Orion Group Holdings, Inc. (ORN) Earnings Call Transcript & Summary

Good day, and welcome to the Orion Group Holdings Second Quarter 2023 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Margaret Boyce, Investor Relations for Orion. Please go ahead, ma'am.

Thank you, Justin, and thank you all for joining us today to discuss Orion Group Holdings Second Quarter 2023 financial results. We issued our earnings release after market last night. It is available in the Investor Relations section of our website at oriongroupholdingsinc.com. I'm here today with Travis Boone, Chief Executive Officer of Orion and Scott Thanisch, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the federal securities laws. Forward-looking statements that are identified by words such as will, be, intend, believe, expect, anticipate or other comparable words and phrases. Statements that are not historical facts are forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-Q and 10-K. With that, I'd now like to turn the call over to Travis. Travis please go ahead.

Thank you, Margaret, and welcome to everyone joining our call today. In the second quarter, we made substantial progress against our strategic plan, and Scott and I will cover the details in our prepared remarks. Before that, I want to give you more context around our second quarter performance. As you saw in our press release, revenue came in at $182.5 million. Our loss per share was $0.01 and adjusted EBITDA was $3.7 million. Last quarter, we told you that we expected second quarter results to be better than the first quarter, and they are a significant improvement over last quarter, reflecting the progress we are making to improve our long-term performance. We expect continued improvement through the back half of the year. I'll start with our concrete business. As you've heard me say before, our immediate priority was to improve concrete's profitability. When Scott and I came on board, the concrete business had been losing money for too long. Since we started the transformation of our company in September, we implemented disciplined bidding processes, made leadership changes, added more rigor in our project delivery, exited the unprofitable Central Texas market and focused our resources on our Dallas and Houston markets. As a result of these actions, our concrete business returned to profitability in March. That profitability continued in April, May and June, and we expect that trend to be sustainable. Right now, we have a large volume of work that has been bid, which reflects very strong demand in our core markets. We won't win all that work, especially if it doesn't meet our bid margin thresholds and some customers are delaying decisions until the cost of capital stabilizes. Even so, we feel concrete is in a strong position for the rest of 2023 and beyond. While concrete was a bright spot this quarter, our volume challenges in the marine business continued, primarily in our dredging operation. For context, our dredging business has historically been roughly 20% of our revenue and 30% of our profit. When that business is slow and we don't have work to bid, it has a big impact on us. The Army Corps of Engineers has the responsibility, the mandate and the funding to maintain U.S. waterways along the Gulf Coast. They are very aware of the pressing need to dredge major shipping channels to keep commerce moving efficiently along the coast into the ports. Taleo this maintenance activity has far-reaching consequences on the Gulf economy and the U.S. supply chain, potentially disrupting shipping goods handling, warehousing and ground transportation. While we are excited about the potential to see significant opportunities in this space in the long run, our near-term bidding opportunities continue to be limited relative to historical levels. In this environment, our focus is on carefully managing our costs and maintaining bidding discipline. In the second quarter, we were successful in winning a $27 million dredging contact from the core. And just last week, we won another $18 million contract with the core for dredging in Louisiana. These wins will help to get our dredges busier in the latter half of the year. We have several large outstanding bids for marine construction, and we remain confident that our opportunities to grow will continue. The $1.2 trillion Infrastructure Act was passed 2 years ago, and while only a very small portion of the work has started, it is coming. Our project to build a dry dock at Pearl Harbor is underway, and we are mobilizing equipment and resources to Hawaii. We expect our portion of the work on this $435 million contract to continue over the next 2.5 years. Orion is now fundamentally stronger and better positioned for accelerated profitable growth. We laid out our 3-point strategic plan earlier this year, and we have made substantial progress in a short time. We are committed to doing what we say we will do and delivering on our plan to transform our business. We began with a long checklist and have ticked off many of the boxes, all focused on derisking the business to clear the path for long-term and sustainable growth. We shored up our balance sheet and liquidity. In many ways, this was one of the most critical objectives we faced. We secured a new $103 million ABL credit facility and have thus far monetized $25 million of assets with substantially more under contract. We have attracted great talent to focus on business development and growth, building stronger customer relationships is a critical element in driving future growth. Casey Stegman joined us to lead business development for our efforts in Louisiana, which is an important state for us considering that $50 billion is earmarked for Louisiana Coastal restoration. Alan Eckman joined us in July to lead corporate growth and strategy reporting directly to me. These individuals bring years of experience and proven results to Orion. We will continue to invest in key resources focused on growing our business. We're also investing in training and tools that will allow our people to reach their full potential. Our goal is for our people to clearly understand our business objectives, embrace a growth mindset and speak about the business in the same way. This is an important step in strengthening our culture, leveraging best practices, driving synergies and cross-selling capabilities. Looking ahead, we are extremely excited about the future. In the remaining months of 2023, we will continue to build momentum in the execution of our strategic plan and expect quarter-over-quarter improvements in performance. After establishing a foundation for the new Orion this year, 2024 will be a very different year for the company. We are fortunate to have the most exceptional people in the industry and 2 businesses with different catalysts for growth, concrete, more driven by the private sector and marine by the public sector that can balance one another during challenging times. We both are performing well as we expect in 2024, they can deliver dramatic growth. Now I'll turn the call over to Scott for his review of the financials and operations.

Thanks, Travis. I'll cover some highlights and then review the second quarter results. The main headline of the second quarter is the progress we've made strengthening our balance sheet and improving the company's liquidity. As we announced on May 15, we closed on a 3-year $103 million ABL credit facility, which includes a term loan of $38 million and the revolving credit facility up to $65 million. By extending our debt maturities and increasing our access to capital, Orion will be positioned to make the most of our market opportunities. In addition, we closed $25 million in equipment and real estate sale-leaseback transactions in the quarter. We're pleased to deliver progress on our asset monetization goals, and we remain focused on opportunities to unlock value on our balance sheet. In April, we signed a $36 million contract to sell our East-West Jones property. And then in June, we signed a contract for the sale and partial leaseback of our Baytown Pipe yard for $8.3 million. We expect these transactions to complete in the third and fourth quarter, respectively. While our balance sheet is stronger and that is the headline for the quarter, I'm more excited about the transformation of our concrete segment performance, which as Travis mentioned, hit positive adjusted EBITDA this quarter for the first time in 2 years. This was a $3 million improvement over both the prior year and the prior quarter. These margin improvements are sustainable and they're supported by both operational process enhancements and more disciplined bidding, leading to higher margin in our backlog. Moving on to our financial results. Orion produced $182.5 million of revenue in the second quarter, up 14.7% sequentially and down 6.2% from the prior year. The year-over-year decline was largely due to our exit of the Central Texas construction market, partially offset by increased revenue in our Marine segment, driven by our Hawaii dry dock project. Second quarter gross profit was $13.8 million or 7.6% of revenue compared to $14.3 million or 7.4% of revenue in the prior year period. Gross margin percentage increased due to our actions to improve Concrete segment margins, partially offset by lower equipment and labor utilization in our Marine business. Turning to more detail on our segments. Our Marine segment reported second quarter revenue just over $100 million, up 22.1% over the prior year. Adjusted EBITDA was $3.5 million or 3.4% adjusted EBITDA margin. This compares to adjusted EBITDA of $8.7 million and an adjusted EBITDA margin of 10.6% in the second quarter of last year. This decrease in adjusted EBITDA was primarily related to lower labor and equipment utilization. Second quarter concrete revenue was $82 million, down 27% from the prior year. Adjusted EBITDA was $264,000 or 0.3% of revenue compared to negative $3 million -- negative 2.7% margin last year. As I mentioned, we expect these margin improvements to be sustainable moving forward. SG&A expenses for the second quarter were $18.1 million or 9.9% of revenues compared to $17.2 million or 8.9% of revenues in the prior year. SG&A grew due to increased compensation expense, partially offset by lower consulting expense related to the management transition. Net loss for the quarter was $0.3 million or a loss of $0.01 per diluted share compared to a net loss of $3.1 million or a loss of $0.10 per diluted share in the prior year. This result included $4.3 million or 13 diluted earnings per share of nonrecurring items. Excluding these items, second quarter 2023 adjusted net loss was $4.5 million or $0.14 loss per diluted share. EBITDA for the second quarter was $7.6 million, and adjusted EBITDA was $3.7 million. Turning to bidding metrics. In the second quarter, we bid on approximately $762 million worth of opportunities and one $534 million with our Hawai dry dock project added to backlog. This resulted in a contract value weighted win rate of 70% and a book-to-bill ratio 2.9x for the quarter. As of the end of June, our backlog was $818.7 million, a 75% increase over backlog at the end of the first quarter. Breaking out our second quarter backlog. $614.9 million of this was in our Marine segment with $203.8 million in our Concrete segment. Furthermore, we've been awarded over $84 million for new project work, not included in our backlog at the end of the second quarter. Of this, approximately $39 million is related to Marine with $45 million related to concrete. Moving on to our balance sheet. As of June 30th, we had approximately $8.9 million of cash and $36.9 million of outstanding debt. In relation to our new debt facility, we incurred $5.9 million of debt issuance cost that will be amortized over the life of the agreement. As of the end of the quarter, we had no outstanding borrowings under our revolver. As we look ahead to the second half of the year, we're optimistic. As Travis said, we expect to see quarter-over-quarter improvements throughout the year as we realize the benefits of our strategic initiatives. While the low bidding volume in the dredging market continues to impact our industry, our mixed wins will enable us to get more of our fleet to work in the coming months. And we are excited as Hawaii ramps up and contribute significantly to our second half. With that, we'll open the call to your questions. Justin?

[Operator Instructions] Your first question comes from the line of Joe Gomes from Noble Capital.

So I just wanted to just clarify some stuff here on the Concrete segment. You talked about it being profitable basically since March. But if I'm looking at the tables in your release that says the Concrete segment had an operating loss of about $1.5 million in the quarter. So when you say profitability, you're just talking about on the adjusted EBITDA basis. And when do you forecast that on an operating income basis, the Concrete segment will turn profitable?

Yes, Joe, that's right. We're thinking about it on an adjusted EBITDA basis. In terms of when it might turn profitable on an operating income basis, I don't know that I want to call a month there, but I do think that we'll see continued improvement in that business. We think that the opportunities in front of it are pretty significant and the strides that we've taken to improve the margins there, as we've said, we think are going to stick. So we expect continued improvement in that business, and we'll close that gap on the op Inc. as well over time.

Okay. And are you completely out of Central Texas? Or is there still a few more things that you need to finish up there?

We're wrapping up. I think we have to maybe 2 or 3 projects kind of in the final throes of completion here, they should be wrapped up, I believe, in the next month or so. We're almost out.

Yes. punch list work, we're -- there's not much -- there's not really any significant backlog associated with Central Texas remaining.

Okay. Great. And one more, if I may. You talked about some of the monetizations, East West Jones, Baytown, I think Port Lavaca South. When all of those are said and done, how much cash do you think they're going to bring in on the balance sheet?

Yes. So I think we've talked about the $25 million already that we did this quarter between the outstanding contracts that we have and other things that we see as potential opportunities on the balance sheet. I think there's probably another $40 million to $50 million that we anticipate as realizable in the near term. So that's kind of what we're working towards in our goals right now.

Your next question comes from the line of Julio Romero from Sidoti.

I wanted to start on the Marine segment. How much revenue in the second quarter did you see from the Pearl Harbor dry dock project? And how much revenue do you expect to realize from that project in the third quarter?

Yes. We don't talk on specific contracts, really, but it was a pretty significant contributor to revenue in the second quarter, and it should be more in the third quarter. I think that in the second quarter, it was several tens of millions, but it was -- it's going to be more going forward. We'll have a more significant ramp in the beginning of next year as we really start driving pit.

Okay. I appreciate the color you can give there. And it was nice to see the $45 million of dredging contracts that you won recently for Texas and Louisiana. But your commentary, Travis, on the prepared remarks on a little bit kind of pessimistic on the pipeline of dredging bids. I don't know if you can just talk about that as a guide maybe a little better or worse or same as 3 months ago.

I mean it's -- I don't know if it's better or worse or roughly the same as it was 3 months ago. It's just been slow quite frankly, slower than historic volumes to be clear. And that -- as you know, it really impacted us in the second quarter. We had dredges sitting around waiting to go to work. Fortunately, we have -- we'll get most of our judges busy with the contracts we've won recently. But we need to keep the bids going so that we can keep those things moving when they're sitting, it costs us a lot of money.

We've had an active dialogue with the Army Corps of Engineers, and we'll certainly continue that. They understand look the need and the value to their purchasing program of getting that bid flow up and getting the market in a more stable position.

Got it. And just one clarification question. You talked about the dredging historically has been 20% of revenue and 30% of profit. I assume those metrics are for the Marine segment standalone and not for Orion overall, is that correct?

It's actually overall.

Your next question comes from the line of Dave Storms from Stonegate Capital Markets.

Just hoping we could touch on the burn rate for the backlog. I know last quarter, you had mentioned it's in the high $300 million. Is that expected to remain constant, maybe another $300 million or so for the rest of the year? Or is there any comments you can give on that?

Generally speaking, looking at our backlog, it's for the next 12 months, probably 2/3. And I think that over the next 6 months, the that -- it's probably the majority of that 2/3. But I think that we typically are looking at backlog out longer than just the next few months. So we're -- we see it right now in kind of the similar place and having a similar profile in terms of how it's going to schedule out is what we have typically seen in our business.

That's very helpful. And then just sticking with the backlog, is there any sense that you could give us on what the margin expansion may look like, specifically on the concrete segment in that backlog? Or are you want to comment on that?