year-long bill. I think, again, the more visibility that we see thee, again, that should do -- provide that visibility. Hopefully to the market place where it helps support bid pricing improvement. And, again, as I said, I think it, you know, all the indicators are there as we see it that we should see -- I think work should be going for -- for better margins today than it is across the board, including stuff in the DOT space.

But we'll have to see. I mean, you know, we've got a few months here. There's a lot of other stuff on the calendar it looks like. So, hopefully we see improvement in a -- in a long term bill but we'll stay tuned on that.

OK. And then I just want to make sure I understand your directional guidance. When you say growth in 2015 should be similar '14, are you referring to that 9% revenue growth, so as we think about '15 it's kind of a high single digit revenue growth here?

Yes, that's exactly what we're talking about.

OK, great. And then just on the fourth quarter itself. Were there any close-outs to help the margin? Or again, it was just better utilization and...

Well, it was -- it was really better utilization of the assets, that is the primary driver. We did have a couple of larger jobs that just had a little bit better production. But generally speaking, it was just that -- that better utilization overall that kind of helped it out.

OK. Good news. Thank you.

You bet.

I would now like to turn you over to Drew Swerdlow for closing remarks.

On behalf of Orion Marine Group, we would like to thank you for taking the time with us this morning to talk with us this morning. We would like -- we look forward to speaking with you in the future. If you have any follow up questions, please feel free to give me a call. Thanks, and have a good day.

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