Orbital Infrastructure Group, Inc.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Good day, everyone, and welcome to Orbital Energy Group's First Quarter 2021 Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow management's remarks. As a reminder, this conference is being recorded. A replay of today's call will be available on Orbital Energy Group's Web site 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 first quarter 2021 conference call. A copy of the company's earnings press release and accompanying PowerPoint presentation are available for download on the Events & Presentations page of the Investor Relations section of the Orbital Energy Group Web site.

[Jim O’Neil:]

Thank you, Scott, and thank you everyone for joining us today on our first quarter 2021 earnings conference call. During the first quarter, we continue to execute on our transformational strategy to become an infrastructure service provider serving the electric power transmission and distribution, telecommunications and renewable markets. Just subsequent to the end of the first quarter, we successfully completed our accretive platform acquisition of 100% of the capital stock of Gibson Technical Service, an Atlanta-based telecommunications company, providing diversified telecommunication services nationally since 1990.

[Dan Ford:]

Thank you, Jim, and good morning, everyone. Today, I'll review our first quarter 2021 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 now operating as Orbital Solar Services, the company revised its segment structure. The electric power and solar infrastructure segment was formed during Q2 2020, and includes Orbital Solar Services, Orbital Power Services, and now Eclipse Foundation Group. Previously, Orbital Power Services, which commenced operations in the first quarter of 2020 was included as part of the former energy segment. The former energy segment was renamed as the Integrated Energy Infrastructure Solutions and Services segment and includes Orbital Gas Systems Limited in the UK and Orbital Gas Systems, North America. We reported total revenues of $9.5 million for the first quarter of 2021 compared to $5.7 million for the first quarter of 2020, an increase of 67%. The year-over-year increase reflected continued ramp up of Orbital Power Services and the start-up of Eclipse Foundation Group in the electric power and solar infrastructure services segment. The increase was partially offset by lower revenues during the quarter from our Orbital Gas Systems operations. The UK market continued to face headwinds related to COVID-19, Brexit and the impact of the political environment on investment within the sector, while the U.S. markets also continue to face headwinds surrounding COVID-19 and associated project delays. Gross loss was $1.3 million for the first quarter of 2021 compared to gross profit of 0.6 million for the first quarter of 2020. The decrease was attributable to ramp-up costs at Orbital Power Services, weather-related impacts to project schedules and start-up costs related to the launch of Eclipse Foundation Group and lower margin projects during the period for Orbital Solar Services. We expect margins to improve substantially during 2021, as Orbital Telecom Services starts to contribute, Orbital Power Services gains greater operating efficiencies and expands its crew counts with new customers and the Orbital Solar Services begins work on significant solar projects. During the balance of 2021, we forecast improved margin and increased revenue as companies throughout our industry continue to learn to cope with the post COVID-19 environment. The increased sales of higher margin products, a better mix of integration projects, increased service revenues throughout our energy focused operations and in solar projects for Orbital Solar are all expected to drive the continued improvement to the company's profitability, as well as the GTS acquisition, which we believe will be accretive. For the first quarter of 2021, selling, general and administrative costs was $14.5 million compared to $7.2 million in the prior year period. The increase in SG&A for the quarter was due to increased costs related to Orbital Power Services and Orbital Solar along with start-up costs of the Eclipse Foundation Group and $2.6 million of employee and director-related stock-based compensation vesting expense. Also contributing to the increase were increased corporate costs and the other segment due to an increase in the mark-to-market adjustment to the executive cash base stock appreciation rights and employee performance bonuses. Orbital Solar Systems was acquired in Q2 2020. So in addition Orbital Solar Services, including amortization expense related to acquisition intangibles, are increased compared to the first three months of 2020, which was prior to Orbital Solar Services acquisition. The company also continued to incur professional fees related to mergers and acquisitions as the company pursues growth, both organically and through acquisitions, as demonstrated by the April acquisition of Gibson Technical Service. These increases were partially offset by decreased SG&A costs in the Integrated Energy Infrastructure Solutions and Services segment due to cost saving measures. The company's operating loss was $17.3 million for the first quarter of 2021 compared to $7.1 million in the prior year comparative period due to the items previously mentioned. As Jim noted, net loss for the quarter was $18 million compared to a net loss of $7.4 million for the first quarter of 2020. We do expect to see overall improvement in revenues, gross margins and net results as 2021 progresses. We also expect an increase in Orbital Solar and Orbital Power Services activity during the second half of 2021. For Orbital Solar, the company expects a meaningful of the utility scale solar market to drive significant backlog and revenue growth during the second half. As Jim previously mentioned, Orbital Solar growth will be benefited by its partnership with Black Sunrise Investment Fund over the next several years. In addition, Orbital Power Services should continue to grow its business throughout the year and we currently expect this segment to achieve profitability in the second half of 2021. At March 31, 2021, our backlog was $62.1 million compared to $40.4 million at December 31, 2020 and $9.5 million at March 31, 2020. The year-over-year increase is due to the inclusion of Orbital Power Services’ increased backlog and the addition of Orbital Solar backlog. This also reflects updated timing of orders and delivery schedules for integration customers. Lastly, we ended the quarter with cash and cash equivalents of $34.7 million and restricted cash of $1.2 million. In Q1, cash used in operating activities was $13.5 million compared to $7.7 million in Q1 2020. Cash used in investing activities during Q1 was $3.5 million compared to $7.4 million in Q1 2020. The increased uses of cash during the first quarter were primarily for M&A activity related to our GTS acquisition, ramp-up costs at Orbital Power Services, start-up costs for Eclipse Foundation Group and cash used by Orbital Solar Services operations, along with ongoing working capital requirements. While the company saw an initial cost increase from Orbital Power Services and Eclipse Foundation Group, we expect these groups to become cash flow positive from operations as the business environment normalizes and the company continues to increase revenue generating service crews deployed. To mitigate these short-term costs, we continue taking steps to shore up our liquidity including disciplined management of both working capital and expenses. As we mentioned previously, during the height of the pandemic, Orbital and its subsidiaries entered into unsecured loans in the aggregate principal amount of proximately $1.9 million pursuant to the Paycheck Protection Program. The loans and interest thereon is forgivable, partially or in full, if certain conditions are met. The company has applied for forgiveness of these loans. During the first quarter of 2021, we supplemented this liquidity by issuing $45 million worth of common stock. Subsequent to quarter end, we closed on $10.7 million of debt funding to further support operating and M&A activities going forward. Additionally, we filed a shelf registration allowing OEG to issue as much as $150 million in additional shares of common or preferred stock or public debt as we explore potential avenues for growth and acquisitions. With these enhanced sources of liquidity, we remain confident in our ability to continue executing on our strategic growth plans. With that, I will now turn the call back over to Jim for closing remarks.

[Jim O’Neil:]

Thank you, Dan. In summary, in the first quarter of 2021, we continue to execute on our strategy to transform Orbital Energy Group into an infrastructure service provider serving the electric power, transmission and distribution, telecommunication and renewable industries. We achieved several milestones during the quarter, including our interest into the telecom sector with our acquisition of GTS. Additionally, we expanded our breadth of capabilities in electric power, transmission and distribution services with the launch of the Eclipse Foundation Group, a turnkey deep foundation construction provider whose skill set complements our Orbital Power Services Group. At the same time, we continued our initiatives to organically grow our existing operations through activities, such as our strategic partnership with the Black Sunrise Fund and Orbital Power Services continued expansion with existing as well as with new customers. Looking ahead, we remain confident that our actions have laid the groundwork for Orbital Energy Group's long-term growth strategy. As we continue to build a diversified infrastructure services platform, both organically and through strategic acquisitions, we will expand both our top and bottom line growth, while building value for all of our shareholders. That includes our prepared remarks. Now, I would like to open up the call for questions. Operator, please go ahead.

[Operator:]

. Our first question comes from the line of Eric Stine from Craig-Hallum. Your line is now open.

[Aaron Spychalla:]

Good morning. It’s Aaron Spychalla on for Eric. Thanks for taking the questions.

[Jim O’Neil:]

Good morning.

[Dan Ford:]

Good morning, Aaron.

[Aaron Spychalla:]

Good morning. Maybe first on the Orbital UK business. Can you just kind of talk about your expectations there over the next year, areas of optimism and just how that pipeline is maybe shaping up versus the last few quarters? I know you talked about the significant award in Ireland and kind of opportunities in LNG and hydrogen. Can you just expand on that a little bit?

[Jim O’Neil:]

Yes. We've been positive cash flow or neutral cash flow since the third quarter of last year and we expect that to continue throughout the year. So we're definitely seeing improvement. I would say that the biggest part of that improvement is diversification both geographically with natural gas and then in addition to natural gas, pursuing new markets, specifically renewable energy, which has been a big boost to the company's overall revenue. The RIIO project, we expect that to be announced. We participated on that in the past that there's very few suppliers that are approved to be on that system. It’s a five-year build out that's going to have a minimum guarantee of revenues per year. So that should ramp up towards the second half of this year, which we're pretty excited about that because that will be a major contributor to revenue. And then we picked up this Irish gas network project, which is to maintain the gas measurement system saw on that network which is a nice lift for the company as well. So we're seeing some nice increases, nice momentum in that marketplace post COVID for sure.

[Aaron Spychalla:]

All right. Thanks for the color. And then on backlog, can you kind of give a breakdown of kind of timing of recognition there? Obviously, it sounds like there's quite a bit of opportunities that have happened in the second quarter and you expect to happen in the back half with solar that can kind of be converted into revenues as well. So just trying to get an idea of kind of cadence of revenues in the back half of the year.

[Jim O’Neil:]

Sure. So approximately half of the backlog in the electric power and solar segment, we would expect to turn over in 2021. And then all of the backlog pretty much in the Energy Infrastructure Group with the Gas Group we would expect to turn over in 2021 as well. And so we see some room to be increasing both of those for the remainder of the year also. So we're really positive on where the backlog stands right now.

[Dan Ford:]

And that's without the telecom addition as well, the backlog that's going to come in from Gibson. And then we haven't quantified the Master Service Agreements that we have to build out broadband over several state areas, but we will have more detail on that in hopefully the coming weeks, definitely by the end of the quarter, and that should significantly increase backlog even though that big project, the broadband build out isn't really going to get started until the fourth quarter of this year.

[Aaron Spychalla:]

Understood. And then maybe last for me. You touched on it a little bit, supply chain. Can you just kind of talk a little more broadly about what you're seeing in supply chain, not just in solar but maybe across the rest of the business and any type of labor constraints that you're seeing at all?

[Jim O’Neil:]

That's a really good question. Labor has historically been the biggest gating factor, especially on the electric power side of our business. But now we're seeing some equipment delays from COVID, the manufacturing of new bucket trucks, for instance. Typically, you feel these effects nine months to a year after in the construction business, and that's what we're seeing now. We're having to make commitments to equipment out to 2022, which typically that hasn't happened in the past in this industry. So I think the big areas are the bucket trucks and the digger derricks and the specialized equipment that you use in both the telecom and the electric power side as well as some delays in the solar panel deliveries from China. But we'll work through it. We've got a path to mitigate some of these issues going forward. But it is a headwind.

[Aaron Spychalla:]

All right. Thanks for the color. I'll hop back in the queue.

[Jim O’Neil:]

Thank you, Aaron.

[Dan Ford:]

Thank you, Aaron.

[Operator:]

Thank you. Our next question comes from the line of Jeffrey Campbell from Alliance Global. Your line is now open.

[Jeffrey Campbell:]

Good morning.

[Jim O’Neil:]

Good morning, Jeff.

[Dan Ford:]

Good morning, Jeff.

[Jeffrey Campbell:]

Jim, you noted that the SG&A jumped quite a bit on the start-up of Orbital’s organic T&D businesses. I just wondered, does this ramp up to just the businesses that are growing at the rate that you expected or are they ahead or behind schedule?

[Jim O’Neil:]

Well, I think we're right on schedule. We have been pursuing additional investor-owned utility MSA work for probably the last four to six months, and we needed to just get a resume of working safely and efficiently, which we have. So we've been asked to participate for these two more utilities under these Master Service Agreements. And so we got to be thoughtful about bringing people on. And so we had to bring on probably close to 10 crews and get them through the evaluation process and training process before we put them on the system. And to Dan’s point, once we get a consistency of work that can carry the profitability of that group, we continue to spend money to try to ramp up, which is a good thing. But it doesn't serve well to the bottom line during the transition. But I think we're on schedule to where we're expected to be with the electric power distribution group for 2021.

[Jeffrey Campbell:]

Okay, great. Thank you for that color. You noted your intention to make additional acquisitions this year. I wondered if you could just give us some high level color on how that effort is progressing. And in particular, if the bias for acquisitions is toward the power group or the telecommunications businesses just based on the quality of the business that you're looking at.

[Jim O’Neil:]

I think I'm agnostic to whether it's the electric transmission and distribution or telecommunication, we're being more opportunistic. I'll tell you when you buy a platform like Gibson, the power of synergies really comes from trying to find organizations that are synergistic with the platform. So, we're looking at tuck-ins that we think will make the one plus one equal three or more factor. But the major focus for us on acquisitions is recurring revenue under multi-service agreements, which you'll get from both the telecommunications and from the electric power T&D’s group. So I think there's no preference, like I said, on which way we go, whether we go to electric power or telecom, it's -- we're pursuing companies in both sectors, and we'll be opportunistic and execute on the ones we think will add the greatest value in the short and long term.

[Jeffrey Campbell:]

Okay. Thank you. And for my last one, I'll just ask a little bit higher level question. You've noted that OEG has significant exposure to the T&D market. Biden administration seems poised to support strategic growth in this area, but NIMBY forces remain an impediment even when they're tied to renewable energy. I’d refer to the New England Clean Energy Connect project as an ongoing example. So high level, do you see the landscape for interstate T&D projects improving? And to what extent is OEG’s exposed to this business as opposed to maintenance of existing infrastructure?

[Jim O’Neil:]

Yes. Right now, we're not as exposed to the bigger transmission projects that fall under the barrier that you mentioned. We're doing mostly the smaller distribution and smaller transmission of projects, which are the day-to-day recurring maintenance. They call it maintenance, but it's really small CapEx projects that we're doing to replace aging conductor or poles or insulators, which is the majority of what we do.

[Jeffrey Campbell:]

Okay. Thank you.

[Jim O’Neil:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Liam Burke from B. Riley. Your line is now.

[Liam Burke:]

Thank you. Good morning, Jim. Good morning, Dan.

[Jim O’Neil:]

Good morning.

[Dan Ford:]

Good morning.

[Liam Burke:]

Jim, can you give us some color on what has gone on, on the build out on solar in terms of expectations changing from last time we spoke on the call to now and being in the deferral of some of those revenues?

[Jim O’Neil:]

Well, it's a couple of things. One, I didn't want to be sitting here without us being on a contract -- executing a contract right now. But it is what it is. There's a couple of factors. One is the project that we're negotiating has been delayed to some degree. I was hoping it would have started by now from the last call. And then secondly, we did lose one opportunity that we were competitively bidding against one other person. So, look, I'm still optimistic about it. The lumpiness of this business can be frustrating to both me and investors. But I can see a path to where we're going to make significant revenues in this group. But this is a cyclical business. And that's one reason why we have a sense of urgency to diversify into recurring revenue streams to where it takes a little bit of the cyclicality out of our outlook.

[Liam Burke:]

And that -- it goes hand in hand with the acquisition of GTS as well as the Foundation, the starting of the Foundation business broadens your portfolio. The telcom MSA agreement sounds pretty exciting. I know you have to be careful as to what you say. But can you give us a little more color on that?

[Jim O’Neil:]

Yes, I do need to be careful right now, because we're still working through what we can say with the customer because we just executed this just last week. But it's a recurring revenue type project that's going to be a multiyear build. And it's going to be a consistent recurring revenue stream, which is what we expected. We'll be serving the project management and doing a significant amount of construction ourselves and subcontract with some of the work as well. But it's building broadband fiber throughout a multistate area, which is to upgrade the fiber optic network for the 5G spectrum.

[Liam Burke:]

And was this in the works when you bought -- when you made the acquisition or is this something that you were able to bring in post acquisition?

[Dan Ford:]

It was something that I think the team was working on that we weren't really that focused on it until we won it. We knew that the GTS team was working on this opportunity. But we weren't counting on it. But we were hopeful. And we did find out post acquisition that we were awarded a significant piece of that contract of the project.

[Liam Burke:]

Thank you, Jim.

[Jim O’Neil:]

Thank you, Liam.

[Dan Ford:]

Thanks, Liam.

[Operator:]

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Jim O’Neil, Vice Chairman and CEO, for closing remarks.

[Jim O’Neil:]

Okay. I would like to thank everyone again for joining us on today's call and for your continued interest in Orbital Energy Group. And we look forward to having follow-up conversations with many of you and updating you on our progress. So thank you again and have a great day.

[Operator:]

This concludes today's conference call. Thanks for participating. You may now disconnect.