Earnings Call Transcript - ORN Q2 2022

Operator, Operator

Good day and welcome to today's Second Quarter 2022 Orion Group Holdings, Inc. Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, today's call is being recorded. I would now like to turn today's call over to Fran Okoniewski, Vice President, Investor Relations. Please go ahead, sir.

Francis Okoniewski, Vice President, Investor Relations

Thank you, Lisa, and good morning, everyone, and welcome to Orion Group Holdings Second Quarter 2022 Earnings Conference Call and Webcast. Joining me today are Austin Shanfelter, Orion Group Holdings Interim CEO; and Craig Owen, currently serving in the capacity of Chief Financial Officer, Adviser. Regarding the format of the call, we've allocated about 10 minutes for prepared remarks in which Austin and Craig will highlight our results and update our outlook. We will then open the call for questions. During the course of this conference call, we will make projections and other 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 uncertainty, 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 future results. By providing this information, we undertake no obligation to update or revise any 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 reconciliations and definitions inclusive of the most comparable GAAP measures and reconciliation tables accompanying this earnings conference call within the press release issued last evening. The press release can be found on 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 would like to turn the call over to Austin Shanfelter, Interim CEO. Austin?

Austin Shanfelter, Interim CEO

Good morning, and thank you, Fran. First, I'd like to thank the entire team for embracing the changes and the new expectations that have been set in the past 60 days. I appreciate the actions that are underway and that needed to be taken to provide a clear successful path forward. As we work to conclude the onboarding of a new leadership team, the steps we are taking now will enhance and set up the foundation for the success of that new team. These steps include a company-wide focus on obtaining margins, improving margin on all projects; ensuring the ability to capture all cost escalations; continuously downsizing unproductive markets; monetizing real estate; improving liquidity; increasing project wins from negotiation processes, not just low bid. And once again, key is onboarding a new management team. Just one example of the efforts that we've put forward is that in June, we posted our first profit in the Concrete segment for the year. Our backlog remains solid, and we continue to see clear opportunities in our end markets, which will be further enhanced as the full impact of the Infrastructure Act comes online. In addition to improving our liquidity and performance, we are also focused on our Days Sales Outstanding (DSOs). Please note that just one day improvement adds over $2.5 million of liquidity. Regarding real estate, we have two pending transactions on our Port Lavaca properties. We believe these will close in the second half of this year. We are fully engaged with CBRE on developing a disposition strategy for the remaining properties. I'll go into that more later in the Q&A. All proceeds from the pending transactions will go to the reduction of our revolver, which will add to our liquidity. Last but definitely not least, we are on the way to selecting our next CEO. We expect this process to be completed in August. The CFO search is well underway and has been very positive as well. We are currently scheduled to have this selection made most likely towards the end of August. I look forward to our Q&A session. I'd now like to turn the call over to Craig.

Craig Owen, Chief Financial Officer

Thank you, Austin, and thanks, everyone, for joining us. I'll now discuss the financial results for the second quarter in more detail. Revenues for the quarter were $195 million, up compared to $146 million in the second quarter of 2021 and $175 million in the first quarter. The increase was primarily due to higher volume in the Concrete business and the startup of large jobs that were awarded in the second half of '21 in the Marine business. Second quarter gross profit was $14.3 million compared to $12.3 million in the prior year period. The increase was primarily driven by efficiencies in equipment and labor utilization and a change in mix of work in the Marine segment in the current period, partially offset by unabsorbed indirect expenses in the Concrete segment. Second quarter gross profit was up 12% compared to the first quarter gross profit of $12.8 million. Year-to-date gross profit of $27.2 million was up over 100% compared to the second half of '21. As a percentage of revenues, gross profit margin was 7.4% in the second quarter, down from 8.4% in the prior year period and up slightly from the first quarter. Turning to the segments, the Marine segment had revenues of $82.3 million and adjusted EBITDA of $8.7 million, equating to an adjusted EBITDA margin of 10.6%. This compares to $63.9 million of revenue, adjusted EBITDA of $7.8 million, and an adjusted EBITDA margin of 12.2% in the prior year period. Marine results were down slightly on revenues but up on adjusted EBITDA and adjusted EBITDA margin compared to the first quarter of '22. The Concrete segment had second quarter revenues of $112.3 million, adjusted EBITDA of a negative $3 million, and adjusted EBITDA margin of negative 2.7%. This compares to $81.9 million of revenue, adjusted EBITDA of $400,000, and adjusted EBITDA margin of negative 0.5% in the second quarter of '21. Concrete results were up compared to the first quarter of 2022. The Concrete segment's second quarter results compared to the second quarter of '21 were impacted by decreased project performance due to inefficiencies in executing work, partially offset by higher volume. SG&A expenses for the second quarter were $17.2 million or 8.9% of revenues compared to $13.7 million or 9.3% of revenues in the prior year period. The increase in SG&A compared to the prior year was primarily due to severance, consulting fees related to management transition, property tax true-ups in the current year period and, as a result of the true-up, reducing bonus expense in the prior year period. Net loss for the second quarter was $3.1 million or $0.10 diluted loss per share. Adjusted for nonrecurring items and the tax impact from valuation allowances, adjusted net loss was $0.9 million or $0.03 loss per share. Second quarter adjusted EBITDA was $5.7 million, representing an adjusted EBITDA margin of 2.9%. This compares to adjusted EBITDA of $7.4 million and an adjusted EBITDA margin of 5.1% in the prior year period, and adjusted EBITDA of $5.2 million. Adjusted EBITDA margin was 3% in the first quarter. In the second quarter, the Company bid on approximately $1.8 billion worth of opportunities and was successful on $194 million. This resulted in a win rate of 10.8% and a book-to-bill ratio of 1.0x for the quarter. As of June 30, '22, backlog was $603 million, up from $394 million at the end of the prior year period. Of the quarter-end backlog, $281 million was in the Marine segment and $322 million was in the Concrete segment. Approximately 81% or $487 million of the quarter ending backlog will burn during the next 12 months, with the remainder associated with longer-term projects burning throughout '23 and into 2024. Additionally, the Company is the apparent successful bidder or has been awarded $153 million of new work subsequent to the end of the second quarter. Of this, approximately $149 million is related to the Marine segment, while $4 million is related to the Concrete segment. The Company ended the quarter with $33 million of outstanding debt, $31.9 million of which was related to the revolver. As of June 30, 2022, the Company had approximately $8.1 million of cash and $8.4 million of availability under its revolving credit facility. The Company is in compliance with its credit agreement covenants. With that, I'll turn the call back to Lisa for Q&A.

Operator, Operator

We'll take our first question from Julio Romero with Sidoti & Company.

Julio Romero, Analyst

So I wanted to start off on the Marine side. If you could just maybe speak on the successful bids of $149 million in Marine. It seems pretty sizable. And if you could just touch on maybe the margin profile and if those awards are public or private.

Austin Shanfelter, Interim CEO

They are somewhat a combination of both public and private projects. The margins on those would range from 10% to about 12.5%. There was extensive discussion, and it's important to note that a significant portion of that work was negotiated rather than awarded based on the lowest bid.

Julio Romero, Analyst

Got it. Understood. And I guess, if you could just talk about Concrete a little bit. Just talk about why profitability kind of trended down sequentially and maybe what you expect for profitability and concrete in the back half of the year?

Austin Shanfelter, Interim CEO

When I arrived, we made significant changes to our margin strategy in that business. We implemented several new minimum margins for bids and new work. Last quarter, we had to work through existing projects, and we are now experiencing the effects of that. A notable example is that we reduced the backlog in Central Texas by over $9 million in the second quarter. Moving forward, we have cut the number of jobs by 15 projects, leaving us with only 19 projects in the market. This market has presented numerous challenges in achieving margins, and we have faced considerable losses there. This is why I discuss the need to downsize unproductive markets. This adjustment impacted our numbers in the second quarter, leading to a $9 million reduction. By decreasing the project count, we anticipate margin improvements in concrete during the third and fourth quarters.

Julio Romero, Analyst

Okay. Very good. And maybe a last one for me is just if you could broadly maybe speak on demand trends in your private markets, both Marine and Concrete. And are you currently seeing any signs of rates leading to any demand changes at all?

Austin Shanfelter, Interim CEO

What's interesting, first of all, the rates. We've gone ahead and changed a lot of our margin profile in our bidding across both divisions, both Marine and Concrete. In doing so, we've been successful in winning what I would call better work, better quality work with great customers at a higher level. So we're not seeing margin compression at this point. As a matter of fact, I'm seeing a little bit of the opposite. We're testing those markets a little bit more. Secondly, we're working really hard to ensure that we're building in contingency language in all of our contracts to handle any unforeseen escalation-type costs that we're experiencing during this time. Most of our customers, if not all, have been working with us very closely on that issue, and we haven't had a lot of pushback. The fact we're still seeing strong markets in both Houston and Dallas. We're not seeing any integration in the opportunities that we have, but we're being more selective. We will likely see a little bit of a positive reduction in revenue in Concrete. But again, with the eye on increasing margins and profitability. The Marine market has remained fairly strong, and this is without the infrastructure bill coming into play at this point yet. I think we'll start seeing a lot more of that coming in maybe the fourth quarter and then starting to hit us in the first part of next year.

Operator, Operator

We'll take our next question from Joe Gomes with NOBLE Capital.

Joe Gomes, Analyst

So just maybe you can talk a little bit about utilization. One of your goals was to improve the utilization of the fleet and your equipment. You mentioned some better utilization in today's call. How much more do you think you can have there on the upside? And what do you do to try to continuously improve that utilization?

Austin Shanfelter, Interim CEO

We just put a couple of new marine assets on the market recently. That didn't happen in the second quarter, but it did happen last week. That could generate anywhere from a low end of $3 million to a high end of maybe $4.5 million for us. It's equipment that we have not been using. We are bringing online a new dredge that will be coming out in October, which will have a significant impact on our revenue and margins in the fourth quarter of this year and, of course, on throughout next year. It will probably run at a much more efficient path, and the productivity of that vessel should be very strong for us. That’s coming on, as I said, in October. But we'll continue to look at any asset that's not being deployed at a high level.

Joe Gomes, Analyst

Okay. You mentioned the real estate sales briefly, and I know you plan to discuss them further during the Q&A. Can you provide an update on the status of East-West and Port Lavaca? We were optimistic that those deals would be finalized last quarter. Please give us a thorough update on our progress. I recall you mentioned that East-West could be valued significantly higher if certain actions were taken; what is your current thinking on that property?

Austin Shanfelter, Interim CEO

Yes. I have a clear understanding of our properties this past quarter, so let me provide you with an update. We have two pending transactions in Port Lavaca, valued at approximately $17.5 million combined. I expect these transactions to be finalized between the third and fourth quarters. We aim to have deals in place by the third quarter, although I currently do not have specific closing dates. We are collaborating with CBRE, developing a strategy, and working on various approaches for East and West Jones and Baytown. We are exploring a lease sale partnership with some groups and considering a joint venture that would assist us in removing the fill and becoming partners in that process, which would help with fundraising. Additionally, we are looking into a joint marketing strategy with other local landowners, as we believe that combining our properties will enhance their value. These discussions are active and multifaceted. I anticipate making a final decision in the next 30 to 40 days based on the feedback and interest we receive. We are pursuing three different paths to create a strategy for monetizing those locations.

Joe Gomes, Analyst

So is the previous agreement that you had on East-West now gone, terminated, expired, however you want to term it?

Austin Shanfelter, Interim CEO

We terminated it, and they've asked to come back in. They're just one of the other people that are looking at these solutions. We are fully free and clear to do any one of these three directions at this time.

Operator, Operator

Our next question comes from Alex Rygiel with B. Riley.

Alex Rygiel, Analyst

Austin, you mentioned you posted a profit in the Concrete segment in June. Has that continued into July? Do you think we could see a profit for the entire quarter in the third quarter in that segment?

Austin Shanfelter, Interim CEO

That's my expectation. What we've accomplished in the Concrete segment is that we were successfully completing 70% of our projects profitably according to our estimates. The team has begun to eliminate locations where we haven’t found success and situations that we couldn’t navigate. This is part of our efforts to downsize in markets where we’re not performing well. By doing this, we anticipate a decrease in revenue and cost divisions, which should lead to improved margins and more consistency in those margins moving forward. I expect to see fewer write-downs on challenging projects and return profitability to appropriate levels. While this improvement may not fully manifest in the third quarter, I am looking for positive month-over-month progress.

Alex Rygiel, Analyst

Just kind of a follow-up on that answer. You mentioned that you're expecting sort of commercial revenue to tail down a little bit. But yet segment backlog in Commercial Concrete is incredibly strong at $322 million, that's up from $287 million in the first quarter, and that's up from $224 million last year. So how soon do you see that sort of tailing lower?

Austin Shanfelter, Interim CEO

Well, I don't mind getting good revenue. You're going to see our Central Texas area continue to reduce in size and in backlog. We're not refilling that at the base unless we get super margins on opportunity. So we'll be very cautious about what we've been and how we've approached it. But the markets in Dallas and Houston remain strong, and those are markets where we have a history of producing margins and positive results. I think there's a combination of drawdown in some locations. In other locations, we're going to take positive opportunities where we can perform correctly.

Alex Rygiel, Analyst

That's very helpful. Within your Heavy Civil segment, the backlog of $281 million, what portion is associated with dredging?

Austin Shanfelter, Interim CEO

I don't have that percentage to tell you. I would imagine it's around 30% to 35%. It could be a little higher. That's depending on how many pieces of equipment we've got working; that changes pretty rapidly. You're going to see it grow to over, I would think, 45% to 50% in the second half of the year as we bring online the new dredges.

Alex Rygiel, Analyst

And that brings me back to CapEx. Understanding you've got kind of a big CapEx spend here because of that dredge. What is your full year view on what the CapEx spend could be in total for 2022? And how do you see that trending in 2023?

Austin Shanfelter, Interim CEO

Well, I see it going up in 2023 when the new management team gets here and creates their strategy. We're looking at a couple of other adjacent markets at this particular point that would be conducive for us to look at and go into. But right now, it's $16 million this year, and I believe that we're going to be looking at some more expansion in the following year, probably another $2 million to $3 million at this point. A lot of it will also depend on exactly what we do with ERP next year, and those decisions will be made probably in the next 30 to 45 days.

Operator, Operator

We'll take our next question from Marco Rodriguez with Stonegate Capital Markets.

Marco Rodriguez, Analyst

I have a follow-up question regarding the concrete market in Central Texas. I want to confirm that when you refer to Central Texas, you mean Austin and San Antonio. Can you provide more insight into that area? It seems you are planning to reduce exposure in that region. Could you share the revenue mix between South, North, and Central Texas?

Austin Shanfelter, Interim CEO

At the end of the day, Central Texas is our smallest region in concrete by a substantial margin, representing around 20% of our total concrete work. Unfortunately, this 20% has struggled to generate profit margins for us over the last two years. We have made several changes, including adjustments to management, bidding processes, and estimating processes, but we have not been able to develop a better strategy in that region. Therefore, we have taken a realistic view of the market and need to significantly downsize our operations there, only accepting jobs where we can accurately predict our profit margins. This will considerably reduce our market presence in that area over the next three to four months.

Marco Rodriguez, Analyst

Got it. And can you maybe discuss some dynamics that make Central Texas much more difficult for you when it comes to bidding? I mean, Austin is still seeing quite a bit of growth compared to Dallas and Houston. Just help us understand some of those dynamics.

Austin Shanfelter, Interim CEO

Well, let me put it this way. When looking at why Houston and Dallas are performing better, we have people in both those markets who have been with the Company for many years. These are folks that know the market, understand all the difficulties, and how concrete suppliers work with us. We have a very good relationship with our clients that we've maintained for many, many years. All those things reduce risk and increase predictability. We're just established well in Houston and Dallas. I think that adds to our ability to be profitable and have predictable results. If you look at the Austin and San Antonio markets, we’ve tried to grow and expand there but have never gotten a good footing. We've changed personnel, but still haven’t built a solid relationship base. It’s different in those areas when it comes to rules, regulations, and processes that have impacted some of our projects. I believe it’s more about the unknown and the risk profile in Austin and San Antonio for us. We have to admit it’s a challenge to build a good team and deliver results, and that's what we're dealing with.

Marco Rodriguez, Analyst

Got it. Very helpful. Also, I was kind of curious about the low bidder numbers; they stood out to me with Marine at $149 million and Concrete at $4 million. Kind of looking at the fact that those numbers are at the high end and the low end of your historical ranges, is there something that we should read into those numbers?

Austin Shanfelter, Interim CEO

It was probably the answer I should have given, Alex. When you see a low number and low bid in Concrete, that's precisely my point. We're being very careful about what we're bidding right now to ensure profitability. So indirectly, that’s living proof that we’re not chasing revenues in Concrete at this moment. We're going to be very disciplined in our approach. That should have been my response when Alex asked too. We've focused on our capacity in Marine, looking for great opportunities that are well-timed for us. In this last quarter, we were able to negotiate some things in Marine that give us a look, not only in '22 but going out into '23 as well. These are more long-term projects that we’re still working out the details for.

Marco Rodriguez, Analyst

Got it. Very helpful. And then just one last quick follow-up on the East-West Jones sale. You provided some great color; do you have any sort of timing for when you think that might come to fruition?

Austin Shanfelter, Interim CEO

Well, if you knew the pressure that I was putting on people to get an answer, my timeline is that I want to have this done before the end of August. I don't know if that's realistic with everything going on in the markets today and the cost of money and capital. But we are definitely all hands on deck with our partners, CBRE. They are a great team, very knowledgeable in the end markets in Houston, and they know how important this is to us. I know we remind them of our urgency. We'll continue to press. I can't predict how the markets will work. But I can tell you the effort, focus, and determination are intact. If we get solid offers, we're not going to grind out a few extra bucks. We want these properties gone so we can concentrate on running our actual business.

Operator, Operator

We'll take our next question from Poe Fratt with Alliance Global Partners.

Poe Fratt, Analyst

If you could just highlight Port Lavaca. It's a little surprising that there's another $12.5 million of potential proceeds there. Can you just talk about the old deal of $5 million and whether the new deal is $12.5 million or sort of have the parameters changed on the two different bids you have right now?

Austin Shanfelter, Interim CEO

They are changing a little bit. We have a brand-new offer that's come in on the one property that has increased from the $5 million for a lot of positive reasons. We're working on those details to close that deal. The other one is going to be a sales leaseback, and we're finalizing the terms of that deal, hopefully in the next two to three weeks.

Poe Fratt, Analyst

Great. And then previously, we had talked about a working estimate under the old deal for East-West Jones, as I recall, in the mid-30s. Can you give us an idea of your targeted proceeds there? I know there's a couple of different avenues you could go forward on as far as joint ventures or otherwise, but what's the working estimate on the value of that property?

Austin Shanfelter, Interim CEO

If you think about the three different opportunities we have, if we do a lease and sale, where we would lease part of it out and sell part of it, I think the numbers still hold. You're looking at approximately a $30 million to $35 million number value for the property as is with a lot of fill on it. But the sales leaseback depends on how we break that out. If we proceed with the joint marketing, that number would hold, but it would have a better chance of selling because the other locations we're talking to don’t have to fill on them, and it’s something that clients can work out over time and not need access to the property immediately. So that's an opportunity. If we get into a joint venture, where we have an individual that comes in and works with us to remove fill over a period of time, that would likely raise the value of the property significantly. But then we're sharing in that upside with another joint venture partner.

Poe Fratt, Analyst

Great. Leaning into the second bullet of ensuring the ability to capture all cost escalators. Can you talk about potentially where you're seeing cost pressures, both on the Concrete side and on the Marine side? And Austin, you offered a targeted margin for the awards that you had in Marine of 10% to 12.5% gross margins. Could you do the same thing on Concrete?

Austin Shanfelter, Interim CEO

The margins I offered to you on Marine are for the new work that we've just obtained. Some of our work in the past has been a little lower. Right now, we're very focused on making sure that we improve our margins on everything bid. So going forward, those are our new goals and objectives. The same applies to Concrete. We are looking at targets of 10% or better margin in Concrete on everything we bid right now. I don't want to give anything more away or more details than that; but at the end of the day, we've definitely increased our minimum requirements for bidding.

Poe Fratt, Analyst

And then just to clarify, when you talk about target margins, is it gross margin, EBITDA margin? Can you clarify that definition?

Austin Shanfelter, Interim CEO

It will be gross margins.

Poe Fratt, Analyst

Okay. And then can you talk about cost pressures, please?

Austin Shanfelter, Interim CEO

Yes. It's a widespread issue. The availability of concrete is challenging, fluctuating in the Houston and Texas markets. Costs are definitely rising, and we need to account for those increases. In the roofing industry, it's now standard to include an escalation clause in contracts, and we will be doing this more frequently in our agreements going forward. We are addressing these concerns with our current clients, and they have generally been very understanding, recognizing that this is a reality we have to deal with. This is not about taking advantage of them; it’s simply the situation we are in. We are experiencing this with fuel prices, concrete, steel costs, metal market prices, and also with wood and framing materials that we need to buy.

Operator, Operator

We have a follow-up question from Joe Gomes with NOBLE Capital.

Joe Gomes, Analyst

Yes. Just one quick follow-up. You guys have previously been guiding into the mid-30s in the adjusted EBITDA range. I'm wondering if you're still sticking with that, or are you making any changes to that guidance?

Austin Shanfelter, Interim CEO

Currently, with new leadership in place, I am allowing them some flexibility as they navigate the transition. I am estimating between $25 million and $30 million at this time. I believe we have the potential to reach $30 million. However, we need to be mindful of the recent changes, including my arrival and the new team's transition, which may take them longer to adapt than it did for me. I am confident that the team is concentrated on improving margins and enhancing performance in the latter half of this year. I anticipate that our circumstances will allow for a stronger second half compared to the first half. Nonetheless, my current estimate remains between $25 million and $30 million.

Joe Gomes, Analyst

That's a substantial drop in the low end from the mid-30s previously, especially when you're saying things are improving. I'm not quite sure why it would be going down that much.

Austin Shanfelter, Interim CEO

Well, the first half of this year was pretty low. I mean, we’re at about $8 million, $8.7 million right now. So if you look at it from what we got done in the first half, and then you start looking at $30 million in the second half of the year, those are some substantial numbers. I'm not saying we can't get there. I'm just trying to be realistic with everybody and not have a number that's maybe not attainable. But we're working towards $30 million. We have plans to get there. I'm just being cautious.

Operator, Operator

And that does conclude the question-and-answer session. I would like to turn the call back over to Fran Okoniewski for any additional or closing remarks.

Francis Okoniewski, Vice President, Investor Relations

Thanks, Lisa, and thanks everyone for your interest in joining our second quarter results conference call. We look forward to speaking with you again in October to discuss our third quarterly results. Thank you, and have a great day.

Operator, Operator

Thank you. And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.