Orion Group Holdings Inc (ORN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2016 Orion Group Holdings Earnings Conference Call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. David Griffith, Manager, Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, everyone, and welcome to Orion Group Holdings' Fourth Quarter and Full Year 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; 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 analysts' 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 other -- as well as our estimates and assumptions regarding our future growth, administrative expenses and capital expenditures.

These statements are predictions that are subject to risk and uncertainty, including those described in our 10-K for 2015, which 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 adjusted net income, adjusted earnings per share, EBITDA and EBITDA margin are non-GAAP financial measures under rules of the Securities and Exchange Commission, including Regulation G. Please refer to the reconciliations and definitions inclusive to the most comparable GAAP measures and reconciliation tables accompanying this earnings call within the press release issued this morning, March 9, 2016 (sic - see press release, "March 9, 2017").

The press release can be found on our new website, www.oriongroupholdingsinc.com. This website will be the principal platform for investor communication going forward. Also, for additional discussion of risk factors that could cause the actual results to differ materially from our current expectations, please refer to our quarterly and annual filings with the SEC, which are also available in the Investors section of our website.

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 2,500 coworkers for their hard work and commitment to our company. As I look back over the last year, I am proud to see the collective efforts come together, making these significant improvements in 2016 possible. I'm looking forward to further achievements together on multiple fronts in 2017.

I'm very pleased with the progress we made during 2016, which included the following highlights. We've made significant structural changes throughout the company to provide a solid platform for future success. We reported a 68% increase in year-over-year gross margin. We reported an 86% increase in year-over-year EBITDA. During 2016, we bid on approximately $2.8 billion worth of projects, winning approximately $654 million, for a win rate of approximately 24%.

Our Commercial Concrete segment continued to perform excellently, seeing solid gains in both top and bottom line performance. Our Dallas/Fort Worth operation contributed significantly to this segment's overall performance, with a 58% year-over-year revenue growth.

Lastly, we prepared to further develop our targeted infrastructure, industrial and building sectors.

Turning to our results. Overall, we executed well on our projects during the fourth quarter. However, during the -- our fourth quarter results -- reported results were impacted by one-time charges related to the accounting treatment of a contract issue involving significant, highly unusual differing site conditions on a large multiyear dredging service project. Our ability to execute the project as originally planned was hampered when we encountered a significantly greater quantity of trash, debris and ship traffic delays than was anticipated by the project owner or the company when the contract was signed.

We have developed and are pursuing a large equitable contract adjustment, which we believe is fully supported by the contract and actual work performed as well as the detailed facts and evidence that support our position. We completed the project to the customer's specification and are working with our customer to resolve our proper compensation for the work performed and the project's success.

While we firmly believe we are entitled to our full earned compensation, accounting practices limit the amount of contract revenue we can recognize at this time. Therefore, during the fourth quarter, we incurred significant unforeseen expenses without the ability to recognize the related revenues for the work performed to complete this project.

While I'm disappointed with the accounting treatment and associated impact to our fourth quarter results, we are vigorously pursuing resolution of these issues by all means necessary. And ultimately, I expect and I a focused on bringing this matter to satisfactory conclusion.

As we look ahead, we will continue to execute on our strategic vision of being the premier specialty construction company, focused on providing solutions for our customers across the infrastructure, industrial and building sectors, while building our market share and enhancing our operations in these areas.

Specifically, we are focused on solidifying and improving our operational results in the Marine Construction segment, working to expand and grow our successful Commercial Concrete segment, and we are pursuing upland opportunities in the industrial sector by leveraging our skill set and customer relations to expand our addressable market. We will continue to look for opportunities in the infrastructure, industrial and building sectors through both M&A and greenfield efforts.

We expect to continue to see solid demand for our services, and we are poised to take advantage of overall economic improvement and potential increases in infrastructure spending. Our Marine Construction segment delivered EBITDA and EBITDA margin improvement for the full year 2016 compared to 2015. I'm confident that with the structural changes we've made in this business, we have the right teams in place to solidify and improve our operating results.

In the private sector, we continue to see opportunities from our recreational and downstream energy customers. We anticipate demand for construction, repair and improvement of marinas and waterside terminals to continue.

In the public sector, we continue to see demand from federal, state and local agencies. At the federal level, we are monitoring budgeting and funding developments, given the change in administration. That said, we continue to expect to see federal opportunities throughout 2017. At the state level, we continue to see good opportunities for bridge construction, with funding under the FAST Act, and we are beginning to see potential opportunities for work related to the RESTORE Act. Additionally, we continue to see demand for infrastructure improvements from local port authorities throughout the markets we serve as they execute their expansion strategies.

In our Commercial Concrete segment, we anticipate increasing demand over the long term for our services. Both the Houston and Dallas metropolitan areas are consistently ranked high in population growth studies, which is the key driver for this big business segment.

The Dallas/Fort Worth market, in particular, remained robust throughout 2016, with top line growth of 58% year-over-year. We expect the strong demand for our services in this market to continue in 2017.

In Houston, as we previously mentioned, we have seen some tightening in bid margins, but we continue to see good bid opportunities. We expect these opportunities will remain steady in 2017 as population infusion spurs demand.

Medical space, educational projects, hotel and retail opportunities are driving this market. Further strengthening economic conditions could prove to be an incremental catalyst for this market. Additionally, we continue to review expansion opportunities for this segment, particularly in the Central Texas market, which is another market in which we expect to see long-term growth.

Overall, I'm pleased with our backlog and our recent project awards, and believe we have the work and the opportunities in both segments to help us achieve significantly improved results in 2017.

In closing, we made a great deal of progress in 2016, improving reported gross margin and EBITDA, while making significant structural changes to provide a platform for future success. Excluding the impacts to the fourth quarter results I mentioned as a result of the accounting treatment, related to a contract involving differing site conditions, our results were significantly improved year-over-year.

Also, our strong market share in both of our segments and demand from our end markets drove our backlog to record-high levels at the end of 2016. We believe we are extremely well positioned to take advantage of improved economic conditions and potential increases in infrastructure spending. We are focused on improving our operational results in our Marine Construction segment, expanding and growing our Commercial Concrete segment and pursuing upland opportunities in the industrial sector.

Now I'd like to turn the call over to Chris to review our financial results in more detail. Chris?

Thank you, Mark, and thanks for joining us this morning. For the full year 2016, we reported a net loss of $3.6 million, or a $0.13 loss per diluted share. These results compare with a net loss of $8.1 million or a $0.29 loss per diluted share in the prior year period.

Excluding the onetime charges Mark mentioned earlier, and certain onetime tax charges, net income for the full year 2016 was a profit of $5.2 million, or $0.19 earnings per diluted share. Contract revenues for the full year 2016 were approximately $578 million, of which approximately 50% came from the Heavy Civil Marine Construction segment and approximately 50% came from the Commercial Concrete segment.

Full-year 2016 revenue from the Heavy Civil Marine Construction segment were down compared to last year due to the retrenchment of Tampa operations in 2015, and the onetime charges related to the accounting treatment of a specific contract with significantly differing site conditions.

Full year 2016 revenues from the Commercial Concrete segment increased approximately 46% from the reported 2015 revenues, primarily driven by the full year impact of TAS as well as increased volume of work in the Dallas market.

Within the Heavy Civil Marine Construction segment, approximately 46% of our full year 2016 revenue was generated from federal, state and local government agencies, while 54% was generated from the private sector. This compares to 60% of full year 2015 revenues being generated from federal, state and local government agencies and 40% from the private sector.

On the Commercial Concrete side of the business, more than 90% of full year 2015 and 2016 revenue was generated from the private sector. As we move forward, we expect to continue to see a higher mix of private sector revenues, driven by the contracts we are pursuing and the overall mix of our Commercial Concrete segment.

During 2016, we saw improvements in both consolidated EBITDA and EBITDA margin. Full year 2016 EBITDA was $38.3 million or a 6.6% EBITDA margin. This compares to full year 2015 EBITDA of $20.6 million, or a 4.4% EBITDA margin.

Consolidated full year 2016 gross profit was approximately $67.5 million, or a gross margin of 11.7%, which compares to 2015 reported gross profit of approximately $40.2 million or a gross margin of 8.6%.

SG&A expense for the full year 2016 was $65 million, or approximately 11% of contract revenues, as compared to $48 million in the prior year period, or approximately 10% of 2015 revenues. This increase is primarily attributable to the full year impact of TAS in addition to increases in accounting and consulting fees as well as increased group health expenses.

As we move forward, we will see leverage from our SG&A expense, and we expect this expense, as a percent of revenue, to flatten in 2017 and begin to decline in future years.

For the full year 2016, we bid on a record $2.8 billion worth of opportunity and were successful on approximately $654 million. This resulted in a 24% win rate for the year and a book-to-bill ratio of 1.13 times.

As of December 31, 2016, we had a record-high backlog of work under contract of approximately $434 million, of which $281 million was attributable to the Heavy Civil Marine Construction segment, while $153 million was attributable to the Commercial Concrete segment.

Moreover, the company is apparent low bidder or has been awarded subsequent to the end of the fourth quarter an additional $78 million worth of opportunities. Of that, approximately $10 million is related to the Heavy Civil Marine Construction segment, while approximately $68 million is related to the Commercial Concrete segment. In total, this means we currently have a record $512 million of projects between backlog and low bids. This level of activity gives us optimism about where we are headed in 2017. While the timing of liquidation of this level of activity may be impacted by customer permitting delays, it will occur and will be a benefit to our bottom line.

Now turning to the balance sheet. After sweeping approximately $14 million at the end of the year to pay down debt, we had approximately $300,000 of cash on hand and access to approximately $41 million under our revolving line of credit. We ended the year with approximately $105 million in total debt outstanding, of which $8 million was related to the revolver and approximately $97 million was related to the term loan.

Subsequent to the end of the year, we drew an additional $10 million on our revolving line of credit to fund ongoing working capital needs. As we go forward, we will continue to focus on paying down debt with excess free cash flows. We believe our liquidity position is adequate for general business requirements and for servicing our debt going forward. Additionally, we are in compliance with our financial covenants, including being below the three times leverage ratio required at the end of the year.

Finally, our bonding program remains solid and is more than adequate to support our bid activities.

As we look ahead, we are pleased with the level of opportunities we have in front of us. Our backlog and low bid activity is at a record high, and we are optimistic given the healthy bid levels we've been seeing over the past several months. Increased government investment in infrastructure could enhance these favorable trends further, but this remains to be seen.

Currently, we have approximately $782 million worth of total bids outstanding, of which $395 million are related to the Heavy Civil Marine Construction segment and $387 million are related to the Commercial Concrete segment.

As we look at full year 2017, we believe we will generate a significant improvement in EBITDA relative to 2016, driven by sustained bid opportunities, record-high backlog and a return to growth from our Tampa operations.

As a result, we would expect to see our full year 2017 EBITDA grow a minimum of 40% as compared to the full year 2016, which would result in a record full year EBITDA for the company.

We believe we are being somewhat conservative with this forecast, largely due to the permitting delays our customers have been experiencing, primarily on certain marine projects. To the extent these delays abate, we would likely see EBITDA grow beyond 40% for the full year. Additionally, we could see further outperformance to our minimum 2017 EBITDA growth guidance if we see accelerated growth in our Commercial Concrete business, particularly in the Dallas or Texas -- Central Texas markets, accelerated growth in our Tampa operations, or higher bid margins resulting from an infusion of investment by federal and local governments to repair and upgrade U.S. infrastructure.

So to wrap up, we feel highly enthusiastic about our prospects for profitable growth in 2017 and the years to follow. Our Commercial Concrete business has proven to be an excellent complement to our Marine Construction segment. And with the integration of TAS fully completed, our two segments are able to collaborate effectively. Our strategy to target the infrastructure, industrial and building sectors is beginning to yield results, and we believe we will not -- this will not only drive growth for Orion but will also provide us with greater diversification that should mitigate a downturn in one or more of our end markets.

With our strong backlog and pipeline of opportunities, coupled with the actions we've taken and initiatives we have underway to improve our operational efficiency and expand our business opportunity, we believe we are better positioned today to deliver increased value to shareholders than any time in our company's history. As we look to 2017, we remain optimistic and look forward to the opportunities to outperform.

With that, I'll turn the call back over to the operator to begin the Q&A portion of the call. Christie?

(Operator Instructions) Our first question is from the line of Min Cho of FBR Company. Your line is open.

A couple of questions for you. First, Mark, could you provide an update just on Tampa, just kind of what the bid activity looks like there?

Bid activity looks real good. As Chris has said, we have some of the issues with the permitting starts and stuff like that on some of the projects. But as far as bid activity, very robust, a really nice backlog for that group, and fully confident that the team we have in place there is going to hit their goals and objectives for this year and well on their way with what they have in backlog and low bid to really perform well this year.

Okay, that's good to hear. In terms of your kind of guidance for 2017, I know you don't provide quarterly guidance. But can you provide a little more direction in terms of 1Q versus kind of what we saw in the first quarter of 2016, and just any seasonality that might be different this year relative to last year?

Sure, absolutely. A good question. So we're sitting on a record-high backlog. We've also got solid bid opportunities where we're headed. But like we mentioned in the prepared remarks, we have seen -- some of our customers have seen some permitting delays, predominantly on Marine Construction projects, just related to some Corps of Engineers permitting delays. So that is moving the timing a little bit of some of the execution.

So looking at it compared to 2016, I would expect that results for Q1 2017 would be either in line, maybe slightly behind what we saw a year ago. And then we would continue to see outperformance as we move through the year. Keep in mind, Q1 is always our weakest period. It builds into the third and fourth quarter, and those quarters would be based on the timing and mix of projects as far as if Q3 outperforms or Q4 outperforms overall.

Okay. So you said that you expect 1Q to be a little behind last year's? But last year, 1Q, I mean, didn't you have the Tampa project issues that were impacting margins? So are you talking only top line, or are you talking top line and EBITDA?

I'm actually speaking to both top line and EBITDA. Yes, we did have the Tampa stuff that impacted those in the first quarter. I think this one's a little bit different. So we're seeing some impact just from, again, the timing of jobs due to customer permitting delays. The difference in that is those jobs don't go away, that's purely a timing impact. So we would see those -- we'll start to see a couple of those permits start to come through. So as they start to come through, we would then see that be a benefit to Q2 through Q4.

Okay. Chris, and then just my last question is really on the SG&A. You said that SG&A -- you expect SG&A leverage going forward, but just kind of flatten out in 2017. So you're suggesting that as a percentage of revenue, kind of 11% in 2017 and then improving after that?

Correct. Yes, I am. And where we'll get that leverage, as you know, we had to add a little bit more staff, we're a larger company, to make sure we have the infrastructure in place going forward. Also, as you're probably well aware, just from the accounting oversight things -- side of things, have increased a little bit and healthcare costs have continued to increase throughout this past year. So we're factoring all that into that 11%. But as we go forward, we think we have the staff in a great place from the overhead side, so we'd expect to start to see leverage of that as we move down the road.

Our next question is from Jon Tanwanteng of CJS securities. Your line is open.

First off, the adjustments you gave in Q4 for the project that had the differing site conditions, have you actually received payment for the work performed and simply can't recognize it in Q4? Or is it something that still actually needs to be hammered out with the customer and then you receive it, then you recognize it. And do you expect that to reverse in Q1? Or is there more of a timing delay for that?

Well, let me -- there's a lot to unpack there. I think I don't expect it in Q1, I think it'll go beyond that. We have been paid for base contract amount as we performed the work and billed and then paid, as we've gone along. The items that we're talking about related to differing sites, we're still in the process of working that out. Once we get that resolved, whether or not -- then it just would become a receivable. So once we get that resolved with out customer, we'll be able to book whatever that resolution is and then bill and get payment as normal -- as we normally would. So we're focused on getting that resolved with them.

As I said in my remarks and in the release, we performed the job, they have a completed project, we did the work, we expect to be fairly compensated for that. And we're working to get that resolved as soon as possible.

Okay, great. And then, second, can you just clarify the EBITDA outlook, just on the 40% growth that you indicated in the press release and your comments before. Is that on the $38 million reported in the results? Or is there an adjusted number? Just trying to figure out what you're actually talking about there.

No, good point. That would be on the reported number, so that would be on the $38.3 million -- $38.3 million, sorry.

Okay, so if I do the math, that's about $53 million. How do you reconcile that with the, I guess, the $70 million target that you've put out in the past, what's the difference there? Is it mainly the permitting that you've been talking about? Or is there something else that we should be thinking about?

Well, it's a couple different things. It's a little bit of a change in strategy as well. What we would like to do is be a little conservative here in this and talk about the minimum that we would expect, and then talk about the things that are going to help us outperform that. We've laid out five or six things that we believe will help us outperform.

So the goal here is to say, hey, we still believe in that $70 million, we still believe that it's achievable. But if we look at the permitting delays, we look at the market we're seeing right now, we're very comfortable that a minimum growth level would be the 40%. Then if the permitting delays actually pick -- stop and we start seeing the jobs come out, that's going to help us overachieve that. If we see accelerated growth in the Dallas and Central Texas markets that we're targeting, particularly on the Commercial Concrete side, that's going to help us over-accelerate.

Again, our Tampa operations are coming back up to full swing. We're bidding a full amount of work. To the extent that outperforms, again, that would give us some outperformance to that number.

And then finally, just looking at the U.S. infrastructure investment that we've all heard about, we've heard the government talking about it. So to the extent that we see -- we're really not factoring much of that in today. To the extent we see that, that again could help us outperform. So we want to set a minimum level and then talk about the things that help us outperform and get to potentially that $70 million.

Okay, great. That's really helpful. And then just with the -- I guess, the hit to the EBITDA, do you anticipate any covenant issues going forward, especially if the payment doesn't come in Q1 or Q2?

No. As we look at it today, we think we've got the -- all the costs associated with the -- that job, in particular, done. It's in the results that we've seen. That did impact Q4. And keep in mind, from an accounting standpoint, the way the accounting rules work, it will limit how much of that claim you would recognize before it's finalized and settled with the customer.

So to that extent, we don't think that's going to have any impact in the covenants going forward. We feel good about where we stand with the covenants. We do have a couple more step-downs here in Q1 and Q2 in 2017, but we feel comfortable with those and the market we see in front of us.

Our next question is from Matt Duncan of Stephens.

So first question. Just on the job where you've had the overrun, it sounds like was just site conditions changing on you. How big of a claim are we talking about here? And then, Mark, any help you can give us on maybe what the timing might look like? Sound like it's not first quarter, but it also sounds like you think it does happen this year. Just give us a little more detail about that if you can. How big would it be? I'm assuming it would flow through as revenue and then pure profit, assuming it happens. And how much would it add, therefore, to the EBITDA for the year that you could do? I'm assuming it's not in the $54 million number.

Right. Well, good question, Matt. What we've said publicly is just -- is what we've said in the release and the remarks today, is we've provided the impact that it had on Q4. We have not disclosed how large it is publicly. I think it's prudent for us not to do so. Yes, we want to work this out with our customer. And obviously, we think we're entitled to fair compensation for the work we performed. So it is -- this is not necessarily unusual from the standpoint of having differing site conditions, it's pretty commonplace in our business. It is unusual that we had sort of the size and the scope that we did on this project, and particularly towards the tail-end of the project that impacted Q4. But we haven't said publicly how large that is. It is significant.

We are working diligently to try to resolve this with our customer. We're hopeful that, that will happen in the next couple of quarters, but, of course, there's no guarantee on that. We're hoping to get this resolved and move on down the road. We've enjoyed an excellent relationship with the customer in question, have done multiple jobs for him.

So we're very hopeful to get this resolved quickly, as quickly as possible, but we're shooting for that over the -- would expect that if we can get this resolved the way we think it should be, it would be over the next couple of quarters or so, maybe before that, or within that. But we'll have to see how it plays out.

And, Matt, as far as the 2017 impact, we factor -- already have factored into our results a portion of that claim. To the extend it exceeds up to that, which we believe is relatively small, then it would have a positive impact. There are no more costs associated with the job. You're absolutely right, that would be a revenue item and then be pure gross profit.

Well, let me maybe do the algebra for you then. The net income impact that you put in the press release was $6.954 million, I'm assuming you can fully tax that, so we're talking about $11.5 million. Am I doing my algebra correctly? Is that about the right number?

Well, again, your math's your math. We're not going to comment publicly on how large our request is, for just obvious reasons, we think. But I'm not going to challenge your math.

And, Chris, you said you have included a portion of that in the guide?

Yes -- well, we've included a portion of that in our financial results for 2016.

Okay. Okay, got you. So there's still some of that on the come. I'm with you, okay. That helps. In the Commercial Concrete business, you guys had a very strong quarter, I would say, unseasonably so because typically, you do get weather impacts in a fourth quarter that I would think would generally make fourth quarter revenue below third quarter. That's not what we experienced this time. Can you talk a little bit about what drove the sequential growth there when normally you wouldn't see that? Was there some weather benefit? Was it in one particularly large project? Or what's going on in that business?

Well, as we talked about, and Chris kind of touched on this, across just from a global perspective, it varies sometimes what you see in weather or just performance in Q3 and Q4. Sometimes, Q3 is the outperform quarter, sometimes Q4. We just -- we had some good windows. The guys did an excellent job executing on work. We've seen, obviously -- we touched on it a couple of different times in the remarks and the release about increasing our market presence and share in the Dallas/Fort Worth market, so that played into that as well. But some of it just kind of hitting good weather windows and taking advantage of that and executing very well on the work.

And so very pleased with that, but I think some of that's just as we sometimes refer to it as timing and mix, and I think that's what you can chalk that up to. Overall, very pleased with their performance and -- but I think it's just, again, good windows that we had in the quarter and excellent execution by the teams at TAS.

All right, that helps. And then two last questions for me, just on 2017. First of all, free cash flow expectation, Chris, if you could give us that. And then it sounds like that EBITDA guide is kind of a minimum, it's an at least guide. What would the revenue amount be that you would have at that roughly $54 million in EBITDA? What kind of revenue are we contemplating there as kind of an at least revenue number?

Yes, I mean, overall, Matt, we provided what we think is going to be that minimum EBITDA guidance and it would grow from there. At this time, we really don't want to put a stake in the ground, either on the free cash flow side or the revenue side, so I'll let you work the numbers.

From that perspective, like we said, we anticipate to see growth as we go into this next year on a free cash flow basis. Clearly from what were talking about, we'd expect to see a nice positive free cash flow.

(Operator Instructions) Our next question is from the line of Bobby Burleson of Canaccord. Your line is open.

So it sounds like that $70 million EBITDA is still in the cards potentially for 2017.

It is potentially in the cards. I think we've got to have a lot of things going right, so that's why we wanted to kind of readjust and say, here's the minimum level, and here's all the things that could potentially get us there.

Okay. And then in terms of what you're seeing on the Commercial Concrete side, and the DFW area was up quite a bit. Do you expect growth rates to kind of back off from the levels that you saw in 2016 in that market?

Well, we think -- again, as a reminder, that was a smaller market for us when we acquired TAS. We have had a much larger presence in Houston. So we always expected that, that would be a growth area for us. We expect growth up there, I don't know if it'll be as much as it was this past year. I mean, but keep in mind, we were starting from a lower number in 2015. So that's -- we saw significant growth up there.

We certainly are excited about that market and are working to kind of take advantage of that market. Obviously, we want to be smart about how we do that. We don't want growth for growth's sake. We want profitable growth. So very possible, we'll see -- our expectation is to see growth there, not necessarily at the same level we saw this year, but we'll see how that plays out.

Okay. And kind of how are bid margins evolving in the Houston area? I know that you're -- were looking for maybe things to improve there. Is there just a lag kind of -- for that idiosyncratic reasons, a lag for that region versus Dallas/Fort Worth? And is it -- or is there some sort of permanent kind of structural thing happening to depress margins there?

No, I don't -- and I'm assuming you're talking Commercial Concrete in Houston.

Yes.

Yes, we're -- I think it's just Houston, I think -- I don't think there's anything structural or just in the paradigm shift or anything like that. I think it's just kind of -- as we were in last year with some of the energy exposure that Houston had, did have an impact. I mean Houston is much more diversified economically than in times past, but it still does have some exposure on the energy side. So there was some effect there.

I think some of it is just, in my view, a little bit of a shift in some way in what some of the work opportunities are out there. A little bit of that sort of market nervousness about what was coming and sort of a little bit of uncertainty driven by some of the energy impact. But I think, by and large, we still expect opportunities, we're still seeing opportunity. It's a little bit tighter -- or it has tightened, as I said, in terms of bid margins for Houston. But we think that is temporary.

I think that, that -- we expect, long term, Houston, and we're very bullish on the Texas economy, Houston, Dallas, Fort Worth in particular. This is going to be a significant -- we're going to see significant population increases, which drives this market. So whatever timing we're seeing, at some point, that'll loosen up. I mean, I don't know when that will be, but I think there's certainly things out there on the horizon that could loosen that up from a macro level. And again, we remain very excited about that segment and our prospects there going forward.

Okay, great. Then just switching gears a little bit to Heavy Civil Marine. Your commentary on the outlook from the public side sounded a little bit more optimistic in terms of better funding from some of these federal items like FAST Act, RESTORE Act, et cetera. And now it sounds kind of like you're monitoring it. So I heard one person say the FAST Act has now become the slow act. Kind of what are you guys thinking in terms of the federal contributions of better outlook for funding. And then also, what are you factoring in, in terms of maybe a better outlook from a funding perspective from state and local on that business?

Sure. Good question. I think, from our perspective, and keep in mind, we draw from a number of different funding sources at the government level, at all levels of government. So what we look -- when we look for opportunities is, is we like to see a lot opportunities from different funding sources and different government agencies, whether those are different federal agencies or whatever.

So when we look at our target universe of projects and stuff, what we're seeing is we are seeing bid opportunities that are being driven by the FAST Act. We do expect to continue to see federal agency-led projects. We're starting to see the RESTORE Act work that we've talked about for a long time. Those projects are coming into the bid hopper. But what we are saying, though, is naturally, there's a change in administrations. I think that's just sort of a natural what's going to happen here type of thing in terms of funding.

We haven't -- as we've commented on many times in our previous calls, we haven't seen a normal budgeting process for a number of years, and we've operated under continuing resolution. So we don't really -- we're kind of monitoring that, as we said, to see what's going to happen with the funding and budgeting process, with the new administration and the new Congress. Obviously, they've got a lot of their plate with some things, and we'll see how that goes forward. And if we're going to have continued dysfunction like we've had in the past, or we're going to have some breaking of the logjams. I think that we're kind of watching that to see what happens.

At the end of the day, we do expect to see -- continue to see there's still a need for these agencies to let work at the federal, state and local level. They're all driven by different funding mechanisms. At the state level effectively, the FAST Act is in place, but obviously, there's some funding processes that have to go on there. At the local level, that's -- a lot of that's done with local financing, but does have some federal piece in it.

So we're monitoring that. At the end of the day, we are seeing projects from all these various sources. I think what we commented on is more around permitting stuff, which really has to do with the regulatory bureaucracy rather than funding stuff. But we're going to continue to monitor that.

Obviously, we've -- in the last couple years, with our diversification in Commercial Concrete, we've lessened our reliance on -- from a consolidated perspective, on the government sector. But we still have exposure to that on the Marine side, in particular. And so we'll continue to monitor this and see how it impacts us. But we are expecting work to come out. We're bidding on work as we speak in these areas.

And then, overall, it's still fair to say that with the material closure to the Tampa projects, that you've eliminated a lot of that lingering execution risk. And this latest event was more kind of normal course of business type permitting delays.

Very, very, very good way to put it. Yes, this -- the issues we talked about on the contract for Q4 is completely unrelated. It's simply a differing site condition. It's a pretty big one, but it's a differing site condition. We're trying to work out with our customer a fair compensation [for it]. It was a bonded project, so we were obligated to continue on with the work even though we're going to have to resolve what our fair compensation on that is. But it was a bonded project that we completed, and that was the best course of action for us to do.

But back to your other point, yes, the Tampa project is behind us. When I spoke about the structural changes, and we refer to that too, there's a lot of things that we've done there. One of the most visible ones is the changes that we made in management in that office. And again, full confidence, we've got the right team there. We are expecting a much improved performance out of that group, significant improvement in top line and, of course, bottom line to -- where we're executing profitable work out of that group.

Okay. And are there any capacity constraints on the Commercial Contract segment? I mean, I know you talked about kind of growing from a low base in Dallas/Fort Worth. But given the growth rates that you're seeing, when do you kind of run into a ceiling there, if at all?

Well, again, we want to be smart about how we do it, and we don't want growth for growth's sake. We want to do it profitably. But in that business -- and again, this really is in all of our -- in both of our segments. It really comes down to the people. The people are key, they're key in both segments. The people are the key to our success in the Commercial Concrete business. So we want to make sure that we have the right folks executing the work and want to make sure that we're smart about that. And so we're -- we expect to take advantage of the growth opportunities there, but we're going to be making sure that we do that smartly and having the right people on our team, executing that work is kind of the key to that.

And that concludes our Q&A session for today. I'd like to turn the call back over to Mr. Mark Stauffer for any further remarks.

Thank you. Thanks for joining us today on the call. We look forward to talking to you soon on our next earnings call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.