Earnings Call Transcript - GLDD Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q2 2025 Great Lakes Dredge & Dock Corp. Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Eric Birge, Vice President of Investor Relations. Please go ahead.

Eric Birge, Vice President of Investor Relations

Good day, and thank you, everyone, for joining us. Welcome to Great Lakes Dredge & Dock Corp.'s Second Quarter 2025 Financial Results Conference Call. Before we begin, please note that certain statements made during this call are forward-looking in nature and are subject to various risks, uncertainties, and assumptions. These factors may cause actual results to differ materially from those anticipated. For a detailed discussion of these risks, please refer to our filings with the Securities and Exchange Commission. We will also discuss certain non-GAAP financial measures, including adjusted EBITDA. Reconciliation of these measures to the most direct comparable GAAP measure can be found on our earnings release and on the Investor section of our website at investor.gldd.com, along with other supplemental operating information. Joining me on today's call is Lasse Petterson, our President and Chief Executive Officer; and Scott Kornblau, our Senior Vice President and Chief Financial Officer. Lasse will begin with a review of the quarter's key developments, followed by Scott, who will provide a detailed overview of our financial performance. Lasse will then conclude the call with commentary on the business outlook and market trends. With that, I will now turn the call over to Lasse.

Lasse J. Petterson, President and CEO

Thank you, Eric. Following strong financial results in the first quarter of this year, the momentum continued into the second quarter with solid results, driven by high equipment utilization and strong project performance, executing complex port deepenings and coastal restoration projects, leveraging the capability of our extensive fleet. We ended the quarter with revenues of $193.8 million and adjusted EBITDA of $28 million. Our dredging backlog remained strong at $1 billion, with 93% coming from capital and coastal protection projects, plus an additional $215.4 million in awards and options pending. Our successful bid strategy from last year resulted in a large number of project wins and a quality backlog, which will support high asset utilization and solid revenue generation for the remainder of 2025 as well as providing a good base and revenue visibility for 2026. During the quarter, we received notice to proceed on the Woodside Louisiana LNG project. The awarded work is included in our second quarter backlog along with two options that are included in our options pending award. Dredging operations on the project are expected to commence early 2026. A strong performance in Q1 and a good outlook for the remainder of the year, contributed to our decision to initiate a $50 million share repurchase program in March as we believe our share price did not reflect the company's financial performance and long-term outlook. As of June 30, we have repurchased 1.3 million shares with a total spend of $11.6 million under this program. During the quarter, we upsized our revolving credit facility to further enhance liquidity, which Scott will provide more details on. Moving to our new build program, which is nearing completion, our newest hopper dredge, the Amelia Island, is expected to be delivered in the next few weeks, and we'll go straight to work on projects already in backlog. The Amelia Island and her sister ship, the Galveston Island, have been specially designed for the shallow and narrow waters in our U.S. coastlines and are efficient tools for us to work on coastal protection projects such as beach restorations, wetland improvements, and barrier island construction. The final vessel in our new build program, the Acadia, the first U.S flagged Jones Act-compliant subsea rock installation vessel, is also currently under construction and hit a key milestone with her launch from dry dock in July. Delivery is expected in the first quarter of 2026, at which time she will go straight to work on Equinor's Empire Wind I project. The target markets for the Acadia include domestic and international projects for the protection of critical subsea infrastructure, such as oil and gas pipelines, power and telecommunication cables, and offshore wind installations. I now turn the call over to Scott to further discuss the results of the quarter, and then I'll provide further commentary around the market and our business.

Scott Lee Kornblau, Senior Vice President and CFO

Thank you, Lasse, and good morning, everyone. I'll start by walking through the second quarter, which resulted in revenues of $193.8 million, net income of $9.7 million, and adjusted EBITDA and adjusted EBITDA margin of $28 million and 14.4%, respectively. Despite having four dredges performing the regulatory dry dockings at various times during the second quarter of 2025, revenues of $193.8 million increased $23.7 million from the prior year’s second quarter as every active dredge was working for the majority of the quarter. Current quarter gross profit and gross profit margin increased to $36.6 million and 18.9%, respectively, compared to $29.8 million and 17.5%, respectively, in the second quarter of 2024. The increase in gross margin is primarily due to improved utilization and project performance in a large number of capital and coastal protection projects, which typically yield higher margins. These projects accounted for over 88% of our second quarter revenue. The quarter-over-quarter gross profit increase was partially offset by higher dry docking costs. Current quarter's operating income of $17.1 million increased $2.5 million compared to the prior year's quarter operating income of $14.6 million. The year-over-year increase is driven by higher gross profit, partially offset by higher general and administrative expenses, mostly due to increased incentive compensation resulting from the strong first half of the year. Net interest expense of $4.2 million for the second quarter of 2025 was flat compared to the second quarter of 2024, and second quarter 2025 net income tax expense of $3.4 million increased from $2.8 million in the same quarter of 2024 due to the stronger results. Rounding out the P&L, net income for the second quarter of 2025 was $9.7 million, up from $7.7 million in the prior year quarter. Total capital expenditures, including capitalized interest for the second quarter were $64.6 million, made up of $19.8 million for the hopper dredge Amelia Island, $28.7 million for the construction of the Acadia, $8.8 million related to the addition of support equipment, with the remaining $7.3 million coming from maintenance and growth. Our previous full-year CapEx guidance of between $140 million and $160 million, including capitalized interest, remains unchanged. Turning to our balance sheet, we ended the quarter with $2.9 million in cash and $5 million drawn on our revolver, which doesn't mature until the third quarter of 2027. And as Lasse mentioned earlier, in May, we executed an amendment to our credit facility, upsizing our revolver by $30 million to $330 million further enhancing our liquidity, which stood at $272 million at quarter end. Our balance sheet is in great shape with a trailing 12-month net leverage ratio of 2.7x, a weighted average interest rate on our total debt under 7%, and no debt maturities until 2029. For the first half of 2025, we were $36 million free cash flow positive, and as our new build program will be substantially complete at the end of the year, we expect this number to significantly grow starting in 2026. As I discussed on the Q1 earnings call, 2025 is a heavier-than-normal dry dock year for us. And during the third quarter, we will have three vessels at the dock at various times for regulatory surveys and repairs. Utilization will remain strong on the other vessels, and with the Amelia Island scheduled to come online, we expect to see third quarter EBITDA higher than the second quarter. Despite the large number of dry docks, our expectation is that full-year 2025 results will be the highest in company history for both revenue and net income. With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward.

Lasse J. Petterson, President and CEO

Thank you, Scott. The administration has continued to demonstrate strong and consistent support for the dredging industry. The U.S. Army Corps of Engineers is operating in fiscal year 2025 under a continued resolution through September 30, which sustains the record funding levels established in the prior fiscal year's budgets. This support, along with our $1 billion backlog, which includes a robust mix of large and complex projects in the beach renourishment and port deepening markets, enables us to continue to deliver on a very busy 2025 and provides clear revenue visibility extending well into 2026. We expect the 2025 dredging bid market to be at a normalized volume of approximately $2 billion, focused on coastal protection projects after very strong port-deepening bid markets in 2023 and 2024. As we look further ahead, we are beginning to see meaningful progress on the next phase of deepening projects, including New York, New Jersey, Tampa, New Haven, and Baltimore, among others, with dredging work likely to commence in 2027. In response to early signs of potential delays in the U.S. offshore wind market, we proactively adjusted our strategic outlook for the Acadia. Over the past couple of years, we have expanded our target markets for the Acadia to include the safeguarding of critical subsea assets, including oil and gas pipelines, power transmission lines, telecommunication cables, and international offshore wind farms, increasing our opportunities into a broader range of services we now refer to as offshore energy. The Acadia is engineered to precisely deposit rock for the protection of subsea infrastructure against environmental forces, such as weather and potential acts of sabotage by hostile entities. We are actively pursuing engagement across these sectors, bidding work for 2027 and onwards, as we have between Empire Wind I and Orsted's Sunrise Wind, Acadia is fully booked for work in the U.S. for 2026. In conclusion, we are confident of strong project execution and results for the remainder of the year, and our strong backlog gives us good revenue visibility for 2026. Our new build program is coming to an end, and we are looking at generating solid positive cash flows for 2026. And with that, I'll turn the call over for questions.

Operator, Operator

Our first question comes from Joe Gomes of NOBLE Capital.

Joseph Anthony Gomes, Analyst

Congrats on the quarter.

Scott Lee Kornblau, Senior Vice President and CFO

Thanks, Joe.

Joseph Anthony Gomes, Analyst

I wanted to start off with just kind of take a look at the pace of awards. Is it running to expectations? Are you seeing anything being kind of pushed out to the right? Is there anything there that leads you to have any concern about the award level for this year?

Scott Lee Kornblau, Senior Vice President and CFO

Yes, Joe. As we discussed at year-end, we anticipated a more normalized bidding environment for this year, and that expectation is materializing. We also recognized that as the ongoing deepening cycle approached its conclusion, there would be a significant reduction in capital projects, which is also occurring. As Lasse mentioned, we are starting to observe early indications of the next wave of deepening projects expected in the next 18 months, which is promising. Additionally, regarding our utilization and backlog, we were unable to participate in many of the bids due to a lack of availability. In the first half of the year, we did not bid on over 50% of the projects because we either lacked the availability or they did not align with the limited resources we had. This market fluctuates, and our win rate will also fluctuate. We have the backlog, but it's unrealistic for us to sustain the winning rate we experienced over the past couple of years.

Joseph Anthony Gomes, Analyst

Okay. And on the Acadia, obviously, I've mentioned you've guided fully booked in '26 and you're exploring other markets in '27, is there the possibility that, that you think that vessel could still be in the U.S. in '27? Are most of your efforts looking overseas in the international markets for '27?

Lasse J. Petterson, President and CEO

Yes. Currently, we are bidding on a lot of work in Europe, and we are also exploring opportunities in Asia for the remainder of this decade. The market in Europe continues to be strong. It is likely that the vessel will be in Europe when we enter 2027.

Joseph Anthony Gomes, Analyst

Okay. And then one last one for me, kind of more 10,000-foot level. You guys have mentioned the new build program should be coming to an end here and all the positives for that. Is there anything out there maybe far out in the horizon right now that would make you reconsider and say, maybe we need to build more vessels? Or is this hey, we are definitely done here for whatever the next phase of years is?

Lasse J. Petterson, President and CEO

We will be assessing our fleet. In my view, we have made significant investments in our hopper fleet, and we now have four modern hoppers in the market, along with two smaller, older ones. Our fleet is updated and competitive. Additionally, our cutter fleet is substantial, and we are consistently enhancing the equipment on our cutters. At this time, we do not foresee the need to construct new dredges, although that could change in the future. However, for the next couple of years, it is not part of our plans. Scott, do you have any comments?

Scott Lee Kornblau, Senior Vice President and CFO

No, I think that's right. Joe, we've said we may look to do some strategic upgrades on some of the non-hopper fleet, but we're comfortable with the number of dredges that we have right now. We strategically invested over the last few years, and I think we're already starting to see the dividends paying off and continue to expect the same sort of results.

Operator, Operator

Our next question comes from the line of Julio Romero of Sidoti & Company.

Julio Alberto Romero, Analyst

What is your confidence level in receiving the Acadia in the first quarter of '26 compared to possibly later in the year? Additionally, what would be your estimate of Acadia's revenue in '26 if we assume it is delivered on time and immediately starts work on Empire I?

Lasse J. Petterson, President and CEO

Yes. We have a high confidence in getting the vessel delivered in Q1. That is the date that the yard is giving us. The acquisition of the yard by the Koreans Hanwha has resulted in additional resources coming to the yard and the progress is good. As I said, we are out of the dry dock, and it's now at the outfitting key at Philly Shipyard, and they are looking at trying to improve the delivery date to an earlier delivery in Q1, but as we are speaking today, that is what the yard is telling us.

Scott Lee Kornblau, Senior Vice President and CFO

Yes. Julio, we are expecting some options to be exercised. We're still finalizing the pricing on that, so I want to keep the numbers a bit closer for now. With the projected end of Q1 delivery and about another month to a month and a half for commissioning, we anticipate seeing a little over six months of revenue. In the U.S., this vessel is certainly capable of generating over $100 million in revenue for the full year. Considering a timeframe of around seven months this year, along with the usual fluctuations between jobs, you can get a good sense of our thought process on this.

Julio Alberto Romero, Analyst

Yes. Fair enough. And any update on potential wins for the offshore energy awards for the Acadia and a quick refresher on what the lead time is between bidding and award for offshore energy in Europe and in Asia?

Lasse J. Petterson, President and CEO

Yes. And the lead time is much shorter in those markets. It's mature markets. Here in the U.S., we were fortunate to be able to book projects very early for the Acadia due to the newness and the novelty in the market and lack of vessels or U.S. flagged vessels. In the international markets, it's more looking at maybe a year, maybe less in lead time between award and you actually execute the project.

Scott Lee Kornblau, Senior Vice President and CFO

Yes. Julio, there has not been one project in Europe or Asia that we have bid on for '27 or beyond that's been awarded to anybody yet.

Julio Alberto Romero, Analyst

Okay. I appreciate the finer point on the lead time there in a year or less. That's very helpful. Just maybe on the base business, are you seeing any change in customer hesitation or any delays in decision-making on the base dredging business?

Lasse J. Petterson, President and CEO

Well, as you know, we are in a continued resolution, which is good and bad news. The Corps cannot bid new projects in this situation. But they have their revenue or the guarantee for the revenues similar to prior years. So that means that there are a lot of projects, which are being executed in this situation. We have to wait until the government or the Congress get together and make a new budget for next year. And then there's a number of new projects that should be included in that new budget. That is the, let's say, clarity that we have around it. There's a number of beach renourishment and reconstruction projects that are being bid at this point in time, and that market is very strong. And as you know, we perform extremely well on those projects on the East Coast.

Julio Alberto Romero, Analyst

And I guess for LNG, I guess, is also what I was getting at, in the order cadence of LNG, any change from customer decision-making on that front?

Lasse J. Petterson, President and CEO

Well, we are currently engaged in three projects in the LNG space. There are a couple of other projects where it's either being done by other dredgers. There's probably two LNG projects, other than the three that we are working on, that is going forward. And where our competition will be fully engaged. So beyond that, it's probably more a discussion on the general LNG market. Is there room for more capacity to be built in the U.S., and how can the export markets really absorb these volumes of LNG going forward.

Operator, Operator

Our next question comes from the line of Kevin Gainey of Thompson Davis & Co.

Kevin Wade Gainey, Analyst

Nice quarter on a heavy dry dock.

Scott Lee Kornblau, Senior Vice President and CFO

Great. Thanks, Kevin.

Kevin Wade Gainey, Analyst

I was hoping that maybe we could kind of touch on the Acadia conversations that you guys are having? And maybe at this point, what is more likely to happen? Is it going to be more international wind work or asset protection jobs and kind of how those conversations are unfolding?

Lasse J. Petterson, President and CEO

Yes, it's a very interesting market for us. I've mentioned in previous calls that we anticipated the offshore energy sector would encompass both U.S. and international work. The current slowdown in the U.S. means we had to focus on international opportunities sooner. We began reaching out almost two years ago to our U.S. clients about their European operations, and we're actively bidding for that work starting in 2027 and beyond. This includes offshore wind farms that require large amounts of rock, along with power and transmission cables being installed in Europe that also need substantial rock protection. It’s a significant market, and we're engaged in bidding for these projects. Additionally, we've discussed communication cables, particularly in light of the sabotage incidents occurring in the Baltics, as well as the unprotected infrastructure present in the North Sea concerning oil and gas pipelines. Ongoing discussions are focused on how to safeguard those from sabotage. There are numerous interesting opportunities for Acadia in these markets.

Kevin Wade Gainey, Analyst

I appreciate that information. Regarding what you mentioned, Scott, I understand there are three dry docks planned for Q3. Is there any preparation for Q4 as well at this time?

Scott Lee Kornblau, Senior Vice President and CFO

Yes. Right now, and again, the caveat these can still ebb and flow left or right. we have two planned at various times, not necessarily full quarter during Q4. And then again, I'll answer the next question you didn't ask because it was such a heavy dry dock year this year, we expect to see a lower-than-average dry docking schedule for 2026.

Kevin Wade Gainey, Analyst

And just to clear up on cash flow. What was the operating cash flow in Q2? And do you have any thoughts about second half cash flow?

Scott Lee Kornblau, Senior Vice President and CFO

Yes. Q2 operating cash flow was approximately 60 million. As I mentioned on the call, free cash flow for the first half of the year was well above 30 million. While I won’t say the numbers will be identical, this year is expected to resemble a normal year. The extremes, Q1 and Q4, will likely be the strongest, with the middle quarters showing less performance. We observed this trend in the first half and anticipate it will continue into the second half of the year. We still need to complete payments related to Amelia Island and have additional work planned for Acadia this year. There will be some capital expenditures this year. My estimation is that total cash flow in the second half of the year will be relatively stable. Looking ahead to next year, as the new build program concludes early in the year, we will begin to generate more cash.

Operator, Operator

Our next question comes from Jon Tanwanteng of CJS Securities.

Unidentified Analyst, Analyst

It's Jeremy on for John. How should we think about capital allocation beyond CapEx, given the stronger performance? Has your preference shifted more towards repurchases versus debt pay down?

Scott Lee Kornblau, Senior Vice President and CFO

No. I think with where we're at now, we should return to the priorities we've consistently stated. Let's complete the new build program and then focus on reducing our debt. The new buyback program we implemented was primarily a response to the market downturn that significantly affected our stock price. We established the program to take advantage of the low stock price. As long as the price remains at its current level or higher, we don't believe it's fully valued yet, but we'll shift our focus back to the other priority. The program is still active, and if we experience another significant imbalance, we can always resume buying back shares. For now, let's finish the new build program and then concentrate on debt reduction.

Unidentified Analyst, Analyst

Makes sense. And then can you just discuss the expansion of the credit facility and kind of the rationale behind doing so?

Scott Lee Kornblau, Senior Vice President and CFO

Yes. Several factors contributed to that. We had the option to increase our second lien paper by $50 million, which expired during the second quarter. We chose not to take that option, but we were able to upsize the revolver, benefiting from much better pricing for an additional $30 million. This was also influenced by the LNG work we are doing and the advancements in our offshore energy projects; these typically need letters of credit instead of the surety bonds used in our base dredging business. Therefore, the revolver serves not only as a means to borrow cash but also as the facility we utilize to issue letters of credit. We will release our 10-Q later today, and currently, we have approximately $60 million in outstanding letters of credit to support our LNG and offshore energy backlog.

Operator, Operator

I'm showing no further questions at this time. So I would now like to turn it back to Eric Birge for closing remarks.

Eric Birge, Vice President of Investor Relations

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

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.