Orion Group Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 8 speakers on the call.

Operator

Day, and welcome to the Orion Group Holdings First Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen only mode. On today's call, management will provide prepared remarks, And then we will open up the call for your questions. Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Orion, please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining us today to discuss Orion Group Holdings' 1st Quarter 2023 Financial Results. We issued our earnings release aftermarket last night. It is available in the Investor Relations On today's call, management will provide prepared remarks and then we'll open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward looking statements under the federal securities laws. Forward looking statements are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases.

Speaker 1

Statements that are not historical facts, such as statements regarding the current and expected status of our negotiations regarding a Replacement credit facility are forward looking statements. Our actual financial conditions and the results of operations may vary materially from those From these forward looking statements are contained in our SEC filings, including our reports on Form 10 Q and 10 ks. With that, I'd now like to turn the call over to Travis. Travis, please go ahead.

Speaker 2

Thank you, Margaret. On our last earnings call, we outlined our strategic plan for improved performance. And today, we have a lot of positive news to share. Before that, I want to acknowledge that our Q1 results did not meet expectations. The main issue was volume and continued wrap up of problem projects.

Speaker 2

We had several marine jobs that experienced owner delays in the quarter. And I know no one wants to hear us talk about weather, but we did in fact Have some abnormally bad weather that impacted our business in Texas in January, and this significantly impacted our production rates and volume for the quarter. As we've said, we are working toward closing out legacy underperforming projects by mid year. This resulted in revenue declining 9% $159,200,000 with a gross profit margin impact of around 5,800,000 In the construction business, we are used to lumpy quarters both on the upside and downside due to project timing and weather and other unforeseen delays, And we saw some of that this past quarter in both our concrete and marine businesses. We were very successful in winning significant contracts Early in the quarter that will drive our volume later in the year, but we are seeing slower activity from major customers like the Army Corps of Engineers, especially for dredging in the Gulf.

Speaker 2

Generally, we have seen some bids as well as contract awards slipping to the right. Overall, we think some of the hesitation with agencies Revolves around funding availability from the Infrastructure Investment and Jobs Act, especially with marine and transportation infrastructure projects. However, on the concrete side of the business, we are continuing to see attractive bid opportunities from our key clients and partners, although we are hearing indications of possible slowing somewhat later in the year. While we still have some project cleanup to complete, Based on our current backlog, we anticipate that the second quarter will significantly improve over this quarter and in the back half of the year, we'll see some major acceleration. Until then, we're carefully managing expenses and running the business as efficiently as possible.

Speaker 2

We are executing our plan and all indications are that by September we'll be cranking. Above all, we certainly don't think the Q1 is indicative of what we can do for the full year. Scott will go into more detail on Q1 performance. As we have said before, It will take time to get this ship turned around and performing to our expectations. Even so, we are acting with urgency and making steady progress on the And our new initiatives are starting to deliver tangible results.

Speaker 2

I'll start with our first initiative to fix profitability in the concrete business. During the Q1, we reached an important milestone in our Concrete segment. March was our 1st profitable month in 2 years. The steps we've taken to implement more disciplined bidding processes have resulted in higher margin projects in Dallas and Houston, And the low margin projects in Central Texas will roll off in the next few months. Based on our current backlog and new opportunities under bid, We expect this trend to continue, especially with our new leader of the Concrete segment.

Speaker 2

Ardil Allred has already made important contributions in just a few short months, And we anticipate his leadership will have greater impact the longer he settles into his role. On improving performance and profitability through continuing to right size the equipment fleet, streamlining the management structure, winning higher margin work, Improving field productivity, building synergies with the marine business and diversifying the concrete business into public sector projects. The second part of our plan is to strengthen business development to drive growth. We are in the process of recruiting senior level talent to build out our growth team. We have hired a business development leader for our efforts in Louisiana, which is an important state for us due to market opportunities there.

Speaker 2

We are also in the process of hiring an executive to lead corporate growth and strategy reporting directly to me. The candidates we are interviewing are very enthusiastic about Orion's capabilities and reputation and the positive industry dynamics ahead including the $1,200,000,000,000 infrastructure bill, the coastal investments in Louisiana and the Gulf, port expansions and maintenance as a result of the Panama Canal Expansion and strong construction demand in both the private and public sector of the growing Texas market. Our recent win in Hawaii is a game changer in so many ways, and I'd like to take a minute to expand on this joint venture to build a dry dock at Pearl Harbor. We're very pleased with the terms of our contract and our ability to proactively mitigate downside risk. We have strong local partners, good contract terms and our material prices are locked in, in our FOB Hawaii.

Speaker 2

These measures, among others, provide confidence that we can deliver on this large and important project profitably. This win also strengthens our team's credibility and reputation in the marketplace and will open the door to future opportunities working with the U. S. Navy in the Pacific Theater. Our work at Pearl Harbor will be underway by late this summer and encompasses the early stages of construction.

Speaker 2

Consequently, we expect the nearly $450,000,000 in revenue to be recognized over the 1st two and a half years as we finish our portion of the project. On the concrete side of the business, we've been pursuing larger, more complex and more profitable projects. Some may be under the impression that we simply pour concrete for sidewalks and driveways. But in fact, the type of work we do is complex And requires an extensive amount of expertise. I'd like to share some details of a recent milestone in a 43 story tower project in Houston.

Speaker 2

We placed £3,000,000 of rebar in a few days and then poured 10,000 cubic yards of concrete, which is 1,000 truckloads With 9,000 man hours of work in less than 24 hours to complete a MAP foundation, it was an incredible planning and execution effort by our team. Our ability to deliver outstanding infrastructure concrete services is the main reason we have 90% repeat business rate. Our partners have absolute confidence in the strength and reliability of our team to deliver. The 3rd prong of our strategy is making the right investments and having the resources to realize our full potential. The big news is that we have reached final agreement on terms with the new credit facility.

Speaker 2

Scott will discuss further, but this is a key component in strengthening our financial flexibility. Another headline is that we executed a contract for the sale of our East and West Jones properties on the Houston shipping channel on April 26. The purchase price is $36,000,000 and we anticipate closing in the 3rd quarter. Scott will also give pillar around our plan to monetize non core property assets. With these funding sources, we have dry powder to make investments in the business to drive future growth For example, investing in more efficient and lower emissions power plants in our dredging fleet will expand our opportunities and our margins as well as support Orion's and our customers' commitment to the environment and lower carbon emissions.

Speaker 2

With the completion of our projects in Central Texas This year, we are disposing of some underutilized equipment. Also, most equipment that we use in our concrete business can be easily leased or rented rather than purchased. And we will be taking this capital light approach going forward. We've continued to remove the silos between divisions that has inhibited our talented people From sharing skill sets, relationships and ideas. There's tremendous power and collaboration of an integrated team and it has really energized our entire organization.

Speaker 2

I'm very proud that for the first time in our company's history, we brought all three divisions of our company together, our engineering group, Our Marine Division and our Concrete Division to jointly pursue a major project. Right now, we don't know if we won the project, but it demonstrates our new culture of eliminating historical silos and moving forward as an integrated company. Finally, the most important resource is our people, and I believe we have the best talent in the industry. Guided by our core values of safety, quality, delivery and teamwork, All based on integrity, our experienced professionals bring an unmatched depth of industry knowledge and exceptional service to every project that we undertake. Morale is high and our people are more enthusiastic than ever to deliver exceptional results to customers and stakeholders alike.

Speaker 2

I will now turn it over to Scott to discuss the Q1 financials.

Speaker 3

Thanks, Travis. As Travis just addressed, We're not satisfied with our Q1 results. We expect to deliver substantially stronger financial results throughout the rest of the year As we complete our exit of Central Texas Jobs, as we realize the benefits of our margin improvement efforts and as we begin to ramp up our work in Hawaii and on other recently won projects. Our confidence is rooted in the meaningful progress we are making executing our 3 point strategic plan to improve financial performance. I'll cover some highlights and then review the Q1 results.

Speaker 3

The first piece of important news as we are very near the successful completion of our ABL credit facility. As Travis mentioned, we have reached final agreement on terms and signature pages are in escrow while we work to complete the final loan documentation. The close of this facility We'll provide us with a term loan of $38,000,000 and a revolving credit facility up to $65,000,000 We expect to have further news to report on this in the near future. 2nd, as you know, we've been in discussions for several quarters to monetize our real estate assets, including sale leaseback transactions or sales of our non core real estate assets. In April, we signed a $36,000,000 sales contract for our East West Jones property, which is 341 acres adjacent to the Houston shipping channel that we formally used as a dredge placement area.

Speaker 3

We expect to close this transaction in the 3rd quarter and we will use the proceeds to reduce debt and for general corporate purposes. Furthermore, we have 2 properties, Our Baytown Pipe Yard and Port Lavaca South Yard under letters of intent for sale leaseback. We are pleased with the progress on our real estate monetization initiative and look forward to redeploying this capital in ways that can drive cash flow and shareholder returns. 3rd, in addition to the key senior hires Travis mentioned, We also recruited a Director of Operational Excellence to develop our people and processes. We view this senior and new position as key to increasing project profitability and delivering improved financial performance on a consistent basis.

Speaker 3

Moving on to our financial results. Once again, we believe our Q1 results are not indicative of what we can deliver for the full year. In the Q1, revenue decreased 9% to $159,200,000 from $174,900,000 last year, largely due to our exit of the Central Texas construction market as well as weather and owner delays that Shifted production and revenue recognition to the right. 1st quarter gross profit was $5,800,000 or 3.7 percent of revenue compared to $12,800,000 or 7.3 percent in the prior year period. Approximately half of this decrease was due to the impact of weather in Texas driving lower revenue and lower labor and equipment utilization.

Speaker 3

The rest of the decrease related to cleanup of problem projects driving write downs in our business. This was partly offset by actions to manage costs during project delays by reallocating equipment, reducing the size of the fleet and reducing headcount as well as the realization of margin improvements in the Concrete business as a result of our margin improvement initiatives. Turning to our segments. Our Marine segment reported 1st quarter revenues of $79,300,000 compared to 84,500,000 in revenue during the Q1 last year. Adjusted EBITDA was negative $1,300,000 or negative 1.6 percent Adjusted EBITDA margin.

Speaker 3

This compares to adjusted EBITDA of $7,300,000 and an adjusted EBITDA margin of 8.6% in the Q1 of last year. This decrease in adjusted EBITDA was primarily related to lower revenue 1st quarter concrete revenue was $79,900,000 a decline from $90,500,000 reported in the prior year quarter. Adjusted EBITDA was negative $2,800,000 or 3.5 percent of revenue compared to negative $2,000,000 or negative 2.3 percent of revenue last year. Both the decline in revenue and the decline in margin are due to jobs in Central Texas. While the full quarter adjusted EBITDA declined, as Travis mentioned, the business did reach an important milestone by breaking into positive territory with its 1st profitable month in 2 years.

Speaker 3

Given the changes we've made around disciplined bidding and higher value quality projects, We expect this trend to continue. SG and A expenses for the Q1 were $17,000,000 or 10.8 percent of revenues compared to 16.2% or 9.1 percent of revenues in the prior year period. SG and A grew slightly due to increased compensation expense, partially offset by lower consulting expense related to the management transition. Net loss for the quarter was $12,600,000 or a loss of $0.39 per diluted share, compared to a net loss of $4,900,000 or a loss of $0.16 per diluted share in the quarter a year ago. This included $2,300,000 of non recurring items.

Speaker 3

1st quarter 2023 adjusted net loss was $10,300,000 or $0.32 diluted loss per share. Adjusted EBITDA was negative $4,100,000 Compared to adjusted EBITDA for the Q1 of 2022 of 5,200,000 Turning to bidding metrics. In the Q1, we bid on approximately $1,400,000,000 worth of opportunities and won $178,000,000 This resulted in a win rate of 12.5% and a book to bill ratio of 1.12 times for the quarter. As of March 31, 2023, Our backlog was $467,400,000 up from $448,800,000 on December 31. Breaking out our Q1 backlog, dollars 187,000,000 was in our Marine segment and $280,400,000 Within our Concrete segment, approximately $382,600,000 of this backlog will burn during the year with the remainder associated with longer term projects extending into 2024 and beyond.

Speaker 3

Additionally, we've been awarded over $624,000,000 for new project work not included in our backlog at the end of the Q1. Of this, approximately $522,000,000 is related to the Marine segment, including our $450,000,000 contract with the U. S. Navy as part of the joint venture, while $102,000,000 is related to the Concrete segment. We expect to execute approximately a quarter of these awarded jobs in 2023.

Speaker 3

Moving on to the balance sheet. As of March 31, we had approximately $2,800,000 of cash and $41,000,000 of outstanding debt. We remain focused on optimizing our capital and disposing of underutilized and non core assets. As we free up capital with asset dispositions and drive operating performance, we are confident that we will increase our cash flow and realize improved returns on capital. As we have said before, we are not providing guidance during this transitional year.

Speaker 3

We do expect substantially improved results throughout the year as we realize the benefits of our action plans. Our first goal is to return to margin levels that Orion achieved before the business disruptions of the past few years. With our more selective targeting of projects, higher bidding margins and operational improvements, we expect to make steady progress quarter after quarter. Once we've restored the business to its historical margins, our second goal is to do much better, continuously improving delivered margins by managing our business more efficiently and productively. When the business is operating well, we believe that Concrete segment should be generating EBITDA margins in the high single digits and the Marine segment should deliver low double digit EBITDA margins.

Speaker 3

With that, I'll turn the call back to Travis.

Speaker 2

Thanks, Scott. While we had disappointing results this quarter, We remain optimistic about the year and about the future of Orion. The actions we are taking to make our business healthy are working and will drive long term stockholder value. I want to recognize the tremendous contribution and dedication that our employees have As we continue this journey together to re energize and transform our company, we know there is still hard work ahead, We are fully committed to realizing Orion's full potential and are very excited about our future. We are grateful for the support of our shareholders I look forward to sharing our progress as it unfolds.

Speaker 2

Operator, we're ready to open the line for questions.

Operator

The floor is now open for your questions. We'll now take a moment to compile our roster. Our first question comes from the line of Julio Romero from Sidoti. Your line is open.

Speaker 4

Thank you. Hey, good morning, Travis and Scott. Good morning, everyone. Hey, good morning. Maybe to start on the marine side.

Speaker 4

I know you talked about Weather and customer delays, I think last quarter you had mentioned one particular project with higher job costs. I'm just curious if That project had an impact in the Q1. And then, if it did, are you complete or near completion on that one project?

Speaker 3

Yes. The project that you're talking about, we are very near completion on that, and that wasn't a significant contributor to The underperformance of the Q1 that we experienced, so that we're getting ready to wrap that one up.

Speaker 4

Okay. Thank you. That's very helpful. And then for my follow-up on the Concrete side, congratulations on getting that profitable in March. Was the driver of turning Concrete profitable in March just better bid cycling through the backlog or were there other drivers That you did right.

Speaker 4

And then if you could talk about how Concrete performed through April from a profitability standpoint? Thank you.

Speaker 2

Sure. So definitely the plan is coming together, if you will. Definitely part of it was on the front end with the bidding side of it and then the other part of it is better execution and better management of the business. And so it's kind of several parts that are coming together. I don't think we're going to say exactly what April looks like yet, but it's

Speaker 3

We see continuing trends in April and we're encouraged that that business has Kind of reached a place where it can start to

Speaker 2

perform the way we expect it can. That's right. We're confident.

Speaker 4

Great. Thanks very much.

Speaker 2

Thanks, Julio.

Operator

Our final question comes from the line of Joe Gomes from Noble Capital. Your line is open.

Speaker 5

Good morning, Travis and Scott. Thanks for taking my questions.

Speaker 2

Good morning, Joe.

Speaker 5

So I just wonder if you could maybe break out a little bit, approaches a couple of ways here. So you kind of call out the Three things for impacts for the decline in revenue, weather, customer delays and obviously the Concrete segment Reductions, just trying to get a better feel for the what kind of impact We know the weather and the customer delays had on the revenues for the quarter and would we Anticipate or expect to see those coming in, in the second quarter?

Speaker 3

Yes. So in terms of weather, I guess, what we experienced kind of straddled January, February with winter storm Mara affecting pretty significantly the Texas market. And when you look across Both businesses, it really cost us about 2 weeks' worth of production, so a fairly significant impact to revenue. Now we always want to catch those things up and deliver Within the same quarter, if we can. But in this particular case, we just couldn't catch up on that much of a delay.

Speaker 3

So anytime you have a weather delay, you are going to realize that production in the future. And so we're Essentially working to backfill as much as we can and work the hours that can really do that In any given time when we experience that, but in this next quarter coming in, I think that There's probably not a big uplift that you'll see spilling over from the Q1 as it is going to take us a little bit more time to kind of work through And pull in all of that production.

Speaker 2

But ideally that wasn't out of I mean it was a named winter storm in Texas, right? So it's And out of the norm type of impact on us, we're hopeful that the second quarter will be I mean, so far so good with weather this quarter and hopefully for the rest of the quarter and Beyond will be good and we won't have to worry about that anymore. And I recognize that weather has been a Sort of a sore subject with investors in Orion, but we're hopeful not to have to talk about weather again.

Speaker 5

Okay, great. Thanks for that. And then on the East West Jones and the other properties, on East West Jones, so You're selling it for $36,000,000 How much of that you think comes in on an after tax basis that you're able to apply to Pay down debt and or for corporate purposes. And can you give us any indication for the other two properties as To what ballpark figure what they could be bringing in?

Speaker 3

Yes. So we are expecting that there's going to be kind of nominal cost to close that transaction as you Having any real estate transaction in terms of the tax bite, we have losses that enable us to shield our earnings related to that sale. So I don't expect that taxes are going to take a significant chunk of the proceeds down the road. So We intend to utilize the largest portion of that proceeds really to fund the working capital investments and Investment in equipment that we need for Hawaii, and we will also be using a good portion of that to pay down debt. On the other properties, we've got we've been marketing those for some time, as you know.

Speaker 3

We feel very good about these transactions, have had very good meetings with these buyers who understand these properties. We'll talk more about proceeds and amounts next when we announce the close of those transactions. But I would say that it's consistent with the prices that we've marketed those properties and talked about them in the past.

Speaker 5

Great. Thank you very much.

Operator

We do have a question from the line of Dave Storns from Stonegate Capital Market, your line is open.

Speaker 6

Good morning. This is John stepping in for Dave.

Speaker 2

Hi, John.

Speaker 6

Hi. So what are you seeing in the market bid volume wise? What are your expectations for the volumes? How you see them changing for the remainder of 2023 and going into 2024?

Speaker 2

That kind of varies by different portions of our business, John. We've got on the concrete side, things have Continue to we've seen a steady volume of bidding on the concrete side that's been good. We're hearing indications that there may be it may slow down a little later in the year, but so far so good on the concrete side. On the marine side, dredging is definitely slow right now on the bidding front with the Corps of Engineers in the Gulf. That's definitely something that we're keeping an eye on and concerned about quite frankly.

Speaker 2

And then kind of marine construction, there's been a decent steady flow of marine construction bids. I wouldn't say it's a plethora of bids, but we've been it's been a steady flow. We've got some Good outstanding bids that we're hoping to hear positive news on in the near future. But it's With the exception of, I would say, our dredging business, it's been a decent flow of bids. What we

Speaker 3

haven't seen probably yet is a large number of projects that are coming out of these latest federal Funding mandates. And so that takes some time to work its way down to the actual State and local authorities that are going to be spending that money, but we do still see that as a pretty significant uplift of the entire market A little bit further down

Speaker 6

the road. Thank you. That's very helpful. And I guess, as you mentioned, Concrete was challenged by weather events and intentional improvements. Are you seeing any green shoots from the implemented improvements?

Speaker 6

And what are your expectations on the Length and depth of the J curve as that segment improves?

Speaker 3

We are definitely seeing improvements in Just about every aspect of our operations on the Concrete business, lower issues on projects, Fewer write downs, better execution. And then in terms of our bidding practices, We've seen through latest market bids opportunities with existing customers, repeat customers who we've done Highly complex and successful projects with and we're seeing opportunities to get the kind of margins that we think that our business is entitled to Based on our capabilities and our ability to deliver for our customers. So, see a lot of Really good positive trends. Ardel has done a great job really shaking things up and doing things differently And is getting a great deal of support from the team in the Concrete segment. I think that the entire business is excited about where it's headed, And we think that there's a lot of room for improvement still.

Speaker 6

Awesome. Really appreciate it.

Speaker 3

Thanks, Anubhav.

Operator

Okay. And our final question comes from the line of Poe Fratt from AGP. Your line is open.

Speaker 7

Yes. Good morning, Travis. Good morning, Scott. It's Alliance Global Partners. But Can we talk about nobody has asked about the credit facility and can you since the terms have been it sounds like Itemized just subject to documentation.

Speaker 7

Can you give us a little better idea of some of the terms, how long is the term loan, The availability under the revolver, is there a set tenor to that too? And then also if you could sort of give us an idea of sort of where your interest rate margin is going to come in on it and whether there might be any equity sweeteners On the arrangement with the private lender?

Speaker 3

Sure. I'll answer what I can. Obviously, those are Discussions that we're wrapping up right now, so we expect to come back to you guys with more information on that when it's all finalized. But It's a 3 year tenure on the term loan and the revolver. In terms of the rates, We have on the revolver rates fairly consistent with our previous debt.

Speaker 3

On the term loan rates that are Pretty consistent with what you're seeing for ABL loans of this type in the market right now. As you know, we went to market and Ran a competitive process, so we feel good that what we're achieving with this debt is going to be consistent with Other market positions right now, so

Speaker 2

Which by the way, the market is not great for getting a loan, but it is what it is.

Speaker 3

But a lot of flexibility in our operations with capacity in the revolver. We're expecting It's like a typical ABL revolver with a borrowing base that undergirds your borrowing capacity. So Over time, the amount of capacity we have changes and we expect that to grow as the business grows.

Speaker 7

Great. Thank you. And then if you look at your awards subsequent to the end of the quarter, I think in the press release you talked about $624,000,000 The Navy contract is what $450,000,000 roughly of that. What are the other components of that So the delta of 175?

Speaker 2

There's both marine and concrete wins of varying Sizes, kind of throughout the business that are make up that delta there, Poe. I wouldn't say there's one Mega project in there. It's a variety of projects throughout the business.

Speaker 7

And then, I think I heard Scott say that a quarter of that 624 would be realized in or burned off in 2023. Was that Correct. And if so, can you talk about the burn rate for the remainder? It sounds like it would be maybe 50% and then in 24% and then 25% in 25%. Is that Fairly, is that a fair estimate?

Speaker 3

I'd say that's a reasonable expectation. Owen, Poe, I didn't answer one part of your question earlier. There's no equity component to the debt.

Speaker 7

Okay, great. And then Along that slide, you highlighted long term margins target for marine of low double digit, I think. Just to clarify, is that on a gross margin basis or EBITDA basis? And then if you could talk about whether the Navy contract Meets that long term goal?

Speaker 3

That's on the EBITDA front. So those are Concordive margins on the bottom of the P and L. The Navy contract is A massive contract, and I would say that we definitely achieved our margin goals with that contract. Given its size, as you might expect, it's not going to be the highest contract the highest margin contract that we have. But we are very pleased with where it was bid, and we think that when executed, we'll be able to deliver A really nice result for ourselves and for shareholders.

Speaker 7

Great. Congratulations. You guys have been really busy. So Covered a lot of ground. Thanks.

Speaker 7

Yes,

Speaker 2

we have. Thanks,

Operator

I would now like to turn the call over to Travis Boone for closing remarks.

Speaker 2

Thank you, and thank you all for joining the call today. We Enjoyed our time with you and looking forward to continuing to have good news for you in the coming quarters.

Operator

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation. You may now

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Orion Group Q1 2023
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