Q1 2020 Earnings Call
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Thank you operator.
Hello, everyone and welcome to orbital energy groups first quarter 2020 conference call.
Copy of the company's earnings press release, an accompanying Powerpoint presentation are available for download on the events and presentations page of the Investor Relations section of the Affordable Energy group website.
With us on today's call or Jim O'neil.
<unk>, Chairman and Chief Executive Officer.
Daniel Ford.
Chief Financial Officer.
And William Club Executive Chairman.
Today.
Well review the highlights and financial results for the first quarter as was recent development.
Following these remarks, we'll be prepared to answer your question.
I would like to also remind everyone that today's call will contain certain forward looking statements made within the meaning of section 27 eight of the security check that 19 pretty three as amended and section 21, each of the Securities Exchange Act of 1934 as amended.
Such statements are subject to risks and uncertainties that could cause actual results to vary materially from those projected in forward looking statements.
The company May experience significant fluctuations in future operating results due to a number of economic competitive in other factors such as the Corona burst, including among other things the company's reliance on third party manufacturer suppliers and service providers.
Agency budgetary and political constraints.
Increased competition.
Changes in the market demand and the performance reliability, which products and a great solution services.
These factors than others could cause operating results vary significantly from though isn't quite period actually does projected in forward looking statements.
Additional information with respect to these and other factors, which could materially affect the company and its operations are included in certain forms to companies Bob's with the Securities Exchange Commission.
These forward looking statements are based on information available to overall energy group today. The company assumes no obligation to update statements as circumstances change.
Now at this time, it's my pleasure and introduce you O'neill, Vice chairman and CEO of orbital energy Jim the floor is yours.
Thanks, Scott and thank you everyone for joining us on our first quarter 2020 earnings conference call.
Last year, we initiated our strategies transforming to a diversified energy services infrastructure company and then the first quarter, we continue to make progress with the strategy.
Importantly were successfully entered into a definitive agreements for our platform acquisition or breach construction group, our utility scale solar engineering procurement and construction services company.
This transaction was completed in April.
We also a copper several other key objectives during the quarter, such as expanding capabilities and our orbital gas systems, Houston, and UK offices to capitalize on favorable trends and the renewable energy market and continuing to gain further traction in the marketplace with our proprietary ve technology sampling and measure.
In systems.
We also continue to develop our greenfield operation overall power services in Dallas, which is focused on electric transmission and distribution services and lastly, with these assets now in place. We recently implemented our corporate name change to orbital energy group and are trading under the new ticker symbol Oh EG, we believe.
This name reflects our progress today, and our strategic repositioning to become a diversified.
Energy infrastructure service provider.
Before I discuss our accomplishments in more detail I would like to briefly review highlights of our first quarter 2020 performance.
Total revenues were $5.7 million for the quarter up from $5.5 million into first quarter 29 team.
The increase was attributable to our integration revenues and our North American operations, reflecting our expanding customer base and increased awareness of the exceptional work performed by our Houston operations.
This was partially offset by lower integration revenues in our UK operations during the quarter, mainly due to the headwinds that the market continues to experience surrounding Brexit foreign exchange fluctuations the impact to the political environment on investment within the sector and the covert 19 pandemic towards the end of the core.
Our total backlog was $9.5 million at March 31st of 2020 from $9.6 million at December 31st of 29 team.
Impacted primarily by more translation rates in the UK and timing of customer projects.
Reach construction group is not in these numbers as they required in April of this year.
As a way of previously discussed given the challenging operating environment in the UK, we have taken appropriate steps to rightsize our operations there while at the same time developing new opportunities for organic growth.
This includes a diversifying our operations away from being solely focused on gas that work revenue opportunities by leveraging orbitals technical expertise in the field, a bio methane and renewable energy production.
This strategy has started to show tangible results as evidenced by overlays reach recent awards for contract by major UK energy provider to design producing commission its first ever Biomethane degrade plans for the UK water industry.
This is a major contract when for orbital but it is not the only one that they've gotten recently.
Others include Hey, Bob I'd say, great entry unit or G., you upgrade project for any with an existing customer.
Hey, comprehensive service contract to cover NIGC use which includes servicing gpus built by other Oems based on our best in class service team.
And the Standalone propane enrichment system for a bio methane g. you in France, our first biomethane projects in Western Europe.
As previously discussed we expanded our Houston operations to capitalize on the favorable trends, we're seeing in the North American renewable energy market.
A world class natural gas measurement integration facility in Houston continues to gain recognition in the marketplace.
In the quarter, we expanded our business development efforts into the renewable gas market and this is a result executed on several bio methane analysts projects I.
Additionally, in March we announced that we had received and deplored orders from several fortune 100 energy companies and oil and gas industry based in Houston, Dallas, and Charlotte North Carolina for trace Mercury measurement and oil and gas utilizing our proprietary ve technology.
In the quarter overall speed technology product sales increased by 250% over 2019 levels.
We continue to gain access to a growing number of leading gas companies as well as keep expanding our pipeline of project opportunities.
We expect a growing number of orders for our Ve technology to improve our product mix and expand gross margins.
In summary in the first quarter, our Houston integration and product sales revenues experienced 50% growth over the same period last year.
By expanding our business development efforts beyond the gas that work market and Rightsizing. Our operations. We believe we have implemented the right strategy in the U.S. and UK to achieve long term success.
We continue to monitor these operations on a daily basis and look forward to keeping you updated as we expand our project portfolio and both the U.S. and Europe.
However, despite our first quarter performance and the incremental gains we anticipated in the renewable gas and the technology product sale opportunities for the remainder this year in April we began experiencing a broader impact of the cold with 19 pandemic on all aspects of our integration and product sales both.
In our U.S. and UK operations.
Several integration projects that had been awarded to construct our now delayed indefinitely and the pipeline of future opportunity. So slow. Additionally, the majority of our service work is on hold as customers are not allowing contractors on their sites such as refineries until further notice.
During the quarter. We also continue to develop our greenfield operation in Dallas overall power services since its inception in late 2019. This internally developed operation has grown to draw a full service construction and maintenance service provider to the electric power distribution transmission. So.
Station renewable and emergency response sectors of North America.
The rate of deployment for this business has been slower than expected due to the impact to covert 19 as most utility customers are not allowing new personnel on their systems in order to mitigate the spread of the pandemic.
However, the majority of our startup costs are behind us and the business is building momentum, albeit slowly.
Our goal is for orbital power to be on a profitable run rate for the third quarter of this year.
Turning to our recent accomplishment in April we successfully completed our creative platform acquisition of reach construction group.
Headquartered in Capex, North Carolina reaches a leading provider of BPC services and the utility scale solar industry with its leadership, having a combined 50 years of industry experience.
This was an attractive transaction for us on many levels first the acquisition is expected to add significant revenues and positive net earnings for the company as a whole.
This is a result or breaches development and reliance on repeatable process is to provide his customers was safe high quality predictable results at the lowest cost.
Reach already had a full years 2020 contractual backlog in access of $100 million in North American projects at the time of purchase however, due to covert 19 several projects have now pushed into 2021, reducing this year's backlog to $55 million.
The addition of reach also offer significant synergies for overall revenue growth, including its deep expertise in renewable energy project delivery, particularly utility scale solar farms.
For the reach reaches in house engineering capabilities supply chain relationships and industry expertise are expected to complement and accelerate the growth of our other divisions within orbital energy, including our overpower services electric transmission and distribution services operations. In addition to.
It is we also anticipate significant cost synergies by leveraging his existing sales integration and distribution infrastructure for cross selling opportunities.
We also closed this transaction at very attractive terms with the purchase price of approximately $37 million via the issuance of 2 million shares of our common stock and the assumption of 35 million in seller stat.
As I mentioned earlier the acquisition was immediately accretive to our earnings brand in Martin the principal owner remains with US as reaches Chief Executive Officer, and we're excited to grow reaches business under Brandon's continued leadership.
At quarter end, we held cash and cash equivalents of $6.7 million and restricted cash of $1 million.
Our cash usage in the first quarter was primarily related to acquisition activity normal administrative costs repayment of the working capital adjustment related to the Bill fuse power transaction in startup cost for the overpower services primarily investment in equipment.
Now that the acquisition of reaches complete and overall power services is fully developed we expect our cash usage rate will return to more normalized levels.
In the short term, we're diligently managing our working capital to preserve liquidity.
As time progresses, we expect reach will contribute positively to our liquidity as we expect them to be cash flow positive during 2020.
We expect to generate further cash flows from volume growth in our energy businesses, both organically and through targeted acquisitions. We further anticipate additional cash inflows from the expected sale or the remaining power and electro mechanical operations of see you are Canada and see you are Japan both of these entities.
Remain held for sale and we are actively exploring the best options for both units.
With the divestiture of the majority of our non energy related businesses in late 2019, the April acquisition of reach and the creation of overall power services. We have the foundation in place to deploy a broader set of service offerings and energy infrastructure market.
In addition, adding reach our organization has also extended our energy services business into the rapidly growing areas of alternative and renewable energy, enabling us to take an active role and reducing our nation's carbon footprint.
In the near term, we expect to capitalize on the complimentary capabilities are breach and overall power services.
This water scope of improve service offerings creates significant new cross selling opportunities with both existing as well as potential new customers.
Longer term, we expect to diversify into synergistic services and to expand geographically to serve the electric power industry as well as the larger infrastructure services market.
In light of our company's strategic repositioning it was the appropriate time to change our corporate name from C. you are global so overall energy group, including the new ticker symbol, Oh, EG, which became effective at the open up trading on May 11.
We believe this new name reflects our increased capabilities and energy centric growth strategy.
In conjunction with his name change we have also launched a new website and social channels that are a better reflection of our companys energy and infrastructure services platform.
When bite you to visit our new website, which can be reached at www, <unk> or <unk> energy group Dot com.
To summarize we've accomplished a great deal during the first quarter as we move forward with our transformational strategy to become a diversified energy infrastructure service company.
During this period, we successfully completed our creative platform acquisition of reach construction group.
Simultaneously, we strengthened our integration capabilities in Houston and in the UK, while launching our internally developed overall power services group in Dallas.
With this structure in place and the divestiture of the majority of our non energy related businesses, we are well positioned to establish ourselves as a leading energy services infrastructure company.
Despite the covert 19 pandemic headwinds we've we've experienced this year our strategy remains the same to diversify our existing energy business into the energy infrastructure services market through both organic growth and by pursuing a targeted acquisition strategy focused on innovative call.
Ladies and complimentary industries.
Reach was the first of these targeted acquisitions and we look forward to updating you as we continue to execute on this plan during 2020 NBR.
This concludes my opening remarks, now I will pass the call onto Dan who will review our financial results.
Dan.
Thank you Jim and good afternoon, everyone.
Today I'll review, our first quarter 2020, GAAP financial results I'd like to remind everyone that I will focus my remarks today on the company's continuing operations, which consists of our energy segment.
The power and electromechanical segment as presented in discontinued operations as electromechanical business. We've disposed of during Q3 2019, while the remainder of the domestic power business was divested during Q4 2019, well see like Canada, and Japan remaining as held for sale at this time and also presented as discontinued operations.
We reported total revenues of $5.7 million for the first quarter of 2020 compared to $5.5 million for the first quarter of 2019. These reflect higher integration revenues and oral power revenue in a company in North America operations, partially offset by lower integration revenues and the company's UK operations during the quarter.
Gross profit was $559000 for the first quarter of 2020 compared to 1.2 million for the first quarter 2019 gross.
Gross margin was 9.8% for the first quarter of 2020 compared to 21.7% for the first quarter 2019. The margin decrease was almost entirely due to startup costs at our new overpower services group, which increased cost to sales as a percent of revenues compared to the comparable 2019 period.
We expect margins to improve during the second quarter and remainder of 2020 as overall power services gained greater operating efficiencies and.
And can be throughout the world learned to cope with the new operating environment created by the Cobot 19 pandemic as well through increased sales of higher margin products and better mix of integration projects.
Increased service revenue throughout our energy focused operation and the addition of reach construction group.
During the three months ended March 31, 2020, SGN, a increased $2.4 million compared to the prior year comparative period.
The increase in that you name for the quarter was due to increased corporate costs largely due largely due to strategic initiatives, which include increased professional fees, including legal accounting tax investor relations and costs associated with due diligence activities related to the prospective acquisitions.
Also contributing to the increase was that increased M&A costs in the energy segment, primarily due to startup cost a real power services group, which included increased payroll and insurance costs.
As Jim noted our backlog was $9.5 million as of March 31, 2020 down slightly from the Decemberthirty, one 2019 backlog of $9.6 million.
Lower translation rates in the UK and timing of projects.
As of March 31, 2020, the comedy held cash and cash equivalents of $6.7 million unrestricted cash of $1 million. This $1 million a restricted cash relate to collateral for several bank issued letters of credit related to contract guarantees.
Along with funding the loss from continuing operations as Jim mentioned earlier, our cash usage in the first quarter was primarily related to acquisition activity, including $3 million issued to reach construction on a note receivable.
Normally administrative costs and startup cost hurdle power services.
To offer some additional transparency cash used in operations for the three months ended March 31, 2020 were almost $4 million and the other category, which primarily related to M&A activity $2.7 million in energy segment from oral power services startup costs.
And $1.1 million related to discontinued operations, that's compared to cash used to point $9 million another category $2.3 million in energy segment and point $5 million provided by the discontinued power and electromechanical segment during the first quarter 2019.
During Q1, we issued $2.8 million to Bellevue is related to the working capital adjustment from the sale of the company's domestic power operation in late 2019.
Now do we have closed to reach acquisition and the majority of oral power startup costs are behind US. We expect our cash usage rage will decrease significantly going forward and returned to more normalized levels. We continue work to improve our short term liquidity through prudent cost control as well as management of working capital, we expect a long term liquidity.
We will benefit from the addition of reach construction group, which is expected to cash flow positive during 2020.
We also expect cash flow to benefit from overall volume growth and our energy business, both organically and through acquisitions and the expected sale the remaining power electromechanical operation.
In addition, subsequent to quarter in the company ended subsidiaries entered into unsecured loans in the aggregate principal amount approximately $1.9 million pursuant to the paycheck protection program.
Alone and interest accrued there on its forgivable, partially oriental if certain conditions are met.
Before turning the call back over to Jim I want to update you on our share repurchase program as previously announced in December 2019, our board authorized the share repurchase program under which the company may repurchase up to $5 million of the company's common stock at market prices.
During the first quarter 2020, we did not repurchase any additional shares under the program.
Due to the onset of the kind of ours pandemic as part of our efforts to strengthen our liquidity. The company has decided to temporarily halt repurchased under this program until the pandemic has passed and we see a return to positive cash flows.
We'll reevaluate this on an ongoing basis.
The period since the share repurchase plan was approved through March 31, 2020 during the open buying windows available to US we repurchased 353063 shares are common stock at an average price of $1.17 cents on the open market.
Ill now turn the call back over to Jim for closing remarks.
Thanks, Dan.
In closing throughout the first quarter, we continue to execute on our companywide transformation into a diversified energy infrastructure services company.
During this period, we strengthened our legacy energy business launched overall power services and added a new supplemental capabilities. While also entering new markets through the acquisition of reach construction group, we believe will be assets in place to drive our growth by serving a much broader portion of the electric utility.
The construction space and overtime, the larger infrastructure service market.
Before we go to Q Renee I'd like to talk about the effects of the cold with 19 pandemic its impact on the global economy, and how it relates to our business.
Overall energy group and its subsidiaries have been designated as an essential critical infrastructure workforce. As a result, we've continued to operate in most areas and we intend to keep delivering high quality products and services to our customers of course is the health and safety of our employees is our top priority.
We will continue to act in accordance with the guidelines provided by the CDC and the department of Homeland Security.
In response to this we have implemented increased safety protocols each of our business locations implemented the utilization of tell work when possible and furloughed. Some personnel. Our team continues to monitor new developments on a daily basis, and we'll continue to make operational changes is necessary to ensure.
The safety of our employees and their families.
As I mentioned on our last call at that time, we had experienced customer and supply chain disruptions in our UK operations with minimal business impacts in the U.S.
Since that time, we're seeing decreased demand for near term domestic construction activity supply chain delays decreased field service work and other impacts related to the call with 19 pandemic.
The company is proactively working to adjust its operations to properly reflect the market environment during the immediate pandemic, while maintaining sufficient resources for the expected rebound later this year.
The impact from covert 19 continues to change daily and it is too early to accurately estimate the full year effect on industry demand, while the company expects the effects of the pandemic to negatively impact the results from operations cash flows and our financial position in the current level of uncertainty over the.
Economic and operational impacts of covert 19 means the related financial impact cannot be reasonably estimate at this time.
Because we had been designated as essential business many of our customers continue to execute on their backlog of projects. However, we expect some construction project timelines will be modified has different geographic markets adjust the economic uncertainties. During this unprecedented time.
Recognizing as well now be a challenging year for our nation in the world as a whole and then certainly in our customer capital spending in construction activity, we will not provide full year 2020 guidance at this time.
Well the covert 19 pandemic has affected all of US we remain confident that our long term business fundamentals remain intact. Accordingly, we have and will continue to take actions to protect our employees bolster our liquidity and support the long term health of our business looking forward we remain confident.
Our strong foundation of energy products and services will be successful in capitalizing on the attractive underlying market fundamentals and long term secular growth trends in the energy infrastructure market.
But continuing to execute on our strategic plans, we will build a diversified energy services platform and position our business for growth was normal commerce resumes.
In doing so we will generate greater and sustainable value for our shareholders.
That concludes our prepared remarks, now I would like to open the call for questions. Operator. Please go ahead.
Thank you to ask a question you'll need to press star one on your telephone to withdraw your question.
Key please standby compared to Q1 day roster.
Our first question comes from Eckstein with Craig Hallum. Your line is now open.
Everyone. Thanks for taking the questions.
Hi, Eric.
So I mean, obviously cobot 19.
The uncertainty there I guess goes on said, but I'd love to get your thoughts on.
The impact of low oil as well and I know, it's not going to impact but.
In terms of the rest of your platform.
How do you view that given that a number of your customers at a pretty substantial cut back in there in their capex budgets. How do you think about that I guess near term and long term.
Yes, it's a obviously low oil prices is a headwind, but I think lesser of a headwind because of the biomethane projects and in Mercury projects and some of these other projects that were focused on that.
That are somewhat independent of of oil pricing to some degree, but the low oil price environment is a headwind for <unk> for sure, but not as much as cobot as Ben.
Right right.
Okay and then.
Obviously first quarter had a lot of I guess onetime costs related to the ramp of the services group and I'm not sure. If you broke that down between.
Cost of goods or the gross margin line in ESG anyway.
Just wondering I mean, how should we think about the business from a margin perspective long term.
Finally, the 9.8% this quarter was not representative of what you would expect going forward.
Right no it's certainly not.
The power services group brought that down with a lot of.
Early startup cost for consumables and things like that that they were expense on the outside as well as.
Getting the fleet ready.
And not fully deployed.
The increase the cost of sale so.
We expect margin to on a combined basis to be in that 20% or better range.
20% the target we're going forward in the near term and we'll continue to evaluate that but thats. The number that we're looking at right now.
Okay got it.
Maybe just last one for me on the acquisition plan just curious how.
Well, I guess cold, but as the main factor, how how that impacts the plan.
In 2020, and also I mean is this something that you actually could use your advantage. If there are some companies out there that maybe are not in very good shape and you could be opportunistic.
As a result.
Yes, we can absolutely be opportunistic.
I think we'll we'll do at least one perhaps more acquisitions. This year. So in my mind, the the pace of acquisitions really Doesnt change.
With cobot.
But they're all.
Given there are opportunities out there to take advantage of some some deals so and that's the position one right now.
Okay. Thanks, a lot.
Thank you are.
Thank you.
Next question comes from Rob Brown with Lake Street Capital. Your line is now open.
I could have to Rob.
Right.
Just a question on reach you had a backlog I think you sit down at 55 million for this year expected is that is that the amount that you'll see from here on out or is that the total year that reach will will do.
That's this year's backlog.
There was two projects that push from 2020 into 2021, but there's also a significant amount of activity that that Oh, we're looking at right now so that number could could go up.
All right here in the near term.
But projects can't push too. So so we've got those puts and takes that can occur.
But but rob that is the forecast or the backlog from data back with position remaining through the end of the year is so it's not not including a period prior to acquisition.
Okay. Good thank you.
And then and then maybe just in terms of sort of some of the cobot impacts on the other business you talked about.
Projects getting getting shifted around or pushed out.
No service business, but how much your business at this point is service and how much is.
That's really product project activity.
And so services.
Services, probably 10% of our overall revenues.
And that business is pretty much shutdown.
Primarily because chemical plants and refiners, they they don't want to us.
Sanders, our contractors on their side, it's right now.
It's kind of ring fence to where they've just got their own employers are showing up for work.
So that.
Service businesses is probably.
10% of what what it should be right now.
And that's about 10, 10% to 12% of our revenues.
Okay, great and.
And then just the balance sheet you have.
Just coming out of the the reach acquisition I think that's pretty neutral the cash but.
What's sort of your cash balance coming out of that and how do you sort of see the.
How much room, you have here on cash as things play out in wind when to things kind of need to improve we get tight cash.
[laughter].
You know catch something we're always keeping an eye on we finished the quarter with 6.7 million of unrestricted cash available on a million dollars restricted.
And we put quite a bit in inventory that we turning over this year and some other areas that can be turning over this year.
We see cash flow positive in the on that short term horizon for reach.
We're reach will be generating cash into the company. So we.
I guess to answer your question, we don't have a panic button right now, but we are now being a small company in the environment. We're in.
We're always keeping an eye on that on that figure, especially and managing how much further and invest some we're going be putting out I think we've we've put out the investment for the power services Group Q1 was was pretty heavy on that between equipment and getting the personnel lined up and ready to go.
That's that's there now.
So inc. it'll be incremental investments going forward based around cash flows for that group.
And products on the horizon.
Or not on the horizon, but actually in the near term when when we do those investments. So I think from that standpoint, the biggest the biggest cash outs or through behind us and from Q1 with the Lps.
Launching the reach M&A activity and investment into them and then also.
You know that working capital adjustment that we paid back to Bellevue is so I think I think were warning good spot right now.
Based on our modeling at this stage and but it is something we're going to continue to keep an eye on and obviously the covance situation is one that will be impacting.
How customers are paying and how vendors are expecting payments all those things. So it's a it's an ongoing conversation and review that we are doing.
Okay, Great and then realizing you can't predict how to covert thing loosens up and turns back competent in the power services group, you've launched what's the typical contract cycle. There how long of things kind of start to open up how long to win a contract typically kind of when it started it and get some revenue out of it is that a long sales cycle just something.
The when things turn on it turned out pretty quickly as well.
It's it's not a longer sales cycle at all we could turn it up pretty quickly so.
Some of the workers I must say work, which which will get on Oh utility system and do their day to day routine maintenance and then the other just short term oh fixed fixed price projects and those happen daily see you can you can basically.
We'll go to work in a matter of a week.
Almost types of projects, so there's not a long sales cycle at all.
Okay, great. Thank you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Liam Burke with B. Riley FBR. Your line is now open.
Thank you good afternoon, Jim Good afternoon dam oddly enough NIM.
And bill.
Could we circle back on the gross margins I understand.
The startup costs in there.
But if I adjust it for the start up costs.
The gross margins directionally, the better than fourth quarter of 19.
Thanks.
Yes, actually they would've been directionally okay.
Yeah.
And then and Daniel mentioned, 20% target a that would be on the power services group.
That's the combined for the group, but we're targeting right now and I think it there's room for that to continue to improve at 20%. The combined group that we're looking at getting it back into the 20% area.
For the near term.
And then orbital power systems that.
For third quarter is where you anticipate getting to critical mass and becoming profitable.
I guess integration is a bad word, but how quickly do you anticipate.
Or bill solar power systems to begin working together.
Creating a one in one equals three situation.
All right immediately whenever a reach goes to work building new solar farms. They had in the past been outsourcing.
Electrical components of about two third parties and now they can do it in house. So we will be able to have immediate synergies between overpower services and reach construction.
Great. Thank you.
Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Jim O'neill for closing remarks.
Okay. Thank you operator, I'd like to thank everyone again today for joining us on the call and your continued interest in overall energy group, we look forward to having follow up conversations with many of you and updating you on continued progress. Thank you and have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.