Orion Group Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Greetings, and welcome to Orion Incorporated Second Quarter 2021 Conference Call and webcast. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Fran Okoniewski, Vice President of Investor Relations. Thank you, sir. Please proceed.

[Fran Okoniewski:]

Good morning, everyone, and welcome to Orion Group Holdings’ second quarter 2021 earnings conference call and webcast. My name is Fran Okoniewski, Vice President of Investor Relations. And joining me today are Mark Stauffer, Orion Group Holdings’ President and Chief Executive Officer and Robert Tabb, our Executive Vice President and Chief Financial Officer.

[Mark Stauffer:]

Thank you, and good morning, everyone. Thanks for joining us today. Today, we'll discuss our second quarter results along with our markets and outlook. I'll begin with an overview of the quarter. Robert will then discuss our financial performance in more detail. Then I'll come back to discuss our market outlook before we turn to Q&A. As always, I'd like to begin by thanking all of our team members for their hard work and commitment to our success. We remain deeply committed to our Target Zero programs to support our vision of zero damage, zero harm and zero incidents. Safety of our employees is a key priority, and we want to ensure that our team members leave work the same way they came in healthy and injury-free.

[Robert Tabb:]

Thank you, Mark, and thanks everyone for joining us. Today, I will review the financial results for the second quarter 2021 and provide an update on the company's liquidity position and balance sheet. Starting with the financials, revenues for the second quarter 2021 were $145.9 million, compared to $183.7 million in the second quarter of 2020. The decrease was driven by a combination of weather, supply chain disruptions and the timing and mix of certain projects. Second quarter gross profit was $12.3 million compared to $20.7 million in the prior year period.

[Mark Stauffer:]

Thanks, Robert. Turning to our markets, as I noted earlier, we have seen improvement in our end markets that were impacted by the COVID-19 pandemic, and we continue to see an upward trend in project lettings in these end markets. While winning new awards and replenishing our backlog is a key focus, our primary focus continues to be bidding on the most attractive jobs where we have a strong likelihood of executing at or above our targeted profitability goals. We will remain disciplined in our bidding approach. To the extent, we see competitors undercut the market such as on the two large projects I mentioned earlier, those competitors will be tying up their equipment and workforce, which will position us well for the bid – the project opportunities we see ahead of us. We are also reaching beyond our traditional project targets in geographic regions to secure quality backlog, and we continue to target select larger, longer duration projects, which provides us with greater operational long-term visibility. Our diverse skill sets in end markets, and our ability easily flex from one type of project to another is one of our competitive advantages. In our marine segment, we continue to pursue opportunities in the public sector at the federal, state and local levels, including port expansion projects, DOT work involving bridges over water, Navy facilities and environmental and flood control projects. We've recently booked new dredging work with the U.S. Army Corps of Engineers, which is highly beneficial to our project mix. We expect to see an uptick in bidding on core dredging projects as we near the end of the federal government's fiscal year on September 30. And we are well positioned to capitalize on these upcoming lettings. We expect projects in the energy space in the Caribbean market will continue to materialize in numbers, as economic activity continues to increase. As the energy markets adjust to global economic activity and cruise lines resume sailings, we expect projects that pushed to the ride due to the pandemic to reenter the bidding pipeline.

[Operator:]

Our first question comes from Alex Rygiel with B. Riley FBR. Please proceed.

[Alex Rygiel:]

Thank you. Good morning, gentlemen. As it relates to some of the early indications of the federal transportation bill, it appears that there's a fair amount of money being allocated towards ports. Can you talk a little bit about your positioning on some of that? And historically, when the federal government does pass big bills like this, what does the timeline look like for lettings and revenue coming through the system?

[Mark Stauffer:]

Well, first off, yes, I mean, the ports are definitely queued up in the infrastructure bill and it looks like progress is being made on that. So it'd be a great additional catalyst to all the work that we're already seeing out in front of us. With respect to the timing of it, it's going to vary. Again, a lot of the port authorities in our market areas have long-range plans in place and expansion plans and things like that. So to the extent the funding moves in that, they can react relatively quickly. In the past, we've seen, for example, with the Corps of Engineers for some of the waterways and port work that they may be teed up on that moves through fairly quickly. Again, they've got a lot of work that they can – once they get funding for, they can get out fairly rapidly. So we saw that last time we saw kind of a infrastructure/stimulus bill after the Great Recession. So we're confident that enough of that moves quickly. It's a great positive on top of all of the work that we're already seeing in our end markets. So it'd be a great additional catalyst. And I think there's enough work that would come out relatively quickly, but also, importantly, it would go on for quite some period of time. That's a lot of money that they're talking about. So we could see some quick things, but we also will see some things that go out over time, so it will be a good catalyst for years to come.

[Alex Rygiel:]

And this is the second quarter in a row where your bids during the quarter were pretty significant. You obviously got to have a lot of bids outstanding right now. What does the time line look like for those awards to be made?

[Mark Stauffer:]

Well, it's a little varied. I mean, we've got some stuff that we'll expect to be seeing relatively soon. We've got other work that we're out – that's out like an RFP type work for the government where there – it's in the evaluation period. So it may be a few months before we fund that. It just – it's across the board. I mean, every day, we – or every week, I should say, we go through, we find out some information on some things. It's short term. It's long term. So it varies. And the key thing that we're focused on is that just we want to bid and secure quality backlog, profitable backlog. So that's our key focus. Project execution, Robert touched on this, we're executing well on the projects, but again, it's – there's just a broad range of timing of projects. And we're trying to get stuff in that we can turn quickly on as well.

[Alex Rygiel:]

Thank you. Good luck.

[Operator:]

Our next question comes from Julio Romero with Sidoti & Company. Please proceed.

[Julio Romero:]

Good morning, everyone. So I wanted to follow up on Alex's question about the amount of money allotted to ports and waterways in the bipartisan framework. I think when I checked on the White House's website, that number was about $16 billion. And I know that's a moving number, but I guess my question is, how much was allotted to the U.S. Army Corps of Engineers back in the Great Recession and that stimulus build? Would you happen to know what that number was?

[Mark Stauffer:]

Yes, it was about $5 billion, which doesn't sound like a lot, but keep in mind that the operating and maintenance budget, typically for the Corps of Engineers is about $5 billion. So back in the – after the Great Recession, it was essentially a doubling of their budget in that period for operation purposes.

[Julio Romero:]

And do you know what their budget is now?

[Mark Stauffer:]

It's about the same. It's about $5 billion, $6 billion for operations and maintenance, similar amount for capital project. So…

[Julio Romero:]

So are we thinking about that – go ahead.

[Mark Stauffer:]

No, go forth.

[Julio Romero:]

I was going to say, so are we thinking about that? Is that $16 billion the number that's most pertinent to the impact on Orion?

[Mark Stauffer:]

No, I think it's multiple buckets in there. Our expectation is that when they're talking about ports and waterways and things like that, some of it is going to be – our anticipation is – I mean, we'll have to see the details, our anticipation is that it would go directly to ports as well for port authorities to execute their expansion plans. So that's things like dock expansion, hard infrastructure, things like that. Our expectation, too, is that the Corps of Engineers would get some for traditional dredging projects, so both of those things are things that we could get. The other thing is, again, this is probably going to involve the elements of the transportation bill. So bridges, the DOTs, we would expect to get a significant funding as part of this, and that, again, is going to be providing project for us. And then we'll have to see in the other. There's a lot of other elements of hard infrastructure construction-type activities, airports, things like that. So we potentially see opportunities across our segments in both the marine and the concrete segments coming out of this bill. And in any event, it adds to the already – our view of the robust pipeline that we see in front of us, number one. And number two, it will also use capacity in the industry's capacity. So all of these things are positive.

[Julio Romero:]

Great. Thank you for the color there. I guess, maybe switching gears to another kind of topic here. I saw in the release there were some segment reclassifications of corporate costs. I think it takes about 3% to 4% off of the margins off the concrete segment and maybe adds 1% to 2% to the marine. Can you maybe just touch on the reclassifications? And then, secondly, does that change your expectation of your long-term expectation of high single-digit targets in concrete and low double-digits in marine?

[Robert Tabb:]

Yes. So, the reclassification wasn't a change. What it was is when we were splitting out the operating income, we were breaking out certain costs. So what we've done is we've combined them to get to a true GAAP operating income measure. So those numbers are the same. I'll let Mark talk about the outlook and expectations for the segments.

[Mark Stauffer:]

Yes. So Julio, for your question on concrete, no, it does not change our expectation. Our expectation is to drive to high single digits. We've made progress in that regard – high single-digit EBITDA margin for concrete. We've made progress on that. Obviously, the first half of the year has been a little bit challenging with weather, but particularly for concrete, I mean, Texas has been kind of hit in the first half of the year. That being said, we're confident in our team. We've got good prospects, good backlog. We're bidding on a lot of work. We're expanding our addressable market. We're moving into Florida. So a lot of big positives. Our backlog is close to pre-pandemic levels in our concrete business are at elevated levels. So a lot of positives there. We've just got to keep grinding away on it, and we'll get there.

[Operator:]

Our next question comes from Marco Rodriguez with Stonegate Capital Markets. Please proceed.

[Marco Rodriguez:]

Good morning, everybody. Thank you for taking my questions. I was wondering if maybe – if you're able to, is there a way that you can kind of give us a sense as far as what the revenue impact was from the weather in Texas?

[Mark Stauffer:]

Well, the revenue impact is kind of a combination of impacts to the revenue, year-over-year revenue. Weather was a big part of it. I mean, in concrete business, we probably report about 85% of what we expected. It was just inefficient in terms of the weather patterns and things like that for us in the quarter. Supply chain disruptions also kind of impact on that just in terms of timing of projects. So it's really kind of a combination of the weather and the timing of work, getting stuff executed.

[Robert Tabb:]

Yes, I mean just from weather days, we saw about a 50% uptick quarter-over-quarter. So we had winter weather in February in Q1, but it's not apples-to-apples because just depending on what day you're scheduled to pull the plug, we had about 50% increase in weather days quarter-over-quarter.

[Marco Rodriguez:]

Okay. I guess what I was trying to ask, and I apologize, if it was a way to quantify the dollars that were missed in the quarter due to the weather.

[Mark Stauffer:]

It probably – for the concrete business would have been closer to last year or above, had we not had the weather. So that's $10 million, $11 million impact at the top line.

[Marco Rodriguez:]

Understood. Helpful. Thanks. And then given that obviously the shifts that you've had here, uncontrollable weather, is there an update on your guidance of mid to high $40 million adjusted EBITDA for fiscal 2021?

[Mark Stauffer:]

Well, we're not updating. We're still grinding towards that. I will say though that as – depending on timing of projects and supply chain issues sorting themselves out, which we believe they are and they will, some of the performance that we're targeting for 2021 may shift into 2022, but we're still grinding away at it. We're still trying to secure quality backlog. We're executing on projects, and we're just – we're keeping after it.

[Marco Rodriguez:]

Got it. And then maybe if you could just address some of the balance sheet shifts, specifically kind of the debt levels right here and the ratios. Are there any particular levels of debt or debt ratios that you'd be targeting, I guess, kind of short term or longer term?

[Mark Stauffer:]

Well, if you think about it historically, when we've levered up for M&A, as an example, we've gone above 3. We've gone 3.5, in some cases, a little bit higher than that 3.5 turn. So that kind of range is ideally where we would not want to exceed and that's kind of where we were after the last acquisition. And so that's – we've got a lot of options with where we are on our debt in our balance sheet.

[Marco Rodriguez:]

Got it. And last quick question, if I might. You obviously have a lot of flexibility here with the improved balance sheet. You have a few different projects and a few different opportunities. Is there any way that you could perhaps sort of rank those opportunities? What might be a little bit more on the forefront?

[Mark Stauffer:]

Well, certainly. I mean, as we've talked about before, all things are on the table. I mean, we'll consider all uses of capital. We – obviously, we talked about it on the last call, we're reinvesting in the fleet, our dredge rebuild at this time. We've talked about in the last several quarters, we're investing in the ERP platform, which is really a big deal for us, but also, we are looking to be opportunistic on accretive acquisition. And to strengthen our service lines and potentially expand our service lines and potentially expand our service lines and provide more recurring type revenue stream for us to add an additional leg to the stool that we already – we have with our other business lines. So those are things that we're keying in on, but obviously, we'll always be looking at all options.

[Marco Rodriguez:]

Great. Thank you very much. I appreciate your time.

[Operator:]

Our next question comes from Poe Fratt with NOBLE Capital Markets. Please proceed.

[Poe Fratt:]

Good morning. A lot's been covered. Most of my questions have been answered, but I did have two lingering ones. One is, if you look at the weather, you addressed the weather issues for the concrete business. But if you look at marine, marine was down more substantially year-over-year. And can you just address how the weather issues played out in the marine sector? And then secondly, if you could talk about timing of additional asset sales, is the Port Lavaca sale going to close? And then also, could you talk about any interest that you've seen on East West Jones since the energy markets have picked up? Thanks.

[Mark Stauffer:]

The first part on marine. Yes, with marine, – quantifying the weather is a little more challenging. I mean, because, again, in the weather – excuse me, on the marine side, when we have weather issues, I mean, we're able to kind of get back to work a little bit quicker. So there were disruptions there, but it wasn't the biggest driver. One of the biggest reasons that year-over-year delta in revenues, there was just timing of work. As Robert touched on in his remarks, in the second quarter of 2020, we had some large projects that were flowing through at the time and actually wrapping up, which drove revenue in the GP line. And again, just compared to this year, just timing of work and startup of projects and just being a different spot on where we were, i.e., not at the completion of projects, we just had a different throughput on our progress and on projects this quarter versus last quarter. With respect to the property, I'll let Robert touch on that.

[Robert Tabb:]

Yes, Poe. So update on the Port Lavaca property, the buyers have completed whatever they needed with their financing partners. We had a couple of meetings earlier this week. So they're working with the title company to get the schedule – to close schedule. I think the only thing that's probably in between of closing is them doing their customary close stuff, getting surveys and completing the financing company's requirements. So I would imagine the next 30 to 45 days, knock on wood, it seems like this has been dragging out, but feel very, very comfortable that this thing is finally making progress. As for East West Jones, same story, good news. We've been getting a lot of new interest in the property. I'd say over the last three or four weeks, interest has probably grown 40% to 45% from new inquiries. So we feel very optimistic about that. I think as energy continues to improve, I think that trend will continue to improve as well. We'll get more and more people looking at it.

[Poe Fratt:]

Great. Thank you.

[Operator:]

Thank you. There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

[Fran Okoniewski:]

Okay. Thank you, Latania, and thank you, everyone, for joining our second quarter earnings conference call. We look forward to talking with you again in October for our Q3 earnings results. Thank you, and have a great day.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day. Thank you.