Orion Group Holdings Inc Q4 FY2021 Earnings Call

Greetings. Welcome to the Orion Holdings Fourth Quarter 2021 Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Francis Okoniewski, Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone, and welcome to Orion Group Holdings’ fourth quarter 2021 earnings conference call and webcast. My name is Fran Okoniewski, Vice President of Investor Relations, and joining me today is Mark Stauffer, Orion Group Holdings’ President and Chief Executive Officer. Regarding the format of the call, we've allocated about 10 minutes for prepared remarks, in which Mark will highlight our results and update our market outlook. We will then open the call for questions. Through the course of this conference call, we will make projections and forward-looking statements regarding, among other things, our end markets, revenues, gross profits, gross margin, EBITDA, EBITDA margin, backlog, projects and negotiation and pending awards, as well as our estimates and assumptions regarding our future growth, administrative expenses and capital expenditures. These statements are predictions that are subject to risks and uncertainties, including those described in our 10-K that may cause actual results to differ materially from those statements. Moreover, past performance is not necessarily an indicator of our future results. By providing this information, we undertake no obligation to update or revise any new projections or forward-looking statements, whether as a result of new developments or otherwise. Also, please note that adjusted net income, adjusted earnings per share, EBITDA and EBITDA margin are non-GAAP financial measures under the rules of the Securities and Exchange Commission, including Regulation G. Please refer to the reconciliations and definitions inclusive for the most comparable GAAP measures and reconciliation tables accompanying this earnings conference call within the press release issued yesterday. The press release can be found at our website at www.oriongroupholdingsinc.com. Also for additional discussion of risk factors that could cause actual results to differ materially from our current expectations, please refer to our quarterly and annual filings with the SEC, which are also available in the Investors section of our website. And with that, I'd like to turn the call over to Mark Stauffer, President and Chief Executive Officer. Mark?

Thank you, and good morning, everyone. Thanks for joining us today. Today we'll discuss our fourth quarter results, our markets and our outlook. As an update, we continue to work with the search firm to diligently conduct our CFO search, and we expect to have news on this soon. Filling this key role in our organization is an opportunity to significantly improve our team as we focus on executing our strategic plan. For today's call, I will begin with an overview of the quarter then discuss our financial performance in more detail. And finally discuss our market outlook before we turn to Q&A. As always, I'd like to begin by thanking our entire team for their hard work and dedication. We've worked through a challenging period and I appreciate everyone's efforts. I also want to thank our team for safely performing their tasks. Our goal is to ensure that our team members leave work the same way they came in, healthy and injury-free. We remain deeply committed to our Target Zero program to support our vision of zero incidents, zero damage and zero harm. As we previously noted, the second half of 2021 was impacted by the lag effects from the COVID-19 pandemic. These lag effects from the macroeconomic impacts to our markets and customers affected prior period project wins, which reduced the volume of work in our Marine business and pressured margins in our Concrete business. That said, we are well positioned to see a reacceleration year in 2022 as we emerge from the trough of the second half of 2021 with improving markets, increased backlog, increased quoted bids outstanding and a robust pipeline of project opportunities. Our disciplined approach to bidding continues to be rewarded in the fourth quarter. The total amount of work we won in 2021 was up 27% over 2020, with two thirds of this work booked in the second half of 2021. Backlog at the end of the fourth quarter was up sequentially and was up significantly year-over-year. Our current level of quoted work outstanding stands at approximately $2.6 billion, up 63% year-over-year. Our current level of bids outstanding and improving macroeconomic environment and the Infrastructure Investment and Jobs Act as an added catalyst to our markets gives us confidence that we will continue to see a robust project pipeline of bid opportunities to grow our backlog, positioning us for improved performance in 2022 and beyond. Now I'll discuss our financial results for Q4 in more detail. Revenues for the fourth quarter were $162 million, down compared to $170 million in the fourth quarter of 2020. This was primarily due to the decreased volume of work in our Marine business. Fourth quarter gross profit was $6.6 million compared to $21.7 million in the prior year period. This decrease was primarily driven by lower volume of work in our Marine business, resulting in under absorption of labor and equipment and decreased project performance in our concrete business as a result of pressures on bid margins and COVID-19 impacts. Additionally, the prior year benefited from three projects that earned final margins well above the as-bid margins. As a percentage of revenue, gross profit margin was 4.1% in the fourth quarter, compared to 12.8% in the prior year period. Turning to our segments. In the fourth quarter, our Marine segment had revenues of $73.1 million and adjusted EBITDA of $5.2 million, equating to an adjusted EBITDA margin of 7.1%. That compares with $97.6 million of revenue, adjusted EBITDA of $13.1 million and adjusted EBITDA margin of 13.5% in the prior year period. The decrease was driven by the decreased volume of work and the under absorption of labor and equipment costs. Our Concrete segment had fourth quarter revenues of $89.2 million, compared to $72.6 million in the fourth quarter of 2020. Adjusted EBITDA for the concrete segment was negative $4.3 million, compared to negative $0.6 million in the prior year period. Our Concrete segment's fourth quarter results were impacted by pressured bid margins and inefficiencies in executing work due to COVID-19 impacts. SG&A expenses for the fourth quarter were $16.1 million or 9.9% of revenues, compared to $17.4 million or 10.2% of revenues in the prior year period. The decrease in SG&A dollars compared to the prior year was primarily related to a decrease in bonus expenses. Net loss for the fourth quarter was $8.8 million or $0.29 diluted loss per share. This includes a non-recurring expense of $2.1 million related to the development of a new ERP system. Adjusting for non-recurring items and tax expense associated with the movement of certain valuation allowances, adjusted net loss was $5.3 million or $0.17 loss per share. Fourth quarter adjusted EBITDA was $0.8 million, representing an adjusted EBITDA margin of 0.5%. This compares to an adjusted EBITDA of $12.6 million and adjusted EBITDA margin of 7.4% in the prior year period. Turning to bidding metrics in the fourth quarter, we bid on approximately $1.6 billion worth of opportunities, and were successful on $180 million. This resulted in a win rate of 11% and a book to bill ratio of 1.11 times for the quarter. As of December 31, 2021, our backlog was $590 million, up from $440 million at the end of last year. Of our year-end backlog, $377 million was in our Marine segment, and $213 million was in our Concrete segment. Approximately, $455 million of the year-end backlog will burn during 2022, with the remainder associated with longer-term projects burning through 2023 and into 2024. Additionally, we are the apparent low bidder or have been awarded $138 million of new work subsequent to the end of the fourth quarter. Of this, approximately $24 million is related to the Marine segment, while $114 million is related to the Concrete segment. As of December 31, 2021, we had approximately $12.3 million of cash and $9.3 million of availability under our revolving credit facility. We ended the year with $39.4 million of outstanding debt, $39 million of which is related to our revolver. Subsequent to the end of the quarter, the company amended its credit agreement effective for the quarter ending December 31, 2021. The goal of this amendment was to provide the company with a waiver and greater flexibility as it provides for suspension of the leverage ratio and fixed charge coverage ratio for the quarter ending December 31, 2021 before reverting back to a leverage ratio not to exceed 3.0 times beginning in the third quarter of 2022 and reverting back to a fixed charge coverage ratio of a minimum of 1.25x beginning in the fourth quarter of 2022. Additionally, the amendment reduces the revolver to $42.5 million for the remainder of the term and provides pay downs on the revolver by any amounts of cash above $10 million until delivery of the third quarter 2022 compliance certificate. Capacity created by any such pay downs remains available to the company. The amendment includes minimum EBITDA requirements for the first and second quarters of 2022. The company is pleased with the continuous support from its lenders and looks forward to maintaining its excellent relationship with its bank group. We also expect to begin discussions regarding a new credit facility in the coming months. As for guidance for 2022, we expect adjusted EBITDA to be in the mid $30 million range. We will provide an update on this guidance as we progress through the year. Turning to our markets. We continue to see improvement in our end markets that were impacted by the COVID-19 pandemic and to see a robust level of opportunities in our bidding pipeline. Winning new awards and replenishing our backlog remains a key focus. We will continue to bid on the most attractive projects that support our profitability goals and will remain disciplined in our bidding approach. We will continue to target select larger, longer duration projects to provide us with greater operational visibility. In our Marine segment, we will continue to pursue opportunities in the public sector at the federal, state, and local levels, including port expansion projects, DOT bridges over water, Navy facilities and environmental and flood control projects. We now have an additional multi-year catalyst for public sector projects, as a result of the Infrastructure Investment and Jobs Act. We expect this act to be a tailwind in our markets for several years. The Infrastructure Act reauthorizes highway transportation funding as well as providing significant new funding for ports, waterways, water infrastructure, bridges, among other things. We are also pursuing project opportunities in the private sector as we continue to see bid opportunities in the recreational and energy sectors. In our Concrete business, we are seeing an increased volume of bid opportunities in our Houston market, along with improving bid margins across all of our markets. Projects continue to come in from a variety of end markets, such as tech, e-commerce and large retail distribution. Demographic trends will continue to provide project opportunities in our Texas and Florida markets. We entered 2022 with increased backlog, increased quoted work outstanding, a strong bid pipeline and long-term tailwinds driving our markets. As we emerge from the lag effects of the COVID-19 pandemic, we are well-positioned for improving results for 2022 and beyond. With that, I'll turn the call back to the operator for Q&A.

Our first question is from Julio Romero with Sidoti & Company. Please proceed.

Good morning. Thanks so much for taking the questions. Can we start off on the Concrete segment? You mentioned pressured bid margins, not necessarily pressured execution margin. Does that imply that maybe the pricing that they were bid at was under the target margins? And if so, when do you think you get through this lower margin bid backlog?

As a reminder, our concrete business turns over relatively quickly, usually within three to six months. This means we'll learn about our backlog fairly soon. However, we've experienced some pressure, especially in the Houston market, due to market shifts related to COVID and similar factors. That said, there has been a significant increase in both the market and awards in Houston, and we're also witnessing improved bid margins across all our markets. As a result, the previous challenges will be resolved quickly, allowing us to replace them with better margins.

Okay, that's very helpful. So I guess your bids outstanding is up $2.6 billion, it's up about 30% sequentially and I guess you mentioned that bid margins are trending upward?

Yes.

I guess, you know, thinking about utilization year-to-date, you’re two months through the first quarter. Are you seeing better utilization in the first quarter than you did in the fourth quarter and third quarter?

Well, couple points to make up. I mean, we are seeing the trend in upward utilization, improving utilization. Keep in mind though that at the beginning of the quarter we were having the surge in the Omicron variant. Just to put that in perspective, we had about a 60% increase in our COVID cases from the beginning of the pandemic. So from the previous 18 months until December and January, we had a 60% increase, over 60% increase in our cases. So we did start the quarter off with the Omicron variant. We are continuing to ramp up on projects. So as we move through the quarter, we expect to see utilization improving. And of course, as we get on to the year, we'll continue to see that improved utilization with the ramp-up of all these projects.

And then the last one for me is I may have missed if you gave any final quantifiable EBITDA guidance for '22. And if not, if you could just be, I guess qualitatively though, how you see shaping up for the year?

No, we did. We said mid $30 million for the year and we'll provide updates on that as we go through. Again, I think as we talked about, we've got significant backlog coming into the year, we've got good markets. We're set up for reacceleration. We got work to go out and win and we've got the markets and the tailwinds to go win that work.

Our next question is from Min Cho with B. Riley Securities.

Just a couple of questions here. Omicron is taken care of. Can you just give us an update on your asset sales in the last quarter?

On the real estate front, both properties are still under contract. For the Port Lavaca property, we are currently awaiting a closing date, and we are optimistic that this will be set soon. As for the East West Jones property, it also remains under contract, but we are still in the diligence phase with the buyer. We need to conclude this process before a closing date can be established.

Are you currently seeing improvements in your backlog regarding concrete and bid margins, or is that yet to materialize? In other words, should we anticipate another three to six, or possibly nine months of lower margins in that business, primarily due to underlying margins rather than just the impacts of COVID?

I believe we are starting to see that reflected in the bid margin. The backlog we are beginning to book seems to be improving from a bid margin standpoint. As I mentioned earlier, we need to address the work from the past few months. Therefore, we anticipate seeing improvement as we progress through the year. Regarding our guidance, we acknowledge the challenges posed by Omicron, and typically, the first quarter is our seasonally weakest period. However, we expect to see better results as we move into Q2 and further into Q3.

Just want to get an update on your ERP system, are you still targeting full implementation by mid 2022? Or did that get pushed out due to COVID?

That's gotten pushed out, we're still committed to the ERP, we think that's going to be an essential piece for us. We do expect to reduce the spend in the first half of the year. We're focused on the ramp up of our projects and things that I talked about earlier, but we're continuing to prepare the implementation of that. We're developing analytics and tools as an example in data warehouses and a lot of kinds of stuff behind the scenes that we can do to continue the project, but we do expect to reduce the spend significantly in the first half.

So, it sounds like you'll probably be running kind of parallel systems maybe through the entire year?

Yes, that's a reasonable assumption.

Can you provide any update on your industrial expansion? Is there anything in backlog currently? Is there any impact from recent oil prices? Can you just talk about the bid opportunities there?

We have work in our backlog, which is included in the Marine segment. For the past year to year and a half, we've been focused on what we categorize as industrial work. As I mentioned earlier, there was a general decline in private sector opportunities due to the COVID pandemic. However, as we noted in the latter half of last year, we began to see private opportunities reemerge, including work that had been postponed. We've been observing bid opportunities in industrial work again, along with other private sector projects within the Marine segment. We anticipate continued opportunities in this area, primarily in the private sector, but there will also be some in the public sector.

Excellent. And just one final question. You mentioned in your amendment to your credit facility that there is a new EBITDA minimum for Q1, Q2. Can you disclose what those minimums are?

Generally speaking, I think it's about 2.6 for Q1 and then cumulative 7.5, 7.7 for Q2. And then the details of all that will be included in the K when we file that.

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

Good morning everybody. Thank you for taking my questions. Just wanted to kind of circle back around on the margin pressures in Concrete. I appreciate the information and the colors surrounding it. But I was wondering if maybe you can help us understand or quantify the impacts from the pressure bid margins and the COVID impact, just kind of where were the biggest issues? And again, if you can quantify it in any manner, that’d be helpful.

Well, I guess I would say, if you look at the results, you kind of see the quantification of that in the Concrete business. I think, again, a large part of that was driven by the Houston market. And the Houston market has always been a strong market for it. It's been the base of our Concrete business since inception. And as you know, the Houston market was impacted probably more than any of our markets as a result of the pandemic with the global downturn and the impacts on energy. It's just generally just been a competitive environment. There has been a shift throughout the pandemic of what projects have moved forward. And, as I talked about in previous calls, kind of the haves and have not type economy was driving where projects were coming out. And so, it just shifted the dynamics, and I think generally just kind of the mood of the competitors was people were very aggressive in bidding work and trying to get work at any price almost. So, it did put downward pressure on the margins. And you can kind of see that reflective in the results in that business year-over-year. That said, as I noted in the remarks, we have seen an improvement in the Houston market. We have won several projects in the last couple of months and a lot of the work that we have mentioned that we have been awarded subsequent to the end of the quarter or the first quarter this year is in the Houston market. So, we are pleased to see that. And we are more pleased to see that we are seeing some improvement in the bid margins not only in Houston but in all our markets in that business.

Understood. And I understand as well that the margin at the Marine segment were a little pressured as well just kind of given the under utilization of assets there. So, is it fair to say then that the compression that we see here in your gross margin from where it normally is on a Q4 basis is primarily due to your Concrete segment, or can you help us think through that mix aspect?

Well, I think it's both. I mean, as I mentioned in the remarks, the volume of work on the Marine side was impacted. And again, just due to the prior period win rates so we did start some ramp up of the Q3 work in Q4, but again, as I said earlier, the Omicron variant came in just as we were kind of starting to gain traction on some of the startup of work. So that impacted both segments, as I mentioned earlier with the huge increase in cases there. The good news is, now as we sit here today that our cases have gone back down to a trickle, I think which everybody else would recognize from their own personal situations. So that's positive, but that impacted the Marine side as well, and just put pressure on us in the quarter. But again, as we move forward from where we are today, those cases have abated and we're wrapping up on work, and we've got a good bid pipeline in front of us.

In terms of guidance, we are projecting adjusted EBITDA at around $30 million, leaning towards the mid $30 million range. Based on previous questions, it seems that this will be primarily weighted towards the second half of the year.

If you consider our typical cycle, Q1 is usually our weakest quarter, followed by a ramp-up in Q2, with Q3 and Q4 being our peak months. We expect to see a similar pattern this year. We're coming into the year with a solid backlog, which positions us well in an environment where we anticipate bid margins will improve, especially in our concrete sector. In our Marine business, prices should remain strong, and there's no reason to underbid on our projects given the upcoming work and the positive impact of the Infrastructure Act. We're optimistic about the opportunities ahead and the potential for enhancing our margins as we replace backlog. Currently, we have a better absorption rate for labor and equipment in our Marine segment thanks to our existing backlog, setting us up for improvement this year and beyond.

And last quick question for me, I'll jump back in the queue. Can you update us on progress here as far as diversifying your business into additional geographies?

In our concrete business, we recorded our first project in the Florida market last quarter, and it is progressing well. We are increasing our bids in that market, and I would say our bidding efforts have intensified. We are also bidding on projects throughout Texas, extending beyond our traditional markets. We expect this trend to continue this year.

Our next question is from Poe Fratt with Noble Capital Markets.

Can you give us a CapEx number for '22? And then also, how much you actually going to be spending on ERP and if you could give us the cadence of that over the course of the year? That'd be helpful.

CapEx is in the $15 million to $18 million range for the year. And then on the ERP spend, I would say, less than $4 million of the spend and that would be backend related.

I believe you mentioned that your current availability under the revolver was $9.3 million at the end of the year. What is your current availability now?

It'd be around 12.5.

You mentioned the minimum EBITDA for the quarter being 2.6 and 5.1 in the second quarter, considering previous results. Is there any effect on your bonding capacity? Have you noticed any changes in that regard?

No, I haven't noticed any change. We still have plenty of bonding capacity, and the bonding company continues to support us with our bids. We expect that to remain the case because we have a strong relationship with our bonding group. Additionally, we have sufficient capacity for the projects we foresee in our pipeline.

Port Lavaca is taking longer to close because I've heard the buyer is looking for financing. Has that financing been finalized? Is that what you've been waiting for? Will the closing date be set soon, or could it be pushed to the second quarter again?

I would expect, just to be conservative, it would probably push to the second quarter. Again, we believe we have seen a reduction in rows, but we will wait to see. We're not going to clarify that until we have a closing date set.

So they don't have financing yet?

We believe they have it, but we don't know the exact timing of when that's available for them.

And the net proceeds from that sale are in what ballpark?

Somewhere around five.

Can you provide an estimate for the proceeds from net sales of East West Jones? Are we still considering early or late second quarter or early third quarter as a reasonable timeframe?

That would be a fair timeframe. Again, assuming there's a lot to get done between now and a closing on that. So, we continue to market that property. But some of the – relating to the first part of your question was, I think the current PSA on that is 35 million. So we would net somewhere north of 30 on that.

Concrete has consistently been an issue. It's not just inconsistent; it's reliably poor. You mentioned structural issues from two years ago. Can you explain what structural or organizational changes you are implementing now, or is it simply a matter of the market improving, COVID being less of a concern, and adjusting your protocols to reduce staffing problems? Can you clarify this for me?

Yeah. I think, I guess the basic thing I would say is, we have made progress in that business. It's obviously with the ISG program that we had in effect and we talked a lot about in previous calls, what I would say is, I think the benefits of that have been obscured a little bit or are obscured a lot by the COVID-19 pandemic. I mentioned this on the call last time I think, but I'll refresh it again, is that we've been undertaking a lot of things in that business to standardize things and improve personnel, improve our processes to execute better on the work. And again, that's obscured somewhat from visibility just by the pressured margins and the impacts from the COVID-19 pandemic. I think as we are emerging out of that, we are going to see those improvements be able to come through. Again, I'll touch back on points I made earlier with the improving market in Houston and improving bid margins. We know we need to make progress in that business. Again, we have been working on a lot of things and processes with the business to make that come to pass, and as we see conditions improve in the marketplace, we expect to see that division produce better results.

Great. Can you provide any details about the amended revolver? Last year, when your other revolver expired, you were able to buy back stock. Does this amendment prevent you from buying back stock?

The amendment does not prohibit buybacks. However, as you may remember, there is a leverage ratio requirement for buybacks, and we must be below two to one before we can proceed with stock buybacks under the credit agreement, which remains unchanged.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Francis for closing remarks.

Thank you everyone for attending our fourth quarter 2021 earnings conference call. We look forward to speak with you in April on our Q1 results. Have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.