Orion Group Holdings Inc Q3 FY2024 Earnings Call

Good morning and welcome to the Orion Group Holdings Third Quarter 2024 Financial Results Conference Call. I will now turn the comments over to Margaret Boyce, Investor Relations. Please go ahead.

Thank you, Operator, and thank you all for joining us today to discuss Orion Group Holdings Third Quarter 2024 Financial Results. We issued our earnings release after market last night. It's available on the investor relations section of our website at oriongroupholdingsinc.com. I'm here today with Travis Boone, Chief Executive Officer, and Scott Thanisch, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions. 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 the factors that could cause our results to differ materially from those forward-looking statements are contained in our SEC filings, including our reports on Form 10-Q and 10-K. With that, I'll now like to turn the call over to Travis. Travis, please go ahead.

Thank you, Margaret. Good morning, everyone, and thank you for joining our third quarter 2024 conference call. I'll start with an overview of our third quarter results and market update, and then I'll turn it over to Scott to cover our financial results. For the last few quarters, we said that we expected momentum to pick up strongly in the back half of this year, and that did play out in the third quarter. Total revenue came in at $226.7 million, and adjusted EBITDA was $15.2 million, a 62% improvement year over year. The $15.2 million in adjusted EBITDA is higher than the $9.6 million we reported in the entire first half of this year, in fact, 59% higher. Our top line growth was largely driven by the ramp-up of our Pearl Harbor and Grand Bahama projects now that the project delays have been resolved. Also, a number of projects that began during the summer contributed to the strong quarter. Our third quarter results demonstrate the level of profitability our business can generate as we scale and grow. For the full year, we're on target to deliver adjusted EBITDA in the range of $40 million to $45 million for 2024, which would greatly exceed the $24 million reported in 2023. We won $116 million in new contract awards in October that will start in the fourth quarter. Here are a few examples of our recent wins. First, Marine was awarded a $30.6 million subcontract to Skanska, USA to construct a temporary trestle for the Portage Bay Bridge project for the Washington State Department of Transportation. This work is expected to begin in the fourth quarter of 2024 with a construction duration of approximately six months for the first phase. We were also awarded an $8.5 million contract for the Port of Houston's Turning Basin, North Wharf, 16 bulkhead repairs. The start is slated for the fourth quarter of 2024 and will run through the middle of 2025. In our concrete business, we won an $18.2 million subcontract to Harvey Builders for the Ritz Carlton residences in The Woodlands, Texas. The project is expected to begin in the fourth quarter of 2024 and will extend approximately two years. Our concrete business continues to win and deliver data center projects. We now have completed and are working on 29 separate data center projects. We have placed over 300,000 cubic yards of concrete for a total of $176 million in revenue on these projects. We're currently working 14 active pursuits. Our strong relationships with key general contractors, our strong performance, and our industry-leading safety record are all contributing factors to our success on data center projects. We have recently received several industry safety awards, including the Florida Transportation Builders Association Safety Excellence Award for the NASA Causeway Bridge projects. Three awards from the American Society of Concrete Contractors, the Liberty Mutual Insurance Company Gold Safety Award for outstanding safety performance, and two awards from the Associated General Contractors of Houston. These awards exemplify our commitment to safety across our business. Our teams have completed over 9,200 site observations so far this year to provide leading indicators and prevent incidents from occurring. Currently, our total recordable incident rate, or TR-IR, is around 0.70 through October; the average TR-IR in the construction industry is 2.40. We are proud of our performance on safety, and we are committed to our people going home safely at the end of every day. We are actively pursuing several significant projects and are excited about the opportunities ahead. With our pipeline quadrupling from $3 billion last year, we're confident that our diverse markets will accelerate revenue growth. We see this project flow beginning to ramp up in 2025, but we expect 2026 will be the year when we see transformational growth. In preparation for the growth we see coming, we're focused on making investments in people and equipment that will help us capture and deliver the large volume of projects in our pipeline of opportunities. The recent hurricanes that hit the southeast have been devastating to large numbers of people and businesses. Our condolences to all those impacted by these storms. We're fortunate to have had only a very minor impact on our people, equipment, and projects. We were able to resume work on our projects quickly, and we have picked up several emergency repair projects in Florida. In closing, we are very healthy across our business. We are delivering at higher margins. We have dramatically improved our cash and liquidity position. We are profitable, and we have a strong growth trajectory over the coming years. Our extraordinarily talented people are all united in their excitement and commitment to continuing to build our company and capturing the market opportunities ahead. Now I'll turn it over to Scott for a review of our financials. Scott.

Thanks, Travis, and good morning, everyone. Our third quarter generated strong results, with revenue increasing 35% over last year to $226.7 million and adjusted EBITDA increasing 62% to $15.2 million. As we indicated earlier this year, the Pearl Harbor and Grand Bahama projects ramped up in the third quarter, and we also had the start of one project that was slated for the fourth quarter accelerate into Q3. This combined to deliver results above our expectations for Q3. Like last quarter, our revenue mix continued to shift, with Marine revenue up 73% and concrete revenue decreasing 1%. As we've said, the Marine opportunity is immense, and we're intensely focused on winning that work. Our concrete segment was relatively flat on the top line, but we're winning our fair share of quality projects that meet our discipline bidding standards of attractive margins. Consolidated third quarter gross profit margin increased to $27.1 million, or 11.9% of revenue, up from $19.1 million, or 11.3% of revenue in the same period last year. The 60 basis point increase in consolidated gross margin was primarily due to improved pricing and execution in both segments. SG&A expenses were $20.8 million, up from $17.1 million in the comparable period. As a percentage of total contract revenues, SG&A expenses decreased to 9.2% from 10.2%. SG&A dollars increased due to compensation, business development, and legal expenses, in addition to some one-time costs of process improvement initiatives. Turning to profitability, adjusted net income was $5.6 million, or $0.16 per diluted share in the third quarter, compared to adjusted net income of $1 million, or $0.03 per diluted share in the prior year period. The third quarter net income included $1.4 million, or $0.04 per diluted share of adjusted items, and GAAP net income for the third quarter of 2024 was $4.3 million, or $0.12 per diluted share. EBITDA for the third quarter was $13.5 million and adjusted EBITDA was $15.2 million. Our adjusted EBITDA margin was 6.7%, up from 5.6% last year. During the third quarter, adjusted EBITDA margin in the Marine segment was 8.2% compared to 9% last year, and adjusted EBITDA margin in our concrete segment was 4.3%, up from 2.4% in the third quarter last year. As a reminder, our goal is to generate adjusted EBITDA margins in the low double digits for our Marine business and the high single digits for our concrete segment. We've been pleased with the progress of our concrete segment since they returned to EBITDA profitability last year. Everything starts with winning the right jobs with good margins. With this better starting point, our project teams have implemented new field practices focused on delivering projects to the customer more efficiently and at better-than-bid margins. Our Marine segment executed well in the quarter as well, with significant increases in activity on our largest projects. Moving on to bidding metrics in the third quarter, we bid on approximately $1.2 billion worth of opportunities, of which we won $159 million in the quarter. This resulted in a contract-valuated win rate of 13.4% and a book-to-bill ratio of 0.7 times for the quarter. As of September 30, our backlog was $690.5 million compared to $758.4 million at June 30, 2024, and $877.5 million at September 30, 2023. Breaking out our third quarter backlog, $537 million was in our Marine segment, and $153.5 million was in our concrete segment. Turning to cash flow, the business generated $35.2 million of cash flow from operations during the third quarter, compared to negative cash flow from operations of $15.1 million in 2023. This huge delta was mainly due to the reversal of working capital on the Hawaii project, which required a cash investment at the start of the project and is now generating cash. We saw most of this reversal in Q3, and Hawaii will continue producing cash going forward. During the quarter, we took steps to strengthen our balance sheet by raising $26.5 million in a secondary offering. We are now better capitalized and will use the proceeds for general corporate purposes, working capital, and the continued repayment of indebtedness under our credit agreement. We will also be making investments in equipment going forward needed to optimize the demand opportunity ahead. We ended the third quarter with $28.3 million in cash. Total debt outstanding was $28.0 million, and we had no outstanding borrowings under our revolving credit facility at the end of the quarter. Our sale of the East West Jones property did not close in September, as anticipated due to a delay in the buyer's due diligence. We remain engaged with this buyer and other interested parties. With declining interest rates, we believe we can turn this valuable asset into cash for growing our business, and our stronger balance sheet and liquidity give us more flexibility and time to strike the right deal. For the full year 2024, we are on target to deliver revenue in the range of $850 million to $900 million and expected adjusted EBITDA in the range of $40 million to $45 million. With the additional shares from our secondary offering, this translates to a range of negative $0.10 to positive $0.04 for GAAP EPS, and $0.11 to $0.22 for adjusted EPS. As we prepare for 2025, we've already executed some important initiatives that will enhance our company's efficiency and productivity. During the third quarter, we hired a leader for our newly created procurement group. This individual will serve the whole company by achieving economies of scale through more efficient and coordinated procurement of materials and resources. Over the last few quarters, we've been implementing new IT tools and processes for our operations and our back office. These tools will share information and provide insight into the progress of our projects, improving our ability to effectively manage these projects on the ground. We've also been migrating our business segments to the same financial platform, which will greatly improve our line of sight across the entire business. This implementation is largely complete and is now in the testing phase with a handful of projects. We plan to go live in January so that we can start the new year on our new systems. We are prepared and excited for 2025 and plan to provide our outlook for the year when we report our year-end results in March.

Our first question will come from Aaron Spychalla with Craig-Hallum.

Maybe first for me, can you just kind of give a little bit more detail on the bidding environment? Backlog was down a little quarter-over-quarter. I know you've talked about exiting the year with higher backlog. It sounds like you're starting to see the bidding activity pick up here, funding start to hit the market, but I was just hoping you could elaborate a little bit on that.

Yes. The bidding environment has been strong. I wouldn't say it's hot, but it's been strong, holding steady. As you can tell from our backlog, we've been keeping a fairly steady backlog throughout the year. We've got several big pursuits that look like they're lining up for the first quarter for awards. So it's looking like a fairly steady year. And then, like I said, quite a few lined up for 2025. So generally good and getting stronger.

And then just maybe on the Navy in particular, can you give us an update there on just how you're thinking about that opportunity progressing, what that can look like for you here in the coming years?

Sure. We remain very optimistic about the Navy opportunities in the Pacific. There are many significant prospects that we are preparing for. A year ago, we anticipated a couple of major projects with the Navy in 2025. However, due to the way congressional funding has been allocated, these pursuits will likely be delayed until later in 2025. Overall, while we still have a positive outlook on Navy opportunities over the next five years or more, the substantial projects we are focusing on will probably emerge toward the end of '25.

All right. Understood. And then just maybe last for me on CapEx. Can you kind of talk about the outlook there as you look to kind of bring in more equipment to capitalize on this opportunity, how we are thinking about it for this year and as we look towards 2025 as well?

Yes. We've been looking at ways in which we could acquire some of the equipment that we think will drive our growth in the future and have our eyes on a few items. I think if we can find ways to complete those transactions in the very near term, we’re going to be looking for ways to do that. We’ve got a strong balance sheet and good liquidity right now to make those investments. So we anticipate that we’re going to be increasing our CapEx spending going into next year as a result of that drive to kind of prepare for growth.

Our next question will come from Julio Romero with Sidoti & Co.

Maybe to start on the Concrete side, specific to data centers, you mentioned you completed or are working on 29 separate data center projects. Maybe if you could help us frame that figure a bit. Is that 29 projects kind of post-COVID to date, year-to-date? And maybe any frame of reference of how does that compare to prior periods?

Yes. That's a total number that we've worked on over the last probably 5 years or so. A large number of them, though, have been in the last couple of years. And this year, we've been bidding and working on more than ever. So it's been a pretty rapid increase starting kind of last year. I don't know the exact number, honestly, for this year, but it's been quite a few of them. Some of them have been very large, and some of them have been on the smaller side. We've got, I think, 14 active pursuits right now. Most of those are in North Texas, but there's also several in other states outside of Texas, where we're going with key partners who have asked us to follow them into other states. So the environment on the data center side is pretty active. You may remember, I think, 3 months ago, I said that we were at 24, so there's been 5 of those added in the last few months. So it's been quite heavy and active on the data center side. And again, the size ranges vary pretty significantly; some are small, and some are very large.

That's very helpful. I wanted to ask about the impressive cash flow achieved in the third quarter. Scott, you mentioned that a significant portion was due to cash generation from Hawaii, which is expected to continue in the fourth quarter. Considering this expectation, how should we approach the overall cash flow for Orion in the fourth quarter?

Yes. We did have a great cash flow quarter, and it kind of lined up the timing on some of that Hawaii revenue as well. So I think that we're going to continue to see cash generated from the Hawaii project. We won't see a fourth quarter cash generation at the same levels as in the third quarter, but still generating nice cash flow on the operating line as we finish out the year.

Okay. Excellent. And then just last one for me would be kind of staying on cash a little bit, as you have a bolstered balance sheet. You generated really strong cash, and you talked about earlier about some CapEx deployment for your growth plans. If you could just give us a quick kind of refresher on how you're thinking about capital allocation overall, kind of growth versus debt repayment versus other in the near term and kind of just size that up for us there.

Yes. So obviously, with the stronger balance sheet that we have after the secondary offering and the strong cash flow that we’ve achieved in the third quarter, we’re thinking about the ways that we ought to be structuring our capital going forward. Our net debt right now is zero, so we have options that we can think about as we move forward. We do think that with our improved credit position and stronger balance sheet that we’ve got a pretty good hand to play as we talk to our existing lender about how we modify the agreement to move forward to make it better suited to give us the flexibility we need for growth. We see a lot of opportunity to potentially put money into equipment in the near future. And I think that’s going to be able to drive the top line and earnings faster. So we want to generate internally the cash flow that we need to drive those investments, and that's our primary focus.

Our next question will come from Min Cho with B. Riley Securities.

So just a question on potential impact from the hurricanes. Can you talk about any positive or negative impacts on your business? I know you talked about some emergency work in Florida post the hurricanes, but I'm assuming that's more kind of 4Q. Wondering if there's any negative impact to your Concrete margins specifically.

No, we don't expect any significant negative impact. The last hurricane approached Tampa but took a slight turn south, which turned out to be beneficial for our business. We avoided major damage to our yard, equipment, and personnel, and our projects were minimally affected. There were a few days of downtime in preparation for the storm, but after it passed, we returned to work with little disruption. We experienced some minor roof damage in our yard, which fell below our insurance deductible, so it was not a significant issue for us. We were fortunate to come through two major storms relatively unscathed, and our team was able to resume work quickly. We did assist some of our customers in the Tampa Bay area with damages to their facilities. Although these were not large projects, supporting our customers during their time of need is important to us.

That's good to hear. Just wondering, I mean, it sounds like you're reiterating your pipeline of opportunities around $13 billion, but I just wanted to make sure that was still the case. And if you're seeing kind of any increased opportunities, especially on the data center work.

Definitely, the data center work is picking up every day. It's definitely, as I said earlier, pretty active and continuing to pick up. As far as our pipeline goes, it's definitely holding strong. I don't know what the exact number is, but it's the $13 billion to $14 billion range. So lots of good opportunities lined up for the next couple of years.

Okay. Perfect. And then just a final question on kind of your SG&A outlook. It sounds like you're definitely investing in equipment through CapEx, and you mentioned investing in people as well. Any guidance in terms of what we should expect in Q4 as a percentage of revenue or in dollars and looking out into 2025 as well?

Yes. We expect the dollar figure in the fourth quarter to be kind of similar to what it was in the third quarter as we complete our investments in systems and process changes. It should be at about that level. And then going into next year, we’ll give you a little more guidance then as to what that looks like.

Our next question will come from Jason Ursaner with Bumbershoot Holdings.

It was a tough end to the World Series last night, and with the recent passing of James Earl Jones in September, I couldn't help but think about the famous speech in Field of Dreams. Growth is on the way, Travis. It's coming to the Gulf and the Pacific for reasons beyond our understanding. Opportunities will arrive at your doorstep, bringing money. But on a serious note.

If you tell them, they will come, right?

Yes, well, it doesn't seem like there's any contention on the demand side longer term, which I think is pretty rare and desirable, I would say, in this market. But so the real question kind of seems to be coming down to execution and credibility and the ability to do the jobs, the people, the equipment, the bidding expertise. So, assuming you can capture the market opportunities that are ahead for the next year or the next decade, it sounds like maybe even longer. I guess what's still giving you the confidence sitting here today? Or what is your confidence level that that's going to translate into some of the profitability metrics and margin expectations that you previously laid out or maybe will be laying out, particularly in the Marine segment?

My confidence remains strong and is even greater than it was a year ago. I feel very optimistic about the market and our ability to seize opportunities, improve our margins, and enhance our performance as we expand our business. We're on track for some exciting developments. From an investor perspective, I understand there are concerns in a year where things haven't all gone as planned, but everything has unfolded as we anticipated. We predicted a slow first half and a robust second half, and that is precisely how it is turning out. While construction can be unpredictable, we will tackle challenges as they arise, seizing every opportunity and minimizing risks whenever possible. Overall, we feel very positive about the future and are eager to realize the full potential of this company.

Yes. And this is a different company than it was two years ago. The investments that we've made in improving the operational performance and improving our ability to go win work and drive business, I think it's really starting to pay off and bear fruit, and we're just excited to see that continue.

And just maybe remind what have you guys communicated in terms of potential margin expectation on the Marine segment at a certain scale? I'm trying to go back at some of the quarters, what kind of what was the target level there?

Yes. The target levels that we've talked about are low double-digit EBITDA margins for the Marine business. We see that as being kind of at the scale where we expect to be over $1 billion of revenue in the near future. So once you kind of get to that level in size and you get the operating leverage from spreading our fixed costs over more projects, then that's when we'll see those margins.

It appears there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Travis Boone for any closing remarks.

Thanks. Thank you all for joining our call today. I want to take this time to thank our employees for all their hard work and for working a lot of hours out in the elements and enduring a lot of different factors, including weather and other things. So thanks to our employees for everything they do every day. And thanks to all of our stockholders for believing in us and having confidence in what we can do. We look forward to speaking with all of you again next quarter.

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