Orbital Energy : Q2 Earnings Call - August 18, 2020

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Q2 2020 Orbital Energy Group Inc Earnings Call

EVENT DATE/TIME: AUGUST 18, 2020 / 9:00PM GMT

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AUGUST 18, 2020 / 9:00PM GMT, Q2 2020 Orbital Energy Group Inc Earnings Call

CORPORATE PARTICIPANTS

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

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

CONFERENCE CALL PARTICIPANTS

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

Jeffrey M. K. Bernstein Cowen Inc. - VP

Liam Dalton Burke B. Riley FBR, Inc., Research Division - Analyst

Robert Duncan Brown Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

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

PRESENTATION

Operator

Good day, everyone, and welcome to Orbital Energy Group's Second Quarter 2020 Conference Call. (Operator Instructions) As a 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. - VP of Market Intelligence

Thank you, operator. Hello, everyone, and welcome to Orbital Energy Group's Second Quarter 2020 Conference Call. A copy of the company's earnings press release and accompanying PowerPoint presentation are available for download on the Events and 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 Daniel 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 may experience significant fluctuations in future operating results due to a number of economic, competitive and other factors, such as the coronavirus, including, among other things, the company's reliance on third-party manufacturers, suppliers and service providers, government agency, budgetary and political constraints, new 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 that could materially affect the company's operations are included in certain forms the company has 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. The floor is yours.

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

Thanks, Scott, and thank you, everyone, for joining us on our second quarter 2020 earnings conference call. During the second quarter, we continued advancing our strategy to transform the company into a diversified energy infrastructure services company and made progress toward our goal of being profitable and cash flow positive on a consolidated basis by the end of this year, positioning the

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AUGUST 18, 2020 / 9:00PM GMT, Q2 2020 Orbital Energy Group Inc Earnings Call

company for profitability as we move into 2021.

We will accomplish this goal through several initiatives we have undertaken over the first half of this year. First, we will construct several utility-scale solar programs through our newly acquired Reach Construction Group, a solar engineering, procurement and construction services company during the second half of this year.

Our utility-scale solar awarded backlog remains at $55 million for the remainder of this year.

Second, we continue to expand our greenfield Orbital Power Services Group throughout the Southern U.S. to provide electric transmission and distribution services for investor-owned utilities and electric cooperatives.

Third, and our legacy natural gas product and integration operations in North America and the U.K. We continue to right size operations, while taking advantage of expanded business development activities in new markets, specifically renewable gas.

And finally, we have an acquisition pipeline of infrastructure companies with mutual interest to join the Orbital Energy Group. Our plan is to bring additional companies into the Orbital family to broaden our service offerings and geographical reach with synergistic acquisitions in the energy infrastructure services space, ultimately adding value for our customers and shareholders.

During the quarter, we also implemented our corporate name change from CUI Global to Orbital Energy Group, which we believe reflects our strategic repositioning and progress in becoming a diversified energy infrastructure services provider.

As a result, our common shares are now trading under the new ticker symbol OEG.

Before I discuss more specifically about our progress with this strategy, I'd like to briefly review the results of our second quarter 2020 performance.

Total revenues were $7.8 million for the quarter compared to $6.3 million for the second quarter of 2019. The year-over-year increase was attributable to Reach and Orbital Power revenues being included in the period offset in part by lower integration revenues in our Orbital Gas Systems operations, reflecting project delays related to the COVID-19 pandemic and lower oil prices that were experienced during the quarter.

Net loss for the quarter was $9.3 million compared to a net loss of $2.3 million for the second quarter of 2019. The delay in Reach solar project awards into the third quarter and higher SG&A expenses during the quarter specifically attributable to Orbital Power Services and Reach Construction overhead costs negatively impacted the Q2 results.

Dan will provide additional detail on our financial performance shortly. Despite COVID-19 headwinds to our business, we are encouraged by the level of customer activity we are seeing throughout most of our operations.

Reach Construction is in the early stages of constructing a 65-megawatt facility in Virginia that began in July with 2 additional projects starting this month and 1 more in September, with several other projects under negotiation to begin construction this year.

As stated earlier, Reach has awarded backlog to be executed this year is approximately $55 million. According to our report published in June by the U.S. Solar Industries Association and Energy Research firm Wood Mackenzie, the solar industry will install 18 gigawatts this year, enough to power more than 3 million homes. That represents new U.S. solar capacity growth of 33% in 2020, and we expect the solar market to be very active for at least the next 5 years and beyond as renewable energy targets set by states and the lower cost of solar power continue to drive demand.

Reach is well positioned to capitalize on this industry momentum.

Orbital Power Services, our greenfield operation, continues to gain traction. This internally-developed operation has grown into a

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AUGUST 18, 2020 / 9:00PM GMT, Q2 2020 Orbital Energy Group Inc Earnings Call

full-service construction and maintenance service provider to the electric power industry, providing distribution, transmission, substation, renewable and emergency response services to customers throughout the Southwestern and Southeastern United States. While this business has developed more slowly than we had originally anticipated due to the impact of COVID-19, it continues to take advantage of new customer opportunities and is expected to be profitable by year-end.

This month, Orbital Power was awarded in electric distribution master service agreement for our customer in Georgia, expanding its geographic coverage beyond Oklahoma and Texas.

We have also dispatched our electric crews to the Eastern U.S. to provide emergency restoration work to the electric power system in response to Hurricane Isaias.

We are confident this group will continue to grow as we are in discussions with several other utilities to assist with their electric transmission and distribution capital plans. We expect this market to be robust for years to come as utility customers continue to replace existing infrastructure, much of which is beyond its useful life as well as integrate renewable generation onto their transmission and distribution system as they move away from coal and nuclear power generation.

Additionally, the electric power industry is dealing with an aging workforce dynamic, which is creating a void in experienced construction resources to meet utility customer needs.

Our Orbital Gas Systems product and integration operations were materially impacted by COVID-19-related disruptions in the local market in the quarter.

Orbital Gas Systems in North America has experienced most large petrochemical integration projects being placed on hold until next year. Smaller maintenance-based projects are moving forward, and we continue to bid and win our share of these projects. Also, some petrochemical plants are beginning to allow contractors to return to their sites to perform service activities.

However, the overall impact of not performing large project work this year will impact our Houston operations by approximately a 30% reduction in revenues compared to our expectations going into this year.

During this downturn, we did identify and initiate a new service offering and are now providing analytical training classes for customers on-site. Providing training to customers will not only create a new revenue stream for the company, but also open the doors for more integration and service opportunities as we move forward.

Turning to our U.K. Orbital Gas System operations, our site service work, which was virtually shut down due to COVID-19 has significantly recovered almost to pre-pandemic levels. We are now experiencing minimal impact on integration services, including engineering, design and project delivery. A significant driver for our success during COVID-19 was the expansion of the company's business development efforts earlier this year to pursue new markets.

As a result, renewable project revenues comprised of approximately 15% of the revenues in the first half of 2020, which includes providing integration services for Mainland Europe's first biomethane project. We anticipate the cadence of customer opportunities to continue at a nice pace throughout the remainder of this year.

As of June 30, 2020, our total backlog under contract, which does not include awarded projects not yet under contract or discontinued operations was $46.4 million, compared to $9.5 million at March 31, 2020. This reflects the inclusion of Reach and the growth of Orbital Power Services in 2020.

In closing, despite recent headwinds from COVID-19 and delays in the construction of utility-scale solar projects to the back half of this year, we continue to make progress during the quarter with our transformational strategy to become a diversified energy infrastructure services company. We successfully completed our platform acquisition of Reach Construction Group, and we'll see meaningful backlog translate into revenues in the second half of this year.

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