Orion Group Holdings, Inc.

Greetings. Welcome to Orion Holdings' fourth quarter 2021 conference call. At this time, all participants are in a listen-only mode. A question and answer session for analysts will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Frances Okenski, Vice President of Investor Relations. Thank you, you may begin.

Good morning, everyone, and welcome to Orion Group Holdings' fourth quarter 2021 earnings conference call and webcast. My name is Fran Okoneski, Vice President of Investment 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 GAAP measures and reconciliation tables accompanying this earnings conference call within the press release issued today. 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 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. Thanks for joining us today. Today, we'll discuss our fourth quarter results, our markets, and our outlook. As an update, we continue to work with the search firm to diligently conduct our CFO search, and we expect to have news on this soon. Filling this key role in our organization is an opportunity to significantly improve our team as we focus on executing our strategic plan. For today's call, I will 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 entire team for their hard work and dedication. We've worked through a challenging period, and I appreciate everyone's efforts. I also want to thank our team for safely performing their tasks. Our goal is 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. As we previously noted, the second half of 2021 was impacted by the lag effects from the COVID-19 pandemic. These lag effects from the macroeconomic impacts to our markets and customers affected prior period project wins, which reduced the volume of work in our marine business and pressured margins in our concrete business. That said, we are well positioned to see a re-acceleration year in 2022 as we emerge from the trough of the second half of 2021 with improving markets, increased backlog, increased quoted bids outstanding, and a robust pipeline of project opportunities. Our disciplined approach to bidding continued to be rewarded in the fourth quarter. The total amount of work we won in 2021 was up 27% over 2020, with two-thirds of this work booked in the second half of 2021. Backlog at the end of the fourth quarter was up sequentially and was up significantly year over year. Our current level of quoted work outstanding stands at approximately $2.6 billion, up 63% year over year. Our current level of bids outstanding and improving macroeconomic environment and the Infrastructure Investment and Jobs Act as an added catalyst to our markets, gives us confidence that we will continue to see a robust project pipeline of bid opportunities to grow our backlog, positioning us for improved performance in 2022 and beyond. Now I'll discuss our financial results for Q4 in more detail. Revenues for the fourth quarter were $162 million, down compared to $170 million in the fourth quarter of 2020. This was primarily due to the decreased volume of work in our marine business. Fourth quarter gross profit was 6.6 million compared to 21.7 million in the prior year period. This decrease was primarily driven by lower volume of work in our marine business resulting in under absorption of labor and equipment and decreased project performance in our concrete business as a result of pressured bid margins and COVID-19 impacts. Additionally, The prior year benefited from three projects that earned final margins well above the as-bid margins. As a percentage of revenue, gross profit margin was 4.1% in the fourth quarter compared to 12.8% in the prior year period. Turning to our segments, in the fourth quarter, our marine segment had revenues of $73.1 million and an adjusted EBITDA of $5.2 million, equating to an adjusted EBITDA margin of 7.1%. That compares with $97.6 million of revenue, adjusted EBITDA of $13.1 million, and an adjusted EBITDA margin of 13.5% in the prior year periods. The decrease was driven by the decreased volume of work and the under-absorption of labor and equipment costs. Our concrete segment had fourth quarter revenues of $89.2 million compared to $72.6 million in the fourth quarter of 2020. Adjusted EBITDA for the concrete segment was negative $4.3 million, compared to negative 0.6 million in the prior year period. Our concrete segment's fourth quarter results were impacted by pressured bid margins and inefficiencies in executing work due to COVID-19 impacts. SG&A expenses for the fourth quarter were 16.1 million or 9.9% of revenues compared to 17.4 million or 10.2% of revenues in the prior year period. The decrease in SG&A dollars compared to the prior year was primarily related to a decrease in bonus expense. Net loss for the fourth quarter was $8.8 million or $0.29 diluted loss per share. This includes a non-recurring expense of $2.1 million related to the development of a new ERP system. Adjusting for non-recurring items and tax expense associated with the movement of certain valuation allowances Adjusted net loss was $5.3 million, or $0.17 loss per share. Fourth quarter adjusted EBITDA was $0.8 million, representing an adjusted EBITDA margin of 0.5%. This compares to an adjusted EBITDA of $12.6 million and an adjusted EBITDA margin of 7.4% in the prior year period. Turning to bidding metrics, in the fourth quarter, we bid on approximately $1.6 billion worth of opportunities and were successful on 180 million. This resulted in a win rate of 11% and a book-to-bill ratio of 1.11 time for the quarter. As of December 31st, 2021, our backlog was 590 million, up from 440 million at the end of last year. Of our year-end backlog, 377 million was in our marine segment and 213 million was in our concrete segment. Approximately $455 million of the year-end backlog will burn during 2022, with the remainder associated with longer-term projects burning through 2023 and into 2024. Additionally, we are the apparent low bidder or have been awarded $138 million of new work subsequent to the end of the fourth quarter. Of this, approximately $24 million is related to the marine segment, while $114 million is related to the concrete segment. As of December 31, 2021, we had approximately $12.3 million of cash and $9.3 million of availability under our revolving credit facility. We ended the year with $39.4 million of outstanding debt, $39 million of which is related to our revolver. Subsequent to the end of the quarter, the company amended its credit agreement effective for the quarter ending December 31, 2021. The goal of this amendment was to provide the company with a waiver and greater flexibility as it provides for suspension of the leverage ratio and fixed charge coverage ratio for the quarter ending December 31st, 2021, before reverting back to a leverage ratio not to exceed 3.0 times beginning in the third quarter of 2022 and reverting back to a fixed charge coverage ratio of a minimum of 1.25 times beginning in the fourth quarter of 2022. Additionally, the amendment reduces the revolver to $42.5 million for the remainder of the term and provides paydowns on the revolver by any amounts of cash above $10 million until delivery of the third quarter 2022 compliance certificate. Capacity created by any such paydowns remains available to the company. The amendment includes minimum EBITDA requirements for the first and second quarters of 2022. The company is pleased with the continued support from its lenders and looks forward to maintaining its excellent relationship with its bank group. We also expect to begin discussions regarding a new credit facility in the coming months. As for guidance for 2022, we expect adjusted EBITDA to be in the mid $30 million range. We'll provide an update on this guidance as we progress through the year. Turning to our markets, we continue to see improvement in our end markets that were impacted by the COVID-19 pandemic. and to see a robust level of opportunities in our bidding pipeline. Winning new awards and replenishing our backlog remains a key focus. We will continue to bid on the most attractive projects that support our profitability goals and will remain disciplined in our bidding approach. We will continue to target select larger, longer duration projects to provide us with greater operational visibility. In our marine segment, we will continue to pursue opportunities in the public sector at the federal, state, and local levels, including port expansion projects, DOT bridges over water, Navy facilities, and environmental and flood control projects. We now have an additional multi-year catalyst for public sector projects as a result of the Infrastructure Investment and Jobs Act. We expect this act to be a tailwind in our markets for several years. The Infrastructure Act reauthorizes highway transportation funding as well as providing significant new funding for ports, waterways, water infrastructure, and bridges, among other things. We are also pursuing project opportunities in the private sector as we continue to see bid opportunities in the recreational and energy sectors. In our concrete business, we are seeing an increased volume of bid opportunities in our Houston market, along with improving bid margins across all of our markets. Projects continue to come in from a variety of end markets, such as tech, e-commerce, and large retail distribution. Demographic trends will continue to provide project opportunities in our Texas and Florida markets. We enter 2022 with increased backlog, increased quoted work outstanding, a strong bid pipeline, and long-term tailwinds driving our markets. As we emerge from the lag effects of the COVID-19 pandemic, We are well positioned for improving results for 2022 and beyond. With that, I'll turn the call back to the operator for Q&A.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. Our first question is from Julio Romero with Sidoti and Company. Please proceed.

Hey, good morning. Thanks so much for taking the questions.

Good morning, Julio.

Hey, so can we start off on the concrete segment? You mentioned pressured bid margins, not necessarily pressured execution margins. Does that imply that maybe the pricing that they were bid at were under the target margins? And if so, when do you think you get through this lower margin bid margin backlog?

Well, as a reminder on the concrete business, we turn our work relatively quickly. So a lot of the work is kind of in the three-month to six-month range. So we'll burn through the backlog fairly quickly. Again, yeah, we've just seen the pressure, particularly in the Houston markets, as a result of the shifts in markets over the last period related to COVID and things like that. As I noted in the remarks, though, we've seen a significant uptick in the market in Houston and awards in Houston, and we're seeing improving bid margins across all of our markets. You know, that stuff will – the prior stuff will burn off relatively quickly, and we'll start replacing that with improving margins.

Okay. That's very helpful. So I guess your bids outstanding is up, you know, $2.6 billion. It's up about 30% sequentially, and I guess you mentioned that bid margins are trending upward?

Yes.

Okay. I guess thinking about utilization, year to date, you're two months through the first quarter. Are you seeing better utilization in the first quarter than you did in the fourth quarter and third quarter?

Well, a couple points to make up. I mean, we are seeing the trend in upward utilization, improving utilization. Keep in mind, though, the beginning of the quarter, we were having the surge in Omicron The Omicron variant, just put that in perspective, we had about a 60% increase in our COVID cases from the beginning of the pandemic. So from the previous 18 months until December and January, we had a 60% increase, over 60% increase in our cases. So we did start the quarter off with the Omicron variant. we are continuing to ramp up on projects. So as we move through the quarter, we expect to see utilization improving. And then, of course, as we get on to the year, we'll continue to see that improved utilization with the ramp up of all these projects.

Okay, perfect. And then the last one for me is I may have missed if you gave any quantifiable EBITDA guidance for 22. And if not, if you could just speak, I guess, qualitatively to how you see EBITDA shaping up for the year?

No, we did. We said mid-30s for the year. We'll provide updates on that as we go through. You know, again, I think, you know, as we talked about, we've got significant backlog coming into the year. We've got good markets. You know, we're set up for reacceleration. We've got work to go out and win, and we've got the markets and the tailwinds to go win that work.

Perfect. I'll hop back into the queue with any follow-ups. Thanks. Thanks.

Thanks, Julio.

You bet.

Our next question is from Min Cao with B Riley Securities. Please proceed. Great. Good morning, Mark and Fran.

Morning, Min.

Just a couple of questions here. Can you – and Omicron is taken care of. Can you just give us an update on your asset sales from the last quarter?

Yeah, on the real estate, I'm assuming you're asking about the real estate. Both properties remain under contract. Yeah, both properties remain under contract. The Port Lavaca property, we are just waiting for a closing date. So that's in progress. We're hopeful that we will have a closing date shortly. And then the East West Jones property, again, still remains under contract, but we're still in the diligence period. with the buyer, so we're still pending the conclusion of that before we have a closed date. Got it.

You talked about concrete margins improving, the bid margins improving. Are you seeing that in your backlog currently, or is that still yet to come? In other words, do we have another three to six to maybe nine months of you know, of lower margin in that business, just outside of kind of COVID impacts, but just due to the underlying margins?

Yeah, well, I think we're seeing that now in the bid margin. So the backlog we're starting to book, I think, is moving up from the bid margin perspective. So as, you know, as I said earlier, we do have to burn off, you know, the work from the last, you few months, so we would expect to see improvement as we go through the year on that. I think, again, you've seen where we've set the guidance. I think for the first quarter, obviously, we've had the challenges with Omicron, and it's generally our seasonally weakest quarter to start with, but we would expect as we get into Q2 and then on into Q3 to see the ramp up. Got it.

Just wanted to get an update on your ERP system. Are you still targeting full implementation by mid-2022, or did that get pushed out due to COVID?

That's gotten pushed out. We're still committed to the ERP. We think that's going to be an essential piece for us. We do expect to reduce the spend in the first half of the year. We're focused on the ramp-up of our projects and things that I talked about earlier, but we're continuing to prepare for the implementation of that. We're developing analytics and tools as an example and data warehouses and a lot of kind of stuff behind the scenes that we can do to continue the project. But we do expect to reduce the spend significantly in the first half.

In the first half. Okay. So it sounds like you'll probably be running kind of parallel systems maybe through the entire year.

Yes. That's a reasonable assumption.

Okay. Just Can you provide any update on your industrial expansion? Is there anything in backlog currently? Is there any impact from recent oil prices? Can you just talk about the bid opportunities there?

Yeah, well, we've had work in our backlog. As you know, it's not split out separately. It's included in the marine segment. We've been working on work that we classify as industrial work for the last year, year and a half. So, obviously, as you point out, I mean, there was a general pullback, or I guess I pointed out in my remarks, there was a general pullback in private sector opportunities as a result of the COVID pandemic. But as we noted in the back half of last year, we started seeing those private opportunities come back online and work that was delayed. we started seeing those bid opportunities. So we have been seeing opportunities in industrial again, along with all the other private sector work that we've seen in the marine segment. And so we'll expect to continue to see opportunities there, both in the, you know, predominantly in the private sector, but also some in the public sector.

Excellent. And just one final question. You mentioned in your presentation amendment to your credit facility that there's a new EBITDA minimum for 1Q and 2Q. Can you disclose what those minimums are?

Generally speaking, I think it's about 2.6 for Q1 and then cumulative 7.5, 7.7 for Q2. And in the details of all that, will be included in the K when we file that.

Sounds good. Great. Thank you.

You bet.

Our next question is from Marco Rodriguez with Stonegate Capital Markets. Please proceed.

Good morning, everybody. Thank you for taking my questions. You bet.

Hey, Marco.

Hey, I just wanted to kind of circle back around on the margin pressures in concrete. I appreciate the information and the color surrounding it, but I was wondering if maybe you can help us understand or quantify the impacts from the pressure bid margins and the COVID impact. Just kind of where were the biggest issues? And again, if you can quantify it in any manner, that'd be helpful.

Well, I guess I would say if you look at the results, you kind of see the quantification of that in the concrete business. I think, again, a large part of that was driven by the Houston market. The Houston market has always been a strong market for it. It's been the base of our concrete business since inception. And as you know, the Houston market was impacted probably more than any of our markets as a result of the pandemic with the global turndown and the impacts on energy. It's just generally just been a competitive environment. There's been shifts throughout the pandemic of what projects have moved forward. And as I talked about in previous calls, kind of the haves and have-nots type economy was driving where projects were coming out. And so it just shifted the dynamics. And I think generally just kind of the mood of the competitors was people were very aggressive in bidding work and trying to get work at any price almost. So It did put downward pressure on the margins. You can kind of see that reflective in the results in that business year over year. That said, as I noted in the remarks, we've seen an improvement in the Houston market. We've won several projects in the last couple of months, and a lot of the The work that we've mentioned that we've been low bidder on or awarded subsequent to the end of the quarter or the first quarter this year is in the Houston market. So we're pleased to see that, and we're more pleased to see that we're seeing some improvement in the bid margins, not only in Houston, but in all our markets in that business.

Understood. And I understand as well that the margins at the marine segment were a little pressured as well, just kind of given – the underutilization of assets there. So is it fair to say then that the compression that we see here in your gross margin from where it normally is on a Q4 basis is primarily due to your concrete segment, or can you help us think through that mix aspect?

Well, I think it's both. I mean, as I mentioned in the remarks, the volume of work on the marine side was impacted. And again, just due to the prior period win rates, we did start some ramp up of the Q3 work in Q4. But again, as I said earlier, the Omicron variant came in just as we were kind of starting to gain traction on some of the startup of work. So that impacted both segments, as I mentioned earlier, with the huge increase in cases there. The good news is, you know, now as we sit here today, our cases have gone back down to a trickle, I think, which everybody else would recognize from their own personal situations. So that's positive. But that impacted the Marine side as well and, you know, just put pressure on us in the quarter. But, again, as we move forward from where we are today, those cases have abated, and we're ramping up on work, and we've got good – bid pipeline in front of us.

Got it. And then in terms of guidance, Justin, you've been at $30 million, mid $30 million. Kind of based on some of the responses to questions prior, it sounds like that is going to be pretty much kind of second half weighted. Is that a first statement?

Yeah, I think, well, if you think about, I think, you know, as we've talked about previously, you know, in prior quarters, prior years, you know, kind of a normal cycle for us is, you know, Q1s are seasonally weakest quarter. We start seeing a ramp in Q2. And then, you know, three and four are typically our peak months. I think that's probably indicative of what we're going to see again this year. Obviously, we'll work to outperform at all times. But, you know, we do have – we're coming into the year with good backlog, a good base to build off of. in an environment where we expect to see bid margins improve. We're seeing that on the concrete side, as I noted. I will say that in our marine business, nobody should be bidding cheaply in our marine projects that we're going after. There's so much work coming down the pipeline. There was a lot of work already. With private sector opening up and then with the additional catalyst of the Infrastructure Act, there's no reason for people to be filling up on cheap work at this point. So we would expect that to help with bid margins on the marine business as well, or in our marine business as well. So, you know, we're excited about the opportunities we see in front of us and continuing to replace backlog with improved margins. And as you pointed out, we're starting from a base of better absorption of our indirection of our labor and equipment in the marine business just with the backlog that we have. So we're poised for improvement this year and on into the future.

And last quick question for me. I'll jump back in queue. Can you update us on progress here as far as diversifying your business into additional geographies?

Well, in our concrete business, we are, as we mentioned last quarter, we've recorded our first project in the Florida market, and that's been executing and going well for us. We are continuing to bid work there. And I would say, describe it as our bidding efforts in that market have ramped up. So that's moving ahead. And we continue to bid projects throughout Texas beyond just our traditional markets. So we continue on with that and expect that to continue this year.

Got it. Thanks a lot, guys. I appreciate your time.

You bet.

Our next question is from POFRA with Noble Capital Markets. Please proceed.

Hi. Can you give us a CapEx number for 22? And then also, how much are you actually going to be spending on ERP? And if you could give us the cadence of that over the course of the year, that'd be helpful.

CapEx is in the $15 to $18 million range for the year. And then on the ERP spend, I would say less than $4 million of a spend, and that would be back-end weighted.

Great. And I think you said that you had current availability under the revolver of $9.3 million at the end of the year. What's your current availability? Do you have that number right now?

It'd be around 12 and a half.

And then, you know, you gave the minimum, you know, EBITDA for the quarters, you know, 2.6 and 5.1 in the second quarter, you know, if you look back at the cumulative. What, is there any impact on your bonding capacity? You know, have you seen that change at all?

No. Haven't seen that change. We continue to have ample amount of bonding capacity. The bonding company has continued to support us with our bids, and we expect that they will continue to do that. We've got a great relationship with our bonding group, and we have ample capacity for the projects that we see in our pipeline.

Great. And then, you know, Port Lubaca is been really slow to close because my understanding was that the buyer was looking for financing has the financing been finalized there and so that you you know that's what you're you had been waiting for and you know the closing date will be set fairly soon could it be this quarter mark or is it you know are we going to see it pushed out into the second quarter again

I would expect, just to be conservative, it would probably push to the second quarter. Again, we believe they have gotten their ducks in a row, but we'll wait to see. We're not going to high-five it until we've got a closing date set.

So they don't have financing yet?

We believe they have it, but we'd We don't know the exact timing of when that's available for them.

And the net proceeds from that sale are in what ballpark?

Somewhere around five.

Got you. And then on East West Jones, can you give us a ballpark number for the proceeds from that sale? And, you know, is that we were sort of thinking early or late second quarter, early third quarter? Is that still a fair timeframe?

That would be a fair timeframe, again, assuming there's a lot to get done between now and a closing on that. So, you know, we continue to market that property. But so the answer to your first part of your question was I think the current PSA on that is $35 million. So we would net somewhere north of $30 on that.

Okay. And then... You know, concrete's been a perennial problem. I mean, it's just inconsistent. Well, actually, it's pretty consistently bad. You know, you talked about structural issues, you know, changes two years ago. What structural or organizational changes are you making now? Or is it just, hey, the market's getting better, COVID's not a problem, we can change our protocols so that we won't have as many you know, as much problem as far as staffing. What, can you just help me understand?

Yeah, no, well, I think, I guess the basic thing I would say is we have made progress in that business. It's, you know, obviously with the ISG program that we had in effect, and we talked a lot about in previous calls, you know, what I would say is I think the The benefits of that have been obscured a lot by the COVID-19 pandemic. I mentioned this on the call last time, I think, but I'll refresh it again, is that we've been undertaking a lot of things in that business to standardize things and improve personnel, improve our processes to execute better on the work. And again, that's obscured somewhat from visibility just by the pressured margins and the impacts from the COVID-19 pandemic. I think as we're emerging out of that, we're going to see those improvements be able to come through. Again, I'll touch back on the points I made earlier with the improving market in Houston and improving bid margins. We know we need to make progress in that business. Again, we've been working on a lot of things and processes with the business to make that come to pass. And as we see conditions improve in the marketplace, we expect to see that division produce better results.

Great. Could you give us any amendment, the amended The big thing was last year when your other revolver expired, you could buy stock back. Does this amendment prohibit you from buying stock back?

The amendment does not, but as you probably recall, Poe, there is a leverage ratio requirement on buybacks, and we have to be below 2 to 1 before we can buy. do stock buybacks under the credit agreement. That hasn't changed. That's the same as it was.

And that's an LTM as far as?

Yes.

Great. Thanks for your help.

You bet, Poe.

We have reached the end of our question and answer session. I would like to turn the conference back over to Francis for closing remarks.

Thank you, everyone, for attending our fourth quarter 2021 earnings conference call. We look forward to speaking with you in April on our Q run results. Have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.