Orion Group Holdings Inc (ORN) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Q2 2016 Orion Group Holdings Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session and our instructions will follow at that time. (Operator Instructions)

I would now hand the presentation over to David Griffith, Investor Relations Manager. Sir, please proceed.

Thank you, Brian. Good morning, everyone, and welcome to Orion Group Holdings second quarter 2016 earnings conference call and webcast. Joining me today on the call are Mark Stauffer, Orion Group Holdings 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 will update our market outlook. We will then open the call for sell-side analyst questions for the remainder of the time.

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 profits, gross margin, EBITDA, EBITDA margin, backlog, projects in negotiation and pending awards, as well as our estimates and assumptions regarding future growth, EBITDA, EBITDA margin, gross margins, administrative expenses, and capital expenditures. These statements are predictions that are subject to risks and uncertainty, including those described in our 10-K for 2015 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 development or otherwise.

Also, please note that EBITDA and EBITDA margin are non-GAAP financial measures under the rules of the Securities and Exchange Commission, including Regulation G. Please refer to the reconciliations and definitions inclusive to the most comparable GAAP measures accompanying this earnings call within the press release issued this morning, August 04, 2016. The press release can be found on our Web site at www.oriongroupholdingsinc.com. Also, please refer to our quarterly and annual filings with the SEC, which are available on our Web site for additional discussion of risk factors that could cause results to differ materially from our current expectations.

And with that, I would like to turn the call over to Mark Stauffer, President and Chief Executive Officer. Mark?

Thank you, David, and welcome, everyone, to our call this morning. I'd like to begin by thanking our 2,400 co-workers for all their hard work and dedication. It's through the combined efforts of our entire team that we will achieve our goals as we move ahead.

Looking at the second quarter, we experienced slightly slower productivity as a result of adverse weather in Texas, along with timing and mix of jobs at our Heavy Civil Marine Construction segment. During the second quarter, we also brought material closure to our troubled Tampa projects. As I stated previously, the fundamentals of our business remained strong, and getting these projects behind us is a significant step in moving us forward to improved future financial results.

In this regard, as previously discussed, during the second quarter, we elected to reduce the scope on one of the remaining troubled Tampa projects in order to bring the project to completion. By doing this, we incurred slightly lower margin during the second quarter. However, we brought finality to a job that would have experienced further customer delays and significantly higher costs to complete in the future. Also during the quarter, we made further improvements to the company's operating management structure, which resulted in one-time expenses during the quarter.

Our Commercial Concrete Construction segment continues to perform very well, with top-line gains in Dallas and continued solid market drivers with good bid opportunities across our market. It's been one year now since we expanded into Commercial Concrete business, and I am very pleased with our acquisition and its performance to-date. I remain encouraged by the future of this segment of our business and the growth opportunities it provides.

Excluding the productivity impacts due to adverse weather in Texas, operations in both Heavy Civil Marine Construction and Commercial Concrete Construction segments had solid performance during the second quarter. Our overall results would have been in line with analyst expectations without these weather impacts and without one-time expenses related to improvements in our operating management structure. I believe with troubled Tampa projects materially behind us, we're positioned for substantial bottom-line improvement in the remainder of 2016 and we're well positioned for solid results in 2017. Overall, our business is performing well and we're seeing improved margins in our backlog.

Turning to our outlook, we continue to experience a high level of demand for all types of services we provide across both operating segments. Our bid opportunities remain solid, and we're focused on opportunities that will create shareholder value.

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 its waterways. Specifically, we continue to see bid opportunities from both our private sector and public sector customers as they expand, refurbish, and repair their marine facilities.

In the private sector, although, we will continue to monitor developments in the energy patch, we continue to expect to see opportunities from this sector from terminal operators, petrochemical-related customers, energy exporters, and LNG facilities. Additionally, we believe we will continue to see opportunities from our recreational customers as they improve and expand infrastructure. Led by these drivers, the majority of our revenue in the first half of 2016 in our Heavy Civil Marine Construction business has come from the private sector. The funding outlook for the public sector has shown improvement as well with the enactment of the FAST Act and progress on funding through RESTORE Act. Additionally, we're seeing opportunities from the U.S. Army Corps of Engineers and the U.S. Navy.

We also continue to see strong market in the second half of 2016 for our Commercial Concrete Construction segment. We continue to see solid bid opportunities in the Houston market for educational, medical, and retail facilities, and we continue to maintain peak backlog levels in the Dallas market. We believe solid demand for our Commercial Concrete Construction segment will continue in our current operating market and support expansion plans for this business in the future.

We remain confident in our ability to create shareholder value in both our Heavy Civil Marine Construction business and our Commercial Concrete Construction business. While the challenges of wrapping up the remaining troubled Tampa projects took longer than organically expected, we're focused on returning to profitable operations. Our underlying Heavy Civil Marine Construction business fundamentals are sound, and the continued opportunities in our various end-markets remain robust. Our Commercial Concrete Construction business has continued to perform very well, and we're confident in the long-term outlook in our current and potential market.

We're focused on and excited about achieving significant improvements in the second half of 2016 and remain determined in achieving our target of $70 million of EBITDA for 2017.

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

Thank you, Mark, and thanks for joining us. For the second quarter 2016, we reported a net loss of approximately $800,000 or a $0.03 loss per diluted share. These results compare with a net loss of $1.8 million or a $0.07 loss per diluted share in the prior year period.

Contract revenue for the second quarter was approximately $140 million, of which our Heavy Civil Marine Construction segment generated approximately $80 million and our Commercial Concrete Construction segment generated approximately $60 million. Within the Heavy Civil Marine Construction segment, approximately 43% of revenue was generated from federal, state, and local government agencies, while 57% was generated from the private sector. This compares to 63% being generated from federal, state, and local government agencies, and 37% from the private sector in the prior year period. For our Commercial Concrete segment, nearly 90% of revenue was generated from the private sector.

EBITDA for the second quarter was $8.9 million, which compares to pro forma EBITDA of $7 million in the prior year period. For the second quarter, we bid on approximately $760 million worth of opportunities and were successful on approximately $123 million. This resulted in a 16% win rate for the quarter and a book-to-bill ratio of 0.88 times.

Overall, we are pleased with the level of opportunities we have, and we remain optimistic given the level of bid opportunities we see for the second half of 2016. As of June 30, 2016, we had total backlog of work under contract of $367 million, of which $166 million was attributable to the Heavy Civil Marine Construction segment, while $201 million was attributable to the Commercial Concrete Construction segment. Additionally, we currently have approximately $725 million worth of total bids outstanding, of which $246 million is related to the Heavy Civil Marine Construction segment and $479 million is related to the Commercial Concrete Construction segment.

Currently, we are the apparent low bidder or have been awarded subsequent to the end of the quarter an additional $101 million worth of opportunities. Of that, the Heavy Civil Marine Construction segment is currently the apparent low bidder on approximately $55 million, and the Commercial Concrete Construction segment has received awards subsequent to the end of the quarter on approximately $46 million worth of jobs.

SG&A expense for the second quarter 2016 was $16.9 million, an increase of $8.1 million as compared to the prior year period. This increase is primarily a result of the addition of TAS. Second quarter 2016 SG&A expense also included approximately $800,000 of one-time cost associated with the management structure changes Mark mentioned earlier. With this in mind, we continue to expect full year SG&A expense for 2016 to be approximately 10% of revenues.

Now, turning to the balance sheet, as of June 30, 2016, we had approximately $1.5 million of cash on hand and access to approximately $37 million under our revolving line of credit. Subsequent to the end of the quarter, we drew $10 million on our revolving line of credit to fund working capital needs. During the quarter, we also paid an additional $5.6 million down on our credit facility beyond the normally scheduled payment. As a result, we ended the quarter with approximately $110 million of total debt outstanding.

As we go forward, we'll continue to focus on paying down debt with excess free cash flows. Additionally, we continue to maintain an excellent relationship with our lenders and appreciate their continued support. I'm confident that our liquidity position is adequate for general business requirements and for servicing our debt going forward.

As a reminder, we amended our credit facility during the first quarter of 2016 to allow for incremental flexibility. We were comfortably below the 3.75 times leverage ratio required at the end of the second quarter. Additionally, our bonding program remains solid and is more than adequate to support our bid activity.

With the material conclusion of the troubled Tampa job, we expect to see improved results throughout the rest of this year, and we believe the fundamental business drivers remain intact for continued long-term growth in both operating segments. As a company, excluding the troubled Tampa projects, our employees delivered solid results despite some challenges in the first half of the year. The Company has the right people and systems in place for profitable and structured growth going forward.

Looking ahead, we expect the third quarter of 2016 to be a much improved period for the company. We continue to focus on improving our margins not only by addressing the cost side of our business and delivering solid projects, but also working to reduce our leverage over time. As Mark said, we are focused on achieving significant improvements in the back half of the year. With the troubled Tampa projects materially behind us, we can move forward with growing the business profitably and returning value to shareholders.

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

Thank you, sir. (Operator Instructions) Our first question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed.

Good morning, guys. Thank you for taking my questions. Just doing the arithmetic, given the performance in the first half, to hit low-end of your reiterated guidance, you'd have to average your revenue run rate of something close to $180 million. Is that what you're seeing in the second half? And what kind of gross margins can you really attach to that level of revenue?

Generally speaking, I would say two things. One is not only the revenue run rate but more importantly it's the profitability going forward. Keep in mind that the -- as we ran through the first half of the year, you still had the jobs from the third quarter of last year, troubled Tampa jobs that were moving forward, where costs equal revenue; so it was pressuring margins overall. So, naturally, as those are material behind as we move in to the back end of the year, we replace those with work where you're seeing margin improvement, which will help on the bottom-line performance.

Okay. And do you think that kind of run rate is sustainable heading into 2017 as well?

Well, we feel very positive as we've said. I mean, again, keep in mind that there is some seasonality in Q1 as normal and we build as we go through the years and things like that in better weather months and whatnot. But, yes, I mean we're focused on, as Chris said, getting these troubled Tampa projects in the drag they kind of had on the financials in the first half of the year, you know, we've gotten behind us.

So, yes, we're focused on ramping up in the back half of the year with the work that we have. We like the opportunities we see going forward. As we talked about in the remarks, we're low bid or been awarded $101 million subsequent to the end of the quarter. So we like what we see in both segments and we're focused on achieving our goals in 2017 of getting to that $70 million EBITDA level.

Okay, got it. And then just on the Concrete side, given that you are at peak backlog, is it possible that pricing in margins there could improve?

Well, it's possible. In the Dallas market, we've seen that. In the Houston market, we haven't seen as we've shifted from the types of projects that are out there and then we're going after. It's been not conducive to moving margins, but I think margins have held fairly steady and we're very -- we're pleased with where we are in Houston and Dallas. As well in Dallas, we've actually been able to see some uptick in bid margin; so we're very pleased with that.

But overall, very, very pleased with the performance of the Commercial Concrete segment. The guys are doing a super job. We're very excited about what we see ahead and the opportunities we see for that segment.

Okay, great. And then just finally on the Marine side. I think you've seen the predictions for it; I guess more active hurricanes season year-over-year. Have you taken that into account when considering your guidance? Have you taken bigger reserves this year? Or is really that outside the scope of what you guys are planning?

Well, hurricane season is a fact of life for us every year. So, we always take a look when we're bidding work in the season for -- as we look at our cost structure, bidding the work, and what type of [continued] season, what not, we need to have in there. So, what I would say is nothing really different from what we normally do. So far this year, it's been fairly quite. Obviously, we're heading into the next six eight weeks here is sort of the peak of the season, but it's been relatively quite. But, again, we always look at this aspect this time of year as we're bidding work.

Okay, great. Thank you very much.

Thank you. Our next question comes from the line of Matt Duncan with Stephens Inc. Please proceed.

Good morning, guys. This is [Will] on for Matt. I was wondering if you could put a range around the weather impact to results. It looks like the $800,000 of one-time SG&A expenses was about $0.02 from the weather as well and then what about the top line impact?

It was -- we didn't give a specific on the top line. In fact, it's really just a movement of -- and especially with the weather, it's timing right. So you're going to have some decrease in the revenue in the second quarter. But then we should be able to make that up in the third and fourth quarters as we go forward.

Okay. So, you haven't seen any of that losses? It's just a shift?

It's just a shift.

Okay. And then will you talk a little bit about the improvements you've made in more detail to the management structure? How is it different today than it was three months ago, six months ago, a year ago?

Well, from a year ago, it's wholesale timing. We've made significant -- obviously, we talked about earlier in the year about the changes we've made in Tampa. We essentially have an entirely new team leading our efforts in Tampa, which we're very -- we have high degree of confidence in the team that we have in place there. Obviously, a lot of attention that the new team has had to focus their efforts on is ramping up these troubled projects.

So, again, as I've said in my remarks, that's a significant step to get that behind us now. And, again, we're focused on rebuilding profitable operations over there. We've made some other changes operationally, though, that we thought were needed to strengthen the overall organization, operational organization, on the Marine Construction side. And that did result in some one-time charges related to severance.

So, we're very pleased with the team we have place. I think in most of the changes that we've made has been in Tampa. But we also felt like there were some other changes that we needed to make that were made and again resulted in some severance payments that obviously impacted the quarter as Chris discussed. So, very confident in the team we have moving forward to help us achieve our objectives.

Okay. And then back on the Texas market a little bit, you said the pricing was holding in steady, maybe improving a little bit in Dallas. Are you seeing anything in the market as you look out into the back half and even into 2017 that is giving you a little bit of pause, maybe as it relates to Houston, in particular, anything there that is giving you a little bit of caution as we head into the back half of the year?

Well, obviously, as I said in my remarks and this is really geared towards on the Heavy Civil side but does impact Houston a little bit is we're continuing to monitor developments in the energy patch, and that does have an impact. And I kind of go back to what we've been over the past year with the -- as we've expanded into the Commercial Concrete business is where we have a high degree of confidence in the Texas market, which is one of the things we liked about the, among a lot of other things that we liked about, the expansion of the Commercial Concrete business with the TAS acquisition.

Again, the Texas market as a whole and the Houston market in particular, it's a lot different than it was 30 years ago. Energy is still obviously very important, but there is a lot of other things going on in the Houston market. With the port expansions, the medical, there has been a lot of diversification in Houston and Texas in the last 30 years or so. So we're very, very confident in the long-term picture of our opportunities in the Commercial Concrete segment.

And then on the Marine side, too, as well, we're continuing to see opportunities as we see expansion of facilities related to just the -- despite what the daily, weekly, monthly changes in the energy price are, the fact is that there is a lot more energy being produced in the U.S. than there was previously, and that has a lot of impact on the supply chain structure. And we see that continuing. And there has been a shift in from imports to exports and things like that, and then there's all this domestic production that's coming down at the Gulf Coast refineries. So we expect that to continue.

Clearly, we're going to continue to monitor that. But we feel pretty good particularly about the -- specifically to your question, nothing that we're seeing changes our thoughts on the back half of '16. And right now, based on what we're seeing in both projects we're picking up that we have in backlog that we will go into 2017 and then the indicators that we see about opportunities for us to bid on, that will generate backlog and work for 2017 or additional backlog and work in 2017. We feel very good about where we are with those opportunities.

Okay. Thanks, guys.

Thank you. Our next question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Please proceed.

Good morning, guys. Thank you for taking my questions. I have one quick follow-up on a prior question here on the weather aspect in the quarter. Can you quantify what the impact was in Q2? I mean I understand it's being pushed out to Q3, Q4, but just trying to understand the impact to the financials in Q2?

Yes, I mean we could -- I don't have that number directly in front of me. We can follow up with you after the call. But I think it's safe to say that we believe that without the weather impact and with the --

One-time expenses.

-- one-time expenses that we would be in line with expectations.

Okay, got you. And just to clarify also, the one-time expenses for the management changes, that's all pretty much related to Tampa. Is that correct?

No, it's not all related to Tampa. Some of it is and some of it is related to other changes we made like -- that was an answer to prior question. We made -- we felt the need to make some other changes to strengthen the organization. And, again, it is primarily related to severance, but not all of it in Tampa. Some of it with some other changes we felt that were necessary to just strike in the organization.

Got you. Thanks. And last quick question, in terms of your EBITDA guidance for fiscal '17 at $70 million, I know you've kind of bracketed a margin of 10% to 12%. But I was wondering if you could kind of walk through some of the major assumptions that are kind of built into that overall guidance?

Well, I think, again, as we see the markets out there, we see the backlog that we have carrying over, we see the opportunities that we have to bid on upcoming that we expect to again maintain historical levels of win rates to generate additional backlog for 2017. And, again, where we think we are with getting the troubled Tampa projects behind us, doing other things necessary, again, goes back to what we were just talking about and strengthening some management areas on an operational side, that -- again, we target that range, that 10% to 12% on a consolidated basis EBITDA margin with revenue expectation. That's how we get there.

So, again, we -- barring any kind of major macro thing, obviously, that's always out there for us and all companies out there, but just with what we see coming out there, what we have in-hand, what we've been able to be successful on and the changes we've made structurally and operationally to our teams here this year, we think it's a very achievable goal for us for 2017.

Got you. Thank you, guys. I appreciate the time.

Thank you. (Operator Instructions) Our next question comes from the line of John Rogers with D.A. Davidson. Please proceed.

Hi, good morning. A couple of things. I apologize if I came on a little bit late for your comments, but as you look at the Marine Construction business, especially, I guess, more into '17, how much of the growth are you assuming in terms of market activity associated with public works versus private sector, including some of the harbor work for the energy industry or the chemicals industry?

Sure, sure. Well, it always varies, what we do always as we look at what are the opportunities that we have to bid on be they -- and we're sort of agnostic as to whether it's public or private. But as you know, John, the types of jobs or the types of services are more -- drive the margin profile versus whether it's public or private. So, we take a look at all of the [step] whether we see it in the Navy, the Corps, the private sector, whatever. We look at those opportunities as we just go through our normal selection process, what provides us with best opportunity for success to achieve our objectives.

And as you know, historically, we run in a kind of a 40 to 60 range on the Marine Construction side being private/public, and we kind of range back and forth depending sort of what we go after and then what we're successful in getting. So what we kind of focus on is, is there a healthy amount of opportunities in both coming from all different types of our customers and the sectors and the drivers? And that's kind of what I was speaking to earlier.

So, we do -- we are seeing some Corps work come out. We announced the project, I think, July that we were successful on with the Corps of Engineers. We're bidding on Navy work. We're seeing other port work and stuff that we've been bidding on in the public sector.

In the private sector, we've continued to see work for the recreational customers and in the energy sector, again, related to all this domestically produced energy that's kind of really been a big shift in the supply chain structure for the energy patch. And as a reminder, our types of projects are mostly downstream, some midstream, but mostly downstream.

So, as we look to '17, to answer your question, as we look to '17 and what we see out there, is right now, we're seeing good indicators in both the public and private sector for the Marine Construction segment. And so that gives us confidence that there is enough work out there regardless of how much we get from each that we will be able to achieve our objectives. And as I said, for first half of this year, the majority of our revenues has been driven by the private sector.

Okay, okay. And I assume that on the Concrete side, that's predominantly private sector work?

It's predominantly. We do -- there is the educational space, and then that's been very nice for us and that's actually been an area where we've seen an uptick in opportunities particularly in Houston. So, we're very pleased with that. But that's generally the public space exposure that we have in the Commercial Concrete business and the vast majority of it is in the private sector.

And then just a couple of modeling things maybe for Chris. The tax rate assumptions staying at the 38% into '17?

I think that's a fair question at this point.

Okay. And your interest in cost then should come down with the debt levels?

Yes, the interest will come down with the -- assuming interest rates don't skyrocket --

Yes, sure.

-- that [could] come down. Do keep in mind the D&A, the amortization of some of the intangibles are to drop off next year.

Okay.

From the purchase accounting.

Right. Okay, great. Thank you.

Thank you. We have follow-up questions from the line of Matt Duncan with Stephens Inc. Please proceed.

Hi, guys. I just wanted to make sure real quick. In Tampa, did any of the materially complete troubled projects lingering to the start of the 3Q that might be a drag on the margins? Or is the door shut on those completely.

Well, we don't think it will be a drag. I mean there is -- the reason why we said material, there were some costly stuff that went into Q3 a little bit, there's some [D modes] that went into Q3. Most of those are already done or being done, but a little bit of minor stuff, which is why we said materially complete. But we don't believe it will be a drag on Q3.

All right. Thanks, guys.

Thank you. There are no further questions in the queue. So, I'd now like to hand the call back over to David Griffith for closing comments and remarks.

Sure. Thanks, again, everyone for joining the call this morning. If you have any follow-up questions, please feel free to reach out to us. Have a great day. Thanks.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.