Great Lakes Dredge & Dock CORP Q2 FY2023 Earnings Call

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.

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, this 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 later 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 3x 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 2 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 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 bid pending award were 2 LNG projects that have been waiting for notice to proceed from our clients. In July, post-quarter end, we received notice to proceed on the Rio Grande LNG projects, which will be the largest project undertaking in our 133-year history. Work on establishing the dredge material containment areas is scheduled to start later this year, the major dredging networks starting in early 2024 and ongoing for the next 2 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 and awarded. As we stated, the company took swift and proactive action on cost reductions and fleet utilization adjustments. Last year, we retired a 42-year-old Hopper Dredge Terrapin Island, and we currently had cold-stacked dredges and various support equipment in anticipation of an improved dredging market in the latter part of 2023 and onwards. As we've 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 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, Jimmy Hart, and President of SIU, David Heindel, SIU crew of hopper dredges. Also present were senior executives from our current and potential clients. Post-quarter end, we signed the first ever sub contractual procurement to our U.S. source rock with Carver Sand & 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 1 and 2 projects with installation windows in 2025 and '26. As we continue to adjust to the current market situation, we remain optimistic in the long-term outlook for the dredging market and our ongoing fleet renewal program is fundamental in our strategy to continue to be the U.S. dredging industry leader. At the decommissioning of several of our older strategies 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 our results for the quarter, and then I'll provide further commentary around the market and our business.

Thank you, Lasse, and 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 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 second quarter and 2 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 fewer dry docking days in the second quarter of 2023 compared to 2022. Despite the lower quarter-over-quarter revenue, the 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 cost 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 expenses. 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 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 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 multicats, $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 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, so 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 2 dredges that will be in the shipyard undergoing the regulatory dry dockings. Both dredges are expected to return to work in the fourth quarter. Also 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.

Thank you, Scott. We continue to receive strong backing from the Biden administration and Congress for the dredging industry. In December 2022, the Omnibus Appropriation Bill for fiscal year 2023 was enacted, providing a record budget of $8.7 billion for the U.S. Army Corps of Engineers' civil works program, which includes $2.3 billion for the Harbor Maintenance Trust Fund aimed at maintaining and modernizing our nation's waterways. Additionally, the Disaster Relief Supplemental Appropriations Act for fiscal year 2023 was approved, including $1.4 billion for the Corps to conduct necessary repairs on infrastructure affected by hurricanes and other natural disasters, and to start renourishment projects to enhance coastal resiliency. This increased budget and additional funding have led to a robust bid market in the first half of 2023, which we anticipate will persist for the remainder of the year. Supporting the dredging market is also the surge in major works for private clients. As mentioned earlier, we have secured NextDecade's dredging contract for their LNG project in Brownsville, Texas. Furthermore, earlier in the second quarter, Sempra made the final investment decision to proceed with the Port Arthur LNG facility, and the award for dredging services is expected to be issued soon. In 2021, the Biden Administration set an ambitious target of 30 gigawatts of offshore wind energy by 2030 and allocated $3 billion in federal loan guarantees for offshore wind initiatives. As noted previously, Great Lakes was granted the rock installation contract for the Empire Wind 1 and 2 projects, with installation scheduled for 2025 and 2026. In July 2023, the federal government further demonstrated its support for offshore wind by approving the construction of New Jersey's first offshore wind farm. Also in July 2023, the Department of the Interior announced the final sales notice for the first-ever offshore wind lease sale in the Gulf of Mexico, slated for the end of August. We have submitted bids for various offshore wind projects, including rock placements in 2025 and beyond to support the work planned for the Acadia as it begins operations. In summary, our primary focus this year is managing the challenges posed by the delayed bid market of 2022. As anticipated, we have seen a healthy overall dredging market this year, including bids for several large capital projects. This, along with our fleet adjustments, cost reductions, and productivity initiatives, will ensure we continue to deliver enhanced results in 2023 and beyond. Now, I'll turn the call over for questions.

And the question comes from the line of Adam Thalhimer from Thompson, Davis.

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

Yes. So Adam, thanks for the question. So 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. So when are we going to 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 project awards that will start in Q4. So it is a good problem to have; where a year ago we were figuring out what we were going to do with dredges, now we're trying to figure out with a lot of work that's coming through how we're going to 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. So 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.

Okay. And 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 plus Texas job. What are your thoughts on the timing of those jobs?

Yes, New York was included in the WaRDA. The studies being conducted by the U.S. Army Corps of Engineers are currently underway. We estimate that it will take about 3 to 4 years before the actual dredging begins. Therefore, this gives us a timeline for perspective. However, it's also essential to take a longer-term approach regarding these capital projects to ensure a steady continuation of large projects in the future.

Got it. Lastly, you mentioned the legal gain in Q2, and over the past year, we've discussed three jobs with differing site conditions. Are those two matters connected? Also, what is our current status on the differing site conditions?

Yes. No, these are unrelated. This is from a – this one is very old. It’s not a claim. It’s just an old legal matter that has been settled during the quarter. So just some balance sheet cleanup and pick up. The claims, they are progressing of the 2 larger ones that I’ve called out. I’m 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.

And the question comes from the line of Joe Gomes from NOBLE Capital.

So I wanted to start out on the Corps and kind of the sequencing here of the releases, listening to one of your main competitors last week. They continue to talk about a less than normal or less than historical level of award activity out of the Corps. And you guys mentioned some of the capital projects that have been coming in that were delayed in 2022, but kind of get a better feel of what you guys are seeing or what you're perception is on the award level of the Corps and 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?

Yes. What we have seen is that the maintenance projects are coming out as scheduled from the Corps. And 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. So in short, maintenance projects are coming out as scheduled and some of the projects or the capital projects have been bid, but there are still some delays.

Okay. And on the NextDecade project, I was wondering if you might be able to talk a little bit more about that. You mentioned it's the largest, and I think you did give us some sizing in terms of what your previous largest project was. But I don't know how much detail you can go into on that in terms of the stages and what kind of, I know the revenue flow, I don't know if you can break it down as a percentage as you seen that come in for that project. With a couple of these large other capital projects that you have, if you were to win the other LNG, how will you stay at capacity-wise to be able to do all these at one time?

Yes. The NextDecade has asked us not to come out with the exact number for the project, so we are respecting that. The project is large. It's starting up now pretty soon with all the preparatory work that we need to do in order to build the containment areas for the dredge material. And 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 2 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. So there's not a concern on that side.

Okay. One more question, if I may. Scott, could you discuss the Capital Expenditures? We mentioned a $175 million guidance for the year. In Q1, we spent $28.7 million, despite initial expectations exceeding $70 million. In Q2, we spent $19.4 million, while expectations were $55 million, which totals approximately $125 million for the last two quarters. In our previous conversation, you noted some projects slipping into the rest of the quarter, but it appears this trend may have persisted. Could you provide more clarity on the current CapEx expenditures? How confident are you in meeting the $175 million target and securing financing in the final rush of the last two quarters of the year?

Yes. Thanks for the question, Joe. It is not unusual on these large capital projects that have milestone payments for those various milestone payments to slip. That is what's 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. So I do still stick by the $175 million. If one of the December payments slips, and these are big payments, that would lower that for this year, but increase it for next year. The total amount we have left to spend on the new build program is still intact. And again, there are going to be these kinds of ebbs and flows to the left and right. To answer your second question, the timing of this CapEx, whether it was more geared towards the first half of the year or second half of the year, doesn't change the full year. It doesn't change the way 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 had $55 million drawn at the end of the first half, and we had cash on the balance sheet at the time. So we have plenty of liquidity to get us through the end of the year into next year even with these large CapEx programs and as we mentioned, Q4 and into '24 is looking to be much stronger years, which will help on the cash flow side of things.

The next question comes from Jon Tanwanteng from CJS.

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?

Yes. What we have targeted was more than a 15% reduction of our SG&A and overhead costs and that's on a permanent basis. So as activity is picking up, we will be careful not to add any SG&A, and there may be some overhead costs that need to come. But I look upon this as a permanent saving on an annual basis. Scott, do you want to have some details?

Yes. Yes. And then specifically for this quarter, we did have a dry docking that should start in Q2. It's going to start in Q3. So we will have some increased costs then. 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 going to shift some costs 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, not only have we been very aggressive on a lot of our initiatives that we're doing to reduce costs, 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 what's keeping the cost down.

Very helpful. And then how much is left in potential change order settlements? And what is the potential timing on those?

Yes. As I mentioned earlier, we highlighted some unusual claims last year due to their size. I anticipate that one of those will settle in the third quarter, and the largest claim is in advanced discussions. I would be very surprised if that one doesn't get resolved this year. As we noted last year, between the two claims, the amounts involved are in the tens of millions of dollars, which are significant in this context. We identified them last year because of their size and the timing of their occurrence; we believed it was an anomaly, and that has proven to be the case. We have not encountered similar claims this year.

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

Yes. Acadia is scheduled to come out in 2025, and she goes to work on the Empire Wind project. And 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 cables, which will then help with the utilization in addition to the main work, which is the foundation’s support. So we are seeing good opportunities for having her fully utilized in 2026 and onwards.

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.

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.

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