Orbital Energy Group, Inc.
Q3 2020 Earnings Call Transcript
Published:
- Operator:
- Good day, everyone, and welcome to Orbital Energy Group Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's remarks. As a reminder, this conference call is being recorded. A replay of today's call will be available on Orbital Energy Group's website later today and will remain posted there for the next 90 days. I will now hand the call over to Mr. Eckstein of KCSA for introductions and the reading of the safe harbor statement. Please go ahead, sir.
- Scott Eckstein:
- Thank you, operator. Hello, everyone, and welcome to Orbital Energy Group's third quarter 2020 conference call. A copy of the Company's earnings press release and accompanying PowerPoint presentation are available for download on the Events and Presentations page of the Investor Relations section of the Orbital Energy Group website. With us on today's call are Jim O'Neil, Vice Chairman and Chief Executive Officer and Daniel Ford, Chief Financial Officer. Today, we will review the highlights and financial results for the third quarter as well as recent developments. Following these formal remarks, we will be prepared to answer your questions. I would also like to remind everyone that today's call will contain certain forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in forward-looking statements. The Company may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, such as the COVID-19 pandemic, including, among other things
- Jim O'Neil:
- Thanks, Scott, and thank you, everyone for joining us today on our third quarter 2020 earnings conference call. During the third quarter, we continue to successfully execute on our strategy to transform Orbital Energy Group into an energy services infrastructure provider. Our electric power and solar infrastructure segment generated increased revenue growth for the quarter, and we executed on a growing number of utility scale solar projects and electric transmission and distribution engagements. We expect this momentum to continue through the fourth quarter and in the next year. At the same time, we continue to improve operating efficiencies throughout our organization moving as closer to our goal of becoming profitable, and cash flow positive on a consolidated basis as we move forward into 2021.
- Daniel Ford:
- Thank you, Jim and good afternoon everyone. Today I'll review our third quarter 2020 GAAP financial results. I'd like to remind everyone that I will focus my remarks today on the company's continuing operations. Also, please note that with the acquisition of Reach Construction Group in April 2020, the company revised its segment structure. The electric power and solar infrastructure segment was formed during Q2, and now includes Reach Construction Group and Orbital Power services. Previously, Orbital Power services which commenced operations in the first quarter of 2020 was included as part of the former energy segments. The former energy segment is renamed as the Integrated Energy Infrastructure Solutions and Services segment includes Orbital Gas Systems Limited in the UK and Orbital Gas Systems North America. The former power electromechanical segment is presented in discontinued operations as electromechanical business was disposed of during Q3 of last year while the remainder of the domestic power business was divested during Q4. CUI Japan was divested effective September 30, 2020. Well CUI Canada previously classified as held for sale and presented here as discontinued operations. I'll speak more on this topic later in my remarks.
- Jim O'Neil:
- Thank you, Dan. In summary, we believe Orbital Energy Group is well positioned for future growth and success. Throughout this pandemic, our team has continued to transform the company into a diversified infrastructure services provider and to position OEG to benefit from the economy's eventual recovery. This has been accomplished through the acquisition or Reach Construction Group to pursue utility scale and community solar projects, the development of Orbital Power services to provide transmission and distribution services and the business development activities at Orbital Gas systems targeted at renewable project revenues. With the progress we've made to date, we believe Orbital Energy Group is at an inflection point. And we intend to capitalize on this momentum moving forward. We expect to continue a transformation as we keep expanding our infrastructure capabilities and service scope both organically and through targeted acquisition opportunities, which we are constantly exploring. The outlook for the energy infrastructure markets that we serve is extremely positive as capital deployment for building new utility scale solar capacity and replacing and reconfiguring existing transmission and distribution infrastructure is expected to be robust for several years to come. At the same time, we have taken the necessary steps to ensure the health and safety of our customers and employees. I want to take an opportunity to thank all of our employees for their commitment to deliver exceptional products and services, while executing our safety protocols. I also want to thank our customers and business partners for their continued support. Last but not least, building a strong environmental, social and governance, or ESG platform, is a priority for the leaders of this company and this will be integrated into our culture as we continue to grow our energy infrastructure services platform. The services we provide will contribute to a cleaner, healthier environment. In terms of social responsibility, we intend to serve as an agent of change for our industry, providing employment opportunities for people of color and other underserved or disadvantaged people. We take this commitment very seriously and we look to be an industry leader in our ESG efforts. That concludes our prepared remarks. Now, I would like to open the call for questions. Operator, please go ahead.
- Operator:
- Thank you, ladies and gentlemen. Our first question comes from Rob Brown with Lake Street Capital. Your line is open.
- Robert Brown:
- I just want to get a little bit on the Reach pipeline of solar projects. You said there are a number of projects you're bidding on and maybe you could just characterize the pipeline at this point? And how long you have visibility on price of the projects? And how long those projects would be continuing?
- Jim O'Neil:
- Rob, we see several hundred million dollars' worth of opportunities to be executed on, between now and the end of 2021. And we expect more opportunities to come out as we move into next year. And we're talking about opportunities that we believe that we can secure. So the only challenge is when these projects go to construction, their permitting issues and so forth and so on, just very much commonplace in this business. But that canter of activity, the pace of opportunities will continue to increase and we will continue to generate more solar revenue over time.
- Robert Brown:
- Okay. And then, maybe just in terms of the electrical business -- power business, the -- how much of your business was storm work, how much was the T&D infrastructure? And how do you see that mix playing out over time?
- Jim O'Neil:
- You want to take that, Dan, on the mix of how much…
- Daniel Ford:
- Sure. Yes, the mix was about 40% to 60% during the quarter, is what I would say, I don't have the numbers exactly in front of me. But I would say it was about 40% to 60%, 40% storm and the rest schedule. Going forward, I think is a better question for Jim to address and how that works.
- Jim O'Neil:
- Yes. I think storm work is going to be something that you don't necessarily put in your forecast, but when it comes it can be meaningful. We did generate more storm -- are generating more storm revenue in the fourth quarter too, it won't be anywhere near where we were in the third. But at the same time, we've increased the number of crews through this MSA work which is recurring. So all in all, we should see growth in that business over the long haul as well, with storm being an incremental positive when it does happen. Typically in the second, third, we see most of that in the third quarter, most of the storm revenue and -- the second would probably be the second highest storm quarter.
- Robert Brown:
- And then, on the gas infrastructure side; it sounds like the visibility there is pretty low at this point. Is that you're saying really sometime next year that can pick up again in the US when you get good visibility there, or is it still too early to tell and is it more back half loaded type activity?
- Jim O'Neil:
- I hope it's not back half loaded activity, I mean, we hopefully will start seeing more visibility about what's going to happen in our North American operations by the end of the year, because engineering needs to be done, which is a six week to eight week lead time before construction happens. So, I think customers are waiting to use budgets for 2021 on these larger capital projects. And hopefully, we'll have visibility here and by the end of the year, but the visibility right now is not good in Houston, and it's not that much better right now in the UK, other than we do see a path opportunities in the UK with the gas network rebidding their five-year plan and some of the renewable gas opportunities that we see.
- Operator:
- Next question comes from Eric Stine with Craig-Hallum. Your line is open.
- Eric Stine:
- So you mentioned on Reach what the pipeline's looking like, but I was wondering if you can maybe provide a little color around the type of uptick that you expect in fourth quarter, knowing that there still is some timing uncertainty there. But then also, the step up you might expect in 2021?
- Jim O'Neil:
- Yes, back when we had our second quarter call, I expected to see more solar growth in the back half of this year. We've had a couple of projects, the bigger projects had been delayed due to permitting. But we do expect the fourth quarter -- for the solar revenues in the fourth quarter to be better than what we experienced in the third quarter. But, at some point, this is going to ramp significantly, in my opinion, to where we're going to be moving in order of magnitude from $30 million to $60 million a quarter. I mean, this is a revenue store for us; that's what's going to take us to profitability -- to execute profitably in the infrastructure segment of -- the solar and electric power infrastructure segment both have significant growth trajectories that we're going to experience here, as we move into next year. So I think, in the fourth quarter we probably we'll see some gain, but not meaningful or significant gains in revenues. But as we get into the next year, I expect those numbers to ramp a lot more as a percentage of growth each quarter.
- Eric Stine:
- Okay, got it. Maybe to turn to the acquisition plan. I think last quarter you said that potentially you may -- I mean, you're looking, you got some potentials that you may close one by the end of the year. So curious if that's still the case? But then also, just what that is, what that outlook is longer term? And is the balance sheet a bit of a hindrance until you get the cash flow positive and start building that cash balance?
- Jim O'Neil:
- Yes, that's a great question. We've got several acquisition targets teed up. And we did decide because of the significant amount of growth that we're experiencing in our electric power and solar segment that some of these opportunities that we were looking to potentially close this year, we'll move into next year. So it's likely that we won't make another acquisition this year. But we certainly have candidates teed up to bring on board when the time is right.
- Eric Stine:
- And high level, I think you've said in the past two to three -- two to three a year. I mean, is that still the way that people should think about it?
- Jim O'Neil:
- Yes, two to three a year is a good number and people should think of it that way. I mean, we want to make acquisitions. We want to grow through acquisition, we want to bring on companies that add to our portfolio and infrastructure, either geographically or expand to service lines that we would provide today, and better cash flow positive and have opportunities for profitable growth. So it's definitely part of our story, and two to three a year is definitely the target for us.
- Eric Stine:
- Got it. And then lastly, just to confirm, so EBITDA and cash flow positive by -- is there a time? I mean, maybe not by the end of this year, I guess, predicated on how much the step up is. But is that something -- just thoughts, is that something you think is early in 2021, or more of an annual number for 2021?
- Jim O'Neil:
- We expect to be there in the first quarter of next year, early in 2021. And that'll be dependent upon the growth in the electric power and solar infrastructure segment. And we continue to see some significant growth in both, our Electric Power T&D Group, Orbital Power Services and Reach construction.
- Daniel Ford:
- Sorry, Eric, were you asking timing on the two to three acquisitions a year…
- Eric Stine:
- No, timing on that cash flow positive target.
- Operator:
- Our next question comes from Liam Burke with B. Riley. Your line is open.
- Liam Burke:
- Jim or Dan, you saw significant step up sequentially in your gross margins from second quarter. How much of that was the ramp up in the project business and how much contribution or improved margin contribution did you get from the storm recovery and restoration?
- Daniel Ford:
- We saw considerable margin coming out of the T&D group overall, and especially the storm work. Storm work, as you know, is very high-margin with crews out working long days, long hours and getting paid essentially from the time they leave the yard driving to whatever state or region they're going to be in its billable time. So very -- that certainly contributed positively to the margin. But the T&D project, as a whole, performed really well during the quarter. So it was a bit of a mix there. But definitely the storm work provided a nice boost into that group and in that segment.
- Liam Burke:
- So if I look into fourth quarter, just on the same thought process, even without the storm contribution, the ramp up in projects, as you convert from backlog to revenue, should translate to continued trends and gross margin improvement?
- Daniel Ford:
- In gross profit improvement, certainly, in gross margin. The solar projects, which are larger scale, are lower margin as a whole. The EPC contracts are generally in the teens, overall, but have much more significant profit profiles as a whole. So it'll be a mix. It's not exactly, I would say, as a split, the T&D group we continue to expect that to perform and provide that positive impact to it. But I think as we see growing revenues from the solar group, that margin will be that growth and the T&D, as it pertains to its impact on margin will be offset by the growth in revenue and the lower margin value of the solar projects; so, a mix there.
- Liam Burke:
- And then on to just one more on T&D. You have two nice MSA agreement signed, how does the visibility or pipeline look on that business?
- Jim O'Neil:
- That visibility is really good. I mean, when you get a multi-year MSA like that, your crews basically become almost like an employee of the customer. And they've got work to do every day. And it's pretty secure. In fact, the industry typically will count that revenue and backlog. They estimate what the revenues would be in the MSA over that that multi-year period. That's how confident the industry is, and I am, that that work is recurring revenue that's very predictable. And it's not seeing very often where those contracts will be terminated. I think it happened back in 2008 when we went into the recession, where utilities cut back distribution crews, that were all MSAs, but other than that, in my history of in the industry, those MSAs just continue to roll and the crews continue to work on that system and they don't leave.
- Liam Burke:
- I'm sorry, Jim. On the MSA, I meant, if there is any pipeline visibility on new agreements?
- Jim O'Neil:
- On new agreements; sorry -- we are -- we're in discussions with customers, and it's more of a function of us being able to secure proves that we're competent at work safely, that we have a history of good execution. And before we take on some of these opportunities -- but there are other utilities that would like us to participate under an MSA agreement with them. I would guess that we'll probably add one or two more MSA agreements with investor owned utilities or co-ops within the next quarter, or two going into next year.
- Liam Burke:
- Great. Thank you, Jim.
- Operator:
- Our next question comes from Jeffrey Bernstein with Cowen. Your line is open.
- Jeffrey Bernstein:
- Sounds like you have been very busy. Thank you for all the hard work. A couple of questions just on the historic relationships with Snam and UK grid and ENGIE. Is any of that still potentially going to come forward at some point, or has the statute of limitations ran out on those?
- Jim O'Neil:
- That's a good question, Jeffrey. I mean, we have hope that those opportunities will play out. But we've been waiting for that for a long time, and there just continue to be delays. So, for Snam, we've got a significant amount of meters that are deployed there already. And I believe there's been some discussion about ordering some more, but that hasn't happened yet. But yes, it's just a very fluid situation.
- Jeffrey Bernstein:
- Got it. And then on the gas PT, all the utilities now -- I think the message has gotten out post-COVID that we're seeing peak hydrocarbon energy and everyone is now planning to move to renewables, etc. So obviously, a great backdrop for you. The guys who have tons of infrastructure in the gas market are trying to figure out how they participate in this world, and it's mostly through hydrogen. How does calorific value measurement apply there, if it does at all, when they start to want to put hydrogen into these Nat gas utility systems?
- Jim O'Neil:
- I'll tell you that that many of the opportunities that we have going forward, especially in the UK, in building and in our integration group are hydrogen-related. The gas PT device, the one of the bigger opportunities that we have for it is in renewable gas. And that is bringing some integration opportunities to us when those projects get released to go to bed. So that's a differentiator for us, but those projects seem to have been slowed down somewhat coming to market. But that's where the big opportunities are, in both the US and in the UK in renewable gas for our company.
- Jeffrey Bernstein:
- Thank you, Jim.
- Operator:
- I'm showing no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Jim O'Neill, Vice Chairman and CEO for closing remarks.
- Jim O'Neill:
- Well, thank you all for your participation in our call today and for your continued interest in Orbital Energy Group. And we look forward to having follow-up conversations with many of you and update you on our progress. So thank you again, and have a great day.
- Operator:
- Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect. Have a good day.