Orion Group Holdings Inc
NYSE:ORN
Earnings Call Analysis
Summary
Q3-2023
The company's revenue reached $169 million with adjusted net income per share at $0.02. Adjusted EBITDA climbed to $9.4 million, reflecting an improved profitability despite a slight revenue drop year-over-year due to exiting the Central Texas market. Concrete business has turned profitable, and the company is witnessing stable bid activity in its core markets. Highlighting a solid growth trajectory, the backlog surged 60% to $878 million from the previous year, signaling robust future revenue streams. The marine construction segment, buoyed by the $120 million Grand Bahama Shipyard project and infrastructure spending, is positioned for growth, with the promising infrastructure bill expected to amplify this momentum. Financial strength remains paramount, with $3.9 million in cash despite a higher debt level due to investments. Revenue dropped 8% sequentially and year-over-year, but gross profit rose to $19.1 million, 11.3% of revenue, with an encouraging outlook for margin expansion and leverage from a growing top line.
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Thank you for standing by, and welcome to the Q3 2023 Orion Group Holdings, Inc. Earnings Conference Call.
I would now like to welcome Margaret Voice, Investor Relations for Orion to begin the call. Margaret, over to you.
Thank you all for joining us today to discuss Orion Group Holdings Third 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 Danish, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we'll open up the call to 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 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.
I'd also like to let you know that Orion will be presenting at the Noble Capital Markets -- Noble [indiscernible] 19 Conference, December 3rd to 5th in [indiscernible] Vocation, Florida.
With that, I'd now like to turn the call over to Travis. Travis please go ahead.
Thank you, Margaret, and welcome, everyone, to our third quarter 2023 conference call. On September 12, Scott and I celebrated our first anniversary with Orion. And looking back, it's been a very exciting and productive year. Both Scott and I are proud of what our team has accomplished.
When we assumed our leadership roles, we knew that success would rely on our people embracing change and pulling together to transform our business performance. They stepped up to the plate eager to move Orion into a new era of collaboration and opportunity.
We are now beginning to reap the benefits of the changes we put into place and we continue to feel bullish about what we can achieve in the future.
Last quarter, we told you that we expected continued improvement in profitability through the back half of the year, and we are delivering on that promise. Our third quarter revenue came in around $169 million, and our adjusted net income per diluted share was $0.02.
Third quarter adjusted EBITDA was $9.4 million versus $3.7 million in Q2. While revenue was down somewhat year-over-year due to our exit from Central Texas, the higher quality of our revenue is delivering improved profitability.
Since March, our concrete business has been profitable and improving on an adjusted EBITDA basis and it is operating income positive on an unconsolidated basis in the third quarter. We have recent wins totaling $50.8 million in concrete and they are the type of projects that require our expertise and will deliver strong margins.
Bid activity has remained steady in our core markets of Dallas and Houston. As I mentioned last quarter, the cost of capital is still a restraining factor in converting bids to backlog, but demand is strong, and we are staying focused and disciplined pursuing projects aligned with our capabilities where we are positioned to win.
Turning to our Marine business. We've got a lot of momentum with projects on and potential future projects. As we reported in October, we were awarded a significant design build contract for Grand Bahama Shipyard, dry dock for $120 million. This is an exciting project for several reasons. The proceed required multiple skill competencies and our marine and engineering teams demonstrated the power of collaboration in scoping out a very complex project that includes infrastructure construction, dredging, creating new mooring facilities and providing enhancements to source stability.
Our team is especially excited about being part of what will be a historic project in the Caribbean. When completed, the Grand Bahama projects will have the largest floating dry docks in the Western Hemisphere, capable of lifting the largest cruise ships in the world. These state-of-the-art floating dry docks promised substantial efficiency in cost savings to the shipyards customers, and this venture also reflects the Bahamian spirit of their country's motto forward upward onward together.
This project is set to commence immediately and will be completed in 2025. The Bahamian project is just one example of the opportunities we see for marine. For a quick recap is estimated at $50 billion will be spent for coastal restoration in Louisiana alone in the coming years, and we are focused on capturing that work. The Panama Canal expansion created the need for U.S. port expansion projects from Texas all the way up to the East Coast to accommodate larger ships in both public and private facilities.
The infrastructure bill will fund important projects in our areas of operation and well within our core capabilities in marine construction. For a quick update on Hawaii, our team is mobilized. We have people and equipment on the ground and work is starting in earnest in the fourth quarter. Pearl Harbor is clearly a game changer for Orion.
Naval Defense spending in the Pacific in the coming years is projected to be tens of billions of dollars and is an urgent priority for our government. Our work with the Navy of Pearl Harbor strategically positions us to leverage this opportunity. I think we'll look back on this project as the tipping point that accelerated the next phase of Orion's growth.
We get a lot of questions about Army Corps of Engineers dredging contracts. The near-term issue is that dribbling out these projects has created intense competition among smaller players who need to get equipment utilized after a dry spell of activity. We won a few dredging bids, but we will be careful not to fall into the trap of winning work at margins that are too low. There's pent-up demand that we think will be a tailwind for us well into 2024 and '25.
A key health indicator of the business is backlog, and we've doubled it since last year. At quarter end, our backlog was $878 million, Altogether, our backlog and contracts awarded subsequent to September 30 totaled $920 million.
Overall, there are 3 significant areas to drive the business forward. First, good margins will be a key driver of our success. That includes winning more work with attractive pricing on better projects and then delivering network with predictable excellence.
Second, investment in business development to build customer relationships and compliance. Being responsible and accountable is a priority for every team member with a special impetus on performing every cash safely every time.
Thank you, and I'll turn the call over to Scott.
Thanks, Travis. I'll cover some highlights and then review the third quarter results. As Travis pointed out, there's a lot of opportunity ahead for Orion. And maintaining a strong balance sheet and liquidity is a top priority in executing our growth strategy. Financial strength is extremely important in winning large contracts that can span over multiple years. . As I reported last quarter, we increased our access to capital with our lenders and succeeded in monetizing $25 million in sale-leaseback transactions, including the $12 million sale of our Port Lavaca South yard. We remain focused on monetizing our real estate assets such as our East West Jones property. East West Jones is a unique development opportunity with 345 acres on the Houston Shipping channel and has generated interest from multiple parties. We have previously announced a signed contract on this land, but that buyer ran into financing issues.
We're now negotiating with another buyer, and we're confident that we will complete a transaction that will provide additional capital to invest and grow our business in 2024. We -- as a result of our performance and Orion's improved financial position, we've also been able to significantly increase our bonding capacity. This gives us a greater ability to bid and win larger projects and grow our business above where we are today.
To wrap up on the balance sheet. As of September 30, we had $3.9 million of cash and total debt outstanding of $50.3 million. Our debt is higher than the end of the second quarter due to a temporary investment in working capital with the mobilization underway in Hawaii.
Moving on to our financial results. Orion produced $168.5 million of revenue in the third quarter, down 8% sequentially and 8% from the prior year. The revenue decline was largely driven due to our exit from the Central Texas construction market, partially offset by increased revenue in our Marine segment from the Hawaii dry dock project.
Third quarter gross profit was $19.1 million or 11.3% of revenue compared to $13.4 million or 7.4% of revenue last year. The gross margin increase of 390 basis points primarily reflected the actions we've taken to improve Concrete segment margins, partially offset by lower equipment and labor utilization in our dredging business.
SG&A expenses for the third quarter were $17.1 million or 10.2% of revenues compared to $15.4 million or 8.5% of revenues in the prior year period. SG&A grew due to increased business development and IT costs as well as higher legal expenses related to customer claims.
Adjusted net income for the quarter was $800,000 or an adjusted net income of $0.02 per diluted share, which was the same as what we achieved in the prior year period. This result excludes $1.5 million or $0.04 diluted earnings per share of nonrecurring items.
Our GAAP net loss for the third quarter 2023 was $700,000 or $0.02 loss per diluted share. EBITDA for the third quarter was $8.7 million and adjusted EBITDA was $9.4 million. Adjusted EBITDA margin was 5.6%, up from 4.8% in the prior year period.
Turning to bidding metrics. In the third quarter, we bid on approximately $1.1 billion worth of opportunities and won $227 million of this. This resulted in a contract value weighted win rate of 21% and a book-to-bill ratio of 1.35x for the quarter.
As of September 30, our backlog was $877.5 million, a 60% increase over the $548.6 million backlog on September 30, 2022. Breaking out our third quarter backlog, $700 million of this was related to our Marine segment and $178 million was related to our Concrete segment.
Furthermore, we've been awarded over $43 million for new project work, not included in our backlog at the end of the third quarter. Of this, approximately $22 million is related to marine, while $21 million is related to the Concrete segment.
Overall, we are pleased with the progress our team is making to improve our margins by winning quality work at attractive pricing. We think low double-digit adjusted EBITDA margins are achievable for Marine. Our Marine segment is performing well. And in the third quarter, adjusted EBITDA margin was 9%. We are experiencing some near-term impact due to lower mix in margin from our dredging business.
Our Concrete segment produced adjusted EBITDA margins of 2.4% in the quarter compared to negative margins in the prior year. We continue to believe that our concrete business can achieve high single-digit adjusted EBITDA margins. And we expect continued expansion of these margins toward our goals over the coming quarters.
As we look ahead to the fourth quarter and beyond, we are very optimistic. We've won several attractive and prestigious projects. We're executing well. We have sufficient capacity to grow, and we are optimizing our people and assets to take advantage of the significant opportunities in our markets.
As with any project-based business, there will be variability in quarter-to-quarter results depending on when projects start and roll off, but the general upward trend in our top and bottom lines will continue.
Our backlog is growing and so is our reputation for being a significant player in our targeted markets. Going forward, we'll see operating leverage as we continue to grow the top line. Margin execution improvement will continue to bear fruit. There's been a lot of positive momentum in our business, and that should flow through quarter 4 and into Q1 of 2024.
And with that, we'll open the call to your questions. Operator?
[Operator Instructions] Our first question comes from the line of Joe Gomes from Noble Capital.
So I wanted to start just on the top line on the revenue. Came a little bit lighter than we were expecting. I think consensus was expecting. I was wondering was the top line revenue in line with you guys' thoughts prior to the quarter was a little softer than what you were thinking? And how does that look -- you just mentioned, Scott, the general trend -- upward trends to continue. But I think consensus for the fourth quarter is more around that $200 million level? Are we all being a little too optimistic there for the fourth quarter even with some of these new contracts coming online?
No, I don't think the fourth quarter is optimistic from the perspective of what I've seen out there and those expectations. But we're pleased with where the quarter ended up. We have a growing backlog. And so although the revenue timing may vary a bit from quarter-to-quarter with the backlog growing, the revenue will come. And so the margin is -- the margin performance was pretty significant this quarter, and we're happy to see that continue.
So I think that for the full year, we're kind of in line with what we were originally thinking it would look like and going into next year, we expect to have some good momentum.
Okay. And then you talked a little bit about the bidding environment. Just maybe get you guys' thoughts. Obviously, what's happening in Washington, the continuing resolution. Are you seeing any impact on the bidding environment from that? Or do you think that given some of the past bills that have been passed for spending in the area, especially on the marine side that the continuing resolution shouldn't have much of an impact on you guys, assuming it doesn't just drag out forever?
Yes. We're not seeing any impact yet, Joe. It's been fairly kind of consistent and we haven't seen the bid opportunity slowing down because of the continuing resolution, yet to be seen what happens next year in case if something does shift there, but I think we're on -- things are continuing to move.
And I think that there's generally good support on both sides of the aisle for the projects that we would benefit from. So Washington has its issues, but I think everyone agrees that the country needs investment in infrastructure, particularly in the marine space.
Our next question comes from the line of Julio Romero from Sidoti.
I appreciate the color you gave about the current bidding environment for dredging. Maybe what's your sense about when the competitive environment might abate? Maybe you can point to historical instances when something like this has happened? And when do you think the environment will allow you to bid for projects with more proper bid margins that you're targeting?
We think it's going to be some time, probably late next year. It's probably going to continue somewhat like this for some period of time. . Obviously, we'd like for it to be sooner, but it seems like it's going to continue this way for a little while longer?
Yes. So we're just making ourselves look at our schedules to be mindful of our maintenance cycles being disciplined in the bidding processes that we're engaged in and making sure that we value our contributions appropriately, and we're pricing ourselves right we're not going to lock our equipment up on low-margin work for long periods of time. But we'll price ourselves according to market dynamics and kind of ride out the storm. We're larger than some of the small players that have to act more desperately.
And then -- maybe piggybacking on Joe's question a little bit about the top line, maybe specifically on the marine side because the marine sales sequentially contracted a bit. Do you -- is it -- is it fair that they're expected to inflect back upward next quarter towards maybe second quarter's top line figure? Or is that not in the ballpark?
Yes. We should see a continuing growth in the marine revenue line as we have more and more production coming off of Hawaii, that will really start to produce in the fourth quarter. just early starts on that, the grand shipyard in Grand Bahamas that's also going to start contributing. So the top line in the marine is going to come up pretty significantly starting in the next quarter and then really in earnest starting into the first and second quarter of next year.
Our next question comes from the line of Dave Storms from Stonegate Capital Markets. .
Just wanted to start with the East West Jones property. If I remember correctly, that had a price tag of about $36 million. Will that -- or has that been repriced? And is there an expected close date with the new potential buyer?
Yes. So we're still marketing in that same neighborhood, and we anticipate that the conversations that we're engaged in right now to the extent that those continue and conclude successfully, the timing of a transaction would be early next year. .
Very helpful. And then just one more for me. With the great contract win in the Grand Bahamas, are there any logistical challenges or resource constraints that you're foreseeing considering you're going to have to very large projects on either side of the continent.
No, it's not really an issue for us. We've got multiple crews and multiple teams and it's different resources, both with our equipment and people that will be delivering each project. So no concerns as far as resource constraints internally. There's the -- It's a different country. So there's challenges with different things didn't go in a different country, but we're -- it's moving quickly and we're mobilizing and getting started on the Bahama project.
Our next question comes from the line of Alex Rygiel from B. Riley.
Coming back to the Grand Bahama project, what's the margin profile of that project relative to some others? And any notable working capital needs in the short term?
Yes. We don't talk about specific project margins, but that's a project that we're really happy with, both in terms of fitting our strategic direction being a design build contract bringing more of our services to bear for our customers. And also just being in a different geographic space than Hawaii, where we've also got some growth going on. It's nice to kind of balance out that. So I'm happy with the margin profile and expect to see continued improvement in the overall marine margins as we execute on that in the Hawaii project going forward.
And then any working capital needs in short-term amount?
There's a fairly good dynamic within that contract for mobilization payments. So the working capital investment is relatively small.
Obviously, working in some different currencies will drive a little bit extra need than what we might normally have. But it's relatively modest not a significant build in working capital anticipated related to Grand Bahamas.
And then as it relates to fourth quarter directionally, how should we think about SG&A expense? I know last year trended down sequentially quite a bit. But given the increase in work here. How should we think about SG&A in the fourth quarter relative to the third?
Yes, I think that we'll see kind of continued levels around where we are potentially a little growth in those legal expenses that I mentioned as we have some customer claims that we're pursuing, and that's probably going to be a higher need over the near term, as we have a couple of fairly significant customer claims that we'll be investing legal expense in.
But I would think the third quarter would be a good measuring stick for where we're expected to be in the fourth quarter and beyond.
And was there any positive benefit from the when East West broke apart?
It's relatively minor. I mean there was some earnest money that was forfeited, but not a material amount. .
[Operator Instructions] There are no further questions at this time. I would now like to turn the call over to Travis Boone for closing remarks.
Thanks, Mondi. We are proud of the progress we have made with transforming this business to be healthier, profitable and set up for future success. We have been doing what we said we would do, and the results are starting to show. . Our team has been working hard to make it all happen, and we appreciate all of their efforts to make us a stronger company.
Finally, our thoughts and prayers are with those who are facing the adversities of war. While being a U.S. domestic company may provide some insulation, we can only keep praying for a peaceful resolution to these devastating conflicts.
Thank you for participating today. And as always, we welcome the opportunity to maintain an open line of communication with current and potential investors.
I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's call. You may now disconnect.