Orbital Energy : Q2 Earnings Call - August 16, 2021

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EDITED TRANSCRIPT

Q2 2021 Orbital Energy Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 16, 2021 / 12:30PM GMT

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AUGUST 16, 2021 / 12:30PM GMT, Q2 2021 Orbital Energy Group Inc Earnings Call

CORPORATE PARTICIPANTS

Daniel N. Ford Orbital Energy Group, Inc. - CFO & COO

James Francis O'Neil Orbital Energy Group, Inc. - Vice Chairman & CEO

CONFERENCE CALL PARTICIPANTS

Alexander John Rygiel B. Riley Securities, Inc., Research Division - Analyst

Eric Andrew Stine Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

Jeffrey Leon Campbell Alliance Global Partners, Research Division - Research Analyst

Jeffrey M. K. Bernstein Cowen Inc. - VP

Scott Eckstein Kanan, Corbin, Schupak & Aronow, Inc. - Former VP of Market Intelligence

PRESENTATION

Operator

Good day, everyone, and welcome to Orbital Energy Group's Second Quarter 2021 Conference Call. (Operator Instructions) As reminder, this conference call is being recorded. A replay of today's call will be available on Orbital Energy Group's website later today and will remain posted there for the next 90 days. I will now hand the call over to Mr. Eckstein of KCSA for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Scott Eckstein Kanan, Corbin, Schupak & Aronow, Inc. - Former VP of Market Intelligence

Thank you, operator. Hello, everyone, and welcome to Orbital Energy Group's Second Quarter 2021 Conference Call. A copy of Orbital Energy's earnings press release and accompanying PowerPoint presentation are available for download on the Events & Presentations page of the Investor Relations section of the Orbital Energy Group website. With us on today's call are Jim O'Neil, Vice Chairman and Chief Executive Officer; and Dan Ford, Chief Financial Officer. Today, we'll review the highlights and financial results for the second quarter as well as recent developments. Following these formal remarks, we'll be prepared to answer your questions.

I would also like to remind everyone that today's call will contain certain forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and 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 experienced significant fluctuations in future operating results due to a number of economic, competitive and other factors, such as the COVID-19 pandemic, including, among other things, the company's reliance on third-party manufacturers, suppliers and service providers, government agency, budgetary and political constraints, or increased competition, changes in the market demand and the performance or liability of its products, integrated solutions and services.

These factors and others could cause operating results to vary significantly from those in prior periods and to those 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 the company is filed with the Securities and Exchange Commission. These forward-looking statements are based on information available to Orbital Energy Group today, and the company assumes no obligation to update statements as circumstances change. Now at this time, it is my pleasure to introduce Jim O'Neil, Vice Chairman and CEO of Orbital Energy. Jim, please go ahead.

James Francis O'Neil Orbital Energy Group, Inc. - Vice Chairman & CEO

Thank you, Scott, and thank you, everyone, for joining us on our second quarter 2021 earnings conference call. The second quarter was a dynamic period for Orbital Energy Group as we continue our transformation into a full-service infrastructure service provider.

During the quarter, we completed our platform acquisition of Gibson Technical Services, or GCS, creating a strong foothold for us in the telecommunications industry. Complementing this milestone transaction, Orbital Power Services experienced significant expansion in the second quarter both in Orbital Power Incorporated, or OPI, expanding their distribution services into 2 new investor-owned utilities and at Eclipse Foundations, which ramped from 1 crew to 3 crews in the quarter providing drill fear foundations to electric transmission customers.

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AUGUST 16, 2021 / 12:30PM GMT, Q2 2021 Orbital Energy Group Inc Earnings Call

We also experienced expansion at Orbital Solar, which is awarded its first large utility-scale solar project, a 137-megawatt program for a major developer in the Southeast U.S. And finally, with oil prices holding around $70 a barrel, Orbital Gas has experienced a resurgence of activity from energy companies both in Houston and the U.K.

All of these accomplishments resulted in significant backlog growth in the quarter. At June 30, 2021, OEG's total consolidated backlog was approximately $295 million, an increase of 630% from backlog of $40.4 million at December 31, 2020. Today, our backlog is approaching $400 million, and we expect backlog to increase meaningfully going forward. Backlog is a good leading indicator of our progress implementing our infrastructure strategy and to improving the company's consolidated financial performance. As we enter 2022 with our progress to date advancing our strategy, we continue to believe the company will achieve an EBITDA and cash flow positive run rate.

Now I'll review our second quarter 2021 results. Total revenue for the quarter were $16.3 million, a 110% year-over-year increase compared to $7.8 million for the second quarter of 2020, primarily due to the addition of GTS, the ramp-up of Orbital Power Services and the start-up of Eclipse Foundation Group in the Electric Power and Solar Infrastructure Services segment. We also experienced higher revenue from our U.K. operations during the quarter.

These increases were partially offset by lower integration revenues in our U.S. Orbital Gas Systems operations during the quarter. The net loss for the quarter was $8.2 million, benefiting from a $9 million income tax benefit. During the quarter, the company expensed $4.6 million of equity-based compensation for employee performance incentives invested and $0.8 million for a referral fee to a consultant on the GTS acquisition. This compares to a Q2 2020 net loss of $9.3 million, which had an income tax benefit of $1.5 million.

Additionally, we incurred increased costs to build out personnel equipment and supplies with our Orbital Power Services operations. For the first 3 months and 6 months of 2021, unallocated indirect costs that negatively impacted gross margins and net results were $2.5 million and $4.8 million, respectively. In 2021, we had a steady increase in crude deployments to projects serving our electric power customers. These upfront costs are an investment in our business and will generate profitable revenue growth going forward.

Additionally, the operations of Orbital Solar Services had minimal project revenues during the 3 and 6 months related to project delays, while the company maintained its staffing levels in preparation for these projects that are now coming online. We believe these are start-up type costs that will be offset in future periods with the generation of revenues and profits of the significant backlog that has been built during 2021, which we expect to result in significant improvement in quarter-over-quarter income from operations. Dan will provide further details on this shortly.

Now let's talk about the telecommunications market and the acquisition of our telecommunications platform, GTS. One of OEG's top priorities was to require a proven telecommunications infrastructure services company providing a full-service solution, which includes the engineering, design, project management, construction and maintenance to broadband and wireless customers. That's because we believe the telecommunication industry is in the very early stages of one of the most exciting infrastructure build-outs in the history of this industry.

The deployment of 5G wireless technologies and the associated broadband network is unparalleled compared to deployment of prior communication evolutions and part of OEG's strategy was to establish a meaningful position in this industry. One of the bigger initiatives in the 5G deployment is federal and state funding programs continue to bring broadband connectivity to rural America. The rural digital opportunity fund will provide $20.4 billion in funding over a 10-year period to support broadband networks in rural communities across the country.

Additionally, in October of 2020, the FCC established the 5G run fund for rural America, which will provide up to an additional $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America. Given these regulatory backdrops, our visibility continues to improve as we see massive fiber builds across the country by new and legacy customers. In addition, just last week, the Senate passed a $1 trillion bipartisan infrastructure bill which includes additional investment in enhancing the telecommunications network and the deployment of the 5G spectrum.

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AUGUST 16, 2021 / 12:30PM GMT, Q2 2021 Orbital Energy Group Inc Earnings Call

The acquisition of Gibson Technical Services was the perfect opportunity to begin building our telecommunications platform. Founded in 1990 and head outside of the Atlanta, GTS is well-established engineering line and construction service provider to the broadband and wireless industry, serving telecommunications, medical and entertainment customers. GTS has a highly technical and very simply base with very little employee turnover. The company is led by one of its founders, Mike McCracken who has a clear strategy on how to profitably grow this platform, both organically and through acquisition in a market where the demand for our services should increase for many years to come.

In the short time since acquiring GTS, we have been awarded some significant project work including a project for a major U.S. cellular carrier to install a distributed antenna system in a large Atlantic Coast Conference, or ACC, University Stadium. GTS won this project in June and worked has just recently commenced. It is scheduled to be completed during the 2021 ACC football season. Building on this momentum, GTS was also recently awarded a major project by Charter Communications, a leading broadband connectivity company and cable operator serving more than 31 million customers in 41 states through a spectrum brand.

GTS has been engaged by Charter for approximately 8,600 miles of full-service broadband construction across 3 states, including Louisiana, Ama and North Carolina. This project is scheduled to begin this year and extend over the next 5 years. In addition, GTS was awarded 700 miles of rural broadband build-out in Mississippi for Telephone Electronics Corporation, or TEC, of Jackson, Mississippi.

Construction is underway and is scheduled to continue throughout the next 4 years. The project is made up of a combination of federal, state and private funding and was the first of its type to be awarded. It speaks to the reputation and capabilities of GTS to be awarded this first such initiative. Given GTS' broad footprint, combined with its diverse complement of service offerings. We anticipate numerous broadband opportunities in the future.

We are extremely grateful for the confidence that our customers have shown in our abilities by awarding us these contracts and we look forward to continuing our relationships with them going forward. A key aspect of our growth strategy is to opportunistically acquire complementary tuck-in companies into GTS to expand their platform service capabilities, broaden their customer base and extend their geographic footprint. Our July acquisition of IMMCO will bring immediate synergies to GTS, expanding their engineering and design capabilities, broadening their customer base, primarily into state-funded doff programs and thereby extending the combined entity's geographic footprint into new states, largely on the Eastern Seaboard. Additional synergies include IMMCO providing Orbital Solar Services with engineering and design capabilities for utility scale solar projects, which previously outsourced to third parties.

And finally, GTS and IMMCO expect to combine their operating facilities and some shared services functions realizing meaningful cost savings going forward. As stated, we believe the telecommunications market will be very active for years to come, and we anticipate strong growth opportunities and increased demand for our nationwide services both in the near term and over the next several years.

Our visibility will continue to improve during the second half of 2021, and we expect there to be a significant increase in broadband and wireless activity in 2022. OEG will capitalize on a strong telecommunication market to opportunistically expand its market presence both organically and through tuck-in acquisitions. GTS has established significant momentum over the last 2 months, and we expect this momentum to continue as it is the top priority of the company to identify digital tuck-in acquisitions that will position OEG and GTS to grow market share in this industry for years to come.

Now I will turn our discussion to Orbital Solar Services. The long-term outlook for the utility scale solar sector remains incredibly encouraging. In the first half of this year, the industry as a whole experienced a slowdown in project awards, primarily due to shortages of solar panels and steel caused by manufacturing delays due to the pandemic which have led to an estimated 6- to 9-month delay in product delivery according to a recent industry report from the Colony company.

In addition to the shortage of materials, project developers delayed construction in the first half of 2021, given inflation and potential regulatory changes in the U.S. around tax credit support for renewables. In late June, the U.S. Internal Revenue Service extended the safe harbor period for solar projects under the investment tax credit, providing support for projects that have been disrupted by the pandemic. This extension was expected by developers and has served as a catalyst for the increasing level of utility-scale solar activity we experienced today.

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AUGUST 16, 2021 / 12:30PM GMT, Q2 2021 Orbital Energy Group Inc Earnings Call

In June, we were awarded our first significant solar project of this year. 137-megawatt utility scale solar project to be constructed in Arkansas. Most recently, we announced another 132-megawatt project to construct the solar farm in the Southeast United States. This project will consist of 350,000 solar panels installed across 800 acres of land and will provide power for 20,000 homes per year. Earlier this year, we provided an outlook that the company would generate $200 million to $300 million in utility scale solar revenues for the full year 2021.

These project awards were anticipated in the $200 million to $300 million range but were delayed due to the lingering effects of the pandemic and related factors I discussed earlier. The tepid environment for the utility-scale solar industry endured in the first 6 months of this year has largely pushed the timing of most projects forward 6 to 9 months, resulting in projects moving to construction later than we originally anticipated.

Now the bulk of this revenue for Project awards is anticipated in 2022. While the utility scale solar industry has not yet returned to optimum activity levels, these recent project awards are very encouraging. And while we continue to maintain a cautious outlook for this business for the remainder of 2021, it is quite possible that additional project awards will materialize during the remainder of this year.

Turning to the electric power transmission and distribution market, major trends in the energy market point to continued investment in clean energy, improving grid resiliency and favorable energy policies. The long-term business strategies of our customers reflect these trends, which present growth opportunities for Orbital Power. Reconfiguring the electric grid from sources of fast fuel generation to renewable energy is a significant growth driver of infrastructure improvements. And we are strategically expanding our presence with utilities to capitalize on infrastructure projects and solar developers to capitalize on clean energy project opportunities.

According to a February white paper from the Energy Systems Engineering Group's power, system, analysts and energy department research, the cost of new transmission needed is estimated to be at least $100 billion and possibly 3x higher. We believe the migration to electric vehicles as the predominant means of transportation in the coming decade will be a major catalyst in modernization of the electric distribution grid.

Increasing electrical vehicle usage will have an enormous impact on the last mile of delivering electricity to charging vehicles. The proposed American Jobs plan includes a $7.5 billion investment to fund the acceleration of electric vehicles and build a national network of charging stations and related infrastructure across the country to support the growing fleet of electric vehicles that will be on the road.

To support our role in this industry's anticipated growth Orbital Power is presently on track for a fivefold increase in its crew count and revenue run rate by the end of the year compared to the same period last year. During the second quarter, Orbital Power expanded its customer base, executing multiyear electric power distribution maintenance contracts with 3 additional investor-owned utility customers. We anticipated these awards several months ago and due to the shortage of skilled labor and specialized equipment to prepare for these contracts, Orbital Power onboarded crews and purchased equipment supplies well in advance of generating revenue.

Additionally, we recorded certain onetime costs during the quarter related to mobile lines and job-specific resources for our new customer, where we are supporting -- upgrading their electric distribution systems in metropolitan areas. These are often inherent costs when establishing a workforce with a customer in a new complex environment. While it was not ideal, onboarding technical personnel, equipment and supplies in advance of generating revenues, we believe this was necessary due to the scarcity of skilled labor and the shortage of equipment availability I mentioned earlier. This resulted in significantly increased costs for the quarter and financial results that were below our internal expectations. We expect that these cost overruns were temporary and can largely be attributed to the growth Orbital Power is experiencing this year.

Transitioning to Orbital Gas Services, we're experiencing an increase in customer activity due to oil price, which has stabilized around $70 per barrel, coupled with business activities returning to pre-COVID levels. As discussed previously, several large petrochemical refinery projects were awarded to our Houston operations earlier this year. These projects were largely in the engineering and the design stage the first half of this year and have now moved to construction in our Houston facility. The projects are associated with providing customers with gas analyzer buildings where we have installed gas chromatographs and other instrumentation for gas process control

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