Orion Group Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Orion Group Holdings First Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I now like to turn the conference over to Margaret Boyce of Investor Relations for Orion.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining us today to discuss Orion Group Holdings' Q1 2024 Financial Results. We issued our earnings release aftermarket last night. It's available in the Investor Relations section of our website at oriongroupholdingsinc dotcom. I'm here today with Travis Boone, Chief Executive Officer of Orion and Scott Vanish, 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'd 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. 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 these 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 10Q 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. Good morning, everyone, and thank you for joining our Q1 2024 conference call. I'll start with a quick overview of our Q1 results as well as providing more color on the tremendous opportunities before us. Then I'll turn it over to Scott to cover our financial results. We generated 1st quarter revenue of $160,700,000 and adjusted EBITDA of $4,100,000 We are continuing to focus on increasing our margins.

Speaker 2

We expect revenue to build throughout the year with our current backlog and strong pipeline of opportunities. In addition to Q1 being our seasonally slowest period, revenue was affected by reduced activity on 2 major projects related to scheduling impacts outside of our control. These delays should not impact the critical completion of these large projects under contract or the total anticipated revenues or margins generated from these contracts. It is normal on construction projects for unexpected delays to occur. We have strong project teams that are nimble and able to respond quickly to get the projects back where they need to be.

Speaker 2

We expect to recover this work in the upcoming quarters with strong momentum in the back half of the year. Based on the activity level that we are seeing for our services, especially in marine construction, we are reiterating our full year 2024 expectations for revenue in the range of $860,000,000 to 9.50 1,000,000 quarter with a solid foundation and a much healthier business. After our hard work transforming the business throughout 2023, we are now in a position to reap the benefits. We have put disciplines, processes and procedures in place. Expectations are crystal clear for our teams and everyone is aligned on the same mission, delivering predictable excellence through outstanding execution.

Speaker 2

We invested in strategic growth and have vastly improved our business development team and processes. Finally, we strengthened the balance sheet and monetized non core assets. These changes are driving energy and momentum throughout the organization. The best way to measure opportunity is our pipeline, an account of all potential projects we might pursue. In just over a year, our pipeline of opportunities has grown from $3,000,000,000 to over $11,000,000,000 The increased volume in large part reflects the investments we have made in our business development efforts that are gaining real traction.

Speaker 2

In addition, the marine construction industry is exploding and we are intensifying our attention on that market. In the coming years, we believe demand for specialized construction could exceed supply. The diversity of both projects and funding sources overlaid with our geographic footprint and areas of expertise gives me great confidence in our ability to win new contracts and drive growth. Given the number of quality projects in this space that fit Orion's unique capabilities, our energy and focus will mainly be on capitalizing on marine construction opportunities. We expect dredging to remain an integral part of our marine business as we grow, but it will be a smaller portion of our revenue in comparison to marine construction.

Speaker 2

Strong secular trends are driving these opportunities and here are some examples. First, the $1,200,000,000,000 infrastructure bill will provide a multiyear catalyst for public sector projects such as transportation funding, ports, waterways, water infrastructure and bridges among other things. The government has planned $6,000,000,000 for ports and waterways and $174,000,000,000 for roads, bridges and major projects. We are just beginning to see these funds start to flow and believe they will drive more projects in 2025 and beyond. 2nd, ships are much larger today than they were 30 or 40 years ago.

Speaker 2

The expansion of the Panama Canal allows larger ships to pass through ports. As a result, infrastructure upgrades are required all along the Eastern seaboard and the Gulf to expand ports and deepen channels. The unfortunate Key Bridge incident in Baltimore shines a spotlight on the infrastructure upgrades needed throughout the country to accommodate larger vessels passing through the ports. The U. S.

Speaker 2

Navy is spending 1,000,000,000 in the Pacific Deterrence Initiative to protect U. S. Interests. Our project in Pearl Harbor, where we are a subcontractor to the $2,800,000,000 joint venture team to build a dry dock for nuclear submarines is the largest construction project in U. S.

Speaker 2

Navy history, but not for long. The Navy has planned a much larger investment to revitalize the Puget Sound Naval Shipyard and other marine facilities in the Pacific. We have a well established presence in the Pacific Northwest, and we are now established in Hawaii. We intend to leverage this presence to capitalize on the billions being invested in the Pacific. In February, I attended the Navy's anchoring ceremony in Pearl Harbor.

Speaker 2

The Orion team was honored to drive the 1st ceremonial pile on this critical Navy project. We are now into our core construction activities and pile driving has continued by our crews. We have been a critical part of the team on this high profile Navy project. Based on our work in Pearl Harbor, we are in a strong position to compete for additional U. S.

Speaker 2

Navy contracts in the Pacific. Finally, there is growing construction activity in the Gulf. As I've mentioned before, coaster restoration is a critical need in many areas and there's $10,000,000,000 planned by multiple agencies for coaster restoration in Louisiana alone. Ammonia terminals are also being constructed to advance green energy initiatives. These projects are a perfect fit for Orion, which is why we have invested there and opened a new office in New Orleans.

Speaker 2

We've been engaged in these projects and expect more work in the future. Many of our long standing private sector petrochem clients are also planning major capital projects, and we are engaged in planning and design with them and we'll be building these projects as well. We expect to see project volume ramp up in 2024 through 2025 and the investments we are making to improve our fleet, our systems and our teams will enhance our competitive position. Turning to our Concrete business, we are also seeing strong demand drivers in this segment. Data centers are the necessary infrastructure for artificial intelligence.

Speaker 2

And the number of AI driven data centers is expected to double in the next year. North Texas now ranks 2nd among U. S. Markets by inventory of data centers with 173% increase in the second half of last year. Orion Concrete is well established in this market.

Speaker 2

And to date, we have already built or are building 19 data centers in Texas. Beyond Texas, we're also pursuing opportunities in Utah, Arizona and Nevada through our strong relationships with general contractors working in those states. Our competitive advantage is not only our experience and the high quality of our work, but also our unmatched safety record, which is extremely important to the owners of these data centers. For 2 years in a row, we have had 0 lost time incidents and we have an extraordinary safety culture focused on our people going home safely every day. While the data center market is booming, we are seeing headwinds in our traditional developer driven concrete markets due to the persistently high interest rates.

Speaker 2

With commercial construction taking a pause, we are shifting our concrete resources to the data center market while it is hot. In summary, we've now set the company up for success and are focused on driving growth for the remainder of 2024 and then in 2025 and beyond. Our leadership and platform are in place to capitalize on the immense opportunity ahead. Looking forward, we expect the business to accelerate in the second quarter with a strong growth in the back half of the year. Before I turn it over to Scott, I'd like to thank our retiring board member, Richard Dair, for his 17 years of service on our board.

Speaker 2

Richard has been with Orion since going public in 2007, serving as Chairman for most of those 17 years. He has been a valuable asset to both management and the Board and will officially step down next month at our Annual Meeting of Stockholders. We wish him the very best in his well earned retirement. I also want to encourage stockholders to cast their votes and participate in our virtual meeting on May 16. You can find the details on the materials and on our website.

Speaker 2

I'll now turn the call over to Scott.

Speaker 3

Thanks, Travis, and good morning, everyone. Starting with our Q1 financial results, we generated revenue of 160 point $7,000,000 up 1% over last year. As Travis mentioned, we experienced a schedule shift during the Q1 in 2 large projects and expect to recover this work over upcoming quarters in 2024. While total revenue for the quarter remained largely flat compared to last year, the mix of revenue changed dramatically with marine revenue up 34% and concrete revenue down 32%. This change in mix reflects our focus on marine segment growth opportunities, as well as the disciplined bidding standards we adopted to win quality work at attractive margins in our Concrete segment.

Speaker 3

We have learned to walk away from work that doesn't fit us and direct our energy to projects that deliver solid margins. With the shift towards marine projects, we are also increasing the average size of projects in our backlog. To give you a sense of typical project size, in our Marine segment, a $150,000,000 project is right down the middle of the fairway for us. And in our Concrete segment, that's about $30,000,000 for a large project. Data center projects in Concrete may run between $20,000,000 $50,000,000 Targeting these larger projects ultimately gives us better revenue visibility over longer time periods.

Speaker 3

We also gain efficiencies in managing resources for a large project versus many small projects. Our goal is to have a more reliable and predictable revenue stream. 3 to 4 large projects rolling out over a 1 to 2 year timeline would help dampen some of the quarterly revenue fluctuations driven by job starts and completions. At this time last year, we had just a couple of large projects in our opportunity pipeline. Today, our business development team is pursuing over 20 of these type of projects.

Speaker 3

1st quarter gross profit margin increased to $15,500,000 or 9.7 percent of revenue, up from 5.8 percent of revenue in the Q1 of last year. Both segments increased both gross margin dollars and gross margin percentage over the prior year. The 600 basis point increase in consolidated gross margins was primarily driven by improved pricing of high quality projects and improved execution in both segments. SG and A expenses were $19,000,000 up from $17,000,000 in the Q1 of 2023. As a percentage of total contract revenues, SG and A expenses increased to 11.8% from 10.7% last year.

Speaker 3

The increase in SG and A dollars reflected greater spending in IT and business development as well as higher legal cost to pursue project related claims. We are on track with our IT implementations and over the next several months, we will be rolling out new tools and processes for our operations and our back office. We're implementing software tools that share information and provide status of projects, improving our ability to effectively manage projects on the ground And migrating our business segments to the same financial platform will deliver efficiencies and greatly improve our line of sight across the entire business. Turning to profitability, we reported an adjusted net loss of $4,000,000 or $0.12 per diluted share in the Q1 compared to an adjusted net loss of $10,300,000 or $0.32 per diluted share in the prior year period. This result excludes $2,100,000 or $0.07 of diluted earnings per share of non recurring items.

Speaker 3

Our GAAP net loss for the Q1 of 2024 was $6,100,000 or $0.19 loss per diluted share. EBITDA for the Q1 was $3,000,000 and adjusted EBITDA was $4,100,000 Adjusted EBITDA margin was 2.5%, up from negative 2.6% in the prior year period. Moving on to bidding metrics. In the Q1, we bid on approximately $1,100,000,000 worth of opportunities, winning $155,000,000 This resulted in a contract value weighted win rate of 15.4% and a book to bill ratio of 0.97 times for the quarter. As of March 31, our backlog was $756,600,000 compared to 762,200,000 dollars at December 31, 2023.

Speaker 3

Breaking out our Q1 backlog, dollars 569,900,000 was in our Marine segment and $186,700,000 was in our Concrete segment. In April, we've been awarded an additional $42,000,000 for new Marine segment project work and $59,000,000 for Concrete segment work. We continue to deliver on our promise to improve profitability by implementing a more disciplined bidding process and winning quality work at attractive margins. During the Q1, adjusted EBITDA margin in the Marine segment was 0.9%, up from negative 1.6% last year. Adjusted EBITDA margin in our Concrete segment improved to 5.7%, up from negative 3.5% in the Q1 last year.

Speaker 3

As a reminder, our goal is to generate adjusted EBITDA margins in the low double digits for Marine and the high single digits for Concrete. Turning to the balance sheet. As of March 31, we had $4,600,000 in cash with negligible outstanding borrowings under our revolving credit facility. Our plan to monetize non core assets is on track. We are working on completing our $34,000,000 land sale contract for our East West Jones property with an expected close in June.

Speaker 3

With the completion of this transaction, in total, we will have unlocked over $60,000,000 of value from our balance sheet to reduce debt and invest in growing our business. We are increasing our CapEx spending over 2023 to upgrade our fleet and be prepared for accelerated growth through 2025 and beyond. To give us more flexibility to make these investments, we have amended our credit agreement to lower our minimum fixed charge coverage ratio covenant to 1:1 for the remainder of 2024 and reduce our June 30 prepayment from $15,000,000 to $10,000,000 in conjunction with a 1 year extension. Our first quarter FCCR was 1.32:one. As Travis mentioned, we anticipate growing our backlog and the top line substantially over 2023 and expect revenue to ramp up in the back half of the year.

Speaker 3

At the same time, we plan to continue to improve margins by managing the business more efficiently and productively. For the full year 2024, we reconfirm our guidance both for anticipated revenue in the range of $860,000,000 to $950,000,000 and expected adjusted EBITDA in the range of $45,000,000 to $50,000,000 And with that, we'll open up the call for questions.

Operator

We will now begin the question and answer Our first question comes from Julio Romero from Sidoti and Company. Please go ahead.

Speaker 4

Thanks. Hey, good morning, Travis and Scott.

Speaker 2

Good morning, Julio.

Speaker 4

Hey, guys. I wanted to start with talking about marine and wanted to talk about the increasing number of bidding opportunities there. Specifically, if we could go into the magnitude of the U. S. Naval defense spending opportunity, you guys talked about the Pearl Harbor project And as you expect, they won't be the largest U.

Speaker 4

S. Navy project for long. I guess if you could help us understand kind of how big the opportunity is relative to the past?

Speaker 2

So we don't have a I can tell you based on what we've compiled, it's tens of 1,000,000,000 in the Pacific. We don't know the exact number. I'm not sure it's actually been published. We just know by pulling together parts and pieces of different projects that we're aware of, it's a very large number in the multi billions.

Speaker 4

Okay, got it. And then talking about the concrete business, can we just talk about your shift in focus to data centers for a bit? Maybe help us understand how much of like trailing 12 months sales in concrete are from data centers and maybe what percentage concrete revenues do you anticipate that makes up a year from

Speaker 2

now? So I don't have the number off the top of my head, but we've done I know our biggest contract to date in concrete was a data center that was roughly $55,000,000 that we did that we signed last year that we're completing this year. And there's several others. I mean, as Scott mentioned kind of on the call there, the range is typically $20,000,000 to 50,000,000 dollars And we've been seeing quite a few of the opportunities spring up here in the last couple of years, especially. And as we've completed more and more of those, we've kind of gotten involved in more of them.

Speaker 2

And so it continues to ramp up here as the AI driven infrastructure is kind of hot at the moment.

Speaker 4

Got it. And then just if you can help us understand how a data center project is maybe a little different than your traditional concrete project. From a concrete contractor perspective, would there be some incremental complexity or specialization of the project and does that lend itself to hopefully higher bid margins for that type of project?

Speaker 2

It's not necessarily that it's super different work than what we already do in concrete. We do a lot of complex concrete work in our concrete business on a regular basis, and it's pretty similar to what we do is just put together slightly different for a data center, but it's very similar work to what we kind of normally do. Typically, the as far as we've performed pretty well on the data centers that we've done. I'm not going to speak to specific project metrics, but generally speaking, we've done very well on our data center work.

Speaker 4

Understood. Well, I'll pass it on and I'll hop back into queue. Thanks very much.

Speaker 2

Thanks, Aliyah. Thanks, Aliyah.

Operator

The next question comes from Alex Rygiel from B. Riley. Please go ahead.

Speaker 5

Thank you. Good morning, gentlemen. A couple of quick questions here. First, the Commercial Concrete segment margins were very positive. Congratulations, Avan, about that.

Speaker 5

How confident are you that that's going to continue?

Speaker 2

Thanks, Alex. Yes, that's a good question. Yes, we're confident in that business. We've as you know, we've done a lot of work over the last year and a half or so, getting kind of being more disciplined about what we pursue in our concrete business, being more disciplined about our minimum bid margins and then improving our ability to deliver the projects profitably. We're pretty confident that we've that we can continue to perform well in our concrete business based on the discipline we have and how we're approaching the work and feel very good about delivering strong margins in that business, whether it's exactly that number or something, it's part of that is part of that will be market driven and part of that will be other things.

Speaker 2

But generally speaking, we feel good about our concrete business continuing to perform profitably.

Speaker 3

Yes, I do think the Q1 was a little bit higher than average, just based on the contracts that completed during the timeframe. So I wouldn't necessarily take Q1 and then run that out the rest of the year, but we do expect that we continue to see year over year progress on our margins as we go forward.

Speaker 5

That's perfect. And then can you remind us what your CapEx budget is for 2024 and maybe talk about a couple of the larger components within that?

Speaker 2

The CapEx budget for the year?

Speaker 3

Yes. So we have maintenance CapEx needs that we always have every year and we've typically talked about that being about $15,000,000 a year for refits and just normal maintenance on our fleet. And then we've talked about investments that we're making to grow our fleet about $30,000,000 in a dredge build program over the next couple of years. So that's kind of the things that we have in mind right now. There may be, according to the opportunities, some of dollars, but I think those are probably the quantities that you should expect going forward.

Speaker 5

Super helpful. And then lastly, can you remind us what the timeline for the Pearl Harbor project is moving forward now? Sort of when do you think construction activity and how long does it last for?

Speaker 2

Yes. So we'll be kind of fully ramped up and operating at kind of peak capacity near the middle of this year until, let's call it, the middle of next year before it kind of starts ramping down somewhat in the latter half of next year.

Speaker 6

Perfect. Thank you very much.

Operator

The next question comes from David Storms from Stonegate Capital. Please go ahead.

Speaker 7

Good morning. Just hoping we could start with the current backlog. It had a nice jump. You mentioned roughly $100,000,000 since the end of the quarter. Was this a timing thing?

Speaker 7

Was this just one big win that came through? Kind of what drove that backlog jump?

Speaker 2

It was just a timing thing. We had it wasn't one specific win that drove that. There was quite a few wins in both concrete and marine that drove that number. And so it wasn't one specific project, which is a good thing, right? It's not just driven by 1.

Speaker 2

I think that's had a pretty good run of wins there that drove that number.

Speaker 7

Understood. Thank you. And then just on the scheduling delays that you've mentioned, are you able to give us a sense of maybe the magnitude of that and the spacing of any catch up? Should we expect most of that to be in Q2? Or will it kind of be equally spread out the remainder of the year?

Speaker 7

How should we be thinking about that?

Speaker 2

Yes, it will be spread out through the remainder of the year. Some of it, I think, on one of the projects, most of the catch up will happen in Q3 and the other one will be probably sort of some in Q2 and then more in Q3 and Q4.

Speaker 7

Understood. And then just one more for me. Your press release mentioned that your opportunity pipeline has almost quadrupled. Are there any specific initiatives that you're on boarding to try to capture obviously as much of this pipeline as you can?

Speaker 2

We've been in progress for the last year plus working on quite a few things to capture that market. We had a pretty strong sense that it was going to be improving significantly, which has driven a lot of the investments and work that we've been doing over the past year plus, David. So it's been not necessarily that we've we're starting something new now. We've already been working on it for quite some time as we saw the market starting to blossom.

Speaker 7

Understood. Thank you for taking my questions and good luck in the second quarter.

Speaker 2

Thanks, David.

Operator

Thanks, David. And our next question comes from Josh Zoffel from NOBLE Capital Markets. Please go ahead.

Speaker 6

Good morning, guys. This is Phil

Operator

in for Joe. This morning.

Speaker 2

Hey, Josh.

Speaker 6

Hey, so you guys talked a little bit of Hawaii. It seems to be obviously having some delays. But could you guys just provide any just really additional color on the Grand Bahama project? How is that looking?

Speaker 2

It's looking very good. That one had some delays with a subcontractor, but kind of moved some non critical path work to the right. They got a little delayed on some other things, and we'll be starting up a little later on their portion of the work than we had anticipated. But it was, again, non critical path work and it didn't impact the schedule of the project or any of our work. It just sort of delayed their work for until the end of the second quarter.

Speaker 6

Okay, perfect. And obviously, there hasn't been a lot of time between Q4 and now. But can you kind of just speak on the judging environment? You guys mentioned it will pick back later in the later half of this year, but do you guys still kind of expect that?

Speaker 2

That's what we're well, I'd say we're optimistic that it will start picking back up later this year. We haven't seen signs of it yet, but it's kind of the same sort of status that has been for a little while at this point. Again, we're optimistic that things will start clicking a little more regularly with the core here later this year.

Speaker 6

Okay, perfect. And then I guess last one that will squeeze in here. I guess in the SG and A, obviously, it's higher kind of than we kind of anticipated. Should we kind of expect this to kind of continue throughout the year, this kind of run rate?

Speaker 3

Yes, I think that this absolute dollar amount is probably a good run rate to use going forward as we continue to incur some costs related to claims and as we make the most of our business development opportunities by investing in that function.

Speaker 6

All right, perfect. Yes. Thank you guys so much for taking my questions.

Speaker 3

Thanks, Josh. And while we wait for more calls, it might be a good time to say there was a typo in our press release that went across the wires and that was to the balance sheet, which had an incorrect current debt number. That has been corrected in the 8 ks, which was filed with the press release there.

Operator

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Travis Boone for any closing remarks.

Speaker 2

Thank you. Thank you everyone for joining today. We appreciate your time. Now I guess in closing, I just want to thank all of our employees who are working really hard in our business every day to work safely and to work profitably and bring the best that they can to work every day. Also want to thank our shareholders for continued confidence in us and look forward to continued growth in the company here going forward.

Speaker 2

Thanks everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Orion Group Q1 2024
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