Orion Group Holdings Inc (ORN) 2019 Q4 法說會逐字稿

Good morning, everyone, and welcome to Orion Group Holdings Fourth Quarter 2019 Earnings Conference Call and Webcast.

Joining me today are Mark Stauffer, Orion Group Holdings' President and Chief Executive Officer; and Robert Tabb, our Vice President and Chief Financial Officer. 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 will then open the call for questions.

For the course of this conference call, we'll make projections and forward-looking statements regarding, among other things, our end markets, revenues, gross profits, gross margin, EBITDA, EBITDA margin, backlog, projects and 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 uncertainties, 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 new 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 to 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'd like to turn the call over to Mark Stauffer, President and Chief Executive Officer. Mark?

Thank you, and good morning, everyone. Thanks for joining us today. Today, we'll discuss our 2019 fourth quarter results and provide an update on our Invest, Scale and Grow initiative, or ISG. The key takeaways from our remarks today will be the vast year-over-year improvement in our top and bottom line performance, the next steps of our process improvement program and our 2020 outlook. I'll begin by giving an overview of the quarter, Robert will then discuss our financial performance, our capitalization and provide an update on expectations for our future results in more detail. And finally, I'll come back to discuss our markets and provide an update on our ISG initiative.

I'd like to start by noting our team's outstanding performance in safety during 2019, with both our marine and concrete divisions reaching historically low recordable incident rates. While this is a remarkable achievement, the importance of this is not in any statistic, but rather in our commitment as a company to watch out for one another and in having a safety mindset in performing our tasks, whether on the job or at home. Our goal under our target 0 program is for all our coworkers to go home to their families each day injury-free. I want to say thank you to all my coworkers for their efforts in looking out for each other and for conducting our operations in a safe manner.

During the fourth quarter, we posted the highest quarterly revenue in company history. More importantly, we were also able to improve our bottom line compared to the prior year period as both the Concrete and Marine segments delivered positive operating profit. The improved operational performance of both segments led to increased year-over-year EBITDA. Both segments also finished with positive operating profit for the full year as we saw improved execution on projects in our sizable backlog and positive results from our ISG initiative, especially around labor and equipment efficiency.

We remained focused on executing our strategy of being a premier specialty construction company and providing solutions for our customers across the infrastructure, industrial and building sectors. Our end market demand remained strong as evidenced by our robust backlog of $572 million as of the end of 2019. This, combined with the operational transformation we've implemented through our ISG initiative, supports our ability to deliver improved results as we progress into 2020.

Now I'll turn the call over to Robert to discuss our financial results for Q4 '19.

Thank you, Mark, and thanks, everyone, for joining us. Revenues for the fourth quarter 2019 were $199.8 million compared to $99.2 million in the fourth quarter of 2018. Our revenues in the prior year period were impacted by a $22.8 million charge related to customer-driven overruns on certain projects in our Marine segment. Excluding this charge, our fourth quarter revenues increased by 64% year-over-year, reflecting our improved execution across both segments.

Fourth quarter 2019 reported gross profit was $19.1 million as compared to a gross loss of $22.2 million in the prior year period. Excluding the previously mentioned $22.8 million charge, along with a $4.3 million reserve on receivables, fourth quarter 2018 gross profit was $4.8 million. The year-over-year gross profit increase in the fourth quarter was a result of better labor efficiency in both segments and better equipment utilization in Marine.

SG&A expenses for the fourth quarter 2019 were $16.3 million, which compares to $13 million in the prior year period. The year-over-year increase in SG&A expenses is primarily driven by ISG-related costs along with professional fees. As a percentage of revenues, SG&A in the fourth quarter of 2019 was 8.2% as compared to 13.1% in the previous year. Excluding $1.1 million of ISG-related costs, our fourth quarter 2019 SG&A as a percentage of revenues was 7.6%, well below our target of 8.5%.

For the fourth quarter 2019, we reported net income of $159,000 or $0.01 diluted earnings per share, which includes $1.3 million or about $0.04 per share of nonrecurring costs and other charges predominantly related to the ISG initiatives. Adjusted net income for the fourth quarter of 2019 was $1.5 million or $0.05 earnings per share. Net loss in the prior year period was $94.4 million or a loss of $3.32 per share. On an adjusted basis, this translated to a loss of $8 million or a loss of $0.28 per share.

Fourth quarter 2019 adjusted EBITDA was $11 million. This represents an adjusted EBITDA margin of 5.5% compared to $2.5 million or an adjusted EBITDA margin of 2% in the prior year period.

Looking at our results of our 2 segments. In the fourth quarter 2019, our Marine segment had revenues of $111.2 million and adjusted EBITDA of $11.7 million. This equates to an adjusted EBITDA margin of 10.5%. This compares to revenues of $36.9 million and adjusted EBITDA of $5.6 million with an adjusted EBITDA margin of 9.4% in the prior year period. The year-over-year improvement in the Marine segment was primarily driven by increased asset utilization and labor efficiency. Our Marine segment had fourth quarter 2019 revenues of $88.6 million as compared to $62.3 million in the fourth quarter of 2018. Adjusted EBITDA for the Concrete segment was a loss of $632,000, which represents a negative 0.7% EBITDA -- adjusted EBITDA margin in the fourth quarter of 2018. This compares to a loss of $3.2 million or a negative adjusted EBITDA margin of 5.1% in the fourth quarter 2018.

Our Concrete segment's year-over-year improvement was driven by increased production and increased labor efficiency. In terms of breakout by customer type, the Marine segment's fourth quarter 2019 revenues were comprised of 69.5% from government agencies, while 30.5% generated from the private sector, which is similar to Q4 2018 when the government sector accounted for 69% and the private sector was 31%. In contrast, the Concrete segment's fourth quarter 2019 revenues were 90% from private sector versus 80% in the prior year period.

Now to the bidding metrics and win rates. For the fourth quarter of 2019, we bid on approximately $1 billion worth of opportunities, and we're successful on $142 million. This resulted in a book-to-bill ratio of 0.71x and a win rate of 14.6% for the quarter. As of December 31, 2019, our backlog was $572 million, of which $340 million was associated with our Marine segment and $232 million for the Concrete segment. Additionally, we're the apparent low bidder, or have been awarded subsequent to the end of the fourth quarter, $154 million worth of opportunities. Of this, $71 million is related to the Marine segment, while $83 million is related to the Concrete segment. In total, currently, we have over $726 million of projects between backlog and low bid, an increase of nearly $130 million compared to the same period last year. This positions us well for growth.

Now turning to the balance sheet. As of December 31, 2019, we had approximately $13 million of cash and revolver availability. We ended the quarter with $72 million of outstanding debt, $35 million of which was related to the revolver, $37 million being related to the term loan. This translated into a 2.27x leverage ratio and a fixed charge ratio of 2.29x, both well within covenant requirements.

Also, we finished 2019 in a net overbill position. Between the availability on our revolver and our expectations for free cash generation, we have ample liquidity to support our operations and 2020 plan. Additionally, our bonding program remains solid and is more than adequate to support our bid activities.

Overall, as we head into 2020, we're pleased with the level of opportunities we have in front of us across both of our segments. Our backlog and low bid activity is near record highs, and we are optimistic given the healthy bid environment. With that, we expect adjusted 2020 EBITDA to be in the mid- to low-$40 million range.

To wrap up, we are pleased with the progress that has been made in 2020, and we remain focused on execution and continued improvement in 2020.

Now I'll turn the call over to Mark.

Thanks, Robert. Turning to a review of our market sectors. In our Marine segment, we continue to have extensive opportunities with both public and private customers for the maintenance and expansion of marine facilities and waterways. This is reflected in the strong bidding environment we are seeing and in our expectations of new awards in 2020. The recreational market continues to be an important driver of project opportunities. With the cruise industry being the fastest-growing category in the leisure travel market, cruise lines, in particular, are a key source of these opportunities. New and larger vessels continue to come online, driving demand in our markets for construction work on existing peer facilities and for new destinations and peer facilities that can accommodate these massive vessels.

The energy sector continues to be a source of bid opportunities for both marine and industrial projects. LNG export terminals represent a sizable part of these opportunities with 8 projects under construction and an additional 12 projects currently approved by FERC and plan for construction within our operating footprint. We expect these, along with other midstream and downstream energy driven projects, to be a major source of bid opportunities in the years to come.

By expanding our addressable market for project opportunities, we view the industrial sector as a key growth opportunity both in 2020 and in the future. Our recent award of a $47 million project for the Port of New Orleans represents one type of projects in the -- one of the types of projects in the industrial space we are targeting, and we are excited about our pipeline of projects in this sector. Our existing skill set aligns well with work in this space, which, in many cases, is being driven by our existing customer base, all of which makes this an attractive area for organic growth for Orion. The American Chemistry Council estimates over $80 billion of planned U.S. refinery infrastructure spend to support new facilities, expansions and restarts. This represents a small portion of what we view as addressable opportunities in the industrial space.

In our Concrete segment, we continue to expect solid long-term demand driven by population growth throughout our markets. We continue to believe in the strength of our concrete markets as evidenced by our bid volume in 2019 when we saw an almost 30% increase in our bid volume over the prior year. Demand for structural work remained strong as shown by several contracts we were awarded in the fourth quarter totaling $28 million. Expansion of our structural business remains a key part of our strategy in this segment.

We expect to see light commercial opportunities being driven by multifamily, warehouse and educational projects in our various markets. Across our operations, we are increasingly focused on pursuing select, larger and longer duration projects in the aforementioned and other markets, which we believe will improve visibility and consistency in our performance.

During 2019, we've bid on $4.2 billion of work, an increase of 33% over the prior year. Our overall win rate in 2019 was 20% with a win rate in the Marine segment of 30% and a win rate in the Concrete segment of 15%. Currently, we have over $1 billion worth of total bids outstanding, of which $289 million is related to the Marine segment and $758 million is related to the Concrete segment. Overall, we are tracking over $9 billion of current and future bid opportunities. With the combination of our current backlog, our low bids, the $1 billion of bids outstanding, the $9 billion of opportunities we are tracking, we see significant growth potential for our business. We're confident in our ability to win work and efficiently execute on that work, which we expect to drive bottom line performance.

That leads me to our ISG update. During the second half of 2019, the changes we implemented through our ISG initiative began to bear fruit across all areas of focus which were labor management, equipment management, project execution and corporate processes. In each of these areas, we've implemented enhancements and improvements to the collection and accessibility of data and timeliness of reporting to provide better visibility, leading to improved efficiencies and cost control. A main focus of our ISG initiative has been providing more transparency in the information provided to our managers to drive better decisions and improve execution. As stated before, the end goal of our ISG initiative has been to provide the pathway to performance that meets our expectations for our business segments on a consistent basis and then aligns with our strategic plan. We are pleased that we have made significant progress with this multifaceted program, yielding improved results in the second half of 2019.

As we have completed embedding the processes from our ISG initiative into our areas of focus, we are now moving on to the next steps of our process improvement program. Our next steps will be centered on driving efficiency -- driving enhanced efficiency in labor management, equipment management, project execution and corporate processes, along with business development, estimating, project execution planning and project controls. As part of this drive for enhanced efficiency, we will be implementing a new ERP platform.

Our implementation of a new ERP platform will solidify our operational efficiencies and allow for us to scale these efficiencies as we grow in the future. Historically, our information systems have evolved as we've grown organically and made acquisitions, and we currently operate separate data platforms in both our segments. We are now embarking on a project to achieve full systems integration across all our businesses and critical functions, including CRM, project management, HR, payroll and financials, among others. When fully implemented, we expect this new platform to significantly enhance our efficiency at both the project and corporate levels.

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

(Operator Instructions) Our first question comes from the line of Alex Rygiel with FBR & Co.

Nice quarter.

Thanks, Alex.

Thanks, Alex.

Couple of questions. First, you're a low bidder on $154 million, that's a big number. Any -- first congratulations, but secondly, any additional details here as to kind of what types of projects, which segments, so on and so forth?

It's a combination of both segments. We should have some announcements coming out starting as early as next week. So they are mid to -- they're kind of midsized projects, mostly in that number and -- but kind of spread between the segments and sectors.

Helpful. And then as you think about your total backlog now, can you characterize the margin profile of that backlog versus maybe what we've seen come through your P&L in the last 12 months? And then comment on sort of the absolute dollar of dredging backlog that you might have.

Well, first, I would say, in terms of the margin profile, we're pleased with what we're seeing on the Marine side in terms of that margin profile. We're working to, as always, outperform what we sort of see as our as-bids and our contingency and work through that to where we can outperform. Our basic goal in both segments is we want to bring in all projects at or above our as-bid margin. Concrete, we've got a little bit more of a competitive pressures, kind of generally speaking, although we've been able to, in certain areas, improve on our as-bid margins there. So if we look at kind of our performance on the Marine side, we're getting into the zone of sort of our EBITDA margin expectations. And we've seen big improvement on the Concrete side. We've got more work to do on the Concrete side. We're performing well in some of our markets. In other of our markets, we've got a little bit more work to do, and we're focused on change management and equipment rationalization, further equipment rationalization in that business. And we expect to be able to drive improvement in our delivered margins in that business as well.

Our next question comes from the line of Marco Rodriguez with Stonegate Capital Partners (sic) [Stonegate Capital Markets].

I was wondering if maybe you could talk a little bit about the gross margin in the quarter. Sequentially, you had a little bit of a decline, roughly the same revenues when I look at them Q3, Q4. If you can maybe talk a little bit about the drivers that you saw in there to kind of move that around a little bit.

Yes, sure. I'll take this one. Yes. What it was really driven by is we had about $10.5 million of uninstalled materials related to 606 accounting, where it says that when you have uninstalled materials, you book that revenue and cost at 0 margin until you have it installed. So if you take that and adjust that, that $10.5 million out, you would see margins look a little bit closer to what they were in Q3. So it's really timing from some of the larger projects and bringing some of the materials on to site.

Got it. And so the expectation, I'm assuming that from an accounting standpoint, as you catch that, that comes back to you guys in the latter part of the project completion.

Yes. We'll recognize that margin as we place those. We -- as we install those materials on the job.

Got it. Okay. And then maybe if you can also talk a little bit about -- in your prepared remarks, you talked about a very robust bid market and pipeline of projects that you guys are looking to pursue. If you could just talk a little bit about -- provide some more color on those types of opportunities that you're looking at. If you can kind of parse them between the Marine and the Concrete, that would be helpful.

Yes. Well, in both segments, we're seeing activity that we'd like to see. In the Marine sector, we're -- segment, we're seeing work from government agencies. Robert noted the kind of tilt towards government sector revenues, that's really been driven by a couple of the large projects that we have from local port authorities that we're executing on now, but we're seeing -- we're continuing to see those opportunities. We're seeing a lot of opportunities in the Caribbean related around the remarks I made with the increased volume of cruise ships and new cruise ships, similar -- yes, we've talked about this for quite some time. So we're seeing those opportunities.

In the energy space, we continue to see opportunities driven by just the domestic energy production that's then being delivered to the Gulf Coast refineries and storage facilities and, in some cases, export facilities. So that's driving -- continue to drive opportunities for us. We've seen an increase in opportunities that those projects drive for our dredging fleet. So we're getting coverage with our dredging fleet, both in the private sector and the public sector, which we hope to see that continue. And -- so we're seeing a lot of different things that we like there, and including medium-sized projects and some larger projects that we talked about, pursuing select larger projects.

On the Concrete side, we continue to see, of course, the normal sort of light commercial type projects that we target. And those are kind of small to medium sized, generally speaking, projects. But we're also seeing -- because we're targeting structural works, we've been very pleased with the structural projects that we're seeing, and we're tracking and we're bidding on. We announced the project last year for a structural project in Austin that has now kicked off. So we're starting to see that. Our efforts in structural go beyond just the Houston market. And as I said in my remarks, this is an area of -- that we've targeted for expansion. So we're pleased with what we're seeing there and again, starting to see that in our other -- or starting to see the payoff of our efforts in other markets besides just Houston for structural work.

Understood. And last question, if I might. You guys recently announced an industrial market win. It's been a strategic initiative that you guys have been working on here for a few years now. I was wondering if you could just talk a little bit about maybe what you've learned over this period of time, what you kind of took away from this particular win and what changes, if any, to your approach you're sort of looking at or implementing to get this to be a larger revenue driver and something that might be more consistent or a larger piece for you guys.

Well, we've done a lot of groundwork and leg work instilling the seeds for our efforts in industrial over the last couple of years. We're starting to see some of that pay off, which we are very happy about. We continue -- a lot of the work that we're targeting, as we've talked about in my remarks, from existing customer base. So we've done a lot of work there to, as I say, lay the groundwork. We are tracking numerous projects that both have -- have both a Marine component to it as well as kind of an industrial component to it. So we're hopeful that we'll see -- as those opportunities progress, that we'll see that pay off for us in terms of backlog in both for Marine work and industrial work.

So we just -- I guess, the key takeaway we've done from this is just being persistent. We're persistent in our pursuit of this, getting on the bid list, getting the opportunities for us to bid on this work and then when we -- where we haven't been successful, using that as a learning feedback loop to inform us better on the next pursuit. So again, a lot of things that we see going on that impact the Marine market will also impact the industrial space for us as well. So we're working to gain some momentum on that in 2020 as we see some of these projects come to fruition.

Our next question comes from the line of Poe Fratt with NOBLE Capital Markets.

I was just wondering if you could highlight whether the low bids outstanding, not yet awarded of $154 million, is that exclusive of the awards that you've already announced this year? Or are those awards part of that number?

It's a combination of both, but the majority of the awards like the industrial award is included in that as well. So it's a mix, but the majority of the awards that we've announced this year are part of that low bid number and subsequent award number.

Okay. Great. And then, Robert, could you highlight on your backlog, what portion of the backlog you expect to recognize over the next year or so? Or just give us an idea of the aging of the backlog.

Yes. We don't give out the specifics, but we do think that a good chunk of it will burn off this year. Now we do have a couple of larger projects. The Port of Seattle project, that's a multiyear project, that's sizable in the backlog. The Port Everglades project that we announced several quarters back should substantially wrap up this year. So when we think about our guidance and what we've laid out, we still have some work to go get, some go get to capture, but we do have a significant portion of the that in hand now.

Yes. And I would just add to that, just to underscore what Robert said, yes, we were -- we liked where we were coming into the year for -- as far as what our backlog was relative to our guidance. And we've been pleased with the low bid and the go get, as Robert said. So we like where we're tracking, still have more work to do, but we like where we're positioned right now.

Okay. And the industrial award, Mark, is going to be -- is part of Marine, you're not going to break out the industrial segment at this point in time.

Not at this point. Hopefully, that will be a good problem to have if we get to the point where we need to break that out. But at this point, it's not of the size that we'll split that out. So we'll continue to report that under the Marine segment for now.

Okay. Great. And then when you look at the -- when you look at sort of when -- where you are in the ISG process, if you -- how far along do you think you are in the process there as far as realizing the benefits of the program? And then also if you could give me an idea of the timing and cost of the ERP implementation and also in the context of what potential you're going to see in CapEx for 2020?

Well, I think in terms of ISG, we're -- we've -- as I said in my remarks, we've kind of got that embedded, those processes that we worked on, over the past year. We kind of view this now as we're coming to the end of sort of the ISG spend. We'll have some -- a little bit of spend for Q1. But really, we're viewing this now as this phase is kind of coming to closure. We have embedded the processes that we developed and -- enhanced, I'll say, not developed, but enhanced and improved throughout this last year in our processes. I think we're -- as we commented on, we've seen the improvement in the back half of the year from those efforts. We obviously are going to continue on in those areas that we've developed. But in terms of ISG and the expenditure there, we should see that expenditure and call-out kind of complete in Q1. As we said, though, we're now moving into the next phase, which is driven around continuing to enhance some things that are really kind of anchored around ERP.

As I said in my remarks, we've got sort of antiquated, if you will, systems, and we've got different systems in both businesses. And so I think there's a lot of efficiencies we can gain by going to a common platform. And the end goal of it really is to get better, faster information in the hands of our project managers, our operational managers to drive their decisions. And so that's kind of the next phase we will go in. We will talk -- we're still in the process of finalizing the cost and the negotiations and things like that with that effort. So it's premature for us to talk about the cost there, but we will have more information on that as we move ahead, and we'll share that at the appropriate time when we get that bit further baked.

Great. And then if -- Robert, if you could talk about 2020 CapEx and then also maybe in the context of what you think working capital is going to do in 2020. You had a big positive in '18, a little -- a pretty draw, a use of working capital in 2019 and then sort of what should we expect in 2020?

Yes. I don't expect outside of -- and Mark mentioned about the ERP, and we'll update on that. But I expect CapEx to kind of be in the normal range that we've seen over the last few years, that $15 million to $20 million range on a gross CapEx spend. As far as working capital, you saw this year, where receivables increased and it starts to alleviate itself a little bit in Q4 as income -- cash flow from operations was positive. So we'll see that cash flow continue to trickle in through Q1 and Q2 this year. But we expect CapEx to be kind of in the same range. We continue to focus, as we generate free cash flows to continue to pay down debt. And as we progress forward in the year, you'll see us to continue to delever from both ends, both increasing the tone and flow of EBITDA and then just the total debt outstanding drop as well.

Great. And then if I could just ask a last one on your guidance for EBITDA in 2020. How much of Concrete -- if you could break that out between Marine and Concrete, it sounds like you have at least a rough idea. And you've made a lot of progress, but Concrete profitability continues to lag. And can you outline a little more definitively the actions you're taking to improve profitability there?

Well, I think as I said earlier, we're a little bit further along in Marine in terms of being in the zone that where we want to be. With -- in terms of EBITDA margins and -- so our guidance is primarily driven by the Marine sector. However, on the Concrete side, we've made significant progress there in terms of what we've done with our processes, how we're set up. So we're very pleased with what we've done there. We're pleased with the efforts of our team in that division. We have great people that do great work in that division. We are working though to improve the bottom line and get into the zone of where we want to be there in terms of performance. And as I said, we're heavily focused on improving and enhancing kind of our change management efforts there, so that when we're doing additional work, we're getting paid for that one way or another in terms of doing that additional work, that we're really zeroing in on our contracts and treating our customers right but also being treated right as well in terms of that change management.

Equipment rationalization continues to be an area of focus for us in both segments, but also, it's a big effort for us in the Concrete division and again, just getting that transparency of information. So our managers make the decisions that they know how to make and see improvement there. And then also just with other cost rationalizations. And so our performance on the jobs has improved significantly in the last year, and we're very pleased about that. And so we'll continue to focus our efforts around that but also around sort of the indirect and overhead cost structure as well. And again, that's about getting information in the hands of our managers so they can make the decisions that they know they need to make and will make, they just got to have to get information there. So we'll continue our efforts on improving and enhancing that data that they see to do that.

Great. Is your -- so you're not going to break out the Marine versus the Concrete profitability, EBITDA in the guidance. Can you give me an idea of whether you -- it's based on getting Concrete profitability or EBITDA into the zone? Or is that going to be a 2021 event?

Well, we certainly hope to outperform. And obviously, we will work, as always, to outperform what we're guiding to. But yes, I think to answer your question, right now, our plan for 2020, which we, again, hope to outperform on is to make progress towards getting where we think we should be. We do plan to have -- in our plan, it reflects that progress. And clearly, we'll work to try to outperform that. It'd be very nice for us to outperform in that division and get us back in that zone. But I think this year, our base plan is to make progress towards that, which would be improvement, significant improvement for the division. So that's our goal. And of course, we'll work to outperform that.

There are no further questions in the queue. This does conclude our question-and-answer session. This does conclude our call. Thank you all for joining us today. We look forward to hearing from you during our next quarter. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.