Great Lakes Dredge & Dock - Q2 2023

Transcript

Operator (participant)

day, and thank you for standing by. Welcome to the second quarter, 2023 Great Lakes Dredge & Dock Corporation earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star one one on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Tina Baginskis. Please go ahead.

Tina Baginskis (Director of Investor Relations)

Good morning, and welcome to our second quarter 2023 conference call. Joining me on this call this morning is President and Chief Executive Officer, Lasse Petterson, and our Chief Financial Officer, Scott Kornblau. Lasse will provide an update on the events of the quarter, then Scott will continue with an update on our financial results for the quarter. Lasse will conclude with an update on the outlook for the business and the market. Following their comments, there will be an opportunity for questions. During this call, we will make certain forward-looking statements to help you understand our business. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations.

Certain risk factors inherent in our business are set forth in our earnings release and in filings with the SEC, including our 2022 Form 10-K and subsequent filings. During this call, we also refer to certain non-GAAP financial measures, including Adjusted EBITDA, which are explained in the net income to Adjusted EBITDA reconciliation attached to our earnings release and posted on our investor relations website, along with certain other operating data. With that, I will turn the call over to Lasse.

Lasse Petterson (President and CEO)

Thank you, Tina. As we indicated in our last earnings call, the difficulties we faced in 2022 as a result of the severely delayed bid market for capital and beach restoration projects, is now slowly coming to an end. The second quarter EBITDA is a result of an improved bid market and our cost-saving initiatives, which resulted in improved project margins. All combined, these resulted in an Adjusted EBITDA of $16.6 million, our highest EBITDA since the first quarter of 2022. Although not all of the challenges from 2022 are behind us, we continue to see positive developments in both a large number and a better mix of projects coming to bid, which provides us with confidence that we are on a path to return to normal operations and results towards the latter part of 2023 and into 2024.

The total bid market through June 30, 2023, was $930 million, of which we won $310 million, or 33% of the total market bid. This is nearly 3 times the amount won by the next closest peer. The first half year bid market saw several bids for port deepening and improvement projects totaling $350 million, of which we won 56%, including the $160 million Freeport Phase II project, on which we will utilize a varied suite of dredging equipment that only Great Lakes can provide. We ended the quarter with $434 million of the dredging backlog, which does not include approximately $50 million of performance obligations related to offshore wind contracts and $487 million in low bids and options pending award.

Included in the low bids pending award were two LNG projects that have been waiting notice to proceed from our clients. In July, post, post-quarter end, we received notice to proceed on the Rio Grande LNG projects, which will be now the largest project undertaking in a 133-year history. Work on establishing the dredged material containment areas is scheduled to start later this year, with the major dredging efforts starting in early 2024 and ongoing for the next two years.

Additionally, as stated previously, we've seen an increase in bids coming to the market, and post-quarter end, we were low bidder on an additional $137 million of projects, which will likely be awarded and added to backlog during the third quarter, together with the Rio Grande LNG project, resulting in a total backlog exceeding $900 million today when all these projects have been included for and awarded. As we stated, the company took swift and proactive action on cost reductions and fleet utilization adjustments. Last year, we retired the 42-year-old hopper dredge Terrapin Island, and we currently have cold-stacked dredges and various support equipment in anticipation of an improved dredging market in the latter part of 2023 and onwards. As we previously stated, cold-stacked vessels can easily be reactivated as the market continues to improve.

These initiatives have led to substantially reduced costs in 2023, which has allowed us to navigate the impacts on the delayed 2022 bid market. Correspondingly, we have reduced our G&A and overhead cost structures by more than 15%, adjusting to the current market conditions. On July 20 this year, we were honored to have President Biden attend the steel cutting ceremony for Great Lakes offshore wind rock installation vessel, the Acadia. President Biden was joined by Congresswoman Mary Gay Scanlon, MARAD Administrator Rear Admiral Ann Phillips, Metal Trades Department, AFL-CIO, James Hart, and President of SIU, David Heindel, SIU crew, our hopper dredges. Also present were senior executives from our current and potential clients. Post-quarter end, we signed the first-ever subcontractual procurement of U.S.-sourced rock with Carver Sand and Gravel, LLC, from a quarry in the State of New York.

Both milestones solidify our entry into the offshore wind market and will support Great Lakes' awarded rock installation contract with Equinor for the Empire Wind One and Two projects, with installation windows in 2025 and 2026. We continue to adjust to the current market situation, we remain optimistic in the long-term outlook for the dredging market, our ongoing fleet renewal program is fundamental in our strategy to continue to be the U.S. dredging industry leader. After decommissioning several of our oldest dredges back in 2017, we have invested in productivity upgrades to our best-performing vessels, and our new hopper dredge, the Galveston Island, is expected to be operational in the third quarter of 2023, and her sister ship, the Amelia Island, is expected to be delivered in 2025.

I now turn the call over to Scott to further discuss the results for the quarter, and then I'll provide a further commentary around the market and our business.

Scott Kornblau (CFO)

Thank you, Lasse. Good morning, everyone. For the second quarter of 2023, revenues were $132.7 million, net income was $1.7 million, and Adjusted EBITDA was $16.6 million. Revenue of $132.7 million in the second quarter of 2023 decreased $16.7 million from the prior year's second quarter. The quarter-over-quarter decrease in revenue was primarily due to lower utilization, as the recently retired Terrapin Island worked most of the prior year's second quarter, and two currently cold-stacked dredges that didn't work in the second quarter of 2023 were operating in the same quarter last year. Partially offsetting the decrease in revenue and utilization were less dry-docking days in the second quarter of 2023 compared to 2022.

Despite the lower quarter-over-quarter revenue, current quarter gross profit and gross profit margin increased to $17.9 million and 13.5% respectively, compared to $10.5 million and 7% respectively in the second quarter of 2022. The increase in gross margin is primarily due to improved project performance, lower operating costs due to our continued focus on cost reduction, and fewer dry-dockings in the current year quarter. In addition, during the quarter, we recorded a $2.4 million benefit to costs related to a legal settlement on a previously completed and closed project. Second quarter 2023 G&A of $14.5 million is $3.7 million higher than the same quarter last year.

The increase in general and administrative expenses from the prior year was primarily due to a one-time, nonrecurring adjustment in the prior year quarter, higher office rent due to the expansion of our Houston headquarters, and lower incentive pay in the prior year quarter, offset partially by a decrease in headcount and lower legal and recruiting expense. Operating income for the current quarter of $3.7 million increased $4 million from the prior year quarter's net loss of $0.3 million, driven by the improved gross profit. Net interest expense of $3.2 million for the second quarter of 2023 was down slightly from $3.4 million in the second quarter of 2022, primarily due to an increase in capitalized interest related to our new build program, partially offset by current quarter revolver interest expense.

Second quarter 2023 net income tax provision of $0.8 million, compared to $0.9 million of income tax benefit from the same quarter of 2022, and was driven by the higher current quarter income. Rounding out the P&L, net income for the second quarter of 2023 was $1.7 million, up from a $4 million net loss in the prior year quarter. Turning to the balance sheet, we ended the second quarter of 2023 with $42.1 million in cash and $55 million drawn on our $300 million revolver, which doesn't mature until the third quarter of 2027.

Total capital expenditures for the second quarter of 2023 were $19.4 million, consisting of $12.5 million for the Amelia Island, $2.9 million for the Multi Cats, $2 million for the Galveston Island, $1 million for the build of the Acadia, and $1 million for maintenance CapEx. Full-year CapEx guidance of approximately $175 million remains unchanged, but can increase or decrease depending on the timing of new build milestone payments. As previously discussed, in January of this year, we applied with the Maritime Administration, or MARAD, which is a unit of the Department of Transportation, for Title XI financing on our new wind vessel, which typically comes with very attractive terms. The review process is ongoing and progressing, but in parallel, we continue to explore other sources of capital.

Though our backlog, and more specifically, our capital project backlog, is drastically increasing. Most of the new work starts towards the end of 2023 and the beginning of 2024. We will not see a major impact from these projects in the third quarter. Costs will likely increase during the third quarter, as we have two dredges that will be in the shipyard undergoing their regulatory dry-dockings. Both dredges are expected to return to work in the fourth quarter. During the third quarter, we will have a previously cold-stacked dredge in the shipyard for reactivation, as she is expected to commence work in the fourth quarter of 2023 on a recently won project.

With no further regulatory dry-dockings or shipyard stays planned for the remainder of the year, a better mix of capital projects and backlog, and the Galveston Island coming online, the fourth quarter is shaping up nicely, which should provide strong momentum going into 2024. With that, I'll turn the call back over to Lasse for his remarks on the outlook moving forward.

Lasse Petterson (President and CEO)

Thank you, Scott. We continue to see strong support from the Biden administration and Congress for the dredging industry. In December 2022, the Omnibus Appropriation Bill for fiscal year 2023 was signed into law, which included another record budget of $8.7 billion for the U.S. Army Corps of Engineers Civil Works program, of which $2.3 billion is provided for the Harbor Maintenance Trust Fund to maintain and modernize our nation's waterways. In addition, the Disaster Relief Supplemental Appropriations Act for fiscal year 2023 was approved, which includes $1.4 billion for the Corps to take necessary repairs to infrastructure impacted by hurricanes and other natural disasters, and to initiate beach renourishment projects that will increase coastal resiliency.

This increased budget and additional funding has resulted in a strong bid market in the first part, half of 2023, which we expect will continue for the remainder of the year. Support for the dredging market, supporting the dredging market is also the increase in major works for private clients. As stated previously, we have been awarded NextDecade's dredging contract for their LNG project in Brownsville, Texas, and earlier in the second quarter, Sempra made their FID decision to proceed with the Port Arthur LNG facility, and the award for dredging services is expected to be issued in the next few months. In 2021, the Biden administration announced the ambitious goal of 30 GW of offshore wind energy by 2030, and provided $3 billion in federal loan guarantees for offshore wind projects.

As stated previously, Great Lakes was awarded the rock installation contract for the Empire Wind I and II projects, with installation windows in 2025 and 2026. In July 2023, the federal government further showed their support for offshore wind by providing approval for New Jersey's first offshore wind farm to begin construction. Also in July 2023, the Department of the Interior issued the final sales notice for the first-ever offshore wind lease sale in the Gulf of Mexico, which will take place at the end of August. We have tendered bids for multiple offshore wind projects for rock placements in 2025 and beyond to support the work schedule for the Acadia as she starts operation. In conclusion, our main focus this year is to keep managing through the various challenges that the 2022 delayed bid market presented us.

As expected, so far this year, we have seen a strong overall dredging market, including bids for a number of large capital projects. This, combined with our fleet adjustments, cost reductions, and productivity initiatives, will ensure we continue to provide improved results for 2023 and onwards. With that, I'll turn the call over for questions.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by, we will compile the Q&A roster. This will take a few moments. We're going to take our first question, the question comes from the line of Adam Thalhimer from Thompson Davis. Your line is open. Please ask your question.

Adam Thalhimer (Director of Research)

Hey, good morning, guys. Congrats on the solid Q2. With the backlog kind of swinging from, you know, lowest, lowest in a while in Q1 to probably record, here in July, when do you think you're going to be fully utilized again?

Scott Kornblau (CFO)

Yeah. Good morning, Adam. Thanks for the question. A number of our dredges now are completely booked, not only for this year, but well into next year. We have a couple of dredges that still have some availability for this year, but that is very, very few. Q1 is also getting pretty booked already for next year. When are we gonna get full utilization? That I can't say. I did mention, though, in my prepared remarks, we are in the midst of reactivating a previously cold-stacked vessel that will work on one of these recent projects award that will start in the Q4. It is a good problem to have, where 1 year ago we were figuring out what we were gonna do with dredges.

We're trying to figure out with this, you know, a lot of work that's coming through, how we're gonna get it all in. One of the things I will mention, though, a number of these projects, the reason they're so attractive to us, is there's a lot of flexibility in the timing to get them done. It does, it does allow us to strategically move vessels around and move, certain scopes of work to the left and the right to try to fit all of this in.

Adam Thalhimer (Director of Research)

Okay. Then, there were 2 super jobs that you called out in the release. One was New York, New Jersey, deepening, and one was the $30 billion+ Texas job. What are your thoughts on timing of those jobs?

Lasse Petterson (President and CEO)

Yeah, the, the New York is, was included in the WRDA. The studies that the U.S. Army Corps of Engineers are executing is ongoing, and, we assume that it, it would take some 3-4 years before the actual dredgings to start. That's kind of the time perspective. It's, it's important to also have a more longer-term view when it comes to these capital projects, so that we see that there is a continuation of large projects as we go forward.

Adam Thalhimer (Director of Research)

Got it. Got it. Lastly, the, you had the legal gain in Q2, and then for the last year, we've been talking about, I think it was three jobs with differing site conditions. Are those two things related, or and where do we stand on the differing site conditions?

Scott Kornblau (CFO)

Yeah, no, these are, these are unrelated. This is a this one is very old. It's not a claim. It's just an old legal matter that had been settled during the quarter, so just some balance sheet cleanup and pickup. The claims, they are progressing. Of the two larger ones that I've called out, I am very comfortable that at least one of those gets closed out in the third quarter. The second one, I'm confident, if not third quarter, it's fourth quarter. We're making very good progress on both of those.

Adam Thalhimer (Director of Research)

Okay. I'll turn it over. Thank you.

Scott Kornblau (CFO)

Thanks.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now, we're going to take our next question. The question comes from line of Joe Gomes, from Noble Capital. Your line is open. Please ask your question.

Joe Gomes (Senior Research Analyst)

Thanks. Good morning for taking my questions.

Scott Kornblau (CFO)

Morning, Joe.

Joe Gomes (Senior Research Analyst)

Wanted to start out on the core and kind of the sequencing here of the releases. You know, listening to, you know, one of your main competitors last week, they continued to talk about, you know, a less than normal or less than historical level of award activity out of the core. You know, you guys mentioned some of the capital projects that have been coming in that were delayed in 2022. Kind of get a better feel of what you guys are seeing or what your perception is on the award level of the core. Do you think it's kind of getting back to a more historical level, or do you still think there's more room for upside there?

Lasse Petterson (President and CEO)

Yeah. What we have seen is that, the maintenance projects, is coming out as scheduled from the Corps. In addition, we have seen an improvement in the capital projects that are coming out. We still see delays on some of the larger dredging projects, but combined now with the private client market, the dredging market turns out to be good, and the bid market is good here for 2023. In short, maintenance projects are coming out as scheduled, and some of the projects or the capital projects, has been bid, but there are still some delays.

Joe Gomes (Senior Research Analyst)

Okay. On the NextDecade project, I was wondering if you might be able to talk a little bit more about that. You, you mentioned it's the largest, and I think you, you, you, you did give us some sizing, in, in terms of what your previous largest project was. I don't know how much detail you can go into on that in terms of the stages and, and what kind of, I know, the, the revenue flow. I don't know if you can break it down into percentages. Have you seen that come in, for that, for that project?

You know, with a couple of these large other capital projects that you have, if you were to, to, to win the, the, the, the other LNG, you know, how will you stand capacity-wise to be able to do all these at one time?

Lasse Petterson (President and CEO)

Yeah. The NextDecade has asked us not to come out with the exact number for the project. We are respecting that. The project is large. It's starting up now pretty soon with the all the preparatory work that we need to do in order to build the containment areas for the dredged material. Then as we get to the end of the year, beginning of next year, we will start with the main dredging that then goes on for almost two years. It's a very good project. It utilizes our cutter dredges, which the market has been very soft for over the last, let's say, 18 months.

There are a couple of other capital projects out there, as I mentioned, that we are bidding and in position to execute. If we are successful, we have capacity to do those projects as well. There's not a concern on that side.

Joe Gomes (Senior Research Analyst)

Okay. Then, one more, if I may. Just, you know, Scott, we could talk a little bit about the CapEx here. You know, we, we've talked about the $175 million guide for the year. In Q1, it was, you know, $28.7 million, even though the, the, the initial expectations were north of $70 million. In Q2, it was $19.4 million, even though expectations were $55 million. Now, that, that leaves a significant number, you know, roughly, let's call it $125 million for the last two quarters here. And, you know, we talked last time we talked, you mentioned some stuff slipping to the right in the first quarter for a couple of weeks, but it seems like it's slipped a lot more than, than that, the whole quarter, at least.

Maybe you can give us a little more insight as to what is going on, on the, on the CapEx spend, and, you know, how comfortable are you with the ability, you know, if you are to hit that $175 million with, you know, financing it in the last, you know, kind of rush here in the, in the last two quarters, of the year?

Scott Kornblau (CFO)

Yeah. Thank, thanks for the question, Joe. You know, it, it is not unusual on these large capital projects that have milestone payments for, you know, those various milestone payments to, to slip. That is what happened here. Q3 will be a high CapEx number. We have already made some of those payments that were expected end of June. They happened early July. You know, I, I do still stick by the $175. If one of the, you know, December payments slips, these are big payments, you know, that would, you know, lower that for this year, but increase it for next year. You know, the total amount we have left to spend on the new build program is still intact. Again, there's gonna be these kind of ebbs and flows to, to the left and right.

You know, to answer your, your second question, you know, the timing of this CapEx, you know, whether it was more geared towards the first half of the year or second half of the year, you know, doesn't change the full year, doesn't change the way that, that we were looking at it. Even though we are working not only on Title XI, but some other financing alternatives, nothing we need to do right now. Our $300 million revolver, you know, had $55 million drawn at the end of the first half, and we had cash on the balance sheet at the time. You know, we, we have plenty of liquidity, you know, to get us through end of the year into next year, even with these large CapEx programs.

You know, as we mentioned, Q4 and into 2024 is looking to be much stronger years, which will help on the cash flow side of things.

Joe Gomes (Senior Research Analyst)

Okay, great. Thanks for that. I appreciate. I'll get back in the queue.

Operator (participant)

Thank you. Now we'll go and take our next question. Just give us a moment. The next question comes from the line of Jon Tanwanteng from CJS. Your line is open. Please ask your question.

Pete Lukas (Director of Institutional Sales)

Hi, good morning. It's Pete Lukas for Jon. You touched on in your prepared remarks in terms of cost reductions. Can you talk a little bit more about how much was permanent cost versus temporary, and what does this mean for your margin potential after Q3, when you return to better utilization and mix?

Lasse Petterson (President and CEO)

Yeah, so-

Scott Kornblau (CFO)

Yeah, so...

Sorry. Go, go ahead, Lasse. I'll jump in afterwards.

Lasse Petterson (President and CEO)

Yeah, it's, what we have targeted was, more than 15% reduction of SG&A and overhead costs, and that's on a permanent basis. As activity is, is picking up, we will be careful not to add any SG&A, and, there may be some overhead cost that needs to come, but I, look upon this as a permanent saving, on an annual basis. Scott, you want to add some details?

Scott Kornblau (CFO)

Yeah. No, yeah. Then, you know, specifically for this quarter, we did have a dry docking that should have started in Q2. It's gonna start in Q3, so we will have some increased costs then. It was just, we just didn't have all the equipment. The dredge is working, so it just shifts. It doesn't really change anything for the year. It's just gonna shift some costs into, into Q3 instead of Q2, and also the margin that we earned on the vessel, which was fully utilized during the quarter. We'll have to take her down.

I'll also say, you know, not only are we being very, you know, aggressive on a lot of our initiatives that we're doing to reduce cost, if you recall last year, because of the unusual bid market, and we had a lot of dredges, that were sitting at the dock, we did take advantage of that time to be proactive and invest in the fleet then. So times like now, that we're starting to see utilization pick up again, we didn't have to take vessels down, so that also is, you know, what's keeping the costs down.

Pete Lukas (Director of Institutional Sales)

Very helpful. Thanks. How much is left in potential change order settlements, and what is the potential timing on those?

Scott Kornblau (CFO)

Yeah, so, you know, as I, as I mentioned earlier, the ones that we called out last year because they were, you know, unusual by the size that we had, as I've just mentioned, I do expect one of those will settle in the third quarter. The largest of them, if not in the third quarter, we're having very advanced dialogues, that one gets done, that one, I'd be very surprised if it does not get done this year. As we had said last year, you know, between the two of them, you know, we're, we're in, you know, teens, you know, $ millions. You know, these, these were pretty large claims, in, in the scope of things.

Fortunately, you know, the reason we called them out last year is because they were large, in nature and unfortunately hit at the same time. We thought it was an anomaly, and that's holding, and that's holding out true. We have not seen, those sort of claims like we did see last year.

Pete Lukas (Director of Institutional Sales)

Very helpful. Thanks. Last one for me. What can we expect in terms of what are you seeing in terms of wind signings? Are you expecting Acadia to be working at 100% capacity?

Lasse Petterson (President and CEO)

Yeah, Acadia is scheduled to come out in 2025. She goes to work on the Empire Wind project. In addition to doing the rock installation that is supporting the monopile, we're also seeing a number of bids coming out for protection, so clay cables, which will then help with the utilization in addition to the main work, which is the foundation's support. We are seeing good opportunities for having her fully utilized in 2026 and onwards.

Pete Lukas (Director of Institutional Sales)

Very helpful, thanks. I'll jump back in the queue.

Operator (participant)

Thank you. There are no further questions at this time. I would now like to hand the conference over to Tina Baginskis for any closing remarks.

Tina Baginskis (Director of Investor Relations)

Thank you. We appreciate the support of our shareholders, employees, and business partners, and we thank you for joining us in this discussion about the important developments and initiatives in our business. We look forward to speaking with you during our next earnings discussion.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a nice day.