Orion Group Holdings Inc (ORN) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Orion Group Holdings Earnings Conference Call. (Operator Instructions) I'd now like to turn the call over to your host, to Sean Martin. Sir, you may begin.

Thank you, Delon. Good morning, everyone, and welcome to the Orion Group Holdings Third Quarter 2017 Earnings Conference Call and Webcast.

Joining me today are Mark Stauffer, Orion Group Holdings President and Chief Executive Officer, and Chris DeAlmeida, our Executive 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 we'll update our market outlook.

We will then open the call for (inaudible) 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, win rates, book-to-bill, backlog, projections in negotiation, administrative expenses, capital expenditures, pending awards, as well as our estimates and assumptions regarding future growth.

These statements are predictions that are subject to risk and uncertainty, including those described in our 10-K 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-GAPP financial measures under rules of Securities and Exchange Commission, including Regulation G.

Please refer to the reconciliations and definitions inclusive of the most comparable GAAP measures within the press release issued this morning, November 8, 2017. The release can be found on our website at www.oriongroupholdingsinc.com. This website is the principal platform for investor communications.

Also, for additional discussion of risk factors that could cause actual results to differ materially from our current expectations, please refer to our quarterly filings with the SEC, which are also available on the investors section of our website.

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

Thank you, Sean, and welcome to our call this morning.

I'd like to begin by thanking our 2,500 coworkers for their hard work, dedication and commitment to our company, as well as the generous support and outreach provided during the recent hurricanes, as they helped coworkers, family, neighbors, schools and charitable organizations to collectively clean up and move forward. I'm extremely proud of the way our team has responded to these devastating events.

Excluding the one-time impacts we experienced during the quarter, all operations performed well and we experienced solid drivers for overall growth of the business long term.

As you are aware, during the third quarter, we experienced unprecedented impacts from three major hurricanes -- Harvey, Irma and Maria -- which affected over 85% of our operations. This resulted in ongoing project delays, the delayed start of newly-secured projects and had a significant impact on our third quarter results. Specifically, the impact was approximately $16.5 million in EBITDA during the third quarter.

However, because of the destruction caused by these hurricanes, we are experiencing higher demand for our services in the marine segment and we expect to see additional opportunities related to the storm effects over the next couple of years.

As an example, the rain event in Texas, due to Hurricane Harvey, brought significant levels of siltation into Texas ports and waterways driving increased need for dredging services. To date, we are processing and working on multiple emergency call-out projects and are ready to meet our customers' needs.

While our business this quarter was significantly impacted by the storms, the underlying fundamentals of our business remain healthy and strong, and we continue to see good (inaudible) opportunities going forward. Currently, our backlog remains at high levels with some increasing job margins in solid-bit opportunities.

As we look ahead, we will continue executing on our strategic vision of being the premier specialty construction company focused on meeting the needs of our customers across the infrastructure, industrial and building sectors while building our market share and enhancing shareholder value.

We will continue to execute this strategic vision through organic growth, greenfield expansion and strategic acquisition opportunities. Specifically, as we increase our service offerings, we will continue to deploy capital to high return, high free-cash-flow businesses with a focus on increasing our return on investment capital.

We expect demand drivers to continue to lead the high-quality-bid opportunities across the infrastructure, industrial and building sectors.

The infrastructure sector, which today our marine segment services, continues to provide both public and private opportunities to maintain and expand marine facilities on U.S. waterways.

Throughout our operating areas, market fundamentals remain positive and we are seeing pockets of margin expansion.

As I previously mentioned, we anticipate increased bid opportunities in the near term related to the third quarter weather event. This should provide an additional catalyst for increased asset utilization.

Additionally, private sector bid opportunities continue from downstream energy customers as they expand their waterside facilities associated with refining and storage.

Also, recreational demand continues from private-sector customers as local marinas are being expanded and remodeled, and bid opportunities related to cruise lines remain promising as we track projects related to new destinations or refurbishment of existing destinations in the Caribbean.

As we have mentioned before, volatility in the marine segment has been much greater than anticipated and we have and will continue to take the necessary steps to address idle labor and equipment costs because of this increased volatility.

However, the underlying fundamentals of this business remain sound with solid demand drivers, bid opportunities and a solid backlog.

Additionally, during the third quarter, permits related to the delayed project we discussed on our prior call were received. This work has commenced as planned and is progressing well.

The building sector, which today our concrete segment services, continues to have solid long-term demand drivers as well. The markets we currently serve continue to retain their positions as leading growth areas for business and population.

Population growth throughout our markets continues to drive new distribution centers, office expansion, retail facilities, multifamily housing units, educational facilities and medical facilities.

In Houston, we are experiencing some tightening in the market, but we expect to continue to maintain market share. We are focused on expanding our market share in the Dallas-Fort Worth market, including adding structural opportunities. Finally, we expect to continue to see solid growth in the Central Texas market as we continue to expand with fundamentally strong end-market drivers.

In the industrial sector, we will continue our greenfield expansion by combining talent and resources from the marine segment and concrete segment to continue to pursue foundation work inside the industrial environment.

The massive long-term, petrochemical-driven opportunities along the Gulf Coast provide significant potential to expand our addressable project opportunities. In fact, the U.S. is on pace to become a net exporter of natural gas by 2018 as a result of the shale revolution which has led to increased domestic natural -- production of natural gas.

This will lead to an outpaced growth in the petrochemical industry, which should account for more than half of the construction spending in the manufacturing sector.

In closing, our fundamental business drivers remain solid. We are working to reduce the volatility in our business by executing our strategic plan and focusing on complementary services with high returns.

While the severity of the third quarter weather impacts were unexpected, we will focus on meeting the opportunities these events create while continuing to right-size our marine fleet and reduce overhead cost.

We believe we have a strong business with good, long-term drivers and opportunities for solid shareholder returns.

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

Thank you, Mark. And thanks for joining us.

For the third quarter of 2017, we reported a net loss of $5 million or an $0.18 loss per diluted share. These results compare with a net income of $4.7 million or $0.17 earnings per diluted share in the prior year period.

Excluding impacts from the storm Mark mentioned, the income for the third quarter 2017 would have been $7.3 million or $0.26 earnings per diluted share.

Contract revenues for third quarter 2017 were $140.2 million, of which 49% came from the marine segment and 51% came from the concrete segment.

Third quarter 2017 revenues from the marine segment decreased 17% compared to last year. This decrease was primarily driven by weather events that Mark mentioned earlier.

Third quarter 2017 revenues from the concrete segment decreased 12% from the prior-year period. This decrease is also primarily driven by the impacts of hurricanes, particularly Hurricane Harvey in the Houston and Central Texas markets.

In total, 26% of our consolidated third quarter of 2017 revenues were generated from federal, state and local government agencies, while 74% were generated from the private sector. This compares to 28% of consolidated revenues being generated from federal, state and local government agencies and 72% from the private sector in the prior year period.

Consolidated third quarter gross profit was $7.8 million or a gross margin of 7.7%, which compares to prior year gross profit of $24.2 million or a gross margin of 14.7%.

During the third quarter 2017, we saw decreases in consolidated EBITDA and EBITDA margins due to the weather events. Third quarter EBITDA was $2 million or 1.5% EBITDA margins. This compares to third quarter 2016 EBITDA of $18.1 million or 11% EBITDA margins. Excluding the impacts from the weather events, third quarter EBITDA would have been $18 million or a 13% EBITDA margins.

SG&A expenses for third quarter 2017 were $16.5 million as compared to $15.3 million in the prior year period. SG&A was 12% of revenues, up from 9% in the prior year quarter. This increase is primarily driven by the inclusion of the recently-acquired Central Texas Concrete Company.

Going forward, we would expect SG&A as a percent of revenue to decline as revenue growth outpaces SG&A expenses and as we continue to reduce our overhead costs.

For the first quarter of 2017, we bid on $752 million worth of opportunities and were successful in approximately $110 million. This resulted in a 15% win rate for the quarter and a book-to-bill ratio of .79 times. On a year-to-date consolidated basis, our win rate was 19% to book-to-bill of .88 times.

As of September 30, 2017, we had a backlog of work under contract at $383 million, which compares to $388 million or relatively flat as compared to the prior year period.

Of our September 30, 2017 backlog, $199 million is related to the marine segment, while $184 million is related to the concrete segment.

Additionally, we are the apparent low builder or have been awarded subsequent to the end of the third quarter an additional $140 million worth of opportunities. Of that, $100 million is related to the marine segment, while $40 million is related to the concrete segment.

In total, (inaudible) we currently have over $520 million of projects in backlog and low bids. This level of activity gives us optimism about where we are headed for the remainder of 2017 and 2018.

Now, turning to the balance sheet, after making payments during the quarter of $15 million on a revolving line of credit, we have approximately $2.7 million of cash on hand and access to approximately $49 million under our revolving line of credit.

We ended the quarter with approximately $82 million in total debt outstanding. Subsequent to the end of the quarter, we drew $20 million on a revolving line of credit to fund ongoing working capital needs.

We believe that our combined liquidity position is adequate for general business requirements and for servicing our debt going forward.

Year to date, the company has produced approximately $32 million of cash flow from operations and paid down approximately $22 million of total debt.

Since entering into our credit facility, we have reduced our total debt outstanding by $67 million as of September 30, 2017.

As we go forward, we will continue to focus on paying down debt with excess free cash flow.

As a result of the weather events experienced during the third quarter, we amended our credit agreement to provide more room with regard to our leverage ratio requirement as well as some other minor changes, including an add back of the weather-related events during the third quarter of 2017.

Regarding leverage ratio, going forward, our leverage ratio cannot exceed 3.0 times our (inaudible) 12-month adjusted EBITDA basis. By making this amendment, we provide adequate cushion within our covenants going forward.

We are pleased with the continued support from our lenders and look forward to continuing a long relationship with our bank group.

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

Turning to our outlook, we continue to see strong demand for services across our business. As Mark mentioned, while the weather events have caused short-term disruptions during the third quarter, they will provide a catalyst for increased demand drivers in the future. We are seeing this increase in demand for certain services now and expect to see additional demand in the future.

Our elevated backlogs (inaudible) remains at near record level and we are optimistic, given the same sitting opportunities we continue to see.

Currently, we have $970 million worth of total business outstanding of which $295 million are related to the marine segment, $675 million are related to the concrete segment.

As we look at full-year 2017 guidance, we recognize the volatility of marine-segment experience this year, plus the weather events during the third quarter has led to changes in the (inaudible) of cost, and, therefore, has led to changes in the goals we set for the year.

We expect the fourth quarter will see increased activity and a return to normal profitability levels with higher asset utilization and solid project execution. Our goal is and always will be to deliver profitable returns for our shareholders.

The company is proactively adapting to the changes in our market and we are focused on growing profitable business lines. Orion has a strong future and we are adapting to reduce volatility in our earnings and results.

As we look at 2018, we will continue to adjust our business to reduce volatility. Demand from the weather events plus ongoing strong demand in our in markets will provide a catalyst for some bottom-line improvement in 2018. This bottom-line improvement should expand more significantly in 2019 and beyond.

Overall, we remain optimistic about our prospects for long-term profitable growth and we remain committed to delivering improved results as we move forward.

Additionally, we look forward to continuing to expand our infrastructure, industrial and building sectors as we adjust the business where necessary to deliver improved shareholder value.

With that, I'll turn the call back over to the operator to begin the q-and-a portion of the call.

Thank you, sir. (Operator Instructions) Our first question comes from Jon Tanwanteng of CJS Securities. Your question, please?

Yes, good morning. It's Pete Lucas filling in for Jon here this morning.

You had mentioned changes in your goals. You recently filed an 8-K detailing $62 to $98 million in annual EBITDA potential. Just wondered if there's a change to that, and what's the timing in realizing that and what has to happen for you to get there?

So there is no change to that at all. Specific, when we talked about the goals, we talked about as we walked into 2017, we had higher goals. Through project delays and weather events, those have changed over time and we've had to reduce those goals, but that's specifically what I'm talking to about the goals.

As we look at the future of the company and where we're taking it, particularly in the industrial, infrastructure and building sectors, we do believe in that 8-K and that we could reach up to $100 million of EBITDA in this business long term.

We have not put a specified timeframe on that. As we look into 2018, we're still making some adjustments to reduce the volatility particularly on the marine side of the business. So we do expect some growth over this year, but don't necessarily expect to get necessarily to where we want to be long term.

You know, looking at that and from the timeframe perspective, we're looking at that as more of a five-year type of goal to achieve, and some of that will depend on where we're at, and that depending on, you know, what we execute as far as growth and expansion opportunities, particularly in the industrial and building sector and any potential acquisitions that could assist as well.

Okay. Very helpful. Thanks.

And you mentioned that you did receive the permits that you had talked about last quarter, but in terms of permitting delays that have plagued you guys for the last several quarters, do you think we're past those issues now or is that still a problem that we're going to face going forward?

Well, I think it's -- We're past kind of the, you know, the little logjam that we had, but I think it's still an issue for us. I don't think it's going to be quite as bad as, you know, the first half of the year when we had some additional roadblocks that were thrown up that delayed the permitting process beyond what we've been seeing.

So I think it's going to -- It's improved from what we saw earlier in the year, but I think we're still going to be living with, you know, an increase in that process versus what we saw a few years ago as an example.

So, you know, again, we're trying to work with our customers to adjust their lead times, and we're very much focused on trying to do that so that we can sort of get into a new rhythm.

I think some of the events that, again, happened earlier this year are more behind us, but I think, you know, overall, we're working to adjust our customers to sort of the new reality of the duration that it takes on these things, and, again, get into a new rhythm with that process.

Great. Thanks. And the last one from me, you mentioned some of the opportunities and tailwinds from reconstruction and emergency work from Harvey and Irma, but in terms of lingering impacts, do you expect that to last for another quarter or so or anything you can kind of touch on there, and, then, how soon before we start to see some of the benefits?

Well, I think, you know, we are back up and running, as we talked about in the earnings release today, and, you know, we worked to get, you know, safely back to operations, you know, as soon as it was safe to do so. And, you know, we are back up and running in all areas.

I think, you know, again, this is sort of playing out like we would expect and with -- I mean, certainly, this was kind of, you know, a very unusual, unprecedented amount of impact that we saw.

But we've seen, you know, hurricane events before where they create opportunities. You know, short term we see, you know, survey work and inspection work, which we've been seeing. We're starting to work on some of the dredging, additional dredging opportunities that have been generated as a result of this.

Longer term over the next couple of years, we'll see additional opportunities as a result of some of the damages that were caused, particularly in the Caribbean. Those will take time. They will be an additional catalyst.

But we're starting to see some of the work now, particularly with dredging opportunities. So expect that as we go into fourth quarter and certainly into the first quarter of next year that those projects will be coming online, and, then, longer term, some of the construction opportunity.

Very helpful. Thank you very much. I'll jump back in the queue.

Thank you. (Operator Instructions) Our next question comes from Bobby Burleson of Canaccord. Question, please?

Yeah, good morning.

So just following up a little bit more on the dredging opportunity, sounds like that's, you know, happening now. Can we talk about where your capacity is, where your utilization levels are now in that business and kind of where you think that can go over the next several quarters? You know, what's the duration of this work and the kind of scope of the potential work that you guys have coming?

Well, yeah, I mean, I think that we definitely expect to see an uptick in our utilization. We've got -- You know, we do have capacity that can assist on some of this work where we've been bringing this online again, as expected. You know, kind of a first step of that occurred right after the storm events in the several weeks after that where, you know, we had inspection and survey work out.

The Corps of Engineers has begun modifying some of the contracts that we've had with them to take care of some of this. Just a mass amount -- particularly in Texas -- a mass amount of siltation occurred as a result of, you know, all the rain that we had in the state.

So we expect increased capacity. You know, obviously, we talked about the volatility in the business, the marine business, and, you know, we still expect that we're going to see some of that related to the permit issue that I just talked about.

However, with respect to near-term and utilization, you know, we've been a little bit underutilized with and have had capacity with our dredging operations. We do expect that to increase nicely as we get into the fourth quarter and certainly go into the first quarter.

We'll see after that, in terms of, you know, the additional opportunities there, how long, you know, that takes to clear out, that it'll be additive to other work that otherwise would be going on. So we certainly expect a near-term uptick in utilization.

Great. And then in terms of, you know, these industrial jobs, you won your first job there recently, and I'm wondering what are the tradeoffs in terms of, you know, maybe TAS work that you're doing, you know, for legacy business versus going after the industrial jobs in terms of, you know, the margins? You know, I think the margin's a lot higher on industrial, and kind of, you know, do you have better kind of longer-term projects in industrial where it goes into your backlog and it gives you more stability? You know, kind of comparing and contrasting your concrete segment with industrial.

Well, yeah, you know, good question. I think, you know, again, right now this is a greenfield opportunity for us, how we're pursuing it. You know, we're leveraging, you know, skill sets from both segments. Most equipment utilization that -- in the particular job that you mentioned would come from the marine side at this point.

But, again, we are pursuing this to be additive, to not take away from anything that we've got going on in our concrete segment or our marine segment. And, you know, as we stand this business up and expand in their greenfield, you know, again, we expect similar attributes that we see in our concrete business, meaning it's not necessarily an asset-intensive business. So from a cash-flow perspective, we expect it to be, you know, similar to, if not better than we see in concrete, over the long term.

And, again, we're certainly focused on pursuing this from a greenfield space, the greenfield perspective, at this point, but standing it up as its own separate unit and certainly an area that might be a good candidate for M&A opportunity down the road, if we see the right opportunity come along.

And just one last quick one. Given the storms and a lot of the damage in some of these Gulf Coast areas, has that changed, you know, the number of opportunities you've seen coming on industrial, maybe the willingness -- I know some of those are existing customers, but the willingness to have, you know, another provider come into the market, has that increased at all because of maybe, you know, some of the, you know, damage that's happened in and around some of these plants or is there no impact, really, from the hurricanes?

Well, I think from the standpoint of, you know, kind of our existing operations in our marine segment, certainly, that's out there, particularly with dredging opportunities.

I think with respect to the industrial stuff, which I think is what your question is, you know, off the water's edge, I don't think it's really-- the storm events really haven't had an impact on that. That's being driven by, you know, the expansion of these facilities driven by, you know, the energy, shale revolution and all that. A lot of that, you know, most of that stuff that's being produced domestically is, you know, eventually winds up on the Gulf Coast, which is driving those expansions.

You know, to the other point of your question, though, I mean, we already -- One of the things that we like about pursuing these -- these are already our customers today. So, you know, that's why we refer to this as leveraging our skill set that we have in both the marine and concrete, but also leveraging our customer relations that we have existing in our marine businesses.

You know, our marine business, essentially, you know, (inaudible) is operating in this industrial space today. So these are, by and large, mostly customers that we already have, facilities that we're already used to working in. It's just, you know, doing additional -- providing additional services for those customers within the plants or off the water's edge, if you will.

Great. Thank you.

Thank you. (Operator Instructions) I show no further questions in the queue. At this time, I'd like to turn the call back to Chris DeAlmeida for closing remarks. Your question --

Thank you. We thank you all for joining us on the call today, and I look forward to speaking with you next quarter. In the meantime, if you have any questions, please feel free to reach out.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect.