Orbital Infrastructure Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 30 Mar 2021

[Operator:]

Good day everyone and welcome to Orbital Energy Group's Fourth Quarter and Full Year 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 fourth quarter and full year 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.

[Jim O'Neil:]

Thank you, Scott and thank you everyone for joining us today on our fourth quarter and full Year 2020 earnings conference call. As most of you are aware I joined CUI Global, now Orbital Energy Group in October of 2019 to guide its transformation into an infrastructure service provider serving the electric power transmission and distribution telecommunications and renewable markets. During 2020 despite COVID headwinds, we began to execute on our infrastructure strategy and lay the foundation for our long-term growth. Last year we launched Orbital Power services, which provides electric transmission and distribution construction and maintenance services to the electric power industry. We also acquired the Reach Construction Group, now Orbital Solar which provides engineering, procurement, and construction services to the utility-scale solar industry.

[Dan Ford:]

Thank you, Jim and good afternoon everyone. Today I will review our fourth quarter and full year 2020 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 and now includes Orbital Solar Services, Orbital Power Services and now also Eclipse Foundation Group. Previously, Orbital Power Services, which commenced operations in the first quarter of 2020, was included as part of the Energy segment, which has now been named the Integrated Energy Infrastructure Solutions and Services Segment and includes Orbital Gas Systems Limited in the UK and Orbital Gas Systems, North America. The former Power and Electromechanical segment is presented in discontinued operations. As the electromechanical business was disposed of during Q3 of 2019, while the remainder of the domestic power business was divested during Q4 of 2019. CUI Japan was divested effective September 30, 2020 and CUI-Canada operations were closed in assets sold in the fourth quarter of 2020. I'll speak more on this topic later in my remarks. We reported total revenues of $11.3 million for the fourth quarter of 2020, compared to $5.7 million for the fourth quarter of 2019, an increase of 99%. The year-over-year increase reflects the addition of Orbital Solar and Orbital Power Services, as well as increased customer activity during the quarter, following COVID-19 related project delays we experienced earlier in the year. This was partially offset by lower revenues during the quarter from our Orbital Gas Systems operations in Houston, which continued to experience project delays related to pandemic, as well as lower oil prices and lower revenues from our UK operations. The UK market continued to face headwinds around COVID-19, Brexit and the impact of the political environment on investment within the sector, while the US markets also continue to face headwinds surrounding COVID-19 and the price of oil. For the full year 2020, total revenues were $38.4 million, a 63.5% increase compared to $23.5 million for the full year 2019. Revenues were higher due to the acquisition of Orbital Solar Services and the development of the company's Orbital Power Services business, which were offset by lower revenues from our Houston and UK Orbital Gas Systems operations due to the factors I mentioned earlier. Gross profit was $3.1 million for the fourth quarter of 2020, compared to $1.5 million for the fourth quarter of 2019. For the full year 2020, gross profit was $7.1 million compared to $5.8 million for the full year 2019. The improvement is mainly due to the increased revenues, as I mentioned previously. We expect this improvement will continue during 2021. Gross margin was 28% for the fourth quarter of 2020, compared to 26% for the fourth quarter of 2019. For the full year 2020, gross margin was 18.5%, compared to 24.7% in 2019. We expect margins to improve during 2021, as Orbital Power Services gain greater operating efficiencies and new customers. Significant solar products commenced in 2021 with improved margin and increased revenue and companies throughout the industry has continued to adapt to the new operating environment created by COVID-19. Increased sales of higher-margin products, a better mix integration projects, increased service revenues throughout our energy focused operations and solar projects for Orbital Solar are all expected to drive continued improvement to the company's profitability, as well as the GTS acquisition, which we believe will be accretive. For the fourth quarter of 2020, SG&A was $8.2 million, compared to $6 million in the prior year period. The increase in SG&A for the quarter was due to an increased SG&A costs related to Orbital Power services and Orbital Solar, along with increased corporate costs, largely due to strategic initiatives, which included increased professional fees and costs associated with due diligence activities related to prospective acquisitions. These increases were partially offset by decreased SG&A costs and the Integrated Energy Infrastructure Solutions and Services segment that implemented cost cutting measures. SG&A expenses for the full year 2020 increased to $29.4 million from $20.1 million for the prior year. SG&A expenses improved as a percentage of revenue to 76.5% compared to approximately 85% in 2019. The company's operating loss was $8.2 million for the fourth quarter of 2020, compared to $4.9 million in the prior year comparative period due to the items previously mentioned. For the full year 2020, operating loss was $28.8 million compared to $16 million for the full year 2019. As Jim noted, net loss for the quarter was $7.5 million compared to net income of $4.5 million for the fourth quarter of 2019. Please note that the Q4 2019 net income included $7.4 million of income from discontinued operations. As we mentioned on our last call, we experienced solar project delays through Q4, along with higher SG&A expenses during the quarter, specifically attributable to Orbital Power services and Orbital Solar overhead costs, which negatively impacted Q4 results. For the full year 2020, net loss of $27.4 million compared to $1.1 million for the full year 2019. We expect an increase in Orbital Solar and Orbital Power services activities in 2021. For Orbital Solar, the company expects the meaningful growth of the utility-scale solar market to drive significant backlog and revenue growth in 2021. As Jim previously mentioned, Orbital Solar growth will be buoyed by its partnership with the Black Sunrise investment fund over the next few years. We believe the earnings of Orbital Solar will positively impact the group. In addition, Orbital Power services should also continue to grow its business throughout the year and we currently expect this segment to achieve profitability in the second quarter of 2021. At December 31, 2020, our backlog was $40.4 million compared to $9.6 million at December 31, 2019. The year-over-year increase is due to the inclusion of Orbital Solar backlog and growth in Orbital power. This also reflects updated timing orders and delivery schedules for integration customers. Lastly, we ended the year with cash and cash equivalents of $3 million and restricted cash of $1.5 million. In Q4, cash used in operating activities was $5.1 million, compared with approximately $951,000 in Q3, $1.3 million in Q2 and $7.7 million during the first quarter. Cash used in investing activities during Q4 was approximately $34,000, compared with $303,000 in Q3 $186,000 in Q2 and $7.4 million in Q1, which included the $3 million note receivable with Reach Construction that an acquisition was allocated to the purchase. We continue to take steps to shore up our liquidity, including disciplined management of both working capital and expenses. In the first half of 2020 Orbital and its subsidiaries entered into unsecured loans in the aggregate principal amount of approximately $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. We supplemented this liquidity by issuing $45 million of shares of stock in January 2021, along with a new shelf registration that allows the company 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. Before I turn it back over to Jim, I'd like to provide an update in CUI Canada and CUI Japan, both of which were previously classified as assets held for sale, in line with our strategy to transform Orbital Energy Group into a diversified infrastructure services platform certain North American and U.K.-based customers. In 2020, we completed the sale and final disposition of the assets and liabilities of both of these subsidiaries. With this completed, the company has fully exited its previous power and electromechanical operations. With that, I’ll now turn the call back over to Jim for closing remarks.

[Jim O'Neil:]

Thank you Dan. In closing, we accomplished a great deal in 2020 despite COVID, the price of oil and the sub-$1 stock price. While it was a challenging year, we laid the foundation for our future growth as an infrastructure service provider in the electric power, transmission and distribution, telecommunications and renewable industries, as well as its positive improvement to the performance of our legacy gas system business. Market trends for all of the industries we serve have multiyear tailwinds with significant market drivers. And at our current stock price, we can now go on the offensive to make meaningful accretive acquisitions, which will add clarity to our infrastructure strategy, significantly change OEG's financial outlook and should add considerable shareholder value. Last but not least, we will be a strong environmental social and governance or ESG platform; we take this commitment very seriously with the goal to be a recognized leader in advancing ESG in the industries we serve. That concludes our prepared remarks. Now, I would like to open the call for questions. Operator please go ahead.

[Operator:]

Thank you. Our first question comes from Liam Burke with B. Riley. Your line is now open.

[Liam Burke:]

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

[Jim O'Neil:]

Good morning, Liam.

[Liam Burke:]

Jim, I apologize for this question, but I'm looking for clarification on the revenue you're discussing in 2021. Is that your entire revenue estimation or is that just Solar? I didn't quite catch that?

[Jim O'Neil:]

Sorry, yeah. It's just solar that we still believe that we can generate $200 million to $300 million from Solar, we should start seeing some awards here in the second quarter. I mean, it only takes two to three big projects to get to that point. So we expect to see that level of activity soon.

[Liam Burke:]

And then when thinking about it, you've also got the layer of MSAs that are flowing through the P&L as well?

[Jim O'Neil:]

That's right. That's right. And I think Orbital Power is going to at least double revenues from what they did last year because they continue to ramp. And GTS is just -- we're just really excited about having them on board. They're going to bring some consistent revenues, they're well-established pipeline and they've got significant opportunities to grow both organically and through some tuck-in acquisitions that will add some significant synergies.

[Liam Burke:]

Okay. And then on the backlog composition, is there any Solar in there, or is it primarily your traditional P&C work?

[Jim O'Neil:]

It's the traditional P&C work. We're -- we do have two very small solar projects going right now, but nothing in backlog to note as of today.

[Liam Burke:]

Okay, great. And lastly on first quarter of 2021 I know you don't give quarterly guidance, but in terms of weather because it is a seasonal quarter, has the seasonality been better than worse than your -- compared to your past experience?

[Jim O'Neil:]

No, I mean I think it's really just affected our solar business. Orbital Power has continued to ramp. And Orbital Gas businesses are quite active right now. So, it's really just the cyclicality that we're seeing in solar which could happen in large project work. It's just a function of what can happen in that business.

[Liam Burke:]

Okay, great. Thank you, Jim.

[Jim O'Neil:]

Thank you, Liam.

[Operator:]

Thank you. Our next question comes from Eric Stine with Craig-Hallum. Your line is now open.

[Eric Stine:]

Hi Jim, hi Dan.

[Jim O'Neil:]

Hey good morning.

[Dan Ford:]

Hey there.

[Eric Stine:]

Hey good morning. Good to see the forward strategy start to come together here. Now, that you've got the balance sheet, just curious how you think about it. I mean should it still be a mix of acquisitions versus some of the organic steps you've taken or do you think that it will be skewed more towards acquisitions again now that you've got the balance sheet and you've got a stock price that you can take action?

[Jim O'Neil:]

Well, I mean I think it's going to be a mix. We're going to continue growing organically, but you can really get some revenue ramp if you're bringing an established company through acquisition that's making significant revenues, like GTS, I mean they'll do -- they're on a $48 million run rate for this year. So, they'll make $8 million in EBITDA. It's hard to do that greenfielding in operation. It takes a little bit of time to do that to get to that point, which it functions like overall power services I mean it's going to take them a while to get there. They're growing. They're doing really well but to get to that level of EBITDA that is going to take a little bit of time.

[Eric Stine:]

Got it. And do you -- are there areas -- I mean when you think about it you mentioned you got an LOI for an acquisition. I don't know if you can give any details there, but -- areas that you look at that would be logical places to fill now the Gibson acquisition made what are some other areas that you think makes sense as part of this platform there?

[Jim O'Neil:]

Well, Gibson is going to be a great platform for our telecom services to grow. A priority for us is well like T&D and more specifically, a company that has a significant part of that revenue is tied to master service agreements that are multiyear with recurring revenue. That's a priority for us right now.

[Eric Stine:]

Got it, okay. Maybe last one for me just to clarify. So, on the solar outlook that $200 million to $300 million. Is that -- like to say that that really wouldn't include anything from Akon that would be more of a 2022 event -- that would start?

[Jim O'Neil:]

That's right. We're not counting any of the Black Sunrise Fund into that $200 million to $300 million. It could start in the fourth quarter this year, but most likely it will be in the first quarter of 2022.

[Eric Stine:]

Okay. Thank you very much.

[Jim O'Neil:]

Thank you, Eric.

[Operator:]

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

[Jeffrey Campbell:]

Good morning.

[Jim O'Neil:]

Good morning Jeff.

[Jeffrey Campbell:]

First of all, you offered to talk about the GTS acquisition, so I'd like to take up on that. I'd just like to better understand what services or advantages they bring to their customers?

[Jim O'Neil:]

Well, I think, GTS they provide engineering design project management services to the telecom industry both in wireless and in broadband. And they work nationwide. So it was important to us to have a service provider that provided the high end engineering services and not just the construction services and telecom and they're well-established in working with customers on the front end of their designs, which often leads into the construction. So they do mostly project management. And in my past life, the areas where I've succeeded most in telecom is when we had the high end services and did project management over – over the construction resources, especially if you work nationally, you'll engage from the local partners there to do the construction. So we're quite – at it with the 5G rollout. I mean, they're doing a lot of work on the distributed antenna systems. They do a lot of inside work trying to advance the technology there for 5G to give more continuity of signal and less interruption of service. So – and they do a lot of work in the land care but they're also expanding out nationally and they've worked with other companies strategically that would be good acquisition targets and fits with prioritization to make one plus one equals three.

[Jeffrey Campbell:]

Okay. Great. I appreciate that color. I wanted to ask you about the UK, the gas in North America, you mentioned that the refining business is picking back up. I just wondered, should we think of this as mainly recovering a backlog of work is that put off because of COVID-19 or is there any growth beyond that possible this year or in 2022?

[Jim O'Neil:]

Well, I think the $4 million in backlog they have is probably the highest they've ever been going into a year. And I think it's a combination of pent-up demand from what didn't happen last year plus trying to continue on their growth plans for 2021. So our customers told us in the fourth quarter to get ready. We're getting ready to get busy. And we started doing a lot of quoting and responded to RPUs in the fourth quarter and did materialize into some backlog. So I think our customers are figuring out how to work in this environment safely. And hopefully, we don't have any more interruptions like we did last year in that business due to COVID.

[Jeffrey Campbell:]

And my last question is with regard to the – and there's a real natural gas project that you made reference to which I think is pretty exciting news. Can you tell us anything about where it's located or what type of customer is going to be taking the gas output?

[Jim O'Neil:]

Yes. I mean we're doing – this is a – the renewable gas project, the grid intersystem that you're referring to?

[Jeffrey Campbell:]

Yes.

[Jim O'Neil:]

Yes. That's – I believe that project is in California. And I can't really mention who the customer is but we've got several opportunities across the nation to build those systems because we – that was a focus point of ours about a year ago to try to enter into that market and we've been successful. So we expect acceleration there not only in Houston area but also in our UK operation.

[Jeffrey Campbell:]

Okay. Great. Thank you. Appreciate the color.

[Jim O'Neil:]

Yes, sir.

[Operator:]

Thank you. I show no further questions in the queue at this time. I'd like to turn the call over to Mr. Jim O'Neil, Vice Chairman and CEO for closing remarks.

[Jim O'Neil:]

Well, thank you all for your time today and we look forward to your continued interest in the company and we look forward to having follow-up conversations with many of you in the next few days. So thank you 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.