Orion Group Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 8 speakers on the call.

Operator

Good day, and welcome to the Orion Group Holdings Second Quarter of 2024 Conference Call. At this time, all participants are in a listen only mode. Please also note that this call is being recorded today. I would now like to turn the call over to Margaret Boyce of Investor Relations. Please go ahead.

Speaker 1

Thank you, Joe, and thank you all for joining us today to discuss Orion Group Holdings' 2nd quarter 2024 financial results. We issued our earnings release aftermarket last night. It's available in the Investor Relations section of our website at oriongroupholdings.com. I'm here today with Travis Boone, Chief Executive Officer of Orion and Scott Vanish, Chief Financial Officer. On today's call, management will provide prepared remarks and then we'll open up the call for your questions.

Speaker 1

Before we begin, I'd like to remind you that today's comments will include forward looking statements under the federal securities laws. Forward looking statements 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 ks.

Speaker 1

With that, I'd now like turn the call over to Travis. Travis, please go ahead.

Speaker 2

Thank you, Margaret, and good morning, everyone, and thank you for joining our Q2 2024 conference call. I'll start with an overview of our Q2 results, recent wins and a market update, and then I'll turn it over to Scott to cover our financial results. In the 2nd quarter, we generated revenue of $192,000,000 and adjusted EBITDA of $5,500,000 As we discussed over the past 2 quarters, we anticipated a slower ramp up with 2 large projects over the first half of the year. We don't like surprises and recognize that we fell short of consensus. We have been transparent about what we were seeing ahead.

Speaker 2

There's nothing more important to me than doing what we say we will do. This is a short term challenge. We have an incredibly talented team and a strong foundation with a huge market opportunity ahead. While we had some logistical setbacks late in the quarter, our Grand Bahama Shipyard Dry Dock project is now back on track and our teams on the Pearl Harbor project are working double time to get back on schedule. In construction, work delays beyond our control are not uncommon and can sometimes cause our results to vary from quarter to quarter.

Speaker 2

While the total value of the contracts remain unchanged, revenue recognition will shift. While these delays are not expected to have any impact on the critical completion of these large projects, they will affect our full year 2024 financial results. For this reason, we are lowering our annual guidance to a revenue range of $850,000,000 to $900,000,000 and adjusted EBITDA range of $40,000,000 to $45,000,000 We are still on target to deliver a very strong second half on a comparable basis. More importantly, our long term outlook remains very strong. We are no less confident about our ability to grow and perform in our business.

Speaker 2

We continue to add attractive projects to our backlog and our pipeline of opportunities has increased to more than $14,000,000,000 This puts us in a great position for an outstanding 2025. Our market is developing as we thought it would. Activity is ramping up and will continue over the coming years. Our business development efforts translated into some noteworthy second quarter wins in both Marine and Concrete segments, including our first large Orion Concrete Award in Florida since expanding our concrete business there. In addition to the awards previously announced, so far in July, we have won a total of $118,000,000 in work across both segments, bringing our total backlog and awarded work to $876,000,000 For our Marine business, we announced an $80,000,000 contract with a longstanding customer, Port Everglades in Fort Lauderdale.

Speaker 2

The scope of work includes the replacement of over 2,000 linear feet of aging steel sheet pile bulkhead walls, including large diameter combi wall systems, soil anchors and encapsulated concrete caps. This project has started and will continue through next year. We also announced the $20,000,000 project for our long time customer Port Tampa Bay. We have a 4 year relationship with Port Tampa Bay and have completed several projects with them over the last 10 years. In this project, we are building a new berth that will include additional breasting dolphins connected to the walkways and onshore high wind warning points.

Speaker 2

This marine project is a prime example of the infrastructure upgrades needed throughout our country's ports to improve and expand port capabilities. Turning to our Concrete segment, we won our first large award since expanding our Concrete business to Florida. It is a $28,000,000 contract for Costco Wholesale through Southeast Industrial Construction as general contractor. The project is for the new construction of the Port St. Lucie Costco Depot Phase 1, a pivotal distribution center located in Southeast Florida, one of the nation's fastest growing regions.

Speaker 2

This facility will be one of Costco's largest distribution centers and our 16th project with Costco to date. This is a reputation building project in the Florida market. Orion Concrete was also awarded a significant data center project in North Texas by a major hyperscaler. While details cannot be fully disclosed, the scope is in the range of $15,000,000 Our competitive advantage in winning data centers is not only our experience and high quality of our work, but also our unmatched safety record, which is extremely important to data center owners. We have an extraordinary culture of safety.

Speaker 2

And for 2 consecutive years, our team has had 0 lost time incidents. In addition to the wins previously announced, during July, we won several notable projects in our Concrete and Marine segments. In Marine, we won a $28,000,000 construction project at the Clearwater Beach Marina, a $28,000,000 construction project for Port of Galveston and a $29,000,000 dredging project for the U. S. Army Corps of Engineers.

Speaker 2

In concrete, we won a $16,500,000 Tilt Wall project in South Texas and 2 additional data center projects for $8,000,000 $5,000,000 our 23rd 24th data center projects. Looking forward, the data center market is going strong at a time when commercial development work is slowing in this higher interest rate environment. The massive data center market is helping to fill the gap and we feel good about our ability to continue to be successful in this area that is being driven by the AI juggernaut. Demand for marine construction work is increasing and is perfectly suited for our expertise. We expect multiple strong tailwinds to drive our marine business going forward.

Speaker 2

These include significant investments by the U. S. Navy to deter potential Chinese expansion in the Pacific, the $1,200,000,000,000 infrastructure bill, capital projects for expansion of port facilities along the U. S. Coast, coastal restoration and numerous large opportunities in private investment for alternative fuels like LNG, methanol and ammonia primarily along the Gulf Coast.

Speaker 2

We expect to see project volume ramp up in 2024 through 2025 and the investments we are making to improve our fleet, our systems and our teams will enhance our competitive position. As we enter the second half of the year, I continue to be optimistic about our future. Together with our teams, we've made great strides in strengthening the foundation of our company. By instilling disciplined processes, investing in business development, training in IT systems, we are much stronger today. Our teams are aligned on the same mission, delivering predictable excellence through outstanding execution.

Speaker 2

We look forward to delivering improving results for our stakeholders. I'll turn it over to Scott for the financial review. Scott? Thanks Travis.

Speaker 3

In our Q2, we generated revenue of $192,200,000 up 5% over last year. As Travis mentioned, projects that were delayed in the first half are back on track and we expect revenue to ramp in the second half of the year. Similar to last quarter, the mix of revenue continued to shift. Marine revenue was up 30%, while concrete revenue was down 25%. This change in mix reflects our focus on Marine segment growth opportunities as well as the disciplined bidding standards we adopted to win quality work at attractive margins in our Concrete segment.

Speaker 3

2nd quarter gross profit margin increased to $18,300,000 or 9.5 percent of revenue, up from $13,800,000 or 7.6 percent of revenue in the Q2 of 2023. Both segments increased both gross margin dollars and gross margin percentage over the prior year. The 190 basis point increase in consolidated gross margin was primarily driven by improved pricing of high Bully projects and improved execution in both segments. SG and A expenses were $21,100,000 up from $18,100,000 in the Q2 of 2023. As a percentage of total contract revenues, SG and A expenses increased to 10.9% from 10%.

Speaker 3

The increase in SG and A dollars and percentage of revenue reflected an increase in compensation expense, business development spending and legal costs. Over the next few months, we will be rolling out new IT tools and processes for our operations and our back office. These tools will share information and provide insight to the progress of our projects, improving our ability to effectively manage these projects on the ground. We are also migrating our business segments to the same financial platform, delivering efficiencies and greatly improving our line of sight across the entire business. Turning to profitability, we reported an adjusted net loss of $5,200,000 or $0.16 per diluted share in the Q2 compared to an adjusted net loss of $4,500,000 or $0.14 per diluted share in the prior year period.

Speaker 3

The 2nd quarter net loss included $1,400,000 or $0.04 per diluted share of non recurring items. Our GAAP net loss for the Q2 of 2024 was $6,600,000 or $0.20 per diluted share. EBITDA for the 2nd quarter was $3,300,000 and adjusted EBITDA was 5,500,000 dollars Adjusted EBITDA margin was 2.9%, up from 2% in the prior year period. Moving on to bidding metrics. In the 2nd quarter, we bid on approximately $1,300,000,000 worth of opportunities, winning $194,000,000 This resulted in a contract value weighted win rate of 15.2% and a book to bill ratio just over one times for the quarter.

Speaker 3

As of June 30, our backlog was $758,400,000 compared to $756,600,000 at March 31 last year and $818,700,000 at June 30 of this year I'm sorry, June 30 last year. Breaking out our 2nd quarter backlog, $567,100,000 was in our Marine segment and $191,300,000 was in our Concrete segment. During the Q2, adjusted EBITDA margin in the Marine segment was 1.1% compared to 3.4% last year. Adjusted EBITDA margin in our Concrete segment improved to 6.6%, up from 0.3% in the Q2 last year. As a reminder, our goal is to generate adjusted EBITDA margins in the low double digits for marine and high single digits for concrete.

Speaker 3

We've been pleased with the progress of our concrete segment since they returned to EBITDA profitability a year ago. Everything starts with winning the right jobs with good margins. With this better starting point, our project teams have implemented new field practices focused on delivering projects to our customers more efficiently and at better than bid margins. Margins in our marine business retreated somewhat this quarter, largely a result of unabsorbed costs related to delayed projects and lower margins in our maintenance stretching business. We expect to see marine margins improve in the back half of the year as activity levels increase.

Speaker 3

Turning to the balance sheet. As of June 30, we had $4,800,000 in cash and total debt outstanding of $60,300,000 We had $21,000,000 in outstanding borrowings under our revolving credit facility at the end of the quarter. In June, our East West Jones deal with the last buyer did not close and was terminated. While this is disappointing, we are confident that the difficulties in closing the sale have been related to the interest rate environment and not due to a lack of interest in the property. Throughout this sale process, we've had multiple serious buyers.

Speaker 3

A good deal of due diligence has been completed without identifying any remediation or related issues specific to the property. On July 2, we entered into a purchase and sale agreement with Capital Development Partners for the East West Jones property for $30,500,000 with an anticipated close on or before September 30, 2024. We remain confident that we will close this sale to free additional liquidity to fuel our growth. As Stratus mentioned, we anticipate growing our backlog and the top line substantially over 2023. We expect revenue to ramp up and we will see a nice increase in cash flow in the back half of the year.

Speaker 3

At the same time, we plan to continue to improve margins by managing the business more effectively, more efficiently and more productive. For the full year 2024, we are lowering our guidance both for anticipated revenue in the range of $850,000,000 to $900,000,000 dollars and expected adjusted EBITDA in the range of $40,000,000 to $45,000,000 And with that, we'll open up the call for questions.

Operator

And our first question here will come from Aaron Spahala with Craig Hallum. Please go ahead with your question.

Speaker 4

Yes. Good morning, Travis and Scott. Thanks for taking the questions. Maybe first for me on the 2 large projects, can you just give a little bit more detail on the logistical setbacks at Grand Bahama and some of the issues in Hawaii that you're working to get back on schedule? Just confidence there and it sounds like really not any changes to overall profitability on the projects per se, just more timing where you can still make that

Speaker 2

up? Sure. Thanks, Aaron. Yes, so I'll start with Grand Bahama Shipyard project. That one we did have a delay with 1 of our subcontractors getting on-site.

Speaker 2

Fortunately, it was a critical path work. They did get on-site in the late in the second quarter and got their work finished in early July. So we were able to catch up there without impacting the overall projects, just a bit of a delay in some of the revenue. And then on the Hawaii project, we've talked about a few of these before, but we had some issues early in the year with the Panama Canal and delays getting material deliveries through there from with our piles that are coming from Houston and going to Hawaii. And then we've had some other hiccups, if you will, related to some work that needed to be done before we did our work.

Speaker 2

It wasn't completed on time. And so we were in a bit of a waiting scenario, waiting to be able to get our work done. So in both cases, it was issues out of our control and we've done everything we can to catch up on the Hawaii project and we'll continue to push forward on that one and feel good about what we're going to be able to finish for the rest of the year.

Speaker 4

All right. Thanks for that. And then maybe second just on the Navy opportunity, saw the 15,000,000,000 RFP that came out. Can you just talk about the process and timeline there? And then just broadly the overall opportunity with the Navy in the coming years.

Speaker 4

Is there still opportunities additional that are outside of that RFP for you as well?

Speaker 2

Definitely. That was the that RFP that came out was the PDIMAC, which stands for multiple award construction contracts. So $15,000,000,000 contract, they'll select 3 contractors for the work there. Timing is we'll be working on the proposal here for several months. I think they're anticipating a selection late this year or early next year.

Speaker 2

And basically that's one of multiple MAC contracts and other contracting mechanisms the Navy is using for the 1,000,000,000 of dollars that they're going to spend in the Pacific. So that's just one of multiple different contracts that are we've either already pursued or will be pursuing in the coming months. So there's quite a few of those out there like that.

Speaker 4

All right. And then just maybe last one. You mentioned a $20,000,000 dredging project for the Army Corps. Are you starting to see that market come back a little bit? And then just maybe talk about how you're managing your equipment fleet there given market dynamics?

Speaker 2

Yes. We're still seeing that market disrupted. It's not still not returning to what was the norm a couple of years ago, still been fairly slow with new projects coming to bid. So it's continued to be a challenge for us. Fortunately, we've been able to keep our dredges busy on doing some private work and a few other contracts that we won earlier in the year last year with the core.

Speaker 2

So we'll obviously continue to pursue those projects when they do come out. And at some point it will get back to normal because it's maintenance dredging that has to happen. And so there's and that work never ends. It's an ongoing process to maintain the shipping channels and intercoastal waterways.

Speaker 4

Understood. Thanks for taking the questions. I'll hop back in queue.

Operator

Thanks, Aaron. And our next question will come from Julio Romero with Sidoti and Company. Please go ahead with your question.

Speaker 5

Thanks. Hey, good morning. Maybe to start on the guidance range, it still implies even at the low end of the sales range, very strong year over year growth in the 3rd and 4th quarters. Can you maybe speak to the confidence in hitting the lower end of your guidance of your sales guidance? And then secondly, the kind of if you can help us out with the cadence of sales expected for the 3rd 4th quarters?

Speaker 2

Sure. So we do feel really good about the second half of the year. There's a large amount of work happening in our Atlantic division in Florida and the Caribbean that's really cranked up in the last half of the year. And then obviously we've got the Hawaii project that's gaining momentum and we expect strong performance there for the rest of the year. Additionally, we've got multiple opportunities that we're continuing to pursue throughout our operating areas in both concrete and marine.

Speaker 2

So we're feeling good about the second half of the year.

Speaker 3

Yes. And when it comes to how it kind of develops out, the second quarter, you'll see a pretty substantial increase over the I'm sorry, the 3rd quarter, you'll see a pretty substantial increase over the second quarter. And then it will kind of hang at that pace in the Q4. So we expect it to develop it will increase a little bit as we go through the year, but the big jump is in the Q3.

Speaker 5

Okay. Thanks. That's very helpful there. And then, how does the guidance change on the sales and EBITDA lines translate to the EPS guidance on both GAAP and adjusted?

Speaker 3

How does the guidance change on the EBITDA line? In terms of dropping in $5,000,000 recognizing a little bit that there's the impact of what we've seen in the Q2, we think that we can offset a lot of that as we continue to improve the performance of those delayed projects. So as we think about the full year EBITDA range, we feel pretty confident about where you've set it at the new level.

Speaker 5

Got you. Sorry, just to clarify, I meant, how does that translate to the EPS guidance that you had the from GAAP earnings per share and adjusted earnings per share?

Speaker 3

Sorry, I misunderstood you. Yes, I believe there's a reconciliation in the press release that gives you kind of the walk down from the various lines down to EPS. So that should give you the components.

Speaker 5

And that's I'm sorry, that's for the guidance?

Speaker 3

Yes. There's a reconciliation of the guidance range in the press release.

Speaker 5

Okay. I'll take another look, I guess, afterwards for that. And just last one for me would be, you talked about the opportunity pipeline now standing at $14,000,000,000 and then how that sets you up for 2025. Can you maybe expand on that a little bit? And how does that opportunity pipeline kind of sets you up for order growth over the next two quarters?

Speaker 5

And how would you have us think about the sales growth in 2025? I know it's early stage, just but any thoughts there?

Speaker 2

Sure. Sure. You may remember on our last call, we talked about our pipeline being around just over $11,000,000,000 it's increased $3,000,000,000 since our last quarterly call. So it's definitely and it's increased multiple millions over the past year, which indicates more and more opportunities out there for us to pursue. And again, it's a constrained market the marine space.

Speaker 2

And so we feel really good about the number of opportunities that are out there. And that pipeline is primarily marine business, just because our concrete work is a shorter visibility to that. So the majority of that pipeline is concrete project is marine projects, sorry.

Speaker 5

Okay, great. I'll pass it along. Thanks so much.

Speaker 2

Thanks, Olivia.

Operator

And our next question will come from Alex Rygiel with B. Riley Securities. Please go ahead.

Speaker 6

Hi, good morning, Travis and Scott. This is Minh for Alex.

Speaker 2

Hi, Minh. Just a couple of questions.

Speaker 6

Hey, there. Couple of questions. So you did talk about the opportunity pipeline growing. Can you talk a little bit about what the kind of bulk of that increase is from different more federal funding, just kind of new geographies, any details there?

Speaker 2

It's not really new geographies and we've stayed pretty consistent with the geographies that we work in. And so it's not necessarily increasing geographies, it's more increasing opportunities with clients. Yes, a lot of it is federally funded or federal projects, whether it's for reports or DOTs or for DOD clients like the Navy and Army Corps of Engineers. There's quite a few opportunities that are showing up on a regular basis for us.

Speaker 6

Okay, excellent. You mentioned that you've won a couple of data center projects and they seem a little smaller in size in general. Want to talk about margins relative to your segment margin targets. Are they at the lower end or higher end or just pretty much right within that target range?

Speaker 2

We have minimum bid margins that we hold steady on. And then different projects, there's different margins. Generally speaking, our data center projects provide good margins at the end of the job and we've been able to perform them very well.

Speaker 6

Okay. And then finally, you mentioned the new concrete award in Florida for Costco. You also mentioned that this is just Phase 1. So can you talk about what the opportunities are there with Costco and just maybe in Florida in general?

Speaker 2

Yes, there'll be a large Phase 2 on that project as well that we're pursuing obviously and hope to bring in the door. But there's opportunities with quite a few different companies, Costco and others that we did actually just win another Costco project in Texas yesterday. So we're continuing to add into the mix there whether it's Costco or other clients that we work with on a regular basis that continue to add to our backlog.

Operator

Min. Our next question will come from David Storms with Stonegate Capital. Please go ahead.

Speaker 7

Good morning. Thank you for taking my questions.

Speaker 3

Good morning, David. Good morning, David.

Speaker 7

Just wanted to try to get a sense of how we should think about margins going forward. I know you mentioned a couple of times that revenues are expected to ramp to the balance of $20,400,000 and into 0.5%. Should we expect there to be maybe a bit of delay in margin expansion due to the catch up that's going to need to take place in Hawaii and the Grand

Speaker 3

Bahamas? Well, we do expect margins to continue to improve. They're not going to just immediately spring up to those target ranges that we've kind of talked about. But we do expect as the activity levels on those delayed projects come up and they're absorbing more of the cost, the indirect cost, then we'll see gross margin improvements there. So we'll I would say that as you look forward into the projections, steady kind of progress on margins as opposed to just kind of seeing the immediate realization of the single digit and the double digit

Speaker 7

goals. Understood. That's very helpful. Thank you. And then just on the SG and A expenses, it sounded like a couple of little bit of increase year over year, maybe one time in nature.

Speaker 7

But Scott, I know you mentioned there's going to be maybe a little more IT spending and a little more expenses coming from business transitions. Should we expect that, call it, 11% low double digit run rate, low double digit SG and A expenses as relative to revenues via fair run rate?

Speaker 3

I think that you'll see the revenue ramps more quickly. But I think that in absolute terms, kind of consistent with what you saw in the second quarter would be a good assumption.

Speaker 7

Sounds great. Thank you. And then just one more, due to some of the interruptions at your larger projects, do you any impact on, call it, the Port Everglades project or the Port of Tampa project? Is there going to be any impact to those newer projects from those interruptions, do you think?

Speaker 2

No, we don't foresee anything, Dave. Those projects are starting off well and seem to be on track. Don't anticipate anything on coming up on those that may cause any issues. That's very helpful. I guess I'll add to that and say it is construction.

Speaker 2

There are a lot of variables in the fields and but we don't anticipate anything.

Speaker 7

Understood. Thank you very much and good luck in the next quarter.

Speaker 3

Thanks, Steve. Thanks, Steve.

Operator

And this concludes our question and answer session. I'd like to turn the conference back over to Travis Boone for any closing remarks.

Speaker 3

Before Travis says that, I realized that in our press release, the EPS is not listed there, just the EBITDA. So the EPS range that we're expecting is adjusted EPS of $0.07 to $0.20 for 2024.

Speaker 2

Sorry, go ahead, Chas. Thanks, Scott. Thank you everyone for joining today. We appreciate your time. In closing, I just want to thank all of our employees who are working really hard in our business every day to work safely and to work profitably and bring the best they can to work every day.

Speaker 2

Also, I want to thank our shareholders for their continued confidence in us. I look forward to our continued growth in the second half of the year and going forward. Thanks everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Key Takeaways

  • Orion lowered its full-year 2024 guidance to $850–$900 million in revenue and $40–$45 million in adjusted EBITDA due to logistical delays on two large projects but still expects a strong second-half ramp.
  • In Q2, the company generated $192.2 million in revenue (up 5% YoY) and improved its adjusted EBITDA margin to 2.9%, driven by a 30% increase in marine segment revenue and higher gross margins.
  • Orion’s backlog and awarded work reached $876 million after winning $118 million of new contracts in July, and its overall opportunity pipeline expanded to more than $14 billion, setting up robust growth for 2025.
  • Notable Q2 and July contract wins include an $80 million Port Everglades bulkhead replacement, a $20 million Port Tampa Bay berth project, a $28 million Costco depot in Florida, and over $23 million in data center work.
  • Management highlighted continued investments in safety (zero lost-time incidents for two consecutive years), IT systems and fleet upgrades to improve project execution and drive future margin expansion.
A.I. generated. May contain errors.
Earnings Conference Call
Orion Group Q2 2024
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