Great Lakes Dredge & Dock CORP Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 Great Lakes Dredge & Dock Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tina Baginskis. Thank you and please go ahead.

Hello. Good morning and welcome to our quarterly conference call. Joining me on the call this morning is our Chief Executive Officer and President, Lasse Petterson and our Chief Financial Officer, Mark Marinko. Lasse will provide an update on the events in the quarter and year. Then Mark will continue with an update on our financial results of the quarter and year. Lasse will conclude with an update on the outlook for the business and market.

Thank you, Tina. This year was full of changes and challenges that the COVID pandemic presented us with and that impacted all our lives. We were fortunate to be able to continue working as a federally designated Critical Infrastructure company throughout this unprecedented crisis. Despite the challenges, Great Lakes Dredge & Dock had another exceptional year as we continued to deliver improved financial results and at the same time advancing on our strategic initiatives, strengthening our balance sheet, working on the renewal of our dredging fleet, improving project performance and positioning for the upcoming US offshore wind market. We had a strong fourth quarter and record full year results with net income from continuing operations for the year of 66.1 million and a full-year adjusted EBITDA from continuing operations of 151.1 million. These results reflect an 11.4% increase over prior year EBITDA from continuing operations. Our strong performance was a result of a solid domestic dredging market and our continued focus on product performance. The company ended the year with a strong cash position of 216.5 million and net debt decreased by 28.6 million in 2020, resulting in a healthy net debt to adjusted EBITDA from continuing operations ratio of 0.7. A strong cash flow and balance sheet allowed us to not only withstand the economic storm as a result of the pandemic, but positioned us well to invest in our future. In 2020, we contracted for a new mid-sized hopper dredge. We upgraded several of our large cutter dredges. We decided to move our headquarters to Houston to be closer to markets and clients. We invested in our shareholders through a 75 million share repurchase program and we invested in positioning for growth both in the domestic dredging market and for the upcoming US offshore wind market.

Okay, great. Thank you Lasse. I will start with the quarterly results and then discuss some specifics related to our dredging business. Please remember that all results from our E&I segment in 2019 were placed in the discontinued operations and therefore not included in the results that I will discuss. For the fourth quarter of 2020, revenues were 172.1 million. Income from continuing operations was 10.6 million and adjusted EBITDA from continuing operations was 29.4 million. The company's revenues for the fourth quarter of 2020 represented a 7.8 million or 4.8% increase compared to the fourth quarter of 2019. The increase was a result of higher domestic capital maintenance and rivers and lakes revenue, offset partially by lower coastal protection and foreign revenue. Gross profit from continuing operations was 33.4 million compared to 34.6 million in the fourth quarter of 2019. Gross profit margin was 19.4%, compared to 21% in the prior year quarter. The small reduction in margin was primarily due to higher maintenance expense and an increase in marine insurance premiums. The total company operating income was 17.3 million, which is a decrease of 4.9 million over the prior year quarter. The decrease was primarily due to a 4.6 million loss of use claim settlement that was received in the fourth quarter of 2019. Additionally, the change in operating income was impacted by higher general administrative expense, offset partially by a gain from the sale of assets. Income from continuing operations for the fourth quarter of 2020 was 10.6 million, compared to 14.8 million in the prior year quarter. The current quarter includes net interest expense of 6.5 million and income tax expense of 1.7 million. Income from the fourth quarter of 2019 included 6.5 million of net interest expense and 1 million income tax expense. Adjusted EBITDA from continuing operations for the fourth quarter of 2020 was 29.4 million, compared to adjusted EBITDA from continuing operations of 32.6 million in the fourth quarter of 2019. Turning to our full-year results for the year ended December 31, 2020. Revenues were 733.6 million. Net income from continuing operations was 66.1 million and adjusted EBITDA from continuing operations was 151.1 million. These results represent a 22.1 million increase in year-over-year revenue, an increase in net income from continuing operations of 10.4 million and an increase of 15.5 million in adjusted EBITDA from continuing operations.

As our country is still facing the challenges of COVID-19, the dredging industry, deemed an essential service, continues to operate and work on critical and needed infrastructure projects. The US Army Corps of Engineers oversees the majority of these infrastructure projects and has continued to follow the bid schedule and prioritize all types of dredging, including port deepening, port maintenance and expansion, coastal protection, and restoration projects that are necessary to avoid storm damage during the coastal hurricane season. As our projects move forward, Great Lakes Dredge & Dock remains committed to maintaining the health and safety of our team members through an incident and injury-free safety management program. This value-based approach has allowed us to respond quickly and effectively to the COVID-19 pandemic and any challenges as a result of the pandemic. As we experience COVID-19 positive cases on several projects, we continue to follow safety procedures of decontaminating the vessels and having replacement crews in order to recommence dredging operations. As of December 31, the company's business has not been significantly impacted by COVID-19 but due to the uncertainty that surrounds this virus, the company will continue to evaluate safety and operational plans and the potential future impact that this evolving environment has on the company's employees, business, financial condition, and results of operations.

We do have a question from the line of Jon Tanwanteng.

Hi, good morning everyone. Can you hear me?

Yes. Hi, John.

How are you doing? Good, thanks for taking my questions. If you could start maybe just talk about what was unusual in the quarter for you compared to your internal expectations. I gather there were weather events, but was there anything else? I think you mentioned maybe high insurance rates, but was there any other unexpected maintenance or COVID impacts? Just tell me how it played out compared to what you're thinking when you last reported?

Right. When we did the, I can handle it, let's say, when we, in the quarter. Actually, the project performance was overall a little bit better than we expected. What we did have though we did have two vessels that had some unplanned downtime, and that's what drove the maintenance expense that I referred to in my comments today. So that was really the debt piece. Those two vessels being downtime. This was really the offset there.

Got you. And the weather impact was within I guess your range given the project?

Correct.

Okay. Correct. Okay and then as we look into Q1 that there has been a lot of winter weather, I read in some of the industry journal that you did have some COVID delays in some of your ships. How should we be thinking about your ability to drive revenue liquidating backlog within those constraints?

Yes, as I said in my remarks, the safety program and safety is a value in our company prepared us for this situation and we have a very strong program in place to ensure that our employees are tested before they leave home and to come to our project sites. Again, tested before we mobilize on our vessels, but unfortunately, some of the cases are then not detected, and we have had some outbreaks. I'm confident in our policies and procedures to take care of our employees, but unfortunately, we do see that some of these cases appear on our vessels and it impacts operation. I'm confident that we will be able to execute our projects as we go into 2021, but it will take some effort and have to see how this situation evolves. Mark, you want to fill in on that?

We've had a situation where, when an outbreak occurs on a vessel, we take immediate action to disinfect the vessel. We bring in the crew and replace it with a new one, as we've discussed previously. Typically, the vessels are out of service for less than a week, and while this does have an impact, the measures we've implemented help to minimize the effects as much as possible.

Okay, great. Thank you. I wanted to drill down into the low bid pending award number that you had out there, which has been pretty large. Can you just talk about the projects that are in there? I guess the next decade one is in there, but I think Lasse you mentioned you want the Boston one too, what else is that comprised of what's left to bid in Q1, maybe that was scheduled for Q4 that might have been pushed out?

Yes, Mark can you take?

Yeah, sure. So in our low bid pending awards at December 31, 2020. So there's two large LNG projects, our energy clients, and there obviously the next decade, one is the big chunk of that. There are some smaller numbers related to what we historically have options that are on current projects we're working on. But the two energy clients make up the bulk of the number and as you go now into 2021, which occurred really in the first quarter so far. Lasse mentioned, we have 90 million of low bids pending award so that would be on top of the December 31, 2020 number with the larger one being the Boston additional phase of the Boston deepening that was the project that we were originally anticipating to bid in 2020, but it didn't bid until January. So yes, very pleased to have that in low bid pending award.

Okay, got it and just in terms of the CapEx you extended this year, you're expecting to extend this year just on the new dredging vessel, the offshore wind ship. I think you mentioned you had invested two other vessels that are not dredges and between capital, just on maintenance spending. Give us a picture of how much you expect to spend this year as we get into 2021?

Sure. So from let's call it the regular CapEx which is maintaining our fleet and a little bit of growth in there for our fleet as we improve the fleet. That's about 35 million. For 2021 we're expecting for the new hopper dredge, the schedule of payments, and I believe we said this before is about 35 million for this year in 2021 and then the two multi-kits that we talked about that are not dredges, we expect to be a little bit about 18 million this year. So a little bit south of 20. There's really nothing on the offshore that is a small amount on the offshore wind. We're just doing the design, no construction yet, so that's in the neighborhood of 1 million and 1.5 million for 2021.

Got it. Thank you. And that's all for me. If you're getting close to the ability to refinance your debt just, what's the right level for you in terms of absolute debt as a company that sort funds your investments and run your business? And number two, what kind of coupon rate are you looking at in the market right now?

Yes. As we think about the call date at par is May 15. So we are at that date. The market is still attractive, much more attractive than the 8% that is currently our coupon. We are, as the market is still very good for high yield. We expect that coupon to be much better than the 8%. The market will dictate a lot of that as we get into May and so that coupon right now, if you looked at it could be 6% or better. Of course, the market can move, so but we expect a good movement also where we are today and depending upon where that rate is. If it gets more attractive, we could upsize it a little bit, but right now, we're expecting to kind of refinance at the same rate or same amount.

Got it. Understood. Thank you, guys.

Sure. Thanks, Jon.

Your next question comes from the line of DeForest Hinman.

Hi, thanks for taking my call. Few of my questions have been asked and answered. Can you give us a little bit more color on the SG&A expense number in the fourth quarter? I know, we had some office moves, share prices moved favorably. Can you help us just think about where does that number kind of fall out in the first part of 2021 from a dollar perspective?

Yes, so yes in the quarter, it was a little bit higher than you've seen in the prior quarters of the year and that was really driven actually by severance expense of about 900,000. So you can call that a one-time, some of that was related to the move and, but some of it was also made a small early retirement program that just impacted a few people but that severance was 900,000 in the quarter. So that would be a one-time. So if you take that out, we would have been a lot closer to where we were in the previous quarters.

Okay. And I know we had, we brought some more leases for some offices. So is it really just a function of the 75 minus 900,000 that's kind of the new run rate?

Yes. From that status quo but what you'll see the new leases, as you go move into next year, you have a couple of other things going on. So the Houston lease wasn't there in 2020 for the headquarters. So you'll have that. We'll have really the relocation of people and those impacts, those would be obviously one-times in 2021. But as we look at G&A for 2021, we're expecting it to be about 3 million higher than it was in 2020 and I talked a little bit about that on my comments. So we're looking at, I would see the things around the Houston move some of those one-times, except for the office lease. And then we are making some investments in some IT digitization. So those impacts, that's why you'll have this overall 3 million increase next year we're expecting.

Okay, very helpful. Thank you. And then when we're thinking about the debt refinancing. It's coming closer and closer by the day. We do have the share repurchase authorization. Can you just give us an update in terms of the Board's thinking as it relates to share repurchase activity and then the potential for initiation or restatement of the dividend, as we get a maybe a more permanent capital structure, if you're comfortable using that. That would be very helpful to understand the thinking there.

Lasse, do you want me to take that one?

Yeah, do that.

Sure. Yes, sure. So, right. Overall on the dividend side, so with between the change in the refinancing these notes to see where we are. We have the share repurchase program and from a Board perspective, we do discuss dividends and all these different options on the capital structure. They kind of, that's fallen I would say out a priority versus the share repurchase program. You want to see how effective that would be as well as waiting for the final where this, let's call the refinance and size of our notes, but I would tell you it's a lower priority than the other items, because we're also obviously looking to invest in our fleet with the new hopper dredge and some of the other pieces of equipment we've mentioned like the multi-kit and the offshore wind vessel. So there are a number of other things that I would say are priorities from the management's and Board's perspective before dividends, but we do discuss it. We definitely do know that's an option for us.

Okay, very helpful. And then maybe just last question. Can you talk about the ability to turn backlog? Can you talk about some of those pending low bids into revenue? If we look back in time, you have had some large backlog numbers in the past and you had realized revenues in excess of 100 million in certain years most recently, 2015. Now we have a situation where just put the two numbers together pending all bids, a backlog over 1 billion. Hopefully, very busy this year. Hopefully good weather, but is it a reasonable expectation to think that we can generate over 100 million of revenues in 2021?

When comparing to 2015, we need to exclude the E&I business, which I believe was over 100 million. Looking at our current backlog of 559 million, we expect to earn 90% of that in 2021. When we file our K in about a week, you will see that it's quite similar to our situation at the start of 2020. We do have a number of low bid pending awards, and we anticipate that revenue will increase next year compared to the 2020 figure.

Okay, that's helpful and thanks for catching me and then I was looking at the I said, if I look at the segment numbers versus.

No problem.

Your next question comes from the line of Poe Fratt.

Good morning. I just wanted to clarify, Mark you said backlog 90% in 202. Can you do the same thing for your low bids pending award? Right now it looks like that number is 560 million. And could you give us sort of an idea of what you would expect to be in realized standards that low bid pending awards in 2021?

Yes. Unfortunately, I can't. Since with the LNG projects being a large chunk of that as we wait for, as we stated before a final investment decision and then prior notice to proceed. We don't have a solid timing on that yet. So I can't give you a number there, but on Boston, we will work some of Boston this year, but some of that will go into 2022. So yes, unfortunately, I can't give you a number yet until those LNG projects get a notice to proceed. So I can't add on that. I don't have that yet for you.

Okay. And then when you talk about that we know the next decade confidentiality, you can't talk about that, but I haven't seen, did I miss the second LNG project that you announced or is that the Sabine Pass or can you sort of give us a highlight which one that is, and then also maybe color on the size of that?

Yes. So that one was actually one, it's been in low bid for actually a long time. So when we put in a low bid pending award we signed the contracts has been out there since '19. So it's the same one for that has not moved forward yet. Still in discussions with them, but it's south of 100 million. So just to give you a little bit of perspective, but yes again, I can't give you a number on that.

Okay. And then if we could look at the buyback program. I missed the amount of the stock that you bought back in fourth quarter?

Yes. Not much in the fourth quarter was really all in the third quarter. Let's say like a regular 10b51 plan. So we set parameters at grid with price targets that have a ceiling and the grid has amounts that even limits on each one of those so, each one of those grids has a limit that we would spend any trials grids and with where the stock prices today it's above our ceiling on that repurchase program. So we didn't buy any additional in Q4.

Okay. And so when you look at it, I think, originally when you implemented the stock buyback program, you the goal was to get that completed by the end of the third quarter of 2021 or within a year. That doesn't seem likely unless you adjust the savings at this point in time, is that fair?

Yes. Technically you wouldn't adjust them that plan would stay in place though what we could do is to another plan is what would be, you would leave the old plan and do an additional one.

Okay. And then can you do, if you wouldn't mind doing us cash flow work on the fourth quarter? You had the one thing I missed in maybe is the working capital changes. You can figure out what operating cash flow before working capital was, the working capital and then potentially any other cash flow items to that pushed that resulted in the 13.2 million decline in cash quarter-to-quarter?

Yes so really the biggest decline in cash for the quarter was related to paying the interest on the senior notes. So that's really the big move, which is 13 million, so that there were some, obviously some pluses and minuses. We paid money about 9 million for the new hopper dredge. So in the fourth quarter, we actually had some there wasn't that much movement on the normal working capital items in that quarter.

Okay. Yeah because CapEx was, looked like 17 million or almost 18 million or so.

Yeah.

And then just looking at your cash outlays in 2021. Can you just clarify that 3 billion higher G&A? Is that exclusive of the 900,000 of severance or is that inclusive? So the net, I guess what's the net, is that a net number of 2.1 million or is it 3 million?

No, it's a 3 million increase is what we're expecting on G&A year-over-year.

Not adjusting for the severance, so.

Correct.

Okay. And then when you look at the CapEx for 2021 that you highlighted, a quick math, you're almost at 80 million. With moving the final investment decision on the rock dumper barge impact that number and then also, can you talk about the option for the second hopper barge, I think that you have until June of this year to execute on or exercise?

We have received an extension on the second hopper dredge for an additional 12 months to make our decision, giving us more time if needed. Regarding the impact for 2021, we do not anticipate any effects on our cash flows related to that. As for the offshore wind vessel, we don't expect any additional impact beyond the amount I mentioned earlier concerning the design work already in progress. We plan to make an investment decision in the second half of this year. There might be a minimal upfront cost when signing the contract, but it should not materially affect our 2021 results.

Okay, great. To wrap up, you mentioned that the bidding market in 2021 is looking as strong as it was in 2020, possibly even a bit better. Could you share your thoughts on the current competitive landscape? It appears that some competitors are increasing their capacity, and I'm curious if there are any larger projects out there. Additionally, can you provide some insights on the competitive environment and whether you've experienced any pressure from the additional equipment? Also, could you address whether there is a shift in your business towards shorter-term projects or more call-outs, or if you expect to focus on larger jobs in 2021?

Well, first of all the markets we believe will be strong in 2021 and onwards. As I said the US Army Corps of Engineers are having record budgets year-over-year and we think that will continue, because the need for Chicago marine and maritime infrastructure, the investments is just increasing. We do have climate change as we were reminded of here in Houston, the last couple of days, with the big freeze and we had a record hurricane season last year. So the need for investing into the infrastructure and in the marine and the coastal areas is just increasing. So we think this market will be stronger as we go forward. Also the funding from Congress is getting stronger, very strong support for this as you saw with the Maintenance Trust Fund, that we are now getting up to a 100% of the annual receipts being used for harbor maintenance and dredging and we also saw an Act which could potentially open up the fund itself for use going forward. The competitive landscape in a strong market will see that our competitors are investing into new equipment as same as we do and we are looking at a strong market which these competitors would like to be part of. So we see in some of our competitors adding new equipment which is good and you see the US dredging industry meeting the challenges and building new to service the US Army Corps of Engineers programs. Yes, we saw a couple of the projects, which were awarded to new entrants and new equipment and that happens when new equipment comes to the market. It's our competitors and we are making sure that we have backlog for that equipment. Once it enters the market to have the initial phase of the dredge being covered with backlog. So you can then optimize its performance. This is nothing new and we think that the market will be able to support the investments that are happening in the industry and it's good for the market as most of the equipment that we do have is getting a little long in the tooth and maintenance costs go up eventually. The size of the projects, no, I don't see the size of the projects being reduced. The phases of the deepening projects have actually been fairly large over the last couple of years. We had a record award for Charleston back in 2017 but on a general note the port deepening and also the beach renourishment projects are staying the same or larger than what we've seen before. And also the contracting model for the US Army Corps of Engineers is changing to more regional jobs, which then gives us a better view to the situation for the need for our equipment as we respond to emergencies particularly in Louisiana.

Great. If we could just one last one if you wouldn't mind on the, it seems like the infrastructure stocks have been moving up like you just with some hopes of stimulus legislation that's infrastructure oriented coming out of Washington. Can you just highlight whether your comments about the bid market in 2021 are influenced by a potential legislation at all?

Well, what impacts our market is the funding for the US Army Corps of Engineers, which has been record high for the last couple of years and also for 2021. So with the focus in Congress for improving infrastructure in general is supportive of our dredging operations in general and then as we do see the funding from the Harbor Maintenance Trust Fund coming forward. In addition, this just supports the market and it is a strong market and gives us opportunity to, as you have seen to generate good product performance and also then renew our fleet.

Great. Thank you so much, Lasse.

Thank you.

There are no further questions at this time, I would like to turn the call back over to Tina Baginskis for any additional or closing remarks.

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.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.