Orion Group Holdings Inc (ORN) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Orion Marine Group, Incorporated fourth-quarter 2015 earnings conference call. At this time, all participants are on a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions). I would now like to turn the call over to your host for today's conference, Mr. Andrew Swerdlow, Investor Relations Manager. Sir, you may begin.

Good morning and welcome to the Orion Marine Group fourth-quarter and full-year 2015 earnings conference call. Joining me today are Mark Stauffer, Orion Marine Group's President and Chief Executive Officer; Dwayne Breaux, our Executive Vice President and Chief Operating 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 our market outlook. We will then open the call for sell side analyst questions for the remainder of the time. We would ask that you limit your questions to one question and one follow-up before getting back into queue.

During the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our end markets, revenues, gross profit, gross margin, EBITDA, EBITDA margin, backlog, projects in negotiation and pending awards, as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margin, gross margin, administrative expenses and capital expenditures.

These statements are predictions and are subject to risks and uncertainties, including those described in our 10-K for 2014, 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 statement 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 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, March 10, 2016 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 and Chief Executive Officer. Mark.

Thank you, Drew and thanks for joining us this morning. I'd like to begin by thanking our 2,400 co-workers for all their hard work and dedication. As I said in our earnings release this morning, 2015 was a year filled with accomplishments, as well as challenges.

During 2015, weather delays, project delays and project execution issues in our heavy civil marine construction segment were disappointing developments during the year. However, I am pleased with the market we see ahead of us in this segment and look forward to an improved 2016. I've made the necessary changes to correct the operational issues impacting our heavy civil marine construction segment, which will bode well for 2016 and beyond.

Additionally, I'm very pleased with the TAS acquisition we made during the year and the growth opportunities it provides. TAS performed exceptionally well during the fourth quarter with record revenue and record EBITDA capping off a very successful year.

As we look to 2016, we continue to experience a high level of demand for all of our services across both operating segments. Our heavy civil marine construction segment continues to see solid demand to help maintain and expand the infrastructure that facilitates the movement of goods and people on and over waterways.

Specifically, we continue to see bid opportunities from our private sector energy-related customers as they expand their marine facilities related to the storage, transportation and refining of domestically produced energy. Over the long term, we expect further opportunities in this sector from petrochemical-related customers, energy exporters and LNG facilities.

Additionally, private recreational customers continue to be a solid driver of bid opportunities as they expand, repair and refurbish waterside infrastructure throughout the Caribbean. We believe we will continue to see opportunities from recreational customers for the foreseeable future as cruise lines seek new destinations and more robust infrastructure.

The funding outlook for the public sector also continues to show improvement. The passage of the Omnibus funding bill and approval of a two-year budget deal in December are encouraging developments. Under the two-year budget deal, appropriations for the fiscal year beginning October 1, 2016 should occur under regular order, which hopefully will allow the US Army Corps of Engineers to let maintenance dredging projects at a more consistent and predictable pace.

We were also pleased to see the passage of a five-year $305 billion transportation bill, the FAST Act, in December. Among other transportation items, the FAST Act will fund bridge construction through various state departments of transportation. This long-term program should not only provide an increase in bid opportunities for bridge construction projects, but we also think it should lead to improved bid pricing given the visibility provided to the marketplace.

We also continue to see strong demand in 2016 for our commercial concrete segment. In fact, the vacancy rates in Houston for both retail and industrial real estate remained at historical low levels. We believe these continued low vacancy rates should lead to additional bid opportunities for both structural and light commercial services in the Houston market.

We have seen a softening in the office and multi-family sector in Houston. However, ample opportunity remains elsewhere in the markets such as demand for educational, warehousing and distribution facilities. Additionally, the Dallas market continues to be a source of growth. Vacancy rates in Dallas are also trending lower, which should continue to drive demand for our services. In fact, the commercial concrete construction segment ended the year with its highest level of backlog for the Dallas market in its history. We believe solid demand for our commercial concrete construction segment will continue in our current operating market with the opportunity for expansion in the Dallas market.

Additionally, we are exploring other growing markets to take our proven services into as we continue to grow the TAS brand and its geographical footprint. We remain confident in both our marine construction business and our commercial concrete business. I'm focused on moving our Company forward, positioning us for success and delivering more predictable results in the future. We faced significant challenges during 2015, but have also made a lot of headway and I'm excited about the year ahead. I'm confident 2016 will be a solid year for the Company with significantly improved bottom-line performance.

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 2015, we reported a net loss of approximately $8.1 million, or $0.30 diluted loss per share. These results compare with net income of $6.9 million or a $0.25 per diluted share profit in the prior year period.

For the year 2015, contract revenue was $466.5 million of which our heavy civil marine construction segment generated approximately $347 million and our commercial concrete construction segment generated approximately $119 million. Within the heavy civil marine construction segment, approximately 60% of revenue was generated from federal, state and local government agencies while 40% was generated from the private sector. This compares to 43% being generated from federal, state and local government agencies and 57% from the private sector in the prior-year period. For our commercial concrete segment, nearly 100% of revenue was generated from the private sector.

Consolidated EBITDA for the full-year 2015 was $20.6 million, which compares to EBITDA of $34.2 million in the prior year period. For 2015, we bid on approximately $1.4 billion worth of opportunities in the heavy civil marine construction segment and were successful on approximately $324 million, which resulted in a 23% win rate for the full-year 2015 and a book-to-bill ratio of 0.94 times.

Within the commercial concrete segment, we bid on approximately $1.2 billion worth of opportunities in 2015 and were successful on approximately $264 million, which resulted in a 22% win rate for the full year and a book-to-bill ratio of 1.1 times. Overall, we are pleased with the level of opportunities we had in 2015 and we remain optimistic given the level of bid opportunities we see for 2016. At this point, we continue to see pockets of improvement in pricing and we are hopeful more widespread improvement will continue going forward.

As of December 31, 2015, we had total backlog of work under contract of $357.6 million of which $194.3 million was attributable to the heavy civil marine construction segment and $163.3 million was attributable to the commercial concrete segment. We currently have approximately $568 million worth of bids outstanding of which $206 million are related to the heavy civil marine construction segment and $362 million are related to the commercial concrete segment. Currently, we are the apparent low bidder or have been awarded subsequent to the end of the quarter an additional $82 million worth of opportunities.

SG&A expense for the full-year 2015 was $47.7 million, an increase of $13 million as compared with the prior year period. This increase is primarily a result of the addition of TAS. With this in mind, we expect full-year 2016 SG&A expense to be approximately 10% of revenue.

Now turning to the balance sheet, as of December 31, 2015, we had approximately $1.3 million of cash on hand after making unscheduled payments of $35 million during the quarter on our credit facility. As of December 31, 2015, we had access to approximately $50 million under our revolving line of credit with approximately $110 million in total debt outstanding.

Subsequent to the end of the year, we drew $22 million on our revolving line of credit to fund working capital needs. We continue to maintain excellent relationships with our lenders and I am confident that our cash position is adequate for general business requirements and to service our debt. Please keep in mind our leverage ratio covenant steps down in the first quarter of 2016. We will continue to monitor our covenants in light of 2015 results and projected performance in the future and will engage our lenders when the need arises.

Additionally, our bonding program remains solid and is more than adequate to support our bid activities. Overall, we are pleased with our financial position and remain focused on maintaining a strong balance sheet. While 2015 was a challenging year for Orion Marine Group, the internal improvements to our operations and the acquisition of TAS laid a strong foundation for the future. The continued strength throughout our end markets gives us optimism that improved results in 2016 are attainable. While we continue to monitor our markets closely for any changes in bid pricing and overall opportunities, we remain confident on our previously stated 2016 guidance. As Mark mentioned, we believe we have corrected any issues that arose in 2015 and we are well-positioned for success in 2016 and beyond.

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

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

Thank you. (Operator Instructions). Scott Levine, Imperial.

Good morning, guys. So I know it's not your custom to provide bookings guidance; you guys are affirming your revenue and EPS guidance here, but could you provide maybe a little bit more color behind what looks like a qualitatively positive bookings outlook for this year. Do you see the bid market as being comparable to last year? Maybe a bit more color regarding the individual segments to get a better sense of what type of commercial activity we can anticipate in 2016?

Scott, obviously, comparable. There may be some areas where it's slightly up, other areas where slightly down. We talked a little bit about that in my remarks, but I think overall comparable. We are pleased with what we see ahead of us. We continue to see the opportunities in the various areas that I touched on in my remarks, so we think the market is there for us to go out and bid and hopefully win our share of the work, and we expect a good improved 2016 as we've said.

And then -- thank you -- and then with regard to the quarterly progression, I'm guessing your guidance implies that you guys remain compliant with your covenants, but maybe a little bit more color regarding -- firstly, if that's true, or the addbacks that make you comfortable. I know you indicated you will revisit with the banks if it becomes necessary. And then for the first quarter this year at the very least, your first half, can you provide a little bit more color regarding trend utilization? Is there anything unusual expected by way of seasonality or just -- so we can get a better sense of what Q1 ends up looking like?

Yes, absolutely. The first quarter is always our weakest quarter of the year, so anticipate that [awful] -- the five jobs we talked about in the third quarter; two of those have completed. They completed in 2015. There are three that continue on. So those are zero margin at this point, so there's no additional gross profit that's coming in. So I think we will see a weak Q1 and then we will see steady improvement as we go throughout the year with probably a pretty strong back end of the year overall.

On the covenant compliance standpoint, I'd just go back to what I said in my prepared remarks that overall we feel good about looking at the full prospective cash position, where we are at on the performance side of things, but if the need arises, we will definitely have conversations with the bank.

So would you be willing to give us where you guys are on the debt to EBITDA ratio as of 12/31 based on your covenant definitions? Can you give us that?

The Form 10-K will come out here probably Monday. What I will say is we are in compliance with the covenants, of course, for the full-year 2015 and at the end of the -- at 12/31.

Fair enough. And one last one, looks like the tax rate came in a little bit lower during the quarter. Can you give us a sense of why that is and maybe what tax rate we should be assuming for 2016?

For 2016, I would assume probably around a 38% tax rate. We are suspecting the tax rate overall for 2015, and as this flows in a little bit into the fourth quarter as well, it's just related to the valuation allowance that we took really in the third quarter, but it does affect the fourth quarter from that perspective. So that's really a full-year look at the total perspective. That caused the tax rate to be around 24% for the year, but if we back that out on the full-year basis, we'd get 38.5%.

Got it, great. Thanks, Chris.

Matt Duncan, Stephens.

Good morning, guys. This is Blake on for Matt. Just following up on Scott's question, if you include the full year of TAS, it looks like your total revenues would've been about $603 million for the year and then your guidance then assumes a top-line growth of about 4% to 12%. I was wondering if you could just break down where you are expecting the sales growth to come from and more specifically how much from your end markets and especially in marine construction.

Right. Well, keep in mind somewhat last year was impacted by a number of different things in terms of what revenue could have been, should have been. We had the significant rain event in Texas in the second quarter that impacted both the marine construction segment and the commercial concrete segment. Hopefully, we are not going to have a repeat of that this year.

We also, as we talked about in the remarks some, on the commercial concrete side, the Dallas market is very robust, so we are very pleased with what we see there. We talked about all of the -- both on the private side and the government side in the marine construction segment -- the things that are going on there that bode well for us.

So we think that in combination of where the markets are, not having the rain events that we had last year, which would be unusual to have that two years in a row, so we don't expect that to occur, we certainly don't expect to have the operational issues that we had last year that also impacted the results and going out and winning our work and executing well that we will achieve the results in line with the guidance we previously provided.

Okay, thanks. And then moreover on that, I was wondering if you could give us a little more detail on how much of your revenues now are from energy-related projects? I know about half I think in 2014 were from the private sector and I believe about half of those were energy-related, so about 25% in 2014, which obviously didn't include TAS, so it would be less now. But what would you say is your energy exposure now at least in your marine construction segment?

On the marine construction segment, it's about the same and as we said in my remarks, we continue to see bid opportunities. There continues to be expansion of facilities along the Gulf Coast just in terms of storage and things of that nature, but also in terms of exports. We talked about petrochem, LNG. We didn't mention it in our remarks this time, but we did last time, the ban on crude exports has been lifted, so we continue to see opportunities. We are working on projects today. We've got work quoted. We've got bids on the schedule upcoming. So we remain confident that we will continue to see opportunities there.

And then there's a certain amount of maintenance work and maintenance of the facilities, including repair and dredging and things like that that just are recurring events. So we think it's about the same and we like what we see. Obviously, as we've said before, we will continue to monitor this area in relationship to what's going on in the marketplace and the price of oil and things of that nature. But right now, we are seeing our demand remain solid and expect that to continue.

Okay, great. And then just last thing on margins, the gross margin was 10.8% for the quarter. How did that come in versus your expectations?

On the margin perspective overall, [revised] after the post third-quarter issues, I think it's pretty much in line with our expectations.

Okay. And then for 2016, any changes in your EBITDA margin long-term outlook for each segment or is it still the same there?

No, as far as the long-term outlook of the EBITDA, it remains the same. As we look beyond, clearly we had the issues in the third quarter, but we expect things to definitely pick back up and we remain confident in our ability to get margins where they need to be.

Okay, great. Thanks.

Alex Rygiel, FBR Capital Markets.

Thank you. Good morning, Mark and Chris. You brought up the topic of TAS market expansions, both some expansions are available to you in Dallas and maybe some other cities. How should we think about that impacting your P&L? Is it near-term cost, intermediate, long-term revenue opportunity and how should we layer that in for our thinking for 2016 and/or 2017?

Well, as you think about 2016, we've reiterated guidance, so you know where we said that was for 2016 in relationship to the results for 2015. So we talked a minute ago about how we get there and part of that is the performance on the marine construction side. Certainly part of it is going to be on the TAS side. We continue to see demand for the services in both segments.

Specific to TAS, we've got good coverage in Houston, so we expect that to remain solid. Dallas has a lot of activity going on right now, so there's the opportunity there for expansion. A lot of work in place and upcoming up there, so we really like that market. And as we said before, we will look for opportunities to expand beyond the two markets that we are currently in. So again, a lot of activity in other parts of Texas that are interesting to us, but factoring all that in, as we said this morning, we are reiterating the previously provided guidance for 2016, so all of that going on in both segments will support that.

Maybe to be a little bit more specific, are you currently actively bidding on any concrete jobs outside of Houston and Dallas and --?

We are not.

At what point this year do you think you might have the people in place to start bidding on projects outside of Houston and Dallas?

Well, I would say this, Alex, is right now our growth strategy is short-term focused on Houston and Dallas with respect to TAS. We want to be smart about how we expand geographically with TAS. It is, as you just mentioned, the equipment side is fairly easy. The people side is a lot more -- there's more to it on the people side. We want to be very deliberate, but thoughtful about how we address that on the people side. That's one of our -- in all our business, but certainly with TAS as well -- the people side of it is certainly key. We've got an excellent workforce at TAS and so we want to make sure that as we expand that, that we retain that. So we are looking for opportunities, but we think 2016, our guidance for 2016 is not dependent upon moving into other areas that we are not currently in.

That being said, we are certainly looking for the opportunities to expand, but we'll be very diligent and thoughtful about how we do that and that may occur this year, it may not occur this year, but again irrespective of that, we are comfortable with our guidance.

And since we don't have too much historical data on TAS, can you help us to better understand the seasonality of that business 1Q, 2Q, 3Q, 4Q for both revenue and margin?

From an overall perspective, typically, they are a little more linear. They see some seasonality through Q1 and Q2 historically. So as we go forward we would expect a little bit back-end-loaded, but not as much as the heavy civil marine construction segment. So I would expect fairly even results over time. And on the margin perspective, same type of thing. Would expect to see it fairly steady across the periods barring no major weather events like we had last year in Q2.

So for TAS, both revenue and margin steps down in 1Q from 4Q?

Slightly, just slightly.

Okay. Very helpful. Thank you.

Marco Rodriguez, Stonegate Capital.

Good morning, guys. Thank you for taking my questions. Real quick follow-up adding on to that previous question there, just kind of trying to take a look at the commercial construction business in the first half of 2015. If I back into what you've reported for Q3 and Q4, it looks like they were down a lot lower from a revenue standpoint. Is that all weather-related or am I not doing my math right here? Can you kind of help me understand that?

Are you talking about the first and second quarter of last year?

Yes, of 2015.

Okay, yes, they were. So the second quarter, if you remember, we had a tremendous amount of rain. I forget the stat of how many days of rain occurred in Texas consecutively, but essentially I want to say it was April to June with steady rain. That did impact their second quarter pretty dramatically, so they did see a significant pullback in Q2 just because they couldn't physically do work at that time. Like Mark talked about, we don't expect that to continue. We wouldn't normally see that two years in a row, so we don't expect to see that significant of an impact as we look at 2016.

Got you. Okay. So that low $70 million run rate that commercial construction or concrete construction had in the second half of 2015 on a pro forma basis, that's just kind of making up revenues that you obviously -- they couldn't work because of the weather?

Correct.

Is that fair? Okay, got you. And then last quick question just kind of a housekeeping item here on the balance sheet, I notice goodwill kind of ticked down sequentially?

Sequentially year-over-year --

Goodwill didn't.

No, I don't believe goodwill ticked down.

No, intangibles may have because of amortization.

Correct. But goodwill actually year-over-year will go up because of the TAS acquisition.

Right, no, sequentially. Maybe I've got a figure wrong. I had Q3 goodwill at $70 million. Your Q4 is at $65 million.

Yes, there was a slight change in [investments] to the purchase price accounting just in relation to what was considered goodwill versus fixed assets as we did our final allocation in the purchase price. That's the only change there.

Got you, got you. And then last quick question, just taking a look at again balance sheet and working capital accounts, given now that we've got TAS fairly fully integrated, I guess, how should we be thinking about the movements on receivables/payables? Just give us a sense as far as from a date standpoint.

Yes, so if you look at -- TAS historically is a sub and we expect them to be a sub going forward to [GP]. Those contracts are usually written as [pay when pay], so naturally we will see their receivable timeframe be a little bit longer than we would see on the heavy civil marine construction side of the house. So with that, we would expect overall, as you've seen, receivables will build.

From the payables perspective, we have been diligently working and focused on that. I don't think there's a massive trend there from that standpoint, but clearly as we grow as a company, we've been seeking to get a little bit better terms with our vendors that are a little bit longer from that perspective for better cash flow management as well.

Got you. Thanks a lot, guys. I appreciate it.

Adam Thalhimer, BB&T Capital Markets.

Good morning, guys. Can you talk about competition within the heavy civil marine segment? And Chris, you talked about pockets of pricing improvement. Can you just expand on that?

Well, I think competition in our heavy civil side is kind of what it's been. We typically have a lot of regional players in our various markets we serve. There's a couple of national marine construction companies that we will compete against as well. And then on certain projects, typically DOT bridgework, where we may compete against large land-based heavy civil guys, but no real kind of change in that. We continue to believe that bid pricing should be better across the board than sometimes it is. We've seen steady improvement in that in areas. In certain areas, it's been more pronounced than others. Certain areas I think lag behind where we believe it ought to be. We think work is out there. We talked in my remarks about funding on the government side of things. Certainly we all like to see GDP growth north of 3%, but we still have GDP growth.

So our belief is that bid pricing should be a little more strong across the board than it is, but certainly we think some of the developments recently in some of the areas hopefully will provide that visibility to the marketplace to where competitors will get on board with that thought process.

Having said all that, as Chris mentioned earlier, we've continued to see pockets of -- what we refer to as pockets of pricing improvement. I think in general though we've seen pricing improvement. In some areas, it's a little bit more advanced than others. And then certainly we will from time to time see some skittishness in the market. We saw a little bit of that in the first part of this year with the overall macro markets kind of having a little bit of a freak out, if you will. We saw some of that sort of immediately kind of tighten some things up, which we will monitor, but overall, no, I'd stick with what we said is that generally speaking we think the demand is there that supports bid pricing improvement. We've seen that steadily occur over time kind of across the board, but in certain areas it's been much better than in others. So again, we'd like to see that continue and think that the work out there is in place for that to occur.

Okay, Mark. And the skittishness, was that more in the marine segment or the commercial segment or just kind across the board?

That was a little bit. I think that was a temporary little blip and we think we are getting past that, but again as we go back to what we said this morning, we think that the market is out there, the demand is out there and I would say overall across the board that's not really a concern of ours that again I refer back to my overall remarks is that we've seen steady improvement. Certain areas, it's been much more improved than others, but across the board it's been improved, so we are confident in our ability to achieve our guidance.

Okay. And then just lastly, the two-year budget deal, it goes into effect October 1. Should that help the Army Corps -- when does that start to help the Army Corps [lettings]?

Well, there's kind of two things. One, under that framework, they passed an Omnibus funding bill, which is kind of like what they've been doing the last several years, for the current fiscal year, but under that two-year agreement, which set the budget framework, which was kind of a big deal because that hasn't happened in quite some time, they should -- it should allow the fiscal year 2017 appropriations process to occur under regular order, which again is something that hasn't happened in quite some time. We were hopeful for fiscal 2016 that would occur and it looked like it was going through the process, but then, at the end of the day, they just couldn't get it done, but we are hopeful that they've got the two-year budget deal in place so they don't have to argue about that. They just kind of have to argue about the appropriations for fiscal year 2017, so we are hopeful that that occurs.

So there is full funding for the balance of this fiscal year. It wasn't done -- it was done under an Omnibus versus normal appropriations, but we are hopeful that this year they get appropriations in place certainly for the Corps of Engineers and the Navy by October 1. And if that occurs, that's got to be an improvement over what we've seen the last couple of years, we believe.

Understood. Okay. Thanks a lot.

(Operator Instructions). Jon Tanwanteng, CJS Securities.

Good morning, guys. It's Pete Lucas for John. How are you? Just a quick question for you. I know you mentioned the possibility or the potential at least out there of TAS expansion, but overall how else should we be thinking about CapEx plans for the year and beyond that, priorities for cash beyond the CapEx?

So overall, we would expect CapEx for 2016 to be fairly in line with 2015, so in the low 20%s. Beyond that, as far as a cash management and cash philosophy, clearly, we would like to pay down the debt as quickly as possible. We made some additional payments in Q4 (inaudible) but at the end of the quarter we re-drew some of that back at the beginning of the year, but our focus is going to be continuous on getting that debt paid down as quickly as possible, using excess cash flow to pull that debt down to a level we feel it should be at, which is much lower than it's at.

Helpful. Thank you.

Thank you. I'm not showing any further questions. I will now turn the call back over to Andrew Swerdlow for closing remarks.

On behalf of Orion Marine Group, we would like to thank you for taking the time to talk to 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, this does conclude the program and you may all disconnect. Everyone have a great day.