Orion Group Holdings Inc (ORN) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q3 2018 Orion Group Holdings Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would like to turn the conference over to your host, Mr. Shane Martin. Please go ahead.

Thank you, Rusty. Good morning, everyone, and welcome to Orion Group Holdings Third Quarter 2018 Earnings Conference Call and Webcast. Joining me today are Mark Stauffer, Orion Group Holdings' President and Chief Executive Officer; Chris DeAlmeida, our Executive Vice President and Chief Financial Officer; and Robert Tabb, Vice President, Finance.

Regarding the format of the call, we've allocated about 15 minutes for prepared remarks, in which Mark and Robert will highlight our results and update our market outlook. We'll then open the call for questions.

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 our future growth, administrative expenses and capital expenditures.

These statements are predictions that are subject to risks 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 developments or otherwise.

Also, please note that adjusted net income, adjusted earnings per share, 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 of the most comparable GAAP measures and reconciliation tables accompanying this earnings call, within the press release issued this morning.

The press release can be found on our website at www.oriongroupholdingsinc.com.

Also, for additional discussion of risk factors that could cause 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, Shane, and thanks to everyone for joining us this morning. I'd like to start by thanking our 2,500 coworkers for all their continued hard work, dedication and commitment to our company. It's through our combined efforts we strive every day to safely meet our customers' needs, while working towards our strategic objectives.

As we announced a couple of weeks ago, during the third quarter we experienced delays due to customer schedules and weather pattern impacts in Texas, both of which impacted cost burn and therefore, revenue generation. However, as customer scheduling adjusts and weather patterns improve, we expect our results to improve. Despite the third quarter customer scheduling and weather impact delays, we remain committed to executing our strategy and returning value to shareholders.

To be specific, we are continuing to execute on our strategy of being a 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. We will continue to look for opportunities in these areas through both greenfield and as appropriate, M&A efforts.

Our marine segment has been performing well, leading to solid bottom line improvements. We are very pleased with the performance in this segment, and continue to be committed to providing quality services to meet our customers' unique needs.

Within our concrete segment, we are continuing our efforts to expand our services and market share in our Central Texas and Dallas-Fort Worth markets, while focusing on maintaining market share in Houston. We believe there continues to be solid long-term demand drivers for our concrete segment and expect to see long-term expansion and growth opportunities.

Finally, in our industrial sector, it continues to develop nicely and has contributed to opportunity for both marine -- for both our marine and concrete segments. By leveraging our skill sets and customer base, we are expanding our addressable markets to provide high-quality services to meet more of our customers' needs. We expect our industrial business to continue to grow as we move into 2019.

We believe we will continue to see strong demand for our services across our current business segments with solid opportunities for profitable growth in the future. We expect to continue to see solid long-term demand drivers across the infrastructure, industrial and building sectors.

Also, as I've stated before, with the favorable macroeconomic conditions we see, we believe conditions exist for improved bid pricing in both our concrete and marine segments, and we remain hopeful that our markets will recognize the prevailing positive conditions and adjust accordingly.

The infrastructure sector, which 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,[metals] remain positive. We continue to see private sector bid opportunities from downstream energy customers as they expand their waterside facilities associated with refining, storage and exporting.

Recreational-driven demand continues from private and public customers with bid opportunities related to cruise lines remain promising as we track projects related to new destinations or refurbishment of existing infrastructure both domestically and in the Caribbean.

Finally, we continue to see demand from port authorities, which are generating opportunities as they execute their expansion plans to handle larger vessels and increased traffic flow, as our recent announcement for our $97 million Port Everglades project demonstrates.

Turning to the building sector, which are concrete segment services, we continue to have solid long-term demand drivers. The markets we currently serve continue to retain their positions as leading centers for population growth and business expansion. Population growth throughout our markets continues to drive demand for new distribution centers, office expansion, retail and grocery facilities, multifamily housing units, educational facilities and medical facilities.

As I previously mentioned, we continue to experience a competitive environment in the Houston market, and we are focused on providing high-quality services and maintaining market share. Additionally, we continue to focus on expanding our market share and service offerings in the Dallas-Fort Worth market and the Central Texas market, both of which we expect to provide near-term and long-term opportunities. In all markets, we will continue our pursuit of structural projects in addition to light commercial work.

In the industrial sector, we are progressing well, and we are continuing our greenfield expansion by combining talent and resources from the marine and the concrete segment to continue to pursue and execute foundation and other work inside the industrial environment and other land-based environments. We expect the massive long-term petrochemical-driven opportunities along the Gulf Coast to provide significant potential to expand our addressable project opportunities.

In closing, while we had a blip in the third quarter, we continue to have confidence in our bid markets and our long-term demand drivers. We are extremely well positioned to take advantage of improved economic conditions and increased infrastructure spending. Additionally, we are focused on maintaining and enhancing the improvements we've made in the marine segment, seeking profitable growth opportunities in the DFW and Central Texas markets in our concrete segment, and continuing to expand our addressable market by pursuing bid opportunities in the industrial sector.

We remain focused on profitably delivering high-quality projects to our customers with continued expansion of our services across our operating segments and areas. We're excited about the future as we continue to execute our strategic plan and believe we have solid fundamentals for future success.

Lastly, this is Chris' last call with us, and I want to publicly thank him for all his hard work, dedication and friendship over these last 11 years, and to wish him well in his new endeavors.

With that, I'd like to turn the call over to Robert to review the financial results in more detail. Robert?

Thank you, Mark, and thanks, everyone, for joining us.

For the third quarter 2018, we reported a net loss of $6.4 million or $0.22 diluted loss per share. These results compare to a net loss of $5 million or $0.18 diluted loss per share for the same period a year ago.

Contract revenues for the third quarter 2018 was $125.1 million, of which 50.8% came from our marine segment, and 49.2% came from our concrete segment. Within the marine segment, 61.5% of third quarter 2018 revenue was generated from federal, state and local government agencies, while 38.5% was generated from the private sector. This compares to 53.1% of third quarter 2017 revenues being generated from federal, state and local government agencies, and 46.9% from the private sector.

In the concrete segment, 80.1% of 3rd quarter 2018 revenue was generated from the private sector as compared to 78.3% in the prior year period. 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 bids in the concrete and industrial businesses.

Third quarter 2018 gross profit was $5.9 million or a gross profit margin of 4.7%, which compares to third quarter 2017 gross profit of $10.8 million or a gross margin of 7.7%.

SG&A for the third quarter 2018 was $14.4 million or 11.5% of contract revenues, which compares to third quarter 2017 SG&A expense of $16.5 million or 11.8% of contract revenues. Over the long term, we expect to continue to see leverage from our SG&A expense as a percent of revenue.

Third quarter 2018 EBITDA was $0.7 million or a 0.5% EBITDA margin. This compares to third quarter 2017 EBITDA of $2 million or a 1.4% EBITDA margin. For the third quarter of 2018, we bid on $871 million worth of opportunities and were successful on $210 million. This resulted in a 24% win rate for the quarter and a book-to-bill ratio of 1.68x.

As of September 30, 2018, we had a backlog of work under contract of $426 million, of which $238.1 million will be related to the marine segment and $187.9 million was related to the concrete segment. Additionally, we are the apparent low bidder or have been awarded subsequent to the end of the third quarter, $63 million worth of opportunities. Of this, $58 million is related to the marine segment, while $5 million is related to the concrete segment.

In total, currently, we have over $489 million of projects between backlog and low bid. While backlog can fluctuate due to the timing and award -- mix of awards, we believe our current level of backlog, low bid opportunities and future opportunities support our outlook for 2018.

Now turning to the balance sheet, as of September 30, 2018, we had $2.6 million of cash on hand and access to $61 million under our revolving line of credit. We ended the quarter with approximately $97 million in total debt outstanding, of which $38 million was related to the revolver and $59 million was related to the term loan.

Total debt outstanding increased slightly during the third quarter due to the timing of general working capital needs, primarily associated with the mobilization of certain projects. We expect our debt levels will decrease as we progress through 2018 and '19. Additionally, we remain in compliance with our financial covenants, including being below the 3x leverage ratio required at the end of the third quarter.

As a reminder, during the third quarter 2018, we amended our credit agreement with the goal of providing greater flexibility, while reducing overall costs. This amendment converted the existing $185 million credit facility to a $160 million credit facility, of which $60 million is a term loan and $100 million is a revolver.

Due to this extension of this credit facility and related terms, we extinguished the remaining unamortized fees from the original facility. As a result, interest in the third quarter 2018 was higher by approximately $2.1 million. The new fees associated with the amendment are approximately $900,000 and will be amortized over the new term or 5 years.

Going forward, we will continue to focus on paying down debt with excess free cash flows. We believe our liquidity position is more than adequate for general business requirement and for servicing our debt going forward. Additionally, our bonding program remains solid and is more than adequate to support our bid activities.

As we look ahead, we remain pleased with the level of opportunities we have in front of us across our business sectors. Our backlog and low bid activity remains strong, and we are optimistic given the healthy bid opportunities we've been seeing over the past several months. Currently, we have over $1.1 billion worth of total bids outstanding, of which $460 million is related to the marine segment and $675 million is related to the concrete segment. Additionally, we are tracking approximately $9 billion of future bid opportunities.

However, given the impacts from the third quarter, we will not meet our EBITDA outlook as previously anticipated. Currently, we believe 2018 full year EBITDA outlook will be in the range of the high 20s to low-30s.

Going forward, we expect this level of EBITDA to increase given the positive industry trends we see in front of us. Additionally, we will continue to focus on developing our industrial services, both on and off the water.

In closing, we remain excited about the future and look forward to improved results in 2019.

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

(Operator Instructions) Our first question comes from the line of Jon Tanwanteng from CJS Securities.

It's Pete Lukas for Jon. Just looking forward to Q4 here, just wondering how much impact from weather and scheduling you're still seeing and if there's any way to quantify that in terms of either EBITDA or revenue perspective?

Well, I think in terms of EBITDA, Robert just kind of commented on that. Again, we expect Q4 to be better than Q3. How much better depends on the patterns and stuff. I will say, in October, we did continue to experience significant rain patterns in Texas, albeit I do think our production was better in October than it was in September. So we're moving in the right direction.

We're not quite back to the level of where we'd like to be in the month of October, on the concrete side, but we have a lot of backlog. And so if we see improved weather, as we move into the back half of the quarter here, then we expect to have improved results. Likewise, on the marine side, as we're starting numerous projects, so it's going to depend on the timing of how much of that cost burn occurs and therefore, revenue recognition occurs. But I think, again, we expect Q4 to be better than Q3. And as we talked about our EBITDA range for the full year, that kind of puts it in perspective for you about how to think about that.

And you mentioned the bidding activity in the macro environment remained strong. But has there been any change in bid pricing on either the marine or contract side that you've seen?

We've seen more improvement on the marine side. I think, we're -- I still think, as I said, and I've said on the last several calls, I believe with all the activity going on and all the activity we see in front of us, the bid opportunities and just the overall macro environment and GDP growth and things of that nature, the market should be bidding a little more than they are, bid pricing should be a little bit higher than it is.

That being said, I think on the marine side, we're -- it has been steadily improving. On the concrete side, as we've talked about, it's still a little -- particularly in Houston, we've seen pressure there. We're hopeful as we move into next year again as we see continued activity and other things in the Houston market, in particular, but that we'll see some improvement in our pricing. Again, we bid on more work in Q3 in that segment than we did in Q2. It's just been kind of a tough environment from a pricing standpoint, but we do think that is a temporary condition and we'll cycle out of that, and we'll see improved bid pricing as we move ahead. It's just a question of timing.

Our next question comes from the line of Marco Rodriguez from Stonegate Capital.

I was wondering if maybe you could circle back around on the industrial side of the equation here from a strategic standpoint. I know you addressed some of the trends there from a high level, but I was wondering if you could kind of help us understand and perhaps quantify some of the positive steps that you see that that area is taking going forward?

Sure, no, absolutely. Well, again, as you pointed out from a macro level, we've talked about that. There's tens of billions of dollars being spent in that sector, in our market areas that -- with customers that we already have in our marine segment.

We have been spending an awful lot of time building our business development capabilities in that regard and spend a lot of time tracking various projects, some of which are tied to other work that we are pursuing or work we're pursuing in our marine segment, but it's tied to the same kind of expansions where, in other words, we are tracking both the opportunity for the marine segment to do the work, but also -- it's also providing opportunities for industrial construction.

So we are tracking work along those lines, we're also tracking other work that's completely unrelated to anything that's going on that we're tracking on the marine side. So we've been very pleased with our project tracking; that has steadily increased. We have added dedicated resources to -- dedicated resource in business development to this sector. And we're seeing a buildup of what we're putting in our tracking database, and I'm very pleased with that.

We've been executing some of our first work in that business this year, and we're just expecting additional opportunities to be able to go after. And again, as we look at the long-term drivers there, we think there's going to be a lot of work for us to pursue, again, some of which may also provide opportunities for marine, but some of which may be standalone and just opportunities that just expand our addressable market.

Do you anticipate that perhaps you start to see some sort of meaningful revenue contribution from the industrial side, maybe in fiscal '19? Or is it perhaps maybe more of a fiscal '20 type of event?

Well, I think we'll definitely see more in 2019 than we saw this year. Whether or not it reaches a point of being reportable as a separate number in '19, we'll see. But we definitely think it's trending up as we would expect, and we would expect to do better in that regard, next year versus this year. And we'll see -- if we have accelerated growth there, we could potentially see it as a standalone number next year, but we'll see how we go there.

Got it. And then kind of switching gears here, just looking at your cash flow statement. Last couple quarters, you've had a usage here from cash flow from operations so year to date, we're kind of trending a little bit lower than what historical patterns would suggest and understood, obviously, that there were some issues here in Q3. But just kind of wondering how you guys are thinking about cash flow generation into Q4? How you're thinking about that cash flow generation into '19? And then debt levels, I know that you commented that you expect debt levels to drop. I'm just kind of wondering sort of timing and cadence as far as access to that debt levels?

Yes. I'll kind of start off here, and then I'll let Robert kind of comment on that, too. But I guess, partially, on cash, obviously, that's something that we pay a lot of attention to. I think as we may have talked about before, but I'll -- we've had certain jobs that we are start -- in the process of starting up, so that's putting on a use of cash, which will reverse as we're able to bill for some of those things. So we expect that trend to reverse as we get those jobs up and running.

Also, we've had other work that just because of the way the work works and the contract schedule of values works, where we're not able to bill for certain things until we get them installed. So nothing that's kind of been unexpected, but that we sort of expect to, from that standpoint, improve as we progress through these projects.

Yes, and I'll add that to the extent the part about how we expect cash debt to trend. We see it decreasing over time, as Mark alluded to, so getting cash in for some of these jobs that we've made large purchases to kick off the project. So the way I kind of think about that is that you should expect to see debt decrease as we go into 2019 and steadily through the year.

Got you. And then here, in terms of the SG&A spend you had in the quarter, just kind of wondering if any permanent costs were taken out or if these are just temporary cost-reduction initiatives that you underwent in Q3?

Yes. No. We saw the benefit of some of the initiatives that we put in place and reduced legal fees in the quarter. But I think the run rate that you've seen earlier this year is probably more in line with where things are going to be in the future.

(Operator Instructions) I'm showing no further questions at this time. I would now like to turn the conference back to your host. Mr. Shane Martin, you may continue.

Thank you, all, for joining us on the call this morning. We look forward to seeing everyone on the next call. Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now disconnect.