Great Lakes Dredge & Dock - Q4 2023

Transcript

Operator (participant)

Good day and thank you for standing by. Welcome to the Q4 2023 Great Lakes Dredge & Dock Corp earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised today's conference is being recorded. I would now like to introduce your host for today's conference, Tina Baginskis, Director of Investor Relations. Please go ahead.

Tina Baginskis (Director of Investor Relations)

Thank you. Good morning and welcome to our fourth quarter 2023 conference call. Joining me on the call this morning is our 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 and the year, then Scott will continue with an update on our financial results for the quarter and the year. Lasse will conclude with an update on the outlook for the business and 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 expected, 2023 was a year of positive transition from the difficult 2022. We ended the year strong, with improved performance, stronger financial results, and a record backlog of $1.04 billion, which does not include approximately $179 million of low bids and options pending award, and approximately $44 million of performance obligations related to offshore wind contracts. The bid market gained momentum throughout the course of the year in our preferred port deepening and coastal protection markets. We ended the year with 71% of our backlog in capital projects with four major awards, including the Freeport Deepening Projects, the Sabine- Neche Waterway Channel Improvement Project, and two large port deepening projects related to liquefied natural gas (LNG) projects, the Port Arthur LNG Phase I, and the NextDecade Corporation Rio Grande LNG projects. The latter is the largest project ever undertaken by Great Lakes.

These two projects are not impacted by the recent White House announcements regarding a pause on new LNG export projects permitting. As we have navigated the challenging market conditions in 2022 and 2023, we have remained focused on staying a competitive market leader for the long term. We have implemented cost reductions initiatives, including strong reductions in our G&A and overhead cost structures. We are modernizing our fleet with our ongoing new build program and retirement of older, less productive dredges, such as the Terrapin Island in 2022 and the Dredge 53 in 2023. We have now taken delivery on our newest 6,500 cubic yard capacity hopper dredge, the Galveston Island. We did that in December last year. Our sister ship, the Amelia Island, is expected to be delivered in 2025.

Also in 2023, we took delivery of our two multicats, the Cape Hatteras and the Cape Canaveral, which will now be efficient tools for mobilizing and demobilizing of pipelines, as well as general operation support. We took delivery of three new scows replacing older equipment last year. Towards the end of 2023, the offshore wind markets started to see growing pains. We saw several cancellations by developers of power purchase agreements (or PPAs) that were entered into in 2018 and 2019 before COVID, inflation, and interest rate increases were a reality. The East Coast states also continued to invite new bids for new PPAs, which included the opportunity to increase the base rates to the new realities and to include inflation adjustments going forward.

Our client, the Equinor BP joint venture, decided to reset the plan for Empire Wind II, wind farm, and to cancel our rock installation contract scheduled for 2026. Equinor is continuing the Empire One development as previously planned, and we will have the opportunity to re-tender the Empire Wind II contract when Equinor re-bids their PPA for this development. In December of 2023, we were awarded a new rock installation contract to perform rock protection over subsea power cables - a new utilization for this vessel - on an offshore wind project off the East Coast of the United States. Going forward, we continue to pursue and bid a number of other offshore wind farm projects, both domestically and internationally, with rock installations planned for 2026 and beyond.

We believe the offshore wind market power generation market offers Great Lakes a strong opportunity for growth in a rapidly growing market, which also provides us with an opportunity to diversify our business and our client base. I now turn the call over to Scott to further discuss the results for the quarter and I will provide further commentary around the market and our business.

Scott Kornblau (CFO)

Thank you, Lasse, and good morning, everyone. I will start by walking through the fourth quarter, which resulted in the strongest EBITDA quarter we have had since the end of 2021. For the fourth quarter of 2023, revenues were $181.7 million, net income was $21.6 million, and adjusted EBITDA was $40.8 million. Revenues of $181.7 million in the fourth quarter of 2023 increased $35.1 million from the prior year fourth quarter, primarily due to higher utilization and higher coastal protection, maintenance, and offshore wind revenues, offset partially by a decrease in Rivers and Lakes project revenue. Current quarter gross profit and gross profit margin increased to $38.7 million and 21.3% respectively compared to -$16.2 million and -11% respectively in the fourth quarter of 2022.

The increase in gross margin is primarily due to improved project performance, utilization, and approximately $20 million of lower operating costs due to our continued focus on cost reductions and efficiencies. Fourth quarter 2023 G&A of $15.4 million is $3 million higher than the same quarter last year, primarily due to higher incentive and severance pay in the current year quarter, partially offset by our continued cost-cutting initiatives. Current quarter's operating income of $30.5 million improved $67.2 million from the prior year's quarter operating loss of $36.7 million, driven by the improved gross profit, a $7.4 million gain related to the recently terminated offshore wind contract, and the non-repeating fourth quarter 2022 write-down of the hopper dredge Terrapin Island after she was retired, partially offset by the previously discussed increase in G&A.

Net interest expense of $2.8 million for the fourth quarter 2023 was down from $3.1 million in the fourth 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. Fourth quarter 2023 net income tax expense of $6.2 million compared to an $8.4 million net income tax benefit in the same quarter of 2022 is driven by the higher current quarter income. Rounding out the P&L, net income for the fourth quarter 2023 was $21.6 million, up from a $31.2 million net loss in the prior year quarter. Turning now to our full year results, revenue for 2023 was $589.6 million, net income was $13.9 million, and Adjusted EBITDA was $73 million.

Despite a $59.2 million decrease in year-over-year revenue, gross profit margin increased from 4.8% to 13.2%, net income increased $48 million, and Adjusted EBITDA increased $56 million, driven by stronger project performance and improved efficiencies. Turning to our balance sheet, we ended 2023 with $22.8 million in cash and $90 million drawn on our $300 million revolver, which doesn't mature until the third quarter of 2027. So far this year, we have paid down $15 million and currently have $75 million drawn against the revolver. During the fourth quarter, we closed on a sale leaseback of various support equipment, bringing in approximately $29 million of cash.

Total capital expenditures for 2023 were $144.8 million, which includes $64.5 million for the construction of the subsea rock installation vessel, the Acadia, $36.3 million for the Amelia Island, $24.8 million for the Galveston Island, $9.2 million for our recently delivered multicat, and $10 million for maintenance CapEx. As previously discussed, a little over a year ago, we applied with the Maritime Administration, or MARAD, for Title XI financing on our new vessel, the Acadia. The recent offshore wind headlines, including the canceled PPAs Lasse discussed earlier, have slowed down the progress of our Title XI application. While we continue our conversations with MARAD, we have shifted our focus and are actively pursuing other financing that can either be a bridge to a Title XI loan or the primary funding source to support and complete our new build program.

These discussions are progressing quickly, and I am confident we are on a good path to secure additional financing soon. I will provide updates in the future as appropriate. Looking forward to 2024, we expect approximately 60% of our $1 billion backlog to be converted into revenue during the year. This can fluctuate higher or lower as vessel schedules adjust throughout the year. We currently have three regulatory dry dockings planned for 2024, with two starting in the first quarter and a third planned for the second half of the year. But, as always, the number and timing of dry dockings is subject to change. We expect full year 2024 capital expenditures to be between $170 million-$195 million, which includes approximately $20 million of maintenance CapEx.

The timing of these payments is dependent on when certain milestones are reached on the new builds, but we expect the heaviest spend to occur in the middle of the year. Looking towards the first quarter, we have two dredges beginning the regulatory dry docking that will continue into the second quarter. Partially offsetting those down days is the addition of the Galveston Island, which began operations earlier this month. With that, I will turn the call back to Lasse for his remarks on the outlook moving forward.

Lasse Petterson (President and CEO)

Thank you, Scott. The U.S. dredging bid market for 2023 was at a record $2.8 billion, of which Great Lakes won 46%. This includes the over $500 million of capital port deepening projects for LNG developments that Great Lakes was awarded. We continue to see strong support from the administration and Congress for infrastructure developments, including new maritime and port deepening, widening, and maintenance projects requiring dredging. In March of 2023, President Biden released the President's Fiscal Year 2024 Executive Budget. The proposed amount for the U.S. Army Corps of Engineers was $7.4 billion, which is a record amount for a President's budget. And in June of 2023, the House proposed an increased 2024 budget of $9.6 billion for the Corps, which is $910 million above the fiscal year 2023. And in July of 2023, the Senate Committee for Appropriations passed the budget, which includes $8.9 billion for the Corps.

This proposed budget is expected to provide for a strong 2024 U.S. Army Corps of Engineers bid market, and we expect budgeted appropriations to support the funding of several previously delayed phases of capital port improvement projects, including for the ports of Sabine, Houston, and Mobile, which is expected to bid in the first half of 2024. Currently, the government is operating under a continuing resolution until the budget is approved, which we hope is done in March of this year. As stated earlier, towards the end of 2023, the offshore wind market started to see growing pains. However, the long-term outlook for the offshore wind market continues to be strong in the U.S. and international, with global installed offshore wind power generation capacity targeted to reach 260 gigawatts by 2030, up from 40 gigawatts in operation in 2020.

In the U.S., the targets are for 50 gigawatts by 2035. These are ambitious targets, and it will challenge the existing supply chains at the same time as it provides strong growth opportunity for the industry. Although New York rejected the developers' request for adjustments to their existing PPAs, the state continues to take steps forward in meeting the renewable energy goals with the announcement in October last year of three new projects awarded for approximately 4 gigawatts of offshore wind power generation, and a new accelerated fourth bid round for additional PPAs was announced for early 2024. Vineyard Wind, the first commercial-scale offshore wind farm on the East Coast, recently completed the installation of the first offshore wind turbine, which on January 2nd of this year began delivering power to the New England Grid.

In addition, South Fork Wind, which will be the first offshore wind farm to supply power to the State of New York, has completed the installation of two of its 12 planned turbines, on which one currently is operational now in January. Recently, also in January, the New Jersey Board of Public Utilities selected two projects to deliver 3.7 gigawatts of offshore wind power generation for the state. With these awards, New Jersey has now 5.2 gigawatts contracted out of its goal of 11 gigawatts by 2040. Great Lakes has established a unique niche business position in the U.S. offshore wind market, and we continue to pursue and tender bids both domestically and internationally on multiple offshore wind projects for the Acadia, the first and only Jones Act-compliant subsea rock installation vessel.

We are also actively seeking for partners that share our ambition for growth in offshore wind and that will co-invest in assets to address this rapidly growing market. In conclusion, our main focus this year was to keep managing through the various challenges that the 2022 delayed bid market presented us. We successfully delivered improved year-over-year results. As we enter the new year with a record backlog, improved fleet, and a slimmer cost structure, we believe the company is positioned to deliver improved year-over-year results this year as well. With that, I will turn the call over for questions.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile our Q&A roster. Our first question is going to come from the line of Adam Thalhimer with Thompson Davis. Your line is open. Please go ahead.

Adam Thalhimer (Senior Research Analyst, Engineering and Construction)

Hey guys. Congrats on the strong Q4. That was great to see.

Lasse Petterson (President and CEO)

Thank you.

Adam Thalhimer (Senior Research Analyst, Engineering and Construction)

I actually wanted to start—why did the MARAD timing shift? I was kind of curious about that from, just from a couple of PPAs. That kind of surprised me that that would matter that much. Well, let's start there. How about that?

Scott Kornblau (CFO)

Yeah. Good morning, Adam. So with, you know, as you know, we've been talking to MARAD now for over a year, and our application has progressed. And as you saw a few months ago, we did kind of get to the final stage. However, as they were continuing their diligence during, you know, some of these negative headlines, it did change how they just look at the market in general today. There is a path for us to get something done now. It is not at terms that worked for us. So I have been very transparent all along. We were not going to put all of our eggs in the MARAD basket, and we are working a number of things in parallel. We will now action those. We will continue our dialogue with MARAD.

I do think there is a path to ultimately get there. But in the meantime, we will secure the liquidity and, you know, hopefully be able to take it out at some point with MARAD. If not, you know, we are very comfortable that we are going to be in a very good liquidity position soon.

Adam Thalhimer (Senior Research Analyst, Engineering and Construction)

Got it. Okay. That's fine. Just a little surprising on there from their perspective. The Scott, how would you characterize margins? The margins are real a gross margin 21% in Q4. That was completely unaffected by the cancellation payments. So that's a real number. How do you think that trend is going forward?

Scott Kornblau (CFO)

Yeah. So, you know, we started executing on the, you know, the capital and coastal protection work during the fourth quarter. We also were benefited by not having any dry docks during the quarter. We got them all out during the first three quarters. So we had a pretty clean cost structure. As I mentioned, we do have two dry dockings beginning this quarter, and we will go into the second quarter. So, as you know, that's kind of the double whammy. No revenue during that time and then the costs to do that. But this has been our expectation all along.

When you have that proper mix of projects and the vessels are working and we execute, in addition to the cost reset that we have done on the fleet, you know, we have been saying for the last year, we thought that we were on this path to normalcy in 2024, and that's exactly how it is playing out.

Adam Thalhimer (Senior Research Analyst, Engineering and Construction)

No, it is good to see. And then, did you, I guess it will be in the 10-K, but did you guys give a figure for percentage of backlog that will burn in 2024?

Scott Kornblau (CFO)

Yeah. I said roughly 60%. But again, as you know, that can move left or right as we adjust schedules throughout the year, but it is roughly 60%.

Adam Thalhimer (Senior Research Analyst, Engineering and Construction)

Okay. All right. I will turn it over. Great to see. Thanks, guys.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Joe Gomes with Noble Capital. Your line is open. Please go ahead.

Joe Gomes (Senior Research Analyst)

Good morning. Thanks for taking my questions.

Lasse Petterson (President and CEO)

Hey. Good morning, Joe.

Joe Gomes (Senior Research Analyst)

So I just wanted to kind of get on the your expectations for the quarter. I mean, it was really good, but on the revenue side, it seemed a little light. You know, in the Q, you mentioned you should have burned about 19% of the dredging backlog in the fourth quarter, which would have been about $190+ million. Was there some weather issues there, some projects that may have been delayed? And kind of, at the same time, on the capital projects, you know, revenue was up about $7 million sequentially. It was kind of flat year-over-year. I was thinking maybe we would have been looking for a little bit higher run rate on the capital projects. Was there anything particular there that, you know, might have, you know, reduced the revenue growth on that segment?

Scott Kornblau (CFO)

No. The big driver of, you know, the revenue you were expecting, compared to what came in, was really driven by some subcontractor work on the LNG project. It is now underway. We had thought it would start earlier in the fourth quarter. It started later. That is really what is driving it. And you are right. The capital revenue was relatively flat, but the coastal protection was way up, and those also have, you know, very solid margins. And of the, you know, so the capital work now will start getting executed. Of the just over $1 billion-dollar backlog, 71% of that backlog is made up of capital projects.

Joe Gomes (Senior Research Analyst)

Okay. Thanks for that. On the termination of the rock contract, obviously, you got I think it was $7.4 million. Is there anything more there, or is that all that you will get from that?

Scott Kornblau (CFO)

So you may have noticed, Joe, in the press release when we broke out revenue that there was an additional, roughly $2.5 million of revenue. That is related to engineering and project management services that had already been performed on Empire Wind 2 prior to its termination. So once it was terminated, we went ahead and booked that. So all in all, for Empire Wind 2, between the termination and the services previously performed, it is roughly $10 million. And we do have similar constructs on our other two contracts, you know, related. There are some, you know, services that do occur before we lay rock.

Joe Gomes (Senior Research Analyst)

Okay. And one last one for me, if I may. I will get back in Q. You mentioned again some additional asset sales in the quarter. You said you raised $29 million of cash. Do you see more of those, here in 2024? Are you kind of through with the asset sales?

Scott Kornblau (CFO)

Yeah. I mean, it is a lever we can pull, Joe, but I don't foresee us doing that. You know, as I mentioned, we are progressing rather quickly, you know, some longer-term financing for the new build program. So I do not see us doing anything more like that in 2024.

Joe Gomes (Senior Research Analyst)

Great. Thanks for taking the questions.

Scott Kornblau (CFO)

Thanks, Joe.

Operator (participant)

One moment for our next question. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open. Please go ahead.

Jon Tanwanteng (Managing Director)

Hi. Good morning. Thanks for taking my questions and great quarter. Lasse, I was wondering if you could tell us if you guys internally have line of sight to full utilization on the Acadia, in the 2026 timeframe or if that is still to be determined, and kind of how that squares with what MARAD is thinking.

Lasse Petterson (President and CEO)

Yeah. With the cancellations of these PPAs, over the last, let's say, six months has pushed some of that revenue to the right. So what we are looking at is, 2025, when the vessel comes out, the Empire Wind 1 is going to be executed, and then we have an additional contract for 2026. Also, the delays in on these, other developments are pushing, project revenues or product opportunities from 2024 and 2025 into 2026 and 2027, but this remains to be seen. We are looking for and bidding a number of projects, starting in 2026 and, for rock installation, but, there are no firm commitments at this point in time. In parallel, we are looking at international work. There is a good strong market in Europe, that we are evaluating and that we may participate in in this period.

Joe Gomes (Senior Research Analyst)

Okay. Great. Thank you. And just relative to the 60% of the backlog that you expect to book this year, can you remind me what your historical level of book and build during the year is, or book and burn, kind of what you go and get within the year and revenue during the year?

Scott Kornblau (CFO)

Yeah. And, John, I would say this this year is going to just be a little atypical because of the large backlog that we have right now. So we don't have as much white space entering a year that we typically would, you know, with over $600 million of, you know, "2024 revenue," quote unquote, in the bank right now. So I wouldn't necessarily, you know, draw a parallel to prior years. I would say typically when we enter a year, we, you know, roughly have 60% like we do now of coverage, but it is on a much lower backlog. So again, the amount of white space we have in 2024 looks much different than it has historically.

Joe Gomes (Senior Research Analyst)

Okay. Great. That is fair. And are there any remaining claims to be settled on older projects?

Scott Kornblau (CFO)

Nothing material. I said we clear out the big ones, you know, that we had previously talked about. And now it is just kind of the normal cadence that pops up, but really nothing of note to call out.

Joe Gomes (Senior Research Analyst)

Okay. Great. And last one from me, and I will leave it at that. Just the year-over-year impact of dry docks, what do you expect that to be in 2023 versus 2024? I think you have disclosed a number, but I don't know if you have a revenue or EBITDA comparison comparator and kind of how that flows through.

Scott Kornblau (CFO)

No. I mean, you know, just, we are going to have three this year in 2024 that was comparable to what we had last year. So I would call it, you know, marginally a wash. I don't see any big swings when it comes to dry docking 2023 versus 2024.

Joe Gomes (Senior Research Analyst)

Okay. Great. Thanks, guys.

Lasse Petterson (President and CEO)

Thank you.

Operator (participant)

Thank you. And one moment for our next question. And our next question is going to come from the line of Brian Russo with Sidoti. Your line is open. Please go ahead.

Brian Russo (Analyst)

Yeah. Hi. Good morning.

Lasse Petterson (President and CEO)

Hey. Good morning, Brian.

Brian Russo (Analyst)

Hey. Hey. So just back on the fourth quarter. You know, if you look at the EBITDA margin excluding the gain, it was a little over 18%. And when I look back at the fourth quarter for the years 2018 to 2021, you know, it was about 16%-21%. So, you know, you're right, you know, smack in the middle of that range. But that is despite the capital projects only generating 34% of the total 4Q revenue, which is, you know, below the 40%-50% of the revenue in prior fourth quarters.

I'm you know, I'm just guessing, you know, is this fourth quarter, in your opinion, you know, considered normalized, or, you know, is it still, you know, below you know, it is below the optimal kind of 50/50, you know, mix that you guys target and will likely see in 2024 given, you know, the backlog profile?

Scott Kornblau (CFO)

Yeah. Yeah. I will reiterate what I said before. Q4 did not have any dry docks. And, you know, as you know, that does impact margins. We take a vessel out and have the additional cost. But if I just look, you know, not just, you know, look at for the whole year as opposed to quarter-over-quarter, we have that mix of backlog to get us to that, you know, what we always aim for, the high teens operating margin and that mid-teens EBITDA. We are absolutely now, you know, setting ourselves up to return, you know, back to normal. And I would call that, you know, the normal margins that we strive to get.

Brian Russo (Analyst)

Okay. Great. And, the $44 million of performance obligations, that are excluded for the backlog for offshore wind, is that just Empire Wind 1, or does that also include the second contract that I guess is pending FID?

Scott Kornblau (CFO)

It is not pending FID. It is a signed contract. It is included in there. Right now, we're under NDA to disclose who it is with. But no, that is a signed executed contract. We will do that work right after we finish Empire One, at the end of 2025.

Brian Russo (Analyst)

Okay. Great. And just, you know, just curious on your thoughts. We have seen a lot of, you know, consolidation in terms of project developer ownership of, you know, offshore wind projects. You know, we also saw utilities sell their stake last night to a global infrastructure fund. And I am, you know, I am just curious, is Great Lakes even better positioned now as a preferred vendor, you know, of the, you know, the consolidated ownership of these projects? Just, you know, wondering what your, you know, kind of general thoughts are there.

Lasse Petterson (President and CEO)

Well, the general thought is that, what we are doing is to install the rock on the sea bottom. And, the ownership structure is really changing a lot over the last couple of months. But what we have seen is that Equinor has and BP has parted ways. And Equinor is continuing with the Empire Wind 1, and they are reevaluating Empire Wind 2. BP is looking at the Beacon Wind 1 and 2, and we probably will see that come to the forefront towards the end of the decade. It is good to see strong companies such as BlackRock getting behind some of these developments. It is huge capital outlays for them, developing the offshore wind field. So when stronger companies are coming into the market, we see that as positive. But in general, we know the developers.

We have good contacts with all of them. And with the Acadia being the Jones Act-compliant vessel, we are very optimistic about the utilization and her engagement throughout the coming years.

Brian Russo (Analyst)

Okay. Great. And then just lastly, you know, when we look at 2024 and into 2025, just your CapEx profile, and as the new vessel CapEx winds down, you know, there seems to be an inflection point, right, as CapEx winds down, your operating cash flow is normalized and is growing. You know, we should start to see, you know, that inflection point kind of, you know, accelerate towards the end of or the middle towards the end of 2025. Is that, you know, kind of a fair statement, you know, when we look over the next, you know, 18 to 24 months?

Scott Kornblau (CFO)

Yeah. That is right, Brian. You know, 2025, we will be finishing up the Acadia and the Amelia Island, but, you know, the CapEx, as you said, will be winding down. One of the advantages of having new vessels is that it keeps your maintenance CapEx, you know, down, you know, from where we historically were. So yeah, you are thinking about that, right? You know, we have said all along, we, you know, we had this big cash outflow as we build for the future that would wind down in 2025. And then, you know, we would quickly, you know, start building up the coffers again.

Brian Russo (Analyst)

Okay. Great. Thank you very much.

Operator (participant)

Thank you. I would like to hand the conference back over to Tina Baginskis for 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. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.