Orion Marine Group's (ORN) CEO Mike Pearson on Q2 2014 Results - Earnings Call Transcript

| About: Orion Group (ORN)

Orion Marine Group, Inc. (NYSE:ORN)

Q2 2014 Earnings Call

July 31, 2014 10:00 am ET

Executives

Drew Swerdlow - Manager, IR

Mike Pearson - President & CEO

Mark Stauffer - President

Chris DeAlmeida - CFO

Analysts

Trey Grooms - Stephens

Scott Levine - Imperial Capital

Jon Tanwanteng - CJS Securities

Veny Aleksandrov - FIG Partners

Jack Kasprzak - BB&T Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Orion Marine Group Earnings Conference Call. My name is Lisa, and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. Drew Swerdlow, Investor Relations Manager. Please proceed, sir.

Drew Swerdlow

Good morning and welcome to the Orion Marine Group’s second quarter 2014 earnings conference call. Joining me today are Mike Pearson, Orion Marine Group’s President and Chief Executive Officer; Mark Stauffer, our President; and Chris DeAlmeida, our Chief Financial Officer.

Regarding the format of the call, we’ve allocated about 15 minutes for prepared remarks in which Mark and Chris will highlight our results and update our market outlook. We’ll then open the call for sell-side analyst questions for the remainder of the time. We would ask that you limit your questions to one question and one follow-up before getting back in the queue.

During the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our end markets, revenue, gross profit, gross margin, EBITDA, EBITDA margin, backlog, projects and negotiation and pending awards, as well as our estimates and assumptions regarding our future growth, EBITDA, EBITDA margin, gross margin, administrative expenses and capital expenditures. These statements are predictions that are subject to risks and uncertainties, including those described in our 10-K for 2013, 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 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 reconciliation accompanying this earnings call available on our website, at www.orionmarinegroup.com, for comments on the use of non-GAAP financial measures as well as the applicable reconciliations to most comparable GAAP measures.

Also, please refer to the press release issued this morning, July 31, 2014, and our quarterly and annual filings with the SEC, which are available on our website, for additional discussions of risk factors that could cause actual results to differ materially from our current expectations.

With that, I’ll turn the call over to Mark Stauffer, President. Mark?

Mark Stauffer

Thank you, Drew, and thanks for joining us this morning. First, I would like to thank our more than 1200 co-workers for all their hard work and dedication. It's because of their efforts that we continue to move in the right direction. We remain focused on executing our strategy by maintaining a high level of backlog through bidding effectively and focusing on opportunities that best suit our specialized marine assets. In fact, we had good success securing additional work during the quarter and ended with a record backlog of $281.6 million. This backlog along with strong market demand gives us optimism about the road ahead.

As expected given our mix of work in the second quarter and the delay in the start of certain jobs we experienced gaps between projects during the second quarter which pressured margins due to out of labor and equipment. However, these delayed projects are started in the third quarter along with our backlog and continued solid bid opportunities we expect to see significant improvement in asset and labor utilization in the back half of 2014.

Turning to our market outlook, overall, we continued to see strong demand for our services with improving industry catalyst which should bode well for the long-term. Specifically, demand from the private sector continues to be a solid driver of bid opportunities to repair, expand and refurbish waterside infrastructure. We expect this high level of good opportunities to reign strong for the foreseeable future driven by energy related customers private terminal developments and recreational dock infrastructure developments.

Local port authorities should also continue to provide a steady source of bid opportunities as they continue to undertake capital expansion plan in anticipation of larger ships and increased cargo volumes as a result of the expansion of the Panama Canal.

As you're probably well aware, the current phase of the Panama Canal expansion is expected to be completed in 2015. While we could see additional delays in the completion of this phase of the expansion, we expect to continue to see opportunities in the U.S. and Caribbean ports for the next decade.

Currently, there is over $10 billion of planned port expansion in our market areas over the next 10 years. This level of activity will be a driver of opportunities for our services for deepening projects, infrastructure improvement and associated maintenance services.

On the state side, we are monitoring the status of the current highway funding which is set to expire at the end of September. Our preference is to see longer term visibility from any new funding bill which we believe could lead to bid pricing improvement. However, a shorter term bill or a continuing resolution is more likely given the current political environment. While a shorter term bill may not help to improve the bid pricing environment we believe even with a shorter term bill or a continuing resolution we will continue to see opportunities to bid on bridge related work.

Additionally, we continue to expect environmental restoration and remediation projects to be a good source of bid opportunities in the future. Specifically, the Clean Water Act fine process related to the 2010 oil spill in to gulf is continuing which will ultimately fund the Restore Act. As we have discussed before, this process has been extended into January of next year, however, once fines are assessed and collected we are hopeful we could see projects coming up for bid in 2015.

Finally, turning to the Federal Government sector, during the second quarter the WRRDA Bill was passed and subsequently signed into law. We believe this is a positive step forward for the nation's water infrastructure. Specifically, the legislation authorizes projects that should be let in the future once fines are appropriated through the normal funding process.

More importantly, we now have resolution on the Harbor Maintenance Trust Fund or HMTF issue and expect to see a 30% increase in spending from HMTF funds for maintenance of the nation's waterways in 2015. From there, spending from the HMTF will continue to increase on an annual basis for the next 10 years until the full amount of HMTF funds collected annually goes towards maintenance of the nation's waterways. This additional funding should help the Army Corps of Engineers carry out its mission of maintaining the nation's waterways over the long-term.

For fiscal year 2015, our preference would be to see an appropriations bill passed soon after the August recess that allocate funds under the previously approved fiscal 2015 budget. However, the likelihood of a continuing resolution being passed is increasing. Still we view the WRRDA and HMTF developments as moving in the right direction.

With the solid level of funding for fiscal year 2015 we would anticipate steadier lettings from the corps next year. Already we have the opportunity to bid on several projects for the remainder of this fiscal year and we are hopeful that pace will continue as we head into 2015.

A healthier level of good lettings from the corps would enable us to maintain better continuity between certain jobs and increase the utilization of some of our assets.

Also, I am pleased to report we have successfully completed receiving the first dredge material into our dredge material placement area and we are well underway on additional work. This new service has been beneficial to our customers and we are very pleased with progress we have seen today at the site. As a reminder, this property gives us the ability to service our private customers along the upper Houston Ship Channel, deploy some of our assets more efficiently, and generate additional revenues from disposal fees.

In closing, a record level of backlog, a strong private sector, improving end markets and industry catalysts continue to give us optimism about the remainder of 2014 and beyond. We continue to see a healthy market with solid drivers and we believe we are poised to capitalize on these opportunities with our specialized workforce, fleet of equipment and geographic coverage.

As I said earlier, the back half of 2014 is shaping up nicely and should drive solid results for the full year. Additionally, we are now building backlog for 2015 and remain optimistic about the level of good opportunities we see.

With that, I will turn the call over to Chris to discuss our financial results in more detail.

Chris DeAlmeida

Thank you, Mark, and again thanks for joining us. For the second quarter of 2014, we reported a net loss of approximately $1.2 million or $0.04 per diluted share. These results compare with a net profit of $0.2 million or $0.01 per diluted share in the prior year period. Second quarter of 2014 contract revenues increased 7.3% year-over-year to $90.3 million of which 42% was generated from federal, state and local government agencies while 58% was generated from the private sector. And this breakdown is comparable to the prior year period.

SG&A expense for the second quarter of 2014 was $8.1 million which compares to $7.8 million in the prior year period. During the second quarter of 2014, we bid on approximately $429 million worth of opportunities and we're successful on approximately $117 million. This resulted in a 27% win rate for the quarter and a book to bill ratio of 1.29 times.

As of June 30, 2014, we have backlog of work under contract of $281.6 million of which 9% is for federal projects, 17% is for state projects, 22% for local projects and 52% is in the private sector. Our quarter ending backlog represents a record level of reported backlog and reflects our continued success with our bidding strategy.

Currently, we have approximately $205 million worth of bids outstanding of which we are the apparent low bidder on approximately $27 million. From a bid margin perspective, we're continuing to see pockets of improvement of pricing but the trend has not become widespread. However, an increased demand in certain areas continues and we could see upward moment on bid pricing. Regardless, with the level of backlog and current bid opportunities we see in front of us, we still expect to see some improvement in reported gross margin during the back half of 2014 as our labor and equipment utilization improves.

Now turning to the balance sheet, as of June 30, 2014, we had approximately $34 million of cash on hand which compares to approximately $41 million of cash on hand at the end of last year. At the end of the quarter, we had access to $11.8 million under our revolver and total debt outstanding of approximately $31 million. This debt includes $22.5 million on a revolving credit facility for term debt of approximately $8 million. Additionally, we have finalized a one-year extension of our current credit facility which now expires on June 30, 2015. Details of this extension will be filed with our Form 10-Q.

Further, our bonding program remains solid and it's more than adequate to support our bid activities. Also, we continue to joy excellent relations with both our lender and surety. Overall, we're pleased with our financial position and we're focused on maintaining a strong balance sheet.

In conclusion, we're pleased with our outlook and continue to expect 2014 will be a profitable year. Beyond 2014, our market drivers remain strong with (inaudible) continuing high demand for our services. Further, we believe we are well-positioned to meet this high demand with the right talent and equipment to get the job done. Overall, we're excited about the road ahead and we continue to believe Orion has a strong future with ample opportunities for continued growth for years to come.

With that, I will turn the call back over to Drew to begin the Q&A portion of the call.

Drew Swerdlow

Thank you, Chris. We would now like to open the call up for questions. Lisa, would you please review the procedures for placing a question?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Trey Grooms with Stephens. Please proceed.

Trey Grooms - Stephens

So it sounds like you guys are going to have some pretty high utilization rates in the second half when you said that utilization rates will improve. Just trying to get a sense of how we should be thinking about margins in a highly utilized type of scenario given the pricing currently in backlog. You said some improvement, but didn't -- can you be a little bit more specific there, give us a little bit more color on how to think about that?

Chris DeAlmeida

Well, because we don't want to specifically give guidance on that, Trey, but kind of a way to start to think about it a little bit. If you think about back in the fourth quarter of last year, we had decently good utilization of our overall fleet in that time period as well and you can see we had a gross margin of about 12%. I think that's probably somewhere in the ball park depending on of course the mix and the timing of the job.

Trey Grooms - Stephens

Okay. That's very helpful, Chris, thank you. And then my follow up, it sounds like you guys are incrementally more positive and incrementally more confident in the back half of this year and looking out to next year, what -- I understand the back half of his year is kind of I guess pretty much in place but as you look into '15 Harbor Maintenance Trust Fund obviously going to benefit, but is WRRDA going to play a role in really helping you guys out with additional bid opportunities in '15 or it that a little bit longer term outlook for that?

Chris DeAlmeida

I think that's a little bit longer term outlook. That will probably -- obviously those projects they're approved that's the first step of the process which is what the WRRDA did. That approved authorized a list of projects. They'll have to go through the normal funding process that will actually be a catalyst for the next several years. It's possible we could see some of those projects start get funding next year in '15, but I think the more immediate impact that we see out of the WRRDA is that -- is the beginnings of the utilization of the HMTF funds. So that's the bigger short term impact.

And yes, with respect to the back half of the year, I mean, yes, I do not know necessarily that it is much of a change from what we talked about before when we spoke a couple of months ago on the Q1 call, I think we were kind of thinking the same thing. Q2 is a kind of came in about where we sort of expected it given the gaps that we saw with certain projects, but we were teed up nicely for the back half of the year, and we did have some positive development of the WRRDA passing. So again, the most immediate impacts for '15 there is the HMTF issue.

Mike Pearson

Yes, keep in mind the Harbor Maintenance Trust Fund is going to increase 30% in 2015, and each year after that it increased about 4% for the year total units of the total amount. So that's the best news we have heard yet.

Trey Grooms - Stephens

Great, I will stick to my two questions and then jump back in queue. Thanks guys and good luck.

Chris DeAlmeida

Thanks, Trey.

Operator

Your next question comes from the line of Scott Levine with Imperial Capital. Please proceed.

Scott Levine - Imperial Capital

So may be a little bit more color on the pricing environment. You talked about your bidding strategy generically, I'm guessing that really hasn’t changed much, and maybe I am over analyzing or misinterpreting, but do you guys seem incrementally positive on the pricing environment generally within the business and/or maybe a little bit more color with respect to general market trends in competition whether we can expect things to improve if indeed the award phased from the public sector side of your business improves over the next 6 to 12 months?

Chris DeAlmeida

Well, I think again as we have said, it's moving in the right direction. We have seen pockets of pricing improvement; it's not yet widespread. I think we have said, I said specifically in the last couple of calls, we feel like -- it feels like we're out there in the market place at a tipping point where we should see widespread pricing improvement. I'd love to be able to tell you I knew when that was but we continually probe that in terms of testing the market and looking for opportunities to push it. As we have said before and will say again today, in our view the table is set for better pricing improvement and all the indicators are there or in queue to be there.

We think pricing should be better today than it is but we're pleased with the win rate. We have been consistently for the last several quarters at our kind of historical win rate. So that's reflective of we think we have a good handle on where the market is for bid pricing, but again we have got certain areas where we have seen improvement in bid pricing, but we're just continuing to test it so we can see that on a more widespread basis.

And again our feel is that it should be there today, but we do think over the long-term we're moving in the right direction. We have seen improvement certainly over the last 12 months in this regard and expect to continue see at least incremental pricing improvement but again it's kind of been a slower climb out of the trough as expected. I mean, so that’s not really a change from what we have said in the past.

Scott Levine - Imperial Capital

Got it, thank you. And as a follow up, I appreciate the implications of the WRRDA bill longer term, but if you can assess maybe -- it sounds like a little bit more on the positive tone on the public sector lettings in the near term. Maybe the relative importance of the highway bill for the bridge side versus the importance of that versus the appropriations bill for the fiscal '15 budget, can you help us get a bit better sense of the relative importance of each of those potential developments here going into the back half?

Chris DeAlmeida

Sure. Well, with respect to the appropriations process we kind of had said in the last call that we were teed up nicely with the budget framework in place for 2015; it was agreed to back in last December, the passage of the WRRDA Bill which released additional funds from the HMTF and all was kind of lining up nicely. Where we are in that process is the house has passed an appropriations bill to fund the corps for fiscal year '15. The senate WRRDA and commerce committee I believe it is has passed a -- energy and water subcommittee has passed an appropriations bill but it has not had any further action in the full senate.

As you know they're breaking camp for their August recess; they come back after Labor Day for a short period of time before they go out campaigning. So the timeframe is dwindling for a passage of an appropriations bill on the senate. So it's looking a little more and more like we're going to have a CR where they are going to kick the can down probably to the lame duck session in December, which would be unfortunate I still think it would be an improvement over the last year just with the additional funding out of the HMTF. But clearly what we like to see is a full year preparations in place on 10/1 that -- there is still a possibility for that. We're going to be watching that very closely, but as I have said it should be an improvement over the last year.

With respect to the highway bill clearly we would like to see a long-term, like we used to in the old days say five or six-year bill which brings continuity to the letting process from the various ADOTs. That didn’t look like that's going to happen either. It looks like again that is going to probably either though a short term bill or a CR be pushed either to the lame duck or to the next congress after the mid-terms. So again, we will probably be status quo there, which again isn’t the end of the world. We continue to see bid lettings come out but we think once we get ultimately we will get a --probably be either like this year or next year when we see a longer term highway bill. That hopefully will again be another catalyst for a bid pricing improvement. So that's the one we will be watching closely.

Mark Stauffer

(inaudible) speaking, Scott, I mean even with regard to (inaudible) clearly in the short-term we would like to appropriations bill occur. We are starting to see some activity from the corps but we would like to see that continue into throughout 2015 or the fiscal 2015. So clearly, getting an appropriations bill done quickly will help that pace (inaudible) hopefully a little more study that has been in prior years.

Scott Levine - Imperial Capital

Thanks. And just be clear, even with some of these uncertainties you would still expect a quicker pace maybe in the back up from what we saw on the first half?

Chris DeAlmeida

Yes.

Scott Levine - Imperial Capital

Okay. Great. Thank you.

Operator

Your next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed.

Jon Tanwanteng - CJS Securities

Good morning. Just wanted to clarify on the dredging, can margins reach what you did in Q4 last year was what you have in hand in the backlog and your hope is right now or do you need to win more awards to get there?

Chris DeAlmeida

There is a still a few gaps out there that we like to sell, but generally speaking as we have ben announced throughout the year and even a couple -- the end of last year those jobs are getting started. And they are putting some assets to work. So we feel a lot more comfortable with the back end of the year. Like I said, there are still some talks but there are still some opportunities to fill those talks as to --

Jon Tanwanteng - CJS Securities

Okay. And how confident are you in filling those pockets?

Chris DeAlmeida

Well, there is a pretty good letting schedule right now, as we said in our remarks, and so we think at least through our third quarter the government's fiscal fourth quarter there is lot of activity out there. So we have got a good shot at picking up additional work.

Mark Stauffer

And there continues to be some good private activity as well. So those two should balance each other out hopefully.

Mike Pearson

Plus with the work we have in hand so.

Jon Tanwanteng - CJS Securities

Okay, great. And then can you stab at fiscal -- at '15 utilization at all, I mean, given the two scenarios of either a full appropriations bill or a CR or late appropriations like we had this year?

Chris DeAlmeida

Well, clearly, if we get a full appropriations bill and we got that for October 1 and we would hope that the pace of lettings would be a lot steadier and we have greater continuity in between our jobs and we still feel pretty comfortable on the private sector and the level of activity that's going to be there. At this point in time, we really need to see some of that play out before we can start making better guestimates of what we think 2015 utilization.

I think from our perspective there's definitely -- the stage could be set where would 2015 could be the year we start to see the lettings come out in a little bit steadier fashion which should certainly help our utilization level, but the flip side of that is we got a little fall here with the senate and the appropriation for 2015. So the question will be when they come back from recess we will get that done, will we see a continuing resolution through the end of the year of beyond? So how does that affect the timing and kind of the paper lettings for the different district corps commanders?

Jon Tanwanteng - CJS Securities

Okay. Got it. And finally, we have seen some large projects in the gulf push out a little bit how the schedule staggered into smaller pieces, that have you seen this in your own business and does that impact your outlook at all?

Mike Pearson

Yes, I mean I would say from our stand point we have not seen anything out of the ordinary. I mean there is the normal ebb and flow of how projects come out. Some get larger, some get broken up, we're just pleased with the level of activity we're seeing particularly in the private sector and we've got a lot of -- as just we said record backlog and we have got a lot of nice things upcoming to bid on. So nothing out of the ordinary from that standpoint.

Operator

Your next question comes from the line of Veny Aleksandrov with FIG Partners.

Veny Aleksandrov - FIG Partners

My first question is again about margins in Q3 and Q4. You talked about some buckets which you have to fill in but only 7% right now of work is federal. Can you still have more letting Corps of Engineering? Is there an upside for these margins?

Chris DeAlmeida

It's a little bit too soon to tell, to be honest with you, Veny. I mean, I think there is always that possibility. I don’t know that at this point we really want to kind of count on that. If we saw outside utilization, for example, a lot of jobs happen and we got fully utilized with all of our assets, there is a potential we could see some growth. Keep in mind though that you still have the general pricing pressures that we talked about and while we're still seeing talks improvement and things are getting a little bit better, we're still working off the work we have in backlog today that's at lower margin. So that will kind of limit the full amount of growth you might see.

Veny Aleksandrov - FIG Partners

All right. Okay. And my second question is to dredge material placement area; you mentioned the first job happened there. How should we think about that? Should we see a significant contribution for margins or should be think more of a revenue contribution on relationships developing --

Chris DeAlmeida

Well, I kind of go back to what we said when we initially bought it in the first quarter. It's definitely a nice business to have. It is a new revenue stream as we now are collecting disposal fees that would otherwise be paid to other disposal areas. Generally speaking, we had said that we feel that we could get upwards of $7 million of revenue in 2014 related to that. I think that's probably still a good figure to go with. We're pretty much on track with the plan we had initially and that's falling nicely. From a margin perspective, it's definitely a margin contributor, but I would say think more standard on a margin contribution side with some pick up in revenue there.

Operator

(Operator Instructions) Your next question comes from the line of Jack Kasprzak with BB&T Capital Markets.

Jack Kasprzak - BB&T Capital Markets

Kasprzak, yes, anyway. So second quarter last year you had about $6 million less revenue but about $2 million more in gross profit. I was just wondering if you could help us understand the change in the mix of projects that affects that difference this year second quarter versus last year second quarter. I mean, where there are more close outs of projects or was it just purely kind of the mix of work that accounts for that kind of difference?

Chris DeAlmeida

Honestly, Jack, it was really the mix of work. So it was the type of services that were brought to bear on the different types of jobs. So you did have some work last year that closed up, but we have also had work that started up this year, so. And we've had some gaps in between some of the projects and that is going to make an impact on the types of services that are coming to bear at any given time on the project.

So with that, it's really more than anything just a mix of the services are brought to bear and the type of assets that are used in those services and we had some higher cost assets that were underutilized in Q2 2014 as compared to Q2 2013.

Mike Pearson

Right, and that's what kind of we have talked about in the release and the remarks today. That mix and then what Chris has touched on in terms of the types of assets utilized and underutilized during the quarter that's what lead we had an increase in idle labor and equipment in Q2 2014 versus Q2 2013.

Chris DeAlmeida

And one thing just to follow on to that we talked about this before sometimes, we're able to flex a little bit of the labor side in time periods where we have less utilizations but given this time period we do have a lot of work to go to work on in the back end of the year, we were getting ready for a lot of that work doing some minor repairs that needed to be done that also put some pressure on there.

Jack Kasprzak - BB&T Capital Markets

Okay. Thanks. Second question is can you tell us mix of dredging projects in the backlog right now versus this time last year than meaningfully different?

Mark Stauffer

Yes, I think it’s fair to say with some of the private sector work, some of the work that we announced earlier this year that we will utilize some dredges that we do expect at the back half of the year that we would see an increase in those assets being utilized versus the first half of the year. As we said also, there are some corps projects on the docket now in this quarter to bid on. So we're hopeful there. And we talked about the DMPA coming online and our ability to service our private sector clients and that will also help some utilization in the back half of the year.

Operator

There are no additional questions at this time. I would now like to turn the presentation back over to (inaudible) for closing remarks.

Drew Swerdlow

On behalf of Orion Marine Group, we would like to thank you for taking the time to talk with us this morning and we look forward to speaking with you in the future. Also, if you have any follow up questions please feel free to give me a call. Thanks and have a good day.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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