Good day and thank you for standing by. Welcome to the Q3 2023 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. And I would now like to hand the conference over to your speaker today, Ms. Tina Baginskis, Director of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to our third 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, 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. The third quarter, as expected, was a challenging quarter due to vessel dry docks and idle equipment because of the market delays from 2022 and the first half of 2023. Despite the challenges, we were successful in building a solid backlog for the fourth quarter and for 2024 and onwards. We continue to see positive developments with both a larger number of capital projects and a better mix of projects coming to the market, which provides us with confidence that we are on a path to return to normal operations going into 2024. Great Lakes ended the quarter with a record dredging backlog of $1.03 billion, which does not include approximately $50 million in performance obligations related to offshore wind contracts and $225 million in low bids and options pending award. At the end of the third quarter, 71% of Great Lakes' backlog consisted of capital projects. In the third quarter, we added $519 million in capital projects, which includes two LNG projects, the Brownsville Ship Channel project for Next Decade Corporation's Rio Grande LNG project, and the Port Arthur LNG Phase 1 project. The Rio Grande Brownsville LNG project is the largest project undertaken in Great Lakes history. Subcontract work on this project is anticipated to start later this year with a major dredging effort starting in Q2 of 2024 and lasting for approximately two and a half years. Our proven performance and safety culture allow us to win and execute these projects and support the growth of LNG exports in the US. In addition to these two capital projects, Great Lakes added $235 million in maintenance and coastal protection projects to our dredging backlog in the third quarter. As we have navigated the challenges from 2022 and have seen the ramp-up in bidding in 2023, we continue to be proactive on cost reductions and fleet adjustments, and we have reduced our general and administrative and overhead headcount by more than 50% during the year. As we have stated previously, we temporarily cold stacked vessels to reduce costs, and these vessels can easily be reactivated as the market improves, as we did for one of our recent new projects. Our newest hopper dredge, the Galveston Island, is expected to be operational later in the fourth quarter, and our sister ship, the Amelia Island, is expected to be delivered in 2025. In the quarter, we took delivery of our two multi-cats, Cape Hatteras and Cape Canaveral, which supports our pipeline operations with a stable work platform for making pipeline connections safely and quickly in most weather conditions, in line with our strong safety culture. We are executing on our strategy to enter the US offshore wind market. In July 2023, we were honored to have President Biden attend the steel-cutting ceremony for Great Lakes' offshore wind rock installation vessel, the Acadia, which marks another step forward as construction begins with expected delivery in 2025. In addition, we signed the first-ever subcontract for procurement with Carver Sand & Gravel, a US quarry in the state of New York. Both milestones solidify our entry into the offshore wind market, and we support Great Lakes' awarded rock installation contracts for the Empire Wind I and II projects with estimated installation windows in 2025 and 2026. We continue to monitor our developments on related offshore wind power purchase agreements after the refusal by the New York State Energy Research and Development Authority to renegotiate the agreements for Equinor and BP's Empire Wind projects and Orsted's Sunrise projects. We expect updates from Equinor in the first quarter on potential impacts to the development plans for the Empire Wind projects. The US offshore wind market has seen other projects delayed or canceled due to higher interest rates and inflation. However, on October 24th this year, the third round of PPAs for the state of New York saw 4 gigawatts of new PPAs awarded to three operators, and we continue to bid on projects with scheduled offshore installation windows in 2026 and onwards. I will now turn the call over to Scott to further discuss the 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 third quarter of 2023, revenues were $117.2 million, net loss was $6.2 million, and adjusted EBITDA was $5.3 million. Revenue of $117.2 million in the third quarter of 2023 decreased $41.1 million from the prior year third quarter. The quarter-over-quarter decrease in revenue was primarily due to lower utilization for the hydraulic fleet as that segment of the market has remained soft. However, we do expect hydraulic utilization to improve during the fourth quarter. Despite the lower quarter-over-quarter revenue, including $36 million less capital revenue, current quarter gross profit and gross profit margin increased to $9 million and 7.7%, respectively, compared to $3.8 million and 2.4%, respectively, in the third quarter of 2022. The increase in gross margin is primarily due to improved project performance and lower operating costs due to our continued focus on cost reductions. Third quarter 2023 G&A of $14.2 million is $900,000 higher than the same quarter last year, primarily due to higher incentive pay, profit sharing, and severance pay in the current year quarter partially offset by lower costs due to our continued cost-cutting initiatives. Current quarter's operating loss of $5.1 million improved $4.4 million from the prior year's quarter net loss of $9.5 million, driven by the improved gross profit. Net interest expense of $2.8 million for the third quarter 2023 was down from $3.6 million in the third 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. Third quarter 2023 net income tax benefit of $1.8 million compared to $3.3 million of net income tax benefit in the same quarter of 2022 due to the higher current quarter income. Rounding out the P&L, net loss for the third quarter 2023 was $6.2 million, an improvement from a $9.9 million net loss in the prior year quarter. Turning to our balance sheet. We ended the third quarter of 2023 with $14.1 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 third quarter of 2023 were $46.6 million, which includes $28.4 million for the construction of the subsea rock installation vessel, the Acadia, $10.1 million for the Galveston Island and $2.2 million for the recently delivered multi-cats. So far in the fourth quarter, we have paid an additional $42 million for new build payments and currently have $85 million drawn on the revolver. Full year CapEx guidance of approximately $145 million is down $30 million from previous guidance due to the timing of milestone payments on the Acadia, which we expect to take delivery in the first half of 2025. 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 is ongoing, and a few weeks ago, we hit a key milestone with the commencement of an independent financial assessment, which is the next step in the process. But in parallel, we continue to explore other sources of capital. Post quarter end, we closed on a sale leaseback of various support equipment, bringing in approximately $29 million of cash. Looking towards the fourth quarter, we expect utilization to greatly increase from the third quarter as most of the non-cold stacked vessels are scheduled to work and there are no planned dry dockings. We should also see a larger amount of revenue coming from capital and beach projects, which typically come with a higher margin than maintenance projects. With that, I'll turn the call back over to Lasse for his remarks on the outlook moving forward.

Thank you, Scott. For the nine months ending September 30, the bid market, not including LNG and offshore wind projects was $1.8 billion, of which Great Lakes claimed 131%. The increase in the bid market was driven by a strong market for capital projects, which has already seen seven bids for port improvement projects, including ports such as Freeport, San Juan, and Norfolk. The total capital bid market for port improvement projects through the third quarter totaled $459 million, of which 39% of the market year-to-date was won by Great Lakes. We expect the budgeted appropriations to support the funding of several previously delayed capital port improvement projects that are still expected to bid before the end of the year, including Sabine, Houston, and Mobile. We continue to see strong support from the Biden Administration and Congress for the dredging industry. In March this year, President Biden released the President's fiscal year 2024 executive budget. The proposed amount for the Corps targets $7.4 billion, which is a record amount for the President's budget. In June this year, the House proposed an increased 2024 budget of $9.6 billion for the Corps, which is $910 million above the fiscal year 2023, and includes $2.8 billion of the Harbor Maintenance Trust Fund and $1.5 billion for flood and storm damage reduction. In July, the Senate Committee for Appropriations passed the budget, which targets $8.9 billion for the Corps. This will move to the Senate floor for further deliberations and considerations. This proposed budget is expected to provide a strong 2024 bid market if passed by Congress over the next few months. Currently, the government is operating under a continued resolution until the budget is approved. Offshore wind has been recognized around the world as a reliable source of renewable energy. Globally, installed offshore wind power generation capacity is targeted to reach about 260 gigawatts by 2030, up from 40 gigawatts in place in 2020. In 2021, the Biden administration announced the ambitious goal of 30 gigawatts in the United States offshore wind by 2030 and provided $3 billion in federal loan guarantees for offshore wind projects. The administration's support for offshore wind culminated in the Inflation Reduction Act, the largest Climate Mitigation Act ever passed by Congress. As stated previously, Great Lakes was awarded the rock installation contract for Equinor and BP's Empire Wind I and II projects with estimated installation windows in 2025 and 2026. The developer requested adjustments to the power purchase agreements for these two projects, which New York rejected in October, and we are awaiting updates in the fourth quarter for potential impacts on the project schedules. New York continues to take a step forward in meeting their renewable energy goals with an announcement on October 24th, 2023, of three new projects awarded with a capacity of approximately 4 gigawatts of offshore wind energy and a new accelerated fourth bid round for additional PPAs that was announced for early 2024. Although the market is facing some short-term challenges, the long-term outlook for offshore wind in the US is optimistic based on strong fundamentals and commitments by the US to meet its energy independence and decarbonization targets. Great Lakes has established a unique business position in the United States offshore wind market, and we continue to tender bids on multiple offshore wind projects for the Acadia, our subsea rock installation vessel currently being constructed. In conclusion, our main focus for the year has been to keep managing through the various challenges that the 2022 delayed market presented us with, with a goal of delivering improved year-over-year results. As expected, so far this year, we have seen a strong overall bid market, including a number of large capital projects that finally got bid, leading us to a record backlog of over $1 billion. This, combined with the fleet adjustments and the cost reductions and production initiatives we have in place will continue to provide improved results in the coming years. And with that, I'll turn the call over for questions.

Thank you. Our first question will come from Joe Gomes of NOBLE Capital Markets. Your line is open.

Good morning. Thanks for taking my questions.

Hey good morning Joe.

Good morning.

So, I wanted to start off on the revenues. I mean, look back at the second quarter, your commentary there, and you talked about the delayed bid market was coming to an end, that the number of dredges were completely booked and very, very few had availability for the rest of the year. But then you came in at a revenue number, which is the lowest quarterly revenue number in at least five years and just trying to square that comment with the number that actually was generated in the quarter. I wondered if you could give us a little more color on that.

Yes, Joe, what I mentioned at the beginning of the year remains unchanged. While we have seen an improving bid market and have won our fair share, we didn't expect this to translate into revenue until the fourth quarter and into next year. We always indicated that the first three quarters would be somewhat muted. Additionally, I mentioned last quarter that we had three dry docks scheduled for the third quarter. We also noted that the hydraulics market remained somewhat challenged, but we are beginning to see it recover now with the LNG. I believe I conveyed that we anticipated revenue to decline in Q3, along with lower utilization. However, you are correct that this is the lowest revenue we have experienced in a long time, yet we still exceeded the prior year's quarter by generating $40 million more in revenue. This highlights our effective cost reduction efforts, particularly in production. Revenue is set to increase, backed by $1 billion in backlog.

I understand the backlog, and you have done an excellent job managing it. However, considering the continuing resolution, how confident are you that revenue will actually come in during the fourth quarter if that resolution extends beyond next week?

Yes, I believe you're inquiring about how this will affect our revenues going forward. The good news is that it will not affect the revenue from the LNG projects that will begin in Q2 with the dredging. Additionally, the capital project that has already been awarded and is in our backlog will continue to perform. Therefore, the short-term impact of a prolonged continuing resolution, similar to what happened in 2022, is not really a concern. It will, however, affect the Corps' ability to issue new contracts for new projects, which will impact us towards the end of 2024 rather than in the first half. We will need to keep an eye on developments in Congress and remain hopeful that the continuing resolution will be brief. Typically, it lasts for two to four months, which is standard, but in 2022, we experienced an eight-month continuing resolution that caused issues.

Thank you for that Lasse. Regarding the wind segment, it's unfortunate that there are delays happening. What is the plan for Acadia if Empire I and II do not move forward? Do you feel confident with some of the bids on other projects that could allow you to transition Acadia to those projects?

Yes, the short answer is yes. We have seen some uncertainty in the market, particularly with Orsted, who canceled their Ocean Wind I and II for New Jersey. The article was citing cost and inflation and also shortage of installation vessel capacity for the project, which tells me that once Acadia is out there, there will be a good demand for it. And also the new rounds for the PPA bidding that happened in October set up the installation windows in 2028 and onwards. And some of the projects that were slated for 2024 and 2025 installation are slipping into 2025-2026. It's a bit of a fluid situation at this point in time. But I'm optimistic that we have a backlog to execute on when Acadia comes out of construction. There is also an international market that we can address. And as you have seen, the European market is very strong for offshore wind installations going towards 2030, and it far outpaces what we do here in the US.

Okay. One more question if I may. Scott, you get this question every quarter. Last year, we discussed the site condition. You mentioned that you thought one of the issues would be resolved in the third quarter and another in the fourth quarter. Could you provide an update on the status of those issues today?

Yes. I can provide a different answer than I have for the last four quarters. We settled two of those this quarter. If you recall, we had small, medium, and large issues, and it was the medium to large that got resolved. The smaller of the two that we settled has been fully booked in the quarter and is now resolved. The larger issue is fully resolved and settled according to the accounting process. About half of that has been booked, while the other half will mostly be recognized in Q4, with a small portion extending into Q1. For this quarter, we booked mid-single-digit millions in revenue, and the total settlement aligns with our previous guidance in the low double digits.

Okay, great. Thanks. I'll get back in queue.

Thank you. Our next question will come from Adam Thalhimer of Thompson, Davis. Your line is open.

Hey, good morning guys. Congrats on the record backlog.

Thank you.

Yes, Q4 is now we're going to start seeing the fruits of some of the backlog that we had won earlier this year. I mentioned in my prepared remarks that most of the non-cold stacked vessels are fully utilized for the quarter and expect the hydraulics, which I mentioned were definitely stressed in Q3. Those are not completely booked, but a lot more full than they were in the third quarter and the rest of the fleet should be pretty busy during the quarter. And we will now start, I think, seeing the shift of having more capital projects in revenue than we had for the first nine months of the year. So, yes, I'm expecting very similar to how we laid out at the beginning of the year, we'll start seeing the fruits of this fantastic bid market starting to come to bear.

Okay, great. Lasse, I'm trying to understand if the significant dredging that begins in Q2 of 2024 is solely related to Rio Grande or if it's a broader comment on the overall capital backlog.

No, it was really a comment on the two LNG projects. As Scott has been saying, the cutter market or the hydraulic market has been challenged over all of 2023. And we are, with the Port Arthur and with the Brownsville project, we are putting those assets back in full operation, which is really generating some good revenues once they are active.

Okay. And then, Scott, do you have any sense for like dry docking schedule in 2024?

Yes, a little early. I'll give more color on the next call. But I'll tell you, it's probably going to be relatively flat to this year. I think it's going to be in that 3 to 4 range. I will say though, Adam, that the way we have it scheduled out now, and again, I'll give more color on the year-end call, it is much more weighted to the beginning of the year than the end, especially on some of the hydraulics as we get ready to execute this LNG, will go ahead and pull those dry docks to the left, so we can get those done and out of the way. So, once we get on payroll, we don't have to stop.

Got it. For next year, we still have some vessels in dry dock. I'm curious about your annual revenue potential at this point, considering all the moving pieces with the boats and the full backlog we have.

Yes, I mean I'm not going to give the full potential because, as you know, a lot of it depends on mix and when the jobs are starting. I will say, though, of our roughly $1 billion of backlog with some of these large capital projects, they're going well into 2025, and one of the LNG projects is going into 2026. So, we will earn rough numbers of the backlog, probably about half of it next year in 2024. So, there is still some white space for us to fill next year, but we also have a lot more backlog already into 2025 and into 2026, and we typically have a couple of years out.

Great. Okay. Thanks guys.

Thank you. Our next question will come from Jon Tanwanteng of CJS Securities. Your line is open.

Hi, good morning. Thank you for taking my question. My first one, just on the wind, I guess, end market is, do you expect the Equinor project to be pushed out or canceled or somehow renegotiated on your end? And if so, what are your options for the Acadia and the timing of delivery of the financing construction if that happens?

Yes. We have been informed by Equinor that they are reevaluating the situation since New York was hesitant to renegotiate the PPAs. We expect to receive information from them in the fourth quarter. There are several other projects moving forward, and we are bidding on most of these projects that have installation windows starting from 2026 and beyond. The situation is somewhat fluid, as you may have seen in the news. However, the outlook for Orsted Wind as we approach the end of this decade is very positive.

Are the projects you are currently bidding on under better contract agreements with the states they provide power to? We have not received updates regarding the costs and interest rates that have been increasing.

Yes. Most of the projects that have now been canceled or delayed had power purchase agreements from 2018 and 2019 before COVID and before the inflationary pressures that we've seen kicked in since then. That includes Empire, that includes Ocean Wind, that includes the Revolution Wind for Orsted. So, now that we see the new PPAs coming through, there are projects that have been awarded since then, which have adjustments for inflation going forward, and those projects are continuing. The new PPAs that have just been bid for New York had inflation adjustments included. RWE, CIP, and TotalEnergies were successful in winning those projects. And we are currently in discussions to tender those projects for them.

Okay. So, it's fair to say that the projects that are scheduled for 2026 and on pretty much have the risk priced in and don't have as much potential for cancellation to push out as we've seen in the ones that have made the news recently?

I think we have seen the bad headlines, both from Orsted, from BP, from Equinor. And the others are proceeding forward. So, particularly for the PPAs that had the inflation adjustments in them, they are continuing as planned.

Yes. And we mentioned Q2 because that's when the LNG works, and that's going to keep a number of the hydraulics busy for a period of time. We still have utilization and work for those in Q4 and the first half of Q1 right now continue to bid more. So, Q4 utilization just on the Hydraulics will be more than double what we saw in Q3. So again, they are starting to get busy. As I mentioned, Q1 is starting to shape up. Then Q2 and beyond, we have a number of those that will be tied up on the two LNG projects.

Understood. Thank you. And then just quickly, is there an update on the competitive environment and how people are bidding now that there's more projects and work out there?

The dredging industry in the United States is highly competitive, with several new vessels added to the fleet in recent years across both the Hopper and cutter segments. We have noticed aggressive bidding on projects, as evidenced by US engineers' records showing significant competition for recently awarded contracts. However, the market remains robust, with strong capital project announcements from the Corps. I am optimistic about the market, especially with our current backlog and the number of upcoming projects expected to enter the bidding process in the next six months.

Okay, great. Thank you.

Thank you. Our next question will come from William Hong of Reorg Research. Your line is open.

Hi good morning. Thanks for taking my question. Perhaps to Scott, you can tackle this one. When do you guys expect to receive notice of approval for your Title XI application? Is the company currently seeking any additional sources of financing to fund your CapEx initiatives?

Yes. As I mentioned in the prepared remarks, we achieved a key milestone a few weeks ago, which was a crucial next step. Now that MARAD has completed their due diligence, they are required to conduct a third-party review, which is currently in progress. This process is still ongoing. While each project is unique and I can't provide a specific timeline, I would estimate that we might see developments in late Q1 or early Q2, based on the current pace. Regarding the second part of your question, while I won't delve into all the details, we are indeed having discussions with MARAD and several others as we move forward with this new build program. We expect to take delivery of the Galveston later this year, while also working on the Acadia and another hopper, the Amelia Island. We have significant capital expenditures ahead, so we will continue to explore various initiatives. I mentioned earlier that we secured around $30 million recently through a sale leaseback and I will keep pursuing several conversations alongside MARAD.

All right. Thanks for the color. Very helpful.

Thanks for the call.

Thank you. Our next question will come from Jacob Christensen of Axebrook Capital. Your line is open.

Hey guys. Thank you very much. Could we talk about the CapEx investment cycle and sort of how much CapEx you expect for the rest of the year and give us a way to think about what to expect for 2024?

Yes. As I mentioned, our full-year capital expenditures will be around $145 million for this year, and we've already spent an additional $40 million in the fourth quarter. Therefore, there's very little remaining to spend this year; we will reach the $145 million target. Currently, we're in the $135 million range. We just need to make the final payment on Galveston Island and handle some maintenance capital expenditures. Looking ahead to next year, I will provide more specific guidance in the next call, but for now, it seems likely to be in the upper range, approximately $175 million to $195 million. I'll refine that figure further during the year-end call.

Got it. Thank you very much. And could you maybe try to parse that 2024 ballpark into maintenance projects?

Yes. So, our maintenance CapEx has decreased over the last couple of years as you bring on new vessels. That's the expectation is that your maintenance CapEx comes down. So, we run about $25 million a year in maintenance CapEx, and then the rest will be for the wind vessel, the Acadia, and the new hopper dredge, the Amelia Island.

Thank you. Our next question will come from Gregory Bennett. Your line is open.

Hey good morning. Thanks for the information. How much of your current backlog that I think you said half of it you expect to monetize over the next 12 months. Half of that is fixed at costs that are going up in this inflationary environment. Do you expect you have adjustments in these contracts for fuel or personnel? Or could we be stuck with low-margin contracts that were delayed over the last several months? Thank you.

Yes. For most of our government contracts, they are fixed-price. However, after last year's events, we have revised how we estimate costs and inflation in our bids. We are determined not to face the same issues as last year, so we've adopted aggressive assumptions regarding inflation, which we incorporated into our pricing. Additionally, as we begin to win more non-government contracts, these tend to allow for negotiation, and while I cannot disclose specific details, these contracts are generally more favorable compared to standard government contracts.

So, you're indicating that during your next earnings announcement for the fourth quarter, the expectation is that you will be profitable and generate significant cash flow. Is that correct?

Telling you that we're expecting a much higher revenue and much higher margin in the fourth quarter than we have seen in the first three quarters of this year. One other comment, too, on the cost and the inflation. Two of the larger costs that we have, one is labor. We do have a lot of union labor. Those agreements are fixed, and we just recently signed a three-year labor agreement. So, we know what that is. Another large component is fuel, and we hedge our fuel as we win a contract, but we mitigate the impact of that as well.

On the new vessel you're building for offshore wind, I believe many of the contracts may not come through. It might be better to wait until you secure financing, pause construction, and ensure you have definitive take-or-pay contracts for that vessel, so we don't expose ourselves to unnecessary risk.

The contract for the vessel in the United States requires three to three and a half years to complete. We signed this contract a year and a half ago and expect delivery in 2025 to work on Equinor's Empire I contract. This is a firm contract that occupies most of our 2025 schedule. Additionally, we have Empire II slated for 2026, which also carries our performance obligation. As mentioned earlier, Equinor will provide their definitive plans for these two projects in the fourth quarter, which will prompt us to reassess our plans. Currently, the construction timeline is on track, and we are actively bidding on several projects for 2026 and beyond that will necessitate the vessels being operational.

What happens if they don't happen?

Well, then we have to reconsider, and we will come back to that in the fourth quarter. Otherwise, it's just speculation.

Thank you. And I'm seeing no further questions in the queue. I would now like to turn the conference back to Tina Baginskis for 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.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.