Orion Group Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Orion Group Holdings Second Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen only mode. Followed by 0. 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.

Operator

I would now like To turn the conference over to Margaret Boyce, Investor Relations for Orion. Please go ahead, ma'am.

Speaker 1

Thank you, Justin, and thank you all for joining us today to discuss Orion Group Holdings' 2nd quarter 2023 financial results. We issued our earnings release aftermarket last night. It is available in the Investor Relations section of our website at oriongroupholdingsinc.com. I'm here today with Travis Boone, Chief Executive Officer of Orion and Scott Thanish, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions.

Speaker 1

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 that are identified by words such as will, We, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts are forward looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward looking statements. Discussion of the factors that could cause our results to differ materially from these forward looking statements are contained in our SEC filings, including our reports on Form 10 Q and 10 ks.

Speaker 1

With that, I'd now like to turn the call over to Travis. Travis, please go ahead.

Speaker 2

Thank you, Margaret, and welcome to everyone joining our call today. In the Q2, we made substantial progress against our strategic plan and Scott and I will cover the details in our prepared remarks. Before that, I want to give you more context around our 2nd quarter performance. As you saw in our press release, Revenue came in at $182,500,000 Our loss per share was $0.01 and adjusted EBITDA was $3,700,000 Last quarter, we told you that we expected 2nd quarter results to be better than the Q1 and they are a significant improvement over last quarter, reflecting progress we are making to improve our long term performance. We expect continued improvement through the back half of the year.

Speaker 2

I'll start with our Concrete business. As you've heard me say before, our immediate priority was to improve Concrete's profitability. When Scott and I came on board, the Concrete business had been losing money for too long. Since we started the transformation of our company in September, We implemented disciplined bidding processes, made leadership changes, added more rigor in our project delivery, exited the unprofitable Central Texas market and focused our resources on our Dallas and Houston markets. As a result of these actions, Our concrete business returned to profitability in March.

Speaker 2

That profitability continued in April, May June and we expect that trend to be sustainable. Right now, we have a large volume of work that has been bid, which reflects very strong demand in our core markets. We won't win all that work, especially if it doesn't meet our bid margin thresholds and some customers are delaying decisions until the cost of capital stabilizes. Even so, we feel Concrete is in a strong position for the rest of 2023 and beyond. While Concrete was a bright spot this quarter, Our volume challenges in the marine business continued, primarily in our dredging operation.

Speaker 2

For context, Our dredging business has historically been roughly 20% of our revenue and 30% of our profit. When that business is slow and we don't have work to bid, It has a big impact on us. The Army Corps of Engineers has the responsibility, the mandate and the funding to maintain U. S. Waterways along the Gulf Coast.

Speaker 2

They are very aware of the pressing need to dredge major shipping channels to keep commerce moving efficiently along the coast into the ports. Delay of this maintenance activity has far reaching consequences on the Gulf economy and the U. S. Supply chain, potentially disrupting shipping, goods handling, warehousing and ground transportation. While we are excited about the potential to see significant opportunities in this space in the long run, Our near term bidding opportunities continue to be limited relative to historical levels.

Speaker 2

In this environment, our focus is on carefully managing our costs and maintaining bidding discipline. In the Q2, we were successful in winning a $27,000,000 dredging contract from the core. And just last week, we won another $18,000,000 contract with the core for dredging in Louisiana. These wins will help to get our dredges busier in the latter half of the year. We have several large outstanding bids for marine construction and we remain confident that our opportunities to grow will continue.

Speaker 2

The $1,200,000,000,000 Infrastructure Act was passed 2 years ago, While only a very small portion of the work has started, it is coming. Our project to build a dry dock at Pearl Harbor is underway and we are mobilizing equipment and resources to Hawaii. We expect our portion of the work on this $435,000,000 contract to We laid out our 3 point strategic plan earlier this year and we have made substantial progress in a short time. We are committed to doing what we say we will do and delivering on our plan to transform our business. We began with a long checklist and have ticked off many of the boxes, all focused on de risking the business to clear the path for long term and sustainable growth.

Speaker 2

We shored up our balance sheet and liquidity. In many ways, this was one of the most critical objectives we faced. We secured a new $103,000,000 ABL credit facility and have thus far monetized $25,000,000 of assets with substantially more under contract. We have attracted great talent to focus on business development and growth. Building stronger customer relationships is a critical element in driving future growth.

Speaker 2

Casey Stavanoa joined us to lead business development for our efforts in Louisiana, which is an important state for us considering that $50,000,000,000 is earmarked for Louisiana Coastal Restoration. Alan Ekman joined us in July to lead corporate growth and strategy reporting directly to me. These individuals bring years of experience and proven results to Orion. We will continue to invest in key resources focused on growing our business. We're also investing in training and tools that will allow our people to reach their full potential.

Speaker 2

Our goal is for our people to clearly understand our business objectives, Embrace a growth mindset and speak about the business in the same way. This is an important step in strengthening our culture, leveraging best practices, driving synergies and cross selling capabilities. Looking ahead, we are extremely excited about the future. In the remaining months of 2023, we will continue to build momentum in the execution of our strategic plan and expect quarter over quarter improvements in performance. After establishing a foundation for the new Orion this year, 2024 will be a very different year for the company.

Speaker 2

We are fortunate to have the most exceptional people in the industry and 2 businesses with different catalysts for growth. Concrete more driven by the private sector and marine by the public sector. They can balance one another during challenging times. We both are performing well as we expect in 2024, they can deliver dramatic growth. Now I'll turn the call over to Scott for his review of the financials and operations.

Speaker 3

Thanks, Travis. I'll cover some highlights and then review the 2nd quarter results. The main headline of the Q2 is the progress we've made strengthening our balance sheet and improving the company's liquidity. As we announced on May 15, we closed on a 3 year $103,000,000 ABL credit facility, which includes a term loan of $38,000,000 and a revolving credit facility up to $65,000,000 By extending our debt maturities and increasing our access to capital, Orion will be positioned to make the most of our market opportunities. In addition, we closed $25,000,000 in equipment and real estate sale leaseback transactions in the quarter.

Speaker 3

We're pleased to deliver progress on our asset monetization goals, and we remain focused on opportunities to unlock value on our balance sheet. In April, we signed a $36,000,000 contract to sell our East West Jones property. And then in June, We signed a contract for the sale and partial leaseback of our Baytown pipe yard for $8,300,000 We expect these transactions to complete in the 3rd Q4 respectively. While our balance sheet is stronger And that is the headline for the quarter. I'm more excited about the transformation of our Concrete segment performance, which as Travis mentioned, hit positive adjusted EBITDA this quarter for the first time in 2 years.

Speaker 3

This was a $3,000,000 improvement over both the prior year and the prior quarter. These margin improvements are sustainable and they're supported by both operational process enhancements and more disciplined bidding leading to higher margin in our backlog. Moving on to our financial results. Orion produced $182,500,000 of revenue in the 2nd quarter, up 14.7% sequentially and down 6.2 from the prior year. The year over year decline was largely due to our exit of the Central Texas construction market, partially offset by increased revenue in our Marine segment driven by our Hawaii drydock project.

Speaker 3

2nd quarter gross profit was $13,800,000 or 7.6 percent of revenue compared to $14,300,000 or 7 point 4% of revenue in the prior year period. Gross margin percentage increased due to our actions to improve Concrete segment margins, partially offset by lower equipment and labor utilization in our Marine business. Turning to more detail on our segments. Our Marine segment reported 2nd quarter revenue just over $100,000,000 up 22.1% over the prior year. Adjusted EBITDA was $3,500,000 or 3.4 percent adjusted EBITDA margin.

Speaker 3

This compares to adjusted EBITDA of $8,700,000 and an adjusted EBITDA margin of 10.6% in the Q2 of last year. This decrease in adjusted EBITDA was primarily related to lower labor and equipment utilization. 2nd quarter concrete revenue was $82,000,000 down 27% from the prior year. Adjusted EBITDA was $264,000 or 0.3 percent of revenue compared to negative 3000000 negative 2.7% margin last year. As I mentioned, we expect these margin improvements to be sustainable moving forward.

Speaker 3

SG and A expenses for the 2nd quarter were $18,100,000 or 9.9 percent of revenues compared to $17,200,000 or 8.9 percent of revenues in the prior year. SG and A grew due to increased compensation expense, partially offset by lower consulting expense related to the management transition. Net loss for the quarter was $300,000 or a loss of $0.01 per diluted share compared to a net loss of $3,100,000.10 per diluted share in the prior year. This result included $4,300,000 or 13 diluted earnings per share of non recurring Excluding these items, Q2 2023 adjusted net loss was $4,500,000 or $0.14 loss per diluted share. EBITDA for the 2nd quarter was $7,600,000 and adjusted EBITDA was 3,700,000 Turning to bidding metrics.

Speaker 3

In the 2nd quarter, we bid on approximately $762,000,000 worth of opportunities and won $534,000,000 with our Hawaii dry dock project added to backlog. This resulted in As of the end of June, our backlog was $818,700,000 a 75% increase over backlog at the end of the Q1. Breaking out our 2nd quarter backlog, $614,900,000 of this was in our Marine segment with $203,800,000 in our Concrete segment. Furthermore, we've been awarded over $84,000,000 for new project work not included in our backlog at the end of the second quarter. Of this, approximately $39,000,000 is related to marine with $45,000,000 related to concrete.

Speaker 3

Moving on to our balance sheet. As of June 30, we had approximately $8,900,000 of cash and $36,900,000 of outstanding debt. In relation to our new debt facility, We incurred $5,900,000 of debt issuance cost that will be amortized over the life of the agreement. As of the end of the quarter, we had no outstanding borrowings under our revolver. As we look ahead to the second half of the year, We're optimistic.

Speaker 3

As Travis said, we expect to see quarter over quarter improvements throughout the year as we realize the benefits of our strategic initiatives. While the low bidding volume in the dredging market continues to impact our industry, Our recent wins will enable us to get more of our fleet to work in the coming months. And we are excited as Hawaii ramps up and contribute significantly to our second half. With that, we'll open the call to your questions. Dustin?

Operator

Your first question comes from the line of Joe Gomes from Noble Capital. Mr. Gomes, your line is open.

Speaker 4

Good morning. Thanks for taking my questions.

Speaker 2

Good morning, Joe.

Speaker 4

So I just wanted to just clarify some stuff here on the Concrete segment. You Talked about it being profitable basically since March, but if I'm looking at the tables In your release, it says, Concrete segment had an operating loss of about $1,500,000 in the quarter. So when you say profitability, you're just talking about on adjusted EBITDA basis? And when do you Forecast that on an operating income basis, the Concrete segment will turn profitable.

Speaker 3

Yes, Joe, that's right. We're thinking about it on an adjusted EBITDA basis. In terms of When it might turn profitable on an operating income basis, I don't know that I want to call a month there, but I do think that we'll see continued Improvement in that business, we think that the opportunities in front of it are pretty significant and the strides that we've taken to improve the margins there as we've said, we think are going to stick. So we expect continued improvement in that business and we'll close that gap

Speaker 4

Sis, are there still a few more things that you need to finish up there?

Speaker 2

We're wrapping up. I think we have 2, maybe 2 or 3 projects kind of in the final throes of completion here. They should be wrapped up, I believe, in the next month or so. We're almost out.

Speaker 3

Yes, it's punch list work. There's not much there's not really any significant backlog associated with Central Texas remaining.

Speaker 4

Okay, great. And one more, if I may. You talked about some of the monetizations, East West Jones, Baytown, I think Port Lavaca South. When all of those are said and done, How much cash do you think they're going to bring in on the balance sheet?

Speaker 3

Yes. So I think we've talked about the $25,000,000 already that we did this quarter Between the outstanding contracts that we have and other things that we see as potential opportunities on the balance sheet, I think there's Probably another $40,000,000 to $50,000,000 that we anticipate as realizable in the near term. So that's kind of what we're working towards in our goals right now.

Speaker 4

Okay, great. Thanks. I'll get back in queue.

Operator

Thank you. Your next question comes from the line of Julio Romero from Sidoti. Sir, your line is open.

Speaker 5

Great. Thanks. Hey, good morning, Travis and Scott.

Speaker 2

Good morning, Raul.

Speaker 5

Hey, I wanted to start on the Marine segment. How much revenue in the second quarter did you see from the Pearl Harbor dry dock project? And And how much revenue do you expect to realize from that project in the Q3?

Speaker 3

Yes. We don't talk on specific contracts really, but it was a pretty significant contributor to revenue in the Q2, and it should be more in the Q3. I think that in the Q2, it was several tens of 1,000,000, but it was it's going to be more going forward. We'll have a more significant ramp in the beginning of next year as we really start to start driving pipe.

Speaker 5

Okay. I appreciate the color that you can give there. And it was nice to see the 45,000,000 contracts that you won recently for Texas and Louisiana. But your commentary, Travis, on the prepared remarks I'm a little bit kind of pessimistic on the pipeline of dredging bids. I don't know if you can just talk about that, has it gotten maybe a little Better, worse or same as 3 months ago?

Speaker 2

I mean, it's I don't know if it's better, worse or Roughly the same as it was 3 months ago. It's just been slow, quite frankly, Slower than historic volumes, to be clear. And that, as you know, it really impacted us in the second quarter. Yes, we had dredges sitting around waiting to go to work. Fortunately, we have we'll get most of our dredges Busy with the contracts we've won recently, but we need to Keep the bids going so that we can keep those things moving when they're sitting, it costs us a lot of money.

Speaker 3

Yes, we've had an active dialogue with the Army Corps of Engineers and we'll certainly continue that. They understand both the need and The value to their purchasing program of getting that bid flow up and getting the market in a more stable position.

Speaker 5

Got it. And just one clarification question. You talked about the dredging historically has been 20% of revenue and 30% of profit. I assume those metrics are for The Marine segment standalone and not for Orion overall, is that correct?

Speaker 2

It's actually overall.

Speaker 5

Really? Okay. Okay. Great to clarify then. Okay.

Speaker 5

Excellent. All right. Well, thanks very much for taking the questions.

Speaker 2

Sure. Thank you.

Operator

Thank you. Your next question comes from the line I have Dave Storms from Stonegate Capital Markets.

Speaker 6

Good morning.

Operator

Good morning. Your line is now open.

Speaker 5

Good morning, everyone.

Speaker 2

Good morning.

Speaker 6

I was hoping we could touch on the burn rate For the backlog, I know last quarter, you had mentioned it's in the high $300,000,000 Is that expected to remain constant, Maybe another $300,000,000 or so for the rest of the year? Is there any comments you can give on that?

Speaker 3

Generally speaking, looking at our backlog, it's for the next 12 months, probably 2 thirds. And I think that over the next 6 months, that 2 thirds it's probably the majority of that 2 thirds. But I think That we typically are looking at backlog out longer than just the next few months. So we're we see it right now in kind of the similar place And having a similar profile in terms of how it's going to schedule out is what we have typically seen in our business.

Speaker 6

That's very helpful. Thank you. And then just sticking with the backlog, is there any sense that you could give us on what the Margin expansion may look like specifically on the concrete segment in that backlog or you want to comment on that?

Speaker 3

Well, in terms of how we're bidding jobs, we've not given a whole lot of details around that. But our historical approach Bidding jobs, we're several points higher than that in terms of how we're approaching our value in the marketplace right now. And we are being successful at those higher bid rates. So we'll see in our backlog Over time, the rates coming up from our historical over the last 12 months up another kind of 2 to 3 points over those historical rates, I think is what we'll see as that kind of bears out.

Speaker 2

Yes, as we burn off the backlog with some of those lower bid margins.

Speaker 6

That's very helpful. Thank you. One more if I could. You mentioned that In your Concrete segment, you're kind of waiting for the cost of capital to stabilize before you think the bidding environment picks up again. Aside from the Army Corps of Engineers kind of changing their stance, are there any catalysts that you're keeping an eye out for the Marine segment to maybe pick up?

Speaker 2

Well, I'm not sure if you had a question on the concrete side there specifically, but I'll just Clarify, with the we've seen quite a few bid opportunities on the concrete side. It's a matter of projects actually moving forward. We're bidding work. The projects Tend to are lagging longer before we get notice to proceed and things like that, as developers Move forward with projects. On the marine side, there's quite a few different catalysts active right now that We see with bidding opportunities picking up, all of the ports are scrambling On the eastern part of the U.

Speaker 2

S. To expand because of the expansion of the Panama Canal, so bigger ships are able to come through the Panama Canal. So all the ports They utilize ships coming through there are scrambling to increase whether it's increased shipping channel Steps or the size of their ports to bring bigger and bigger ships in. And then with that, the private sector does the same, right? All of the Whether it's industrial, petrochem companies all along Gulf and East Coast They utilize ships that come through there.

Speaker 2

They're also scrambling to be able to bring in bigger ships. So they're all in the same boat With needing to expand the facilities. So you have that catalyst. Defense spending is continuing pretty rapidly, especially in the Pacific. So that we expect that Due to continue ramping up.

Speaker 2

And then we've got the Infrastructure Act, IIJA, that's Money we expect money to start flowing to projects in the relatively near future. So there's several catalysts on the marine side that we're very optimistic about.

Speaker 6

That's incredibly helpful. Thank you for the clarification and thank you for taking my question.

Speaker 3

Thanks, Dave.

Operator

Thank you. Moving forward, please limit yourselves to questions. Thank you. And your next The next question comes from the line of Alex Rygiel. Your line is open.

Speaker 2

Thank you. Good morning, Travis and Scott. Good morning, Alex. Can you

Speaker 5

first on the Hawaii project, is the profit recognition along the same trajectory as the revenue?

Speaker 3

In terms of physical progress, it's a little bit different. The revenue recognition has a few different drivers. Physical progress is kind of that 2.5 year fairly steady as we drive pile over that time frame, And we can report on that as we go. But revenue recognition will largely align, but there'll be some differences early in the project as we Have some mobilization related revenues.

Speaker 2

Okay. And then can you talk a

Speaker 5

bit about the cash needed for working capital on the Hawaii project?

Speaker 3

Sure. Yes. In terms of our expectations of the level of working capital investment needed, I think we've talked before about Between $5,000,000 to $10,000,000 of working capital investment, when we were negotiating those contracts, we were Very careful to include in that good cash dynamics and terms for us both with the JV partner and the JV with the Navy. So we have a fairly short period of time that we have to wait some of our revenues and that helps to ease a little bit of the dip necessary for working capital.

Speaker 2

And then lastly, What's your CapEx budget for this year and next?

Speaker 3

Good question. We this year, I would say that Our year to date CapEx is relatively low considering where we have historically been. I think Historically, you would typically see us around $15,000,000 of annual CapEx. I think that that's Probably a good number for us on a normal year and I would expect that we'll get A little more spending in the back half of the year, although we won't quite approach that level for this year. Next year, We'll probably see a little bit more spending, and we're working through the plans on that right now.

Speaker 3

Not quite ready to talk about it, but we'll get there closer to the end of the year.

Speaker 2

Perfect. Thank you very much. Nice quarter. Thanks, Tom. Thank you.

Speaker 2

More to come.

Operator

Thank you. Moving forward, please limit your questions. And your next Question comes from the line of David Wright from Henry Investment Trust. Sir, your line is open. Good morning.

Speaker 2

Good morning, Bill. Good morning.

Speaker 7

There was a press release from the company not quite 2 years ago about a couple Contracts, one is State Road 405 Indian River Bridge and the other was Birth VI expansion. There were a couple of nice sized contracts that were I was wondering, could you give us an update on the status of each of those and whether you've had any snags or not?

Speaker 2

Quite frankly, I've only been here 9 months. I'm not familiar with either one of those projects. Those press release We're before my time and they must be complete because I'm not familiar with them at all. So, I wish I had a better answer for you. They must be complete or something because I'm We

Speaker 3

might know them by different names.

Speaker 2

Or we might maybe we know them by different names, right? Not familiar with those two projects.

Speaker 7

Well, the first one, dollars 125,000,000 over the NASA Causeway near Cape Canaveral. Oh, yes.

Speaker 2

That's the only way, yes. Yes. Thank you. That's helpful. I know that one.

Speaker 2

That's not the causeway in our terminology. So, that project is going really well. We reached a big milestone here a couple of months ago with getting there's 2, it's a side by side bridges. So we completed the 1st bridge here a couple of months ago, ahead of schedule, and there's actually quite a bit from Florida DOT about that one. They were really excited to get that one open.

Speaker 2

We're now in the demo phase of the existing bridge And expect to get the 2nd bridge open ahead of schedule as well. So that project is going very well.

Speaker 7

Okay. The other one, maybe you'll notice Port Arthur. Wood Arthur Births expansion project $67,000,000

Speaker 2

Yes. It's under construction right We're making good progress on it. And I'm not sure I have more details than that other than we're making good progress on that project.

Speaker 7

Well, great. Thanks for updating those

Speaker 2

Thank

Operator

you. Please limit your substitute questions. Thank you. And with that being said, there are no further questions at this time. Mr.

Operator

Broom, I turn the call back over to you.

Speaker 2

Thank you. I just wanted to close with We are really proud of the progress we've made with transforming this business to be healthier, profitable and set up for future success. We've been doing what we said we would do and the results are starting to show. Our team has been working hard to make it all happen and we appreciate all of their efforts to make us

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