Orion Group Holdings, Inc.

Greetings and welcome to the Orion Group Holdings Inc. Third Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Fran Okanowski, Vice President of Investor Relations, Thank you. You may begin.

Good morning, everyone, and welcome to Orion Group Holdings' third quarter 2021 earnings conference call and webcast. My name is Fran Okoneski, Vice President of Investor Relations, and joining me today is Mark Stauffer, Orion Group Holdings President and Chief Executive Officer. Regarding the format of the call, we've allocated about 10 minutes for prepared remarks in which Mark will highlight our results and update our market outlook. We will then open the call for questions. Through 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 our 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 for the most comparable gap measures and reconciliation tables accompanying this earnings call within the press release issued yesterday. The press release can be found at 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 investor 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. Thanks for joining us today. Please bear with me as I'm a bit under the weather. As previously announced, Robert will be departing us this week. I'll be covering the information he would normally cover on our call today. But I wanted to thank Robert for all his hard work, particularly over the last three years, and I wish him all the best in his new endeavors. Today we'll discuss our third quarter results, discuss our markets, and our outlook. I'll begin with an overview of the quarter, then discuss our financial performance in more detail, and finally discuss our market outlook before we turn to Q&A. As always, I'd like to begin by thanking our fellow team members for their hard work and dedication, and to remind everyone that safety of our employees is a key priority. We want to ensure that our team members leave work the same way they came in, healthy and injury-free. We remain deeply committed to our Target Zero program to support our vision of zero incidents, zero damage, and zero harm. On our last call, we noted that some of the performance that we were targeting for 2021 could shift into 2022. We saw this in the third quarter as revenue was well short of our targets. Revenue was impacted by phasing of work, project win rates and timing, tropical weather, and COVID-19-related items. In the marine segment, a large portion of our year-over-year decline in revenues was a result of project phasing. Last year's third quarter saw some full swing on a number of sizable projects, which have since completed. While in the current year, prior period win rates, projects pushing rightward, and projects recently awarded that have yet to commence resulted in a gap in project burn for the third quarter, resulting in a negative revenue variance. As noted in the latest project announcements, recently awarded projects will begin ramping up as we move through the fourth quarter and into 2022. We also discussed in our last call our optimism regarding the activity level in our end markets, the robust pipeline of bid opportunities, and our intention to remain disciplined in our approach to bidding work. Our disciplined approach was rewarded in the third quarter as we saw 45% growth sequentially in our backlog with an overall book-to-bill of 2.28 times. In our marine business, we saw a win rate of 53.4% on a book-to-bill of 4.83 times. We remain optimistic about the trends and project opportunities across our end markets, in particular those end markets that are emerging from pandemic-related impacts. Our current level of quoted work is approximately $2 billion, which remains an elevated level sequentially, is almost double the level a year ago, and is up almost 30% from the end of last year. The current level of bids outstanding, an improved macroeconomic environment, and a potential infrastructure bill gives us confidence that we will continue to see a robust project pipeline with bid opportunities available to grow our backlog, positioning us for improved performance in 2022. Now I'll discuss our financial results for Q3 in more detail. Revenues for the third quarter 2021 were $139.9 million, compared to $189.4 million in the third quarter of 2020, or a decrease of 26.1%. The decrease was due to the phasing of work, project win rates and timing, tropical weather, and COVID-19-related items. Third quarter gross profit was $6.6 million, compared to $22.5 million in the prior year period. The year-over-year decline is attributable to the items just mentioned, which also increased our indirect costs from unabsorbed labor and equipment. As a percentage of revenues, gross profit margin was 4.7% in the third quarter of 2021, compared to 11.9% in the prior year period. Turning to our segments, in the third quarter of 2021, our marine segment had revenues of $54.7 million and an adjusted EBITDA of half a million dollars, equating to an adjusted EBITDA margin of 0.9%. In the prior year period, we generated revenues of 112.9 million, and adjusted EBITDA of $13.4 million with an adjusted EBITDA margin of 11.9%. Marine revenues and EBITDA declined due to the aforementioned items. However, as previously noted, we announced a number of project awards for our marine business, providing backlog to support improving results. Our concrete segment had third quarter revenues of $85.2 million compared to $76.6 million in the third quarter of 2020. Adjusted EBITDA for the concrete segment was negative $1 million compared to $3.6 million in the prior year period. While concrete segment's third quarter results were impacted by tropical weather and COVID-19 related items, along with the cost overrun on the completion of one project. SG&A expenses for the third quarter were $15.7 million or 11.2% of revenues compared to $15.3 million or 8.1% of revenues in the prior year period. The increase in SG&A dollars compared to the prior year was primarily related to ERP implementation, partially offset by decrease in bonus expense. Net loss for the third quarter of 2021 was $10.2 million, or $0.33 diluted loss per share. This includes a non-recurring expense of $1.4 million for the implementation of a new ERP system. Adjusting for non-recurring items and tax expense associated with the movement in certain valuation allowances, adjusted net loss was $8.4 million, or $0.27 loss per share. Third quarter adjusted EBITDA was negative $500,000, representing an adjusted EBITDA margin of 0.3%. This compares to $17 million for an adjusted EBITDA margin of 9% in the prior year period. Turning to our bidding metrics, for the third quarter of 2021, we bid on approximately $1.3 billion worth of opportunities and were successful on $318 million. This resulted in a book-to-bill ratio of 2.28 times and a win rate of 24.3% for the quarter. As of September 30, 2021, our backlog was $573 million, up from $394 million on June 30, and $429 million at the same time last year. 380 million of our backlog was associated with our marine segment, and 193 million was associated with our concrete segment. Additionally, we are the apparent low bidder or have been awarded, subsequent to the end of the quarter, $103 million worth of opportunities. Of this, approximately $47 million is related to the marine segment, while $56 million is related to the concrete segment. Moving to our balance sheet, as of September 30, 2021, we had approximately $900,000 of cash on hand, and $29.3 million of availability under our revolving credit facility. We ended the quarter with $19.4 million of debt outstanding, all of which is related to our revolver, a leverage ratio of 1.34 times and a fixed charge coverage ratio of 1.83 times, both well within covenant requirements. Turning to our markets, as I noted earlier, we continue to see improvement in our end markets that were impacted by the COVID-19 pandemic and to see an upward trend in project lettings in these end markets. Winning new awards and replenishing our backlog remains a key focus, and our primary focus will be bidding on the most attractive projects that support our profitability goals. We will remain disciplined in our bidding approach. We continue to reach beyond our traditional project targets in geographic regions to secure quality backlog. As we recently announced in the quarter, we secured our first project for our concrete business in the Florida market, and we are actively working to build on this success. We will continue to target select larger, longer duration projects, which provide us with greater operational visibility. The two recently announced large projects for our marine business fit this profile with both projects scheduled to complete in 2024. In our marine segment, we continue to pursue opportunities in the public sector at the federal, state, and local levels, including port expansion projects, DOT work involving bridges over water, Navy facilities, and environmental and flood control projects. We are also pursuing project opportunities in the private sector, as evidenced by the recently announced awards for private sector dock projects along the Gulf Coast. As stated before, the passage of an infrastructure bill would be an additional catalyst for our end markets. However, even without this spending bill, we expect to see continued project opportunities for infrastructure projects in our markets. Ports in the U.S. are expected to spend over $160 billion over the next five years, focused on capacity expansions and upgrades. Likewise, absent a federal infrastructure bill, we still expect Congress to address long-term highway funding by alternative means. According to the American Society of Civil Engineers, over 46,000 bridges in the U.S. are considered structurally deficient, and 42% of all bridges are over 50 years old. In our concrete business, we continue to see projects from a variety of end markets, such as tech, e-commerce, and large retail moving forward. Demographic trends will continue to drive project opportunities in our markets. In Texas, we continue to see corporate relocations, such as a recently announced headquarter move to Austin. Similar demographic changes are opening up opportunities for us in the Florida market. To sum up, although our third quarter results were disappointing, we are heartened by the solid backlog we added during the quarter, along with the overall positive bid opportunities we see ahead. With that, I'll turn the call over to the operator for Q&A.