Earnings Call Transcript - GLDD Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 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, Director of Investor Relations. Please go ahead.

Tina Baginskis, Director of Investor Relations

Thank you. Good morning, and welcome to our quarterly conference call. Joining me on the call this morning is our President and Chief Executive Officer, Lasse Petterson; and our Chief Financial Officer, Mark Marinko. Lasse will provide an update on the events of the quarter. Then Mark will continue with an update on our financial results of 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.

Lasse Petterson, CEO

Thank you, Tina. During 2020, as the COVID-19 pandemic hit our nation, Great Lakes Dredge & Dock was able to adjust and navigate the difficulties and challenges the pandemic posed to our operations. However, as the third wave of the pandemic spread through our population, we started to see significant additional direct costs and operational interruptions in the first quarter of 2021. Several of our vessel crews were infected despite our extensive testing and isolation protocols. Vessels were required to go to shore for crew changes, and the vessels had to be disinfected before returning to work. The direct COVID costs of at-home and on-site testing, disinfecting other vessels, and quarantining of crew were $4.3 million in the quarter. More importantly, the crew changes and taking the vessels offline for disinfection impacted the vessel scheduling and availability. In addition, it severely impacted the productivity on several projects and led to delays. This also pushed revenue from the first quarter into the remaining quarters of 2021. Today, the projects and vessels that were impacted are back in operation, and with our solid backlog, increasing vaccinations, and stronger performance expectations in the third and fourth quarters, we do not see a need to adjust our full year expectations at this time. Vaccinations are now available to all age groups. We have initiated an extensive effort of communication and education about vaccinations for crews and staff. We encourage them to get vaccinated as early as possible to keep themselves, their fellow workers, family, and friends safe and to be part of the effort to stop the pandemic and hinder new strains of the virus from developing and spreading.

Mark Marinko, CFO

Okay. Thank you, Lasse. I will start with the quarterly results and then discuss some specifics related to our dredging business. For the first quarter of 2021, revenues were $177.6 million, net income was $8.8 million, and adjusted EBITDA was $26.8 million. Total company revenues for the first quarter of 2021 represented a $40.1 million decrease or 18.4% compared to the same period last year. Lower revenue in the first quarter of 2021 was due to decreased coastal protection and capital dredging revenue, offset by an increase in revenue from maintenance dredging projects. The decrease in revenue compared to the first quarter of 2021 is mainly attributed to the fact that last year’s first quarter had no vessels in drydock, which allowed for more revenue generation, and we also had exceptional performance on several projects. Gross profit was $33.1 million, compared to $68.5 million in the first quarter of 2020. Gross profit margin was 18.6%, compared to 31.5% in the prior year quarter. Direct COVID-19 costs negatively impacted gross profit by $4.3 million during the first quarter, and related productivity impacts and delays affected several projects. Approximately 23 revenue days were lost due to COVID delays. Downtime of the vessels directly impacted by COVID delays resulted in a loss of $3.9 million in revenue and $1.2 million in gross margin that we expect to recoup later this year. Both the Dredge 55 and the Carolina remained in drydock for the entire quarter, but are expected to return to work in the second quarter of 2021. Total company operating income was $16.6 million, a decrease of $36.4 million over the prior year quarter. The decrease is a direct result of lower gross margin. General and administrative expenses were slightly higher than the prior year quarter by $0.7 million. This increase in general and administrative expenses for the quarter was due to higher relocation expenses in the current year related to regional office and headquarters relocation, partially offset by a decrease in incentive pay. Net income for the first quarter of 2021 was $8.8 million compared to $34 million in the prior year quarter. The current quarter income includes net interest expense of $6.6 million and an income tax expense of $1.4 million. Basic income for the first quarter of 2021 also included $6.6 million of net interest expense and $11.3 million income tax expense. Adjusted EBITDA for the first quarter was $26.8 million compared to adjusted EBITDA of $61.4 million in the first quarter of 2020.

Lasse Petterson, CEO

Yes. As our country is still facing the challenges of COVID-19, the dredging industry, deemed an essential service, continues to operate on work on critical and needed infrastructure projects. The U.S. Army Corps of Engineers oversees the majority of these infrastructure projects, and this capacity has continued to follow the bid schedule and prioritize all types of dredging, including port deepening, port maintenance, and expansion, as well as coastal protection and restoration projects that are necessary to avoid potential storm damage during the coastal hurricane season. At the end of the first quarter, Great Lakes projects awarded totaled $90.3 million, resulting in a 42% bid market share. For 2020, the domestic market reached $1.8 billion in project bids. We continue to be optimistic and confident that the 2021 domestic market will remain strong, driven by work that will include large-scale port deepening projects along the East and Gulf Coast, several large marsh creation projects in Louisiana, and coastal protection projects, including the renourishment of coastal beaches. We expect that 2021 will see bids for multiple project phases for port deepening in Corpus Christi, Norfolk, and in Houston for the Houston ship channel expansion. These projects will continue for the next several years. Additionally, a strong hurricane and storm season last year has resulted in an increase in erosion and other damage, which increases the recurring nature of our business and the need for more frequent coastal protection and port maintenance projects.

Operator, Operator

Thank you. Our first question comes from Jon Tanwanteng with CJS Securities. You may proceed with your question.

Jon Tanwanteng, Analyst

Mark Marinko, CFO

Yes. So we had some dry docks extended, and some equipment repairs were needed. From an EBITDA perspective, there’s a little bit of a change related to what we originally expected from a few months ago; it was probably in the neighborhood of about $6 million to $8 million.

Jon Tanwanteng, Analyst

Okay, got it. And does that pull forward any expenses from future quarters at all, or was that all just emergency?

Mark Marinko, CFO

Could you say that again, Jon? Sorry.

Jon Tanwanteng, Analyst

I’m sorry. Did that pull forward any work from future quarters, or was that all due to unexpected repairs and maintenance?

Mark Marinko, CFO

No, we didn’t pull forward anything from Q2 in the first quarter.

Jon Tanwanteng, Analyst

Okay. Got it. And then just looking for the year, last year you mentioned you didn’t have any change to your full year expectations. Just to clarify, I think last quarter you had said you expected revenue growth for the year. Is that what you’re referring to, or was there an earnings expectation attached to that as well?

Lasse Petterson, CEO

No, it goes to our expectations for earnings. So we do see this quarter as exceptional. We were heavily impacted by COVID and the infections and the off-hire of our vessels and the scheduling impact. When you have these delays, the direct cost is something that you can estimate, but there are productivity impacts and other effects of these delays, which are difficult to estimate. So it was a tough quarter. With the vaccinations now going on full speed, we have vaccination crews going to our projects and vaccinating those who are positive to receive the vaccination. I think by the end of the second quarter, we’ll be at a stage where we have vaccinated most of our personnel, which should eliminate that type of impact for the remainder of the year. We have a strong backlog, and I’m confident in our ability to perform the work that was delayed from the first quarter, and also in our performance in the remaining quarters of the year.

Jon Tanwanteng, Analyst

Got it. And then just one question on the wind energy opportunity; I actually have a two-part question. One, can you talk about the discussions with your potential customers and how that’s going, how receptive they are to having a new vessel that you had slag working for them? Number one. And number two, just given that there’s been a lot of inflation both in steel and construction costs, I’m wondering your estimates for how much that will cost to change and if that changes the return profile at all.

Lasse Petterson, CEO

I assume the latter question relates to offshore wind. But yes, since we announced the construction of the U.S. flagged Jones Act compliant fall-pipe vessel, we have received a lot of interest from both developers and first-year installation contractors. We are looking at participating and bidding for the upcoming wind developments that are now happening in 2024, 2025, and 2026. With the strong commitment from the administration and also the strong commitment from the industry, I’m very optimistic for this market. As you remember, we made a decision to go ahead with the design and the development of this vessel when the ambitions for 2030 were at 10 gigawatts, and now the ambitions have increased by 200%. Hopefully, the majority of that will come to fruition. So that should create a very strong market for our services. We are in dialogue with both developers and first-year installation contractors for our services, so it’s developing very nicely.

Jon Tanwanteng, Analyst

Got it. And just on the ship construction costs and the potential return on the vessel.

Lasse Petterson, CEO

Well, we haven’t changed our expectation for the return on the vessel. As you know, steel prices have increased somewhat here, like all commodity prices have over the last six months. But we haven’t adjusted the estimate for the construction cost of the vessel as of today.

Jon Tanwanteng, Analyst

Okay, got it. Thank you. I’ll jump back in queue.

Operator, Operator

Thank you. Our next question comes from Poe Fratt with Noble Capital Markets. You may proceed with your question.

Poe Fratt, Analyst

Great. Good morning, Lasse. And good morning, Mark. Just to clarify, Mark, on the $6 million to $8 million cost impact from the dry docks and equipment failure. The dry docks, I think, were somewhat expected, but we spent $6 million to $8 million on unexpected costs. Or is there a lesser part that was unexpected?

Mark Marinko, CFO

No, there was – I hope I answered your question, but the $6 million to $8 million I’m talking about was the dry docks being longer than we expected. So that delayed our opportunity to earn money, along with the costs that were in there. So this would all be money that we expected, absent the extended dry docks and absent the unplanned downtime.

Poe Fratt, Analyst

And then when you highlight any downtime that you might have with your fleet for the rest of the year.

Mark Marinko, CFO

Yes, sure. The number of dry dock days that we had in the first quarter was planned, but we had some regulatory as well as unplanned downtime. The second quarter is actually fairly similar to those numbers of days. Then you see a dramatic reduction in the back half of the year. The third quarter is about half of what the first and second quarter average would be, and then very minimal in the fourth quarter. So we expect a much stronger second half of the year than the first half of the year because of that, along with how other projects are scheduled.

Poe Fratt, Analyst

Okay. And then if we could just clarify in the expectation that you can recoup or recover and that you’re not changing your full year expectations. My recollection is that your full-year expectations from an EBITDA standpoint were in the $150 million range. Is that – am I recalling correctly?

Mark Marinko, CFO

No, I didn’t give a number, but when we came into this year, I talked about that we expected revenues to be higher than in 2020. We expected the gross profit margin percentage to be a little lower than in 2020 due to the really extraordinary performance we had in the first quarter of 2020. Additionally, G&A would be about $3 million higher, and we are still under those same expectations at this point in time.

Poe Fratt, Analyst

Okay. And then thanks for highlighting the amount that you spend on the hopper dredge and also the rock dumping barge or dredge and then also the multi-cats. Can you do that for the full year, as far as what your expectations for CapEx are, including the money you expect to spend on the hopper dredge and also the rock dumping barge?

Mark Marinko, CFO

Yes, sure. So again, it’s the same as what we talked about last quarter: $35 million of what we call regular CapEx for the existing fleet, $35 million on the hopper dredge, $1.5 million on the design of the rock fall-pipe vessel, and $18 million on the multi-cat. I do want to add that in the first quarter, we did do an $11 million lease buyout of an existing vessel, the Terrapin. So, as we’re looking at cash usage in the first quarter, that’s an important number.

Poe Fratt, Analyst

Yes. You sort of preempted my next question, which is if you could do a cash walk. It looked like cash, debt in chains with cash was down about $39 million, CapEx was roughly in line with what I’m getting for operating cash flows. So before working capital, could you highlight the other changes?

Mark Marinko, CFO

Yes, sure. So it was $16 million in CapEx, plus the $11 million in the lease buyout. Then on the working capital side, $32 million if added – if you add back the net income and depreciation, that gives you about $40 million right there. Within the working capital, we had a $26 million increase in accounts receivable; usually, this first quarter goes off, so there is seasonality, but there was a $4 million payment we were expecting that ended up coming in early April. There was also an $11 million decrease in accounts payable and accrued expenses, which again, you generally see in the first quarter as we make our annual incentive pay payment. So that should give you the reconciliation to get to our main drivers of the cash change in the quarter.

Poe Fratt, Analyst

Okay. And then you talked about tearing to refinance. Could you give us an idea of whether you’re going to refinance the entire amount or maybe do a two-part or just sort of what your current thinking on refinancing is now? And also in the context market of would you consider changing the metrics or the matrix that’s in place for the stock buyback program too?

Mark Marinko, CFO

At this point, we expect to refinance just $325 million; the market is still favorable. We do, if we were to go today, expect it to be below 6%. We’ll see how the market is as we get closer to the launch here. Again, we can refinance these at par on May 15, so it’s just about 10 or 11 days away. On your second question about the stock buyback, yes, that stock buyback has just actually expired. We will again look at any opportunity where we think the stock is undervalued and will make the appropriate moves as we did last August.

Poe Fratt, Analyst

Great. And lastly, you highlighted that there were a couple of big projects coming up, whether it’s Corpus, Houston, Boston, or Norfolk. Can you quantify those and maybe quantify some of the other state-level projects that you might be competing on over the next couple of quarters, like, in Louisiana?

Lasse Petterson, CEO

Yes. When we look at our, let’s say, crystal ball for projects, we are looking at the Corps of Engineers bid list. If we pick the largest projects, let’s say the 12 to 14 largest projects on that list, the bid market that we see for the next three quarters is somewhere between $650 million and $1.2 billion. There are some large bids for the marsh creation, which is bidding here in the second quarter. We expect phase 3 of that project in Corpus Christi to bid in the second quarter. There is some work on the East Coast and New Jersey that’s also set to bid in the second quarter, and then we expect a lot of bid activity in the third quarter with shoreline stabilization projects and some deepening projects.

Poe Fratt, Analyst

Okay. If I could just squeeze one last one. If you have awards right now, they’re running for the quarter, $96.3 million, the golden triangle, and then also mobile, your low bidder on Captiva Island. Do you have a low bid pending award number that you could share with us?

Lasse Petterson, CEO

Do we have that point?

Mark Marinko, CFO

Yes. Let’s see, low bid pending award at the end of the year, if you remember, was $488 million at the end of 2020. Then we had some options on top of that of about $30 million. If you add this, I’m trying to – what date do you want as of today? Because some things have been awarded, right? So at year-end, it’s over $500 million.

Poe Fratt, Analyst

Yes. I was just trying to sort of put it in the context of what might be awarded that is currently low bid, reward that might be awarded this quarter. I get what market is trying to get a flavor for that.

Mark Marinko, CFO

Yeah, you know, the wins that were post include the Memphis rental and Captiva, as you mentioned, where the two wins that were posted March 31. Then we had about $90 million of awards that were low bid before March 31 that were awarded post-March 31. Between the two wins, that’s about $39 million, almost $40 million.

DeForest Hinman, Analyst

Hey, thanks for taking my questions. Most of them have been answered. Can you give us a little flavor as it relates to the debt refinancing in terms of what you’re seeing on the covenant side and then any features that might be attractive to us like secured, unsecured, early call provisions if we made a decision to pay that off early? Any color there would be helpful.

Mark Marinko, CFO

Yes. Good question, DeForest. From where we last launched in 2017, obviously, our credit ratings improved. We are seeing much more favorable terms in the covenants now, whether it’s in permitted indebtedness, restricted payments. Any of those covenants are much more favorable than they were before. In terms of the call provision, what we are looking at today is an eight-year tenure, so longer liquidity than the old one which was five years with a no call three.

DeForest Hinman, Analyst

Okay. That’s helpful. And I know we’ve started building some of the vessels and we’re working on the proposal for the rock dumping vessel. You’ve spent some time talking about the Biden administration and trying to support offshore wind. Is there anything out there in terms of special financing that could be provided by the government to fund the construction of the Jones-built vessel?

Lasse Petterson, CEO

Yes. We have been investigating that, and maybe Mark can give an update on that.

Mark Marinko, CFO

Yes. We’ve had a conversation with the Department of Energy related to new innovations and items that support renewable energy, and we have had some favorable early discussions with them. This was a few months back, and yes, it looks like we could get more favorable financing than in the general commercial markets.

DeForest Hinman, Analyst

I mean can you expand on that in any way? Would that be a very long-term financing coupled with an attractive interest rate? How would that work?

Mark Marinko, CFO

Yes, it’s a – you can actually do it, and they’re pretty open to multiple ways of doing it, but yes, it could be in a term type of loan for a number of years. You can pick a time, and the rate is a floating rate based on your credit rating, a LIBOR plus a number based on your credit rating. Looking at where our credit is today, it will be more favorable than we’ve seen in the past in the commercial markets.

DeForest Hinman, Analyst

Okay. And then separately going on post question on the backlog with these sizeable, low bids pending awards. I know some of those were LNG project related. What sort of thing needs to happen for some of those larger projects to actually become backlog that we can disclose in our filings?

Lasse Petterson, CEO

Yes, what needs to happen is that the developer of the LNG facilities needs to make a definitive final investment decision (FID). We’ve been picked as their partners to execute the work when they go for FID. The contracts are negotiated and ready to go, but we are waiting for that final FID. I believe stabilization in the oil and gas market, along with some stable LNG prices, will incentivize developers to enter into longer-term delivery contracts. When that is in place for the financing, the FID can proceed.

DeForest Hinman, Analyst

Okay. That’s helpful. And then the last question on the – I don’t think it was touched on, but the foreign market. Can you just give us an update there in terms of what you’re seeing? Any thoughts on repositioning any of the vessels in the foreign dredging markets?

Lasse Petterson, CEO

We have done our restructuring of our foreign market exposure. We have sold off some older vessels in the Middle East and have repositioned two dredges back to the U.S. markets, which are very active. The international market is still depressed, but as oil prices are starting to come back, there will be some more stability in the Middle East. You could see that market improving with the need for large land reclamation or major infrastructure projects internationally, to regain strength, much like it was before the 2014 oil price fall. For now, we are concentrating on the U.S. domestic market and also looking at the very promising offshore wind market. If the international market returns to its previous strength, there’s potential for us to participate again. But at present, it looks like that market will remain weak for some years.

DeForest Hinman, Analyst

And maybe just some push on how many vessels are basically in those international geographies currently.

Lasse Petterson, CEO

Currently, we do not have any vessels in the Middle East.

Operator, Operator

Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. You may proceed with your questions.

Jon Tanwanteng, Analyst

Hi Mark, I was just wondering if you could give a number for backlog scheduled to liquidate in the quarter in Q2, number one. And then two, if there were any further COVID impacts that you saw so far in April and May.

Mark Marinko, CFO

Yes. The good news is that as that wave kind of slowed down, and the third wave that we saw in January and February, we’re actually following kind of national trends. Now things have stabilized as Lasse mentioned. All the vessels are back to work. At this point, it looks much more favorable than it did in the first quarter. That’s the good news regarding the COVID impact. We still have some costs, but if we track as we are now, it won’t be to the same degree as we had in the first quarter.

Jon Tanwanteng, Analyst

Got it. And the backlog scheduled to liquidate.

Mark Marinko, CFO

So as you look at Q2, we expect revenues to be – I was talking about earlier with the drydocks being similar as in Q1; the revenue would then fall close to the same number as Q1.

Jon Tanwanteng, Analyst

Okay, got it. I also wanted to clarify a comment you made earlier. I think you said you spent $1.5 million on the design of the new wind vessel, and that it was going to be close to that for the year. Did I miss something for the spending on the design for the rest of the year? Or is there something else going on?

Mark Marinko, CFO

Yes. We spent $1 million in the first quarter with a total of $1.5 million expected for the year on the design.

Jon Tanwanteng, Analyst

Got it. And if you make a decision to move forward, does anything else fall into this year?

Mark Marinko, CFO

It depends on the timing of the decision. If we decide – it just depends on when we start construction. So at this point, I don’t have anything in expectations at this moment. But if we want to aim for a year-end 2023 delivery, we’ll have to start either late this year or at the latest, the first quarter of 2022.

Jon Tanwanteng, Analyst

Got it. Lasse, just one question for you on you said that the scale of the opportunity has increased quite a bit. Is one vessel actually enough to support that industry, or will those building these things have to rely on non-Jones Act vessels to do that? Is there an opportunity to build more if it’s really that big of an opportunity?

Lasse Petterson, CEO

Yes, we are – as there are no vessels in this market today, we are starting out with this first one, which is going to be a state-of-the-art vessel. It’s going to be the largest in that market. We are looking at starting with one vessel and then expanding to address the full market. I do believe if the Biden administration’s ambitions materialize, we will need more than one vessel; probably two to address the market, but it’s a ramp-up from 2024 and onwards. I think we have time to address that question.

Jon Tanwanteng, Analyst

Got it. Thank you very much, guys.

Mark Marinko, CFO

Thanks, Jon.

Operator, Operator

Thank you. Our next question comes from Poe Fratt with Noble Capital Markets. You may proceed with your question.

Poe Fratt, Analyst

Yes, thanks for the follow-up. I just had a quick question on Mark, that the refinancing you detailed; you’re potentially refinancing the full $325 million for eight years. Can you just talk about that in the context of how much cash you have on the balance sheet and your longer-term construction program that’s currently based on going forward on FID with the first offshore wind vessel should be in the $200 million range? It seems like you’re going to continue to be overcapitalized. Could you just talk about that sort of how you’re looking at the three- to five-year timeframe in terms of capital allocation?

Mark Marinko, CFO

Yes. As of today, we’ve got about $177 million at the end of this quarter. You do want to have some cash on the balance sheet for short-term needs. But as we talk about this first upper dredge, we have a second upper dredge option, which would be one potential use of cash. That second one, as we’ve mentioned earlier, would be a replacement for two older vessels. We would also look at the potential cutter market down the road. So there are multiple upcoming uses for that cash that aligns with our original strategy of capital allocation, first and foremost, refreshing the fleet. We are also interested in programs like the share repurchase program. If we put another one in place, if we think our stock is undervalued, we would definitely be open to doing that as we did last year. So there are plenty of upcoming uses for that cash.

Poe Fratt, Analyst

Okay, great. Thank you. And then in the context, what’s the working estimate right now for the first offshore wind vessel? Is that still in the $100 million to $120 million range of costs?

Lasse Petterson, CEO

I think the cost of the offshore wind vessel will be somewhere in the range of $140 million to $160 million. Those are the estimates that we have been basing our calculations on. That’s what we get from the market when we go out to the yards.

Poe Fratt, Analyst

Okay. Maybe a little bit higher than like six months ago, Lasse.

Lasse Petterson, CEO

No, it’s always been in that range. At least in my calculations, it’s always been in that range, and this is a larger vessel than the upper dredge that we are building; it's complicated.

Operator, Operator

Thank you. I’m not sure if there are any further questions at this time. I would now like to turn the call back over to Tina Baginskis for any further remarks.

Tina Baginskis, Director of Investor Relations

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

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.