Orion Group Holdings, Inc. (NYSE:ORN) Q1 2020 Results Earnings Conference Call April 30, 2020 10:00 AM ET
Mark Stauffer - President, CEO
Robert Tabb - CFO, VP & Treasurer
Conference Call Participants
Marco Rodriguez - Stonegate Capital Markets
Poe Fratt - Noble Capital Markets
Alex Rygiel - B. Riley FBR
Good morning, everyone, and welcome to Orion Group Holdings’ First Quarter 2020 Earnings Conference Call and Webcast. Joining me today are Mark Stauffer, Orion Group Holdings President and Chief Executive Officer, and Robert Tabb, our Vice President and Chief Financial Officer. Regarding the format of the call, we have allocated about 10 minutes for prepared remarks, in which Mark and Robert will highlight our results and update our market outlook. We will then open the call for questions.
For the course of this conference call, we’ll 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 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 to the most comparable GAAP measures and reconciliation tables accompanying this earnings call within the press release issued this morning. 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’d like to turn the call over to Mark Stauffer, President and Chief Executive Officer. Mark?
Thank you and good morning, everyone. Thank you for joining our call. Today we will discuss our 2020 first quarter results and provide you with an update on the current state of our business during these unprecedented times, given the COVID-19 pandemic. I’ll begin with a few remarks, then turn the call over to Robert to review our financial results in more detail. Then I’ll make some concluding remarks before we turn to Q&A.
First, I’d like to extend our deepest sympathies to those who have been affected by or have had family or friends affected by this virus. I also want to sincerely thank our team members who are safely working at our project sites, yards, field support offices and remote locations around the nation and outside the country.
Our focus has been and will remain on ensuring the health and safety of all our people. We are doing everything we can to support our customers, keep our business operating and support our employees and our communities.
Our services are critical to the economy and because we are involved in construction activities supporting critical infrastructure, we are fortunate to be an essential business.
We’ve been able to maintain our strong market position, and in the first quarter delivered sequential and year-over-year improvement in profitability. We continue to execute on projects in our sizable backlog with only minor disruptions.
To ensure the health and safety of all our employees, we have taken actions, including pre-ship temperature testing, social distancing, heightened sanitation and disinfection practices, use of face coverings, COVID-19 specific safety meetings, leadership training and distribution of educational information. We have also instituted a travel ban, and we have most of our office staffs working remotely.
As we now move toward the reopening of the overall economy, it’s unclear whether we may experience some delays in the timing and execution of new project awards later in the year.
Though this pandemic is unprecedented, we are encouraged by our near record level of backlog, our continued productivity during this period and the long-term resiliency of our end markets that we service.
We have taken steps to ensure that our liquidity position will enable us to continue to execute on projects and backlog and future pursuits. We believe that we entered this pandemic from a position of strength and have gotten through the first phase of this challenge incredibly well. I am confident that we will be able to navigate any potential challenges as we move through the year, all while protecting the health and safety of our employees.
Now I’ll turn the call over to Robert to discuss Q1 ‘20 in more detail and elaborate on our liquidity and cash strategy.
Thank you, Mark. And thanks, everyone, for joining us. Before I jump into COVID-19 discussion and the related measures we’ve taken to solidify the business, I want to take the opportunity to highlight our Q1 results.
Revenues for the first quarter of 2020 were $166.6 million compared to $143.1 million in the first quarter of 2019. The increase in revenues are driven by increased project activity in the marine segment.
We were also very pleased that in the first quarter, we had a book-to-bill ratio of 1.2 times, further extending our backlog and providing us with a substantial amount of work to execute in the upcoming quarters.
First quarter 2020 reported gross profit was $19.8 million, this compared to $9.1 million in the first quarter of last year. The year-over-year increase in margin was driven by a 140 basis point increase in project level margins and a 412 basis point improvement in indirect project support costs.
Also in the first quarter of 2020, we booked roughly $8.4 million of revenue with zero margin related to uninstalled materials in accordance with the accounting guidance under ASC 606 compared to $600,000 in the prior year period. This resulted in an 80 basis point drag to gross margin compared to the prior year period. Note that margin on these materials will be recognized as they are installed.
Turning to the segments, excluding the gross-up impacts of accounting for uninstalled materials, the marine segment’s margins improved by over 1,000 basis points year-over-year, of which 73 basis points came from project-level margins, 997 basis points came from improvements in indirect project support costs.
These improvements were primarily driven by execution-related margin expansion on certain projects and increased human capital and equipment utilization, resulting in higher absorption of fixed costs.
Now turn to the concrete segment. The concrete segment’s year-over-year margins improved by 129 basis points, of which 183 bps of improvement came from project-level margins, slightly offset by 54 bps of increased indirect project support costs. The improvements in project-related margins were driven by increased labor efficiency.
One final note on gross margin. In the first quarter, we adopted ASC 326 regarding accounting for our credit losses. Considering uncertainty created by the COVID-19 pandemic, we booked a $400,000 credit loss reserve against gross profit. This reserve reduced earnings by roughly $0.01 per share.
Moving to SG&A, for the first quarter 2020, SG&A expenses were $15.9 million, up from $15 million in the first quarter of 2019. The increase is driven by the full ratable accrual of the incentive compensation plan.
As a percentage of revenues, first quarter 2020 SG&A was 9.5%, down from 10.4% in the prior year quarter. We remain focused on SG&A being at or below 8.5% of revenues, recognizing that we may see fluctuations on a quarterly basis.
Now to bottom line results. For the first quarter of 2020, we reported net income of $2.7 million, or earnings of $0.09 per share. These results compared to a net loss of $7.9 million, or a loss of $0.27 per share, for the same period a year ago.
After removing approximately $300,000 of pretax, nonrecurring costs associated with our process improvement initiative and approximately $600,000 of benefit from tax valuation allowances, adjusted net income for the first quarter of 2020 was $2.4 million, or earnings of $0.08 per share.
First quarter 2020 adjusted EBITDA was $12.2 million, representing an adjusted EBITDA margin of 7.3% compared to adjusted EBITDA of $3.1 million, or a margin of 2.2%, in the first quarter of last year.
We’ve bid on approximately $1 billion worth of opportunities and were successful on $204 million in the first quarter of 2020. This resulted in a win rate of 20%. While the timing and execution of future project awards remain uncertain, we are encouraged by the amount of quality work that we were able to successfully bid and win during the quarter.
As of March 31st, 2020, backlog was at $609 million, of which $362 million was associated with our marine segment and $247 with the concrete segment. This is a record high for the concrete segment.
Currently the company has approximately $850 million worth of bids outstanding, including approximately $57 million on which it is the apparent low bidder or has been awarded contracts subsequent to the end of the first quarter 2020. In total, we currently have over $665 million of projects between backlog and low bid, a substantial increase from the end of 2019.
Moving into further COVID-19 discussions, I’ll now address some of the proactive measures we have taken. As always, we continue to monitor our CapEx needs and operating costs.
To this end, we’re deferring certain capital and operational expenditures. Also, we have developed and executed heightened controls around cash management and broader risk management and mitigation.
Despite the noted challenges and uncertainty, we feel comfortable with our current liquidity position, which was enhanced in the first quarter as we generated $15.3 million in free cash flow. At the end of Q1, we had $12.6 million of unrestricted cash and access to $12.9 million of availability under our revolving line of credit.
We ended the quarter with approximately $71.5 million in debt outstanding, of which $35 million was related to the revolver and $36.5 million was related to the term loan. This translated into a 1.75 times leverage ratio and a fixed charge ratio of 3.2 times. We feel comfortable with our current debt levels and are secure in our covenants.
As always, we will continue to evaluate opportunities to enhance our liquidity position. In particular, we are working with our banks to explore ways to gain access to additional liquidity. Also, we will continue to look for opportunities to sell non-core assets.
I want to reiterate, we feel comfortable with our current liquidity situation, which will enable us to execute on our backlog and new projects we are awarded in the coming quarters. We remain optimistic in our ability to execute on our near record backlog as we continue to navigate the current health and economic crisis.
Now I’ll turn it back over to Mark to wrap up.
Thanks, Robert. Turning to our markets, we continue to see bidding activity in both our segments. As I stated earlier, it’s unclear whether we may experience some delays in the timing and execution of new project awards later in the year, but as we move to the next phase of improving the functionality of the economy, our focus will remain on profitable project pursuits.
We have diverse end market drivers in both our segments, and while there may be a few that have or will be impacted as a result of COVID-19, there are others that we expect to provide bid opportunities as we go forward. Our focus will be on the bids for these projects.
We have a strong history of adjusting between end market bid opportunities, and our pursuit of select larger and longer duration projects will also benefit us as we go forward.
We remain in constant contact with our customers, and we are closely monitoring their spending plans. Additionally, we are tracking government project letting schedules across federal, state and local agencies, and we are encouraged by the bid opportunities we see upcoming in this space.
We will, of course, also track any movement on a federal infrastructure bill that may be part of future stimulus spending plans for restarting the economy, which could provide significant bid opportunities and for which we are well positioned.
We started this year with a solid Q1 performance, entered Q2 with backlog and low bids at elevated levels, including a record amount of backlog in our concrete segment, and we currently have nearly $850 million of bids outstanding. We also continue to bid on projects in both of our segments.
While we remain focused on continuing to deliver improved performance, given the uncertainty due to the COVID-19 pandemic on the timing and execution of new project awards later in the year, we are proactively suspending our previously disclosed full year 2020 guidance for adjusted EBITDA.
The situation we are all experiencing is unprecedented. However, we are confident that we have the team, processes and procedures in place to get through this pandemic, and we will be well positioned to take advantage of market conditions as the economy emerges from this crisis.
We are focused on safely meeting our customer’s needs now and in the future, and we are confident in the long-term drivers of our markets. Our thoughts and prayers go out to those who have been affected by this virus. And again, I’d like to thank all our team members for all their efforts, especially during these times.
I will now turn the call back to the operator for questions.
Thank you. [Operator Instructions] Our first question today is coming from Marco Rodriguez from Stonegate Capital Markets. Your line is live.
Good morning, guys. Thank you for taking my questions.
I was wondering if you could talk a little bit more on the liquidity aspects. You mentioned some deferral in expenses and CapEx. Maybe you can give us a sense as far as where you think CapEx might end up in fiscal ‘20 and what sort of expenses you might be deferring here?
Well, we’re just being prudent, Marco. We’re deferring some CapEx spend. That may not mean that we’re deferring equipment needs. We’re certainly - we need equipment for projects and execution of those projects. We may just acquire that equipment through other means - renting or leasing or something like that.
So as we’ve gone through this first phase, we’ve just been - 45 days ago, we were entering a new world here, and we weren’t sure where things were going to go. So we’re very deliberate about the plans we’ve set in motion.
And so we’ve just been focused on controlling our cost, as we always do, but also just focused on cash and protection of cash. And so we’ll, as we go through this, we’ll determine when we need to spend or not spend.
But we are still meeting our needs out there with our equipment. And so it’s too soon to tell what our full year CapEx may look like. Right now we’re in a suspension mode on an as-needed basis, and we’ll look at that and evaluate that as we go forward.
Another thing, too, Marco, to think about is we were getting ready to kick off the ERP project. We haven’t canceled that, but we suspended it. We’re going to get a little bit farther into COVID, and we can read and react and see how that plays out.
So we’re looking at that from month to month. As we get a little bit more clarity into the future, we’ll make the go-forward decisions around ERP later on in the year.
Got it. And in terms of backlog, is there any sort of color you can provide in terms of what the margins look like for the marine and then the concrete segment?
Well, we’re pleased with where we are in the work that we’re bidding and the margins that we’re bidding our work at in line with what our expectations have been. Obviously, that is one part of the equation in terms of our performance, and we’ve been focused on our indirects, as you know, through our processes last year. I think the first quarter, you saw improvement there. Robert touched on that in his remarks.
So we’re focused on not only the margins on the projects, but also controlling the other costs, indirect costs that are in COGS. And we’re pleased with what we’ve been seeing and are focused on where we need to be to continue to book work.
Got it. And then I was wondering if you can maybe talk a little bit more about, I guess, the suspension of guidance you had here. Just trying to square some of the comments that I thought I heard on your prepared remarks. It sounded like you had mentioned that you’re still seeing good bid activity in both markets, but you’re suspending because longer term, you’re just not sure what that might look like or what sort of delays may come about.
Is there anything that you’re seeing in particular that is giving you pause for the later part of the year or any additional color you might be able to frame there to help us understand that?
Yeah, I think it’s just we don’t know what the future’s going to hold, right? So I think, as we talked about in our remarks, we came into this thing with near record levels of backlog. We’ve been able to continue to work. We’ve been an essential business in virtually every market that we’re in, even under the various orders, stay-at-home orders. So we’ve been able to continue productivity. As we stated, we have had minor disruptions, but nothing substantial. But we just don’t know what the future’s going to hold. We’re confident in the long-term resiliency of our markets.
We think we’re positioned well coming into this thing. And as I said, we got through this first phase with the shutdown incredibly well. But it’s just being prudent. We don’t know what we might see, but as we said in our remarks, we’re going to be focused on the work that is coming out, and we’re going to be focused on going after profitable project pursuits.
And so we’re going to continue to do what we’re doing. But we don’t know what’s going to happen down the road with this, so it’s just prudent for us to pull that down at this point.
And just to be specific to your question, there’s not anything we’re seeing. It’s just that it gives us pause. It’s just who knows what’s going to happen later on in the year and in the fall and things like that.
There’s such a wide array of scenarios that can play out here. The economy’s trying to reopen. There’s not a cure for this, so there could be a second wave that can impact the current work that’s in backlog right now and in book and burn work, depending on how the end markets react to the slowdown. That can also impact it. As Mark said, there’s just a wide array of outcomes that can happen.
Understood. Thank you, guys. I appreciate your time.
Thank you. Our next question is coming from Poe Fratt from Noble Capital Markets. Your line is now live.
Good morning, Mark. Good morning, Robert. Can you expand, Robert, on your liquidity? You ended the quarter with cash of just a little bit over $12 million. And what’s your availability on the revolver now?
Yeah, we ended the quarter with a little over $12.5 million. Then we have another almost $13 million of availability. In my comments over the last couple of quarters, we talked about returning to the free cash flow position, and we thought it would liquidate in Q1 from working capital. So Q2, we started seeing cash coming in, but then AR ticked up in Q3 and Q4 of last year. We’re now starting to see that liquidate and that cash come back in.
Yeah, look, cash, working capital changes was positive with all but $4 million. What’s your sort of outlook for the second quarter and maybe for the rest of the year from a working capital perspective, if you have an idea of that, Robert?
Well, I expect it to continue on the same trend. It really is going to be dependent upon the level of activity. Seasonality-wise, Q2 and Q3, we tend to burn more costs. And as we burn more costs, I expect to see that have a little bit of a toll on working capital creeping up. But it specifically tends to be dependent upon how much activity we’re able to get into over the next couple of quarters.
Great. And then, Mark, you talked - you gave a little color on just the suspension of EBITDA guidance. Maybe it would be helpful to look at the bids outstanding that you have now with $850 million.
Is it more on the marine side or the concrete side that you’re maybe a little more cautious or a little more concerned about from the standpoint of just the visibility into the second half of the year?
Well, no, good question. I think again, we’re continuing to see work come out for bid in both segments. We’re continuing to book work in both segments. So again, I think this is just a - it’s a prudent course for us right now, just not knowing what’s going to happen, whether or not new work is going to be affected in the future.
As I said right now, and I said it in the remarks, we’re focused on delivering improved results. We’re focused on going after the work that is out there. We do anticipate that there may be some - as I said in the remarks, there may be some markets or projects that get a little more, or are a little more affected right now. But there is others we anticipate activity will continue as we go forward.
A lot of stuff that’s been in the planning stages in the pipeline may already have its financing in place, so that’s very encouraging. On the other hand, we certainly have seen some people pull back their CapEx projects in certain sectors.
But again, we’re focused on what we can focus on. We have been able to continue to operate. We’ve got a nice backlog coming into this. We’re continuing to see work come out for bids. And so that’s all positive as far as we see.
It’s really just around being prudent, given the unknown nature of this. And again, just to reiterate my answer from the last question is there’s nothing specific that is causing us to do this. It’s just being prudent, given the macro uncertainty. But again, from our perspective, we’re focused on doing what we need to do to continue to work and continue to improve our results.
Great. If I could just follow up on that. When you look at - you mentioned CapEx budgets coming down, my assumption is that it’s the energy industry less of a driver now for the Texas economy than it was, say, a decade ago. But still, that’s a potential source of concern.
And then secondly, is it also from the standpoint of looking at some of the public work you do for public entities? Is it from a fiscal standpoint, looking at just lost tax revenue, whether it’s sales or income taxes, is it from that kind of funding perspective? If you could just follow up a little bit on that, that would be helpful.
Sure. Well, yes, obviously in the energy space, everybody’s seen what’s gone on there with energy and related to the switch-off of the economy, if you will. So you’ve seen out there where a lot of the energy companies have pulled back on CapEx. A lot of that has to do with the upstream stuff. So that’s one thing that’s out there.
I will say, as you know, a couple of weeks ago we just put an announcement out on some work that we just were awarded in the energy sector. So there are still things that are going on out there. Even though there’s a pullback, there are still things that are progressing there.
So with respect to the government sector, that’s actually one where, again, we have exposure there, particularly on the marine side in the government space. But our sense that we’re seeing from a lot of the agencies, particularly at the state and federal level, is that they intend to put work out.
So we’ve, again, been closely watching and in discussions with the various folks at the agencies and stuff and see things coming out on the schedule in the next couple of quarters.
So again, I think we’re seeing work to bid on, and we think we will still continue to see work to bid on as we go forward. It’s just, again, nothing specific that we’re seeing to pull this down. We just think it’s prudent, given the uncertainty. And as things move forward throughout the year as we gain more clarity around that, then we’ll address guidance at that point. But for right now, there’s nothing specific that we’re going to point to, so this is why we’re pulling it down. It’s just the macro environment.
But as far as what we’re seeing out there is, like I said, we’ve got diverse end markets, a lot of different drivers. While we may see some that have some pullbacks in them, others, we think, are going to go forward. And again, as you said, Texas has diversified a lot in the last couple of decades. And so we expect, again, the same thing to apply in Texas, where certain things will go forward, and other things may be a little more impacted for a period of time.
Great. That’s helpful. And Robert, if you wouldn’t mind just expanding on your view on enhancing liquidity. And I noticed in the quarter you sold assets which generated about $1.3 million of assets - proceeds from asset sales. And then you had insurance recovery of just a little bit over $1 million.
Can you frame the potential buckets that are out there as far as additional asset sales? And then are there any other insurance recoveries that might occur over the next couple of quarters?
Yeah, I think about it in a few buckets here. The selling of equipment is a normal course of business, so as things get a little bit older, we move them in accordance with our equipment strategy. Some of the things that we talked about over the last few quarters around some of the non-core real estate assets, we have a few pieces that we’re looking to liquidate.
Now the timing of that in this environment can fluctuate, so I won’t guide you to the timing of when we think something like that could happen. But it’s something that we’re pressing forward towards. And then the other piece of it is just the cash from operations, continuing to see our AR liquidate and the EBITDA that we generated over the last four quarters, the $46 million of flow of EBITDA, seeing that really convert to cash. So those are the kind of buckets that I think about enhancing liquidity.
And then finally, we’re working with the banks to see if we can add some availability to the revolver. So as we work through that, we’ll have more to say on it.
Great. Thank you so much.
The next question is coming from Alex Rygiel from B. Riley FBR. Your line is now live.
Thank you. Its good to hear you all healthy and safe and very, very nice quarter.
Mark, in a normalized market, can you remind us what your segment margin targets are?
Yeah, in a normalized market, we would want to see concrete EBITDA margins in the high single digits, and we would want to see marine in the lower - on a consistent basis, on the lower double digits. That’s the target ranges for us.
Do you think your backlog today, if executed as planned and there aren’t any material impacts from timing issues around start dates and what-not, do you think your backlog today can get you to those levels, or is it walking your way towards those targets in a year or two?
Well, I think, again, a lot of the things that we’ve done in the past year and we’ve talked about on the previous several quarters have been to, with the focus on improving our processes, and so we’re making better decisions quicker and faster. So again, that is still the track that we’ve been on, and we’re going to continue down that track, and again, ERP is part of that, as Robert touched on earlier.
So I think there is a couple of things. There’s one, we’re pleased with the progress we’ve made in that regard. As you know, there are two pieces to the performance, and that is at the project level and then controlling indirects and labor utilization, equipment utilization, things like that.
So we’ve been focused on both of those things. I think you can see that, the progress we’ve made on that in our Q1 results. And so we’re continuing down on that path, and I would say that we’re comfortable with where we are in the backlog in terms of margin, and we’re focused on the things we’ve been focused on around labor and equipment efficiency.
And again, I think you saw the positive direction we’ve moved on that in Q1. So yeah, we think in a normalized world, we’re making progress now on achieving those goals for ourselves.
Last question. As it relates to the heavy civil segments, margins picked up nicely here in the first quarter versus other prior quarters. Can you talk a little bit about the mix between more traditional construction versus dredging activities and how that mix may have benefited the first quarter of 2020?
Yeah, dredging was up about 18% year-over-year in the quarter. But really, what drove the margin was improvement in indirects. I touched a little bit on that in the comments. We saw substantial increase in margins, driven by better equipment utilization. A good chunk of that was from the dredges.
And then on the labor side of things, we had less unassigned labor, so people who were hired to work on projects were assigned to projects as opposed to being on the sidelines. So it was really - the story is really a story of being driven by indirects.
And when you look at the overall consolidated margins, concrete was flat from a revenue standpoint, and marine saw year-over-year activity increase. So better margins made up a larger preponderance of the share for the total business. But overall, we’re pleased with where we are. We did see margin expansion at the project level, but most of it was really carried by indirect costs.
That’s, great. Good luck.
Thank you. We have reached the end of our - I do apologize. We do have a follow-up from Poe Fratt. One moment please. Poe Fratt, your line is now live for your follow up.
Hi. Just a quick question. Did you consider or did you apply for any of the paycheck protection program benefits? It seems like construction companies in general, and then in particular Texas, seemed to be a - see a lot of those funds allocated towards that. Did you consider that, or is that something that you just didn’t you qualified for?
Well, just to be prudent, we looked at everything. As we talked about earlier, our focus coming into the - as this crisis was unfolding - was to make sure we were protecting liquidity and focused on cash and liquidity. The PPP does not apply to us, so we had looked at the details of that. It doesn’t apply to us.
The Main Street lending programs, we looked at the details of that just to be aware of them in case. We don’t think that that’s a necessity for us. But we certainly looked at all options that may have been available as we were going through this. But I’ll have Robert touch on the rest of that.
Yeah, we take a look at all of it. I think the PPP program, you have to have less than 500 employees. We’re closer to 2,700 employees, so that’s eliminated out. The Main Street lending program, we looked at that as well. We think our best bet is to continue to work with our banks. Down the road, maybe, that could be an option, but at this particular point in time, work with the banks and squeezing liquidity out of the current operations is our best bet.
Thank you. We have reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.
We thank everybody for joining us, and we look forward to catching up on the next call in August.
Stay well, everybody.
Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.