Great Lakes Dredge & Dock Q1 2023 Earnings Call Transcript

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May 2, 2023

There are 7 speakers on the call.

Operator

Welcome to the Q1 2023 Great Lakes Dredge and Dock Corporation 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. To withdraw your question. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Tina Bighinskas, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to our Q1 2023 conference call. Joining me on this 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 market.

Speaker 1

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 ks 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.

Speaker 1

With that, I will turn the call over to Lasse.

Speaker 2

Thank you, Tina. As stated in our press release, we reported improved results in the Q1 of 2023. The company showed improvements in gross profit margins and Adjusted EBITDA compared to each of the prior three quarters. In this winter quarter, We continue to face weather challenges on projects in the Northeast. And as in the previous quarter, we had a lower than normal amount capital work due to the delay in the bid market for large port deepenings and coastal protection projects in 2022.

Speaker 2

We ended the quarter with revenues of $158,000,000 and an EBITDA of 10,200,000 Our fleet utilization in the Q1 was strong, but project revenues came primarily from maintenance projects, which typically provide lower margin work. Fortunately, we have started to see positive developments in 2023 with both a larger number of projects coming out to bid and a better mix of projects coming to the market. In the Q1 of 2023, We had a total bid market that reached over $300,000,000 which is approximately 125,000,000 greater than the Q1 of 2022, and we were low bidder on 41% of this market. We ended the quarter with $327,100,000 of dredging backlog, which does not include approximately $50,000,000 of performance obligation related to offshore wind contracts. And in addition, we ended the quarter with $516,900,000 in low bids and options pending award.

Speaker 2

Not included in the Q1 backlog numbers are 2 major projects on which we were the low bidder in early April, namely the Freeport deepening projects at around $160,000,000 and our coastal protection project in the Northeast at approximately $90,000,000 Assuming these two projects move forward to award in the 2nd quarter, we could see work commence in the second half of the year. It is positive that we have seen overall improvements in results in the Q1 and that bidding for large projects has started to pick up in 1st and second quarter. And with expected additional large projects going to bid for the remainder of the year. However, as new projects typically take 6 to 8 weeks from bidding to contract award and additionally minimum of 4 weeks to mobilize to site, we do expect in the short term to see some continuous slowness in project revenues as we will have some dredged and drydock and some lower fleet utilization in Q2 and Q3 and Q1. That's due to the slow bid market that we saw in 2022.

Speaker 2

In the last 6 months, we took swift and proactive action on cost reductions and fleet utilization adjustments. Last year, we retired the 42 year old hopper dredge for Terrapin Island, and we currently have cold stacked 2 major dredgers and various support equipment in anticipation of an improved dredging market in the second part of 2023 and onwards. Correspondingly, we have adjusted our G and A and administrative cost structure to reflect the changed market conditions. And earlier this year, we had a 10% reduction in SG and A and overhead staff, and we target a further 5% reduction in 2023 through natural attrition. As we adjust to the current market condition, we remain optimistic in the long term outlook for the treasury market and our ongoing fleet renewal program is part of our strategy to continue to be the U.

Speaker 2

S. Industry leader in our selected market segments. After decommissioning several of our oldest dredges in 2017, we have invested in productivity upgrades on our best performing vessels and our new hopper trench to Galveston Island is on budget and is expected to be operational in the 3rd quarter. And her sister ship, the Amelia Island, is expected to be delivered in 2025. We are also executing on our strategy to enter the fast growing U.

Speaker 2

S. Offshore wind market. Construction of our U. S. Flag Jones Act compliant inclined 4 Pipe Versal for subsea rock installation, which will be named Arcadia, is on budget and expected to be delivered and operational in the first half of twenty twenty five.

Speaker 2

Last year, Great Lakes was awarded its first rock installation contract for the Empire Wind 1 and 2 by Equinor and BP with installation windows in 20252026. And we are currently bidding rock installation on several other offshore wind farm projects with work planned for 2025 and beyond. 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.

Speaker 3

Thanks, Lasse, and good morning, everyone. For the Q1 of 2023, revenues were $158,000,000 net loss was $3,200,000 and adjusted EBITDA was $10,200,000 Revenue of $158,000,000 in the first quarter of 2023 decreased $36,300,000 from the prior year Q1. The lower revenue was primarily due to lower and Coastal Protection revenue offset partially by an increase in maintenance and Rivers and Lakes project revenue. Current quarter gross profit and gross profit margin was $12,100,000 7.7 percent compared to $33,100,000 17% respectively in the Q1 of 2022. Capital project revenue in the Q1 of 2023 was 1 third of the capital revenue earned in the Q1 of 2022 contributing to the decrease in margin.

Speaker 3

In addition, significant weather delays continue to severely impact a number of projects in the Northeast. Operating loss for the current quarter of $900,000 decrease from $18,800,000 of operating income from the prior year quarter. The decrease is a result of the lower gross margin offset slightly by lower G and A expenses compared to the prior year Q1. Q1 2023 G and A of $13,000,000 was $1,600,000 lower than the same quarter last year. The decrease in general and administrative expenses from the prior year was primarily due to lower relocation, leg recruiting and consulting expenses and our continued efforts on cost reduction.

Speaker 3

Net interest expense of $3,400,000 for the Q1 of 2023 was down from $4,000,000 in the Q1 of 2022, primarily due to an increase in capitalized interest on our newbuild program, partially offset by current quarter revolver interest expense. Q1 2023 income tax benefit of $800,000 compared to $3,300,000 of income tax expense from the same quarter of 2022 was driven by the lower current quarter income. Rounding out the P and L, net loss for the Q1 2023 was $3,200,000 down from $11,100,000 of net income in the prior year quarter. Overall, we saw significant improvements in the first quarter compared to the second half of twenty twenty two as the majority of our dredges were on projects the entire quarter with the exception of the Ohio, which was in the shipyard for most of the quarter performing a regulatory dry docking. Our cost savings initiatives also paid dividends as spend was down in most categories.

Speaker 3

Turning to our balance sheet, we ended the Q1 of 2023 with $32,500,000 in cash $50,000,000 drawn on our $300,000,000 revolver. Total capital expenditures for the Q1 of 2023 were $28,700,000 consisting of $10,400,000 for the Amelia Island, dollars 9,700,000 for the Galveston Island, $4,300,000 for the build of the SoCe Rock installation vessel, the Acadia and $4,300,000 for the construction of the multicats and maintenance CapEx. Previous full year CapEx guidance of approximately $175,000,000 remains unchanged. As discussed last quarter, in January of this year, we applied with the Maritime Administration or Department of Transportation for Title XI financing on our new wind vessel, which typically comes with very attractive terms. The review process, which can take up to 9 months is moving as expected, but in parallel, we continue to explore other sources of capital.

Speaker 3

As Lasse mentioned, we entered the 2nd quarter with $327,000,000 of backlog, but due to the delays in port deepening projects bid in 2022, only $119,000,000 of our current backlog consists of capital projects. While capital backlog will increase significantly Upon the award of the Freeport job, we expect second and third quarter margins to be lower than normal due to the current mix of projects and backlog. We also have 2 dredges that will be in the shipyard for part of the second quarter undergoing the regulatory dry dockings and a third dredge that will enter the shipyard towards the end of the quarter for plant maintenance and repairs. We have no further regulatory drydocking plans for the remainder of the year. With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward.

Speaker 2

Thanks, Scott. We continue to see strong support from the Biden administration and Congress for infrastructure initiatives, including funding of ports and Protection Projects that require the use of dredging equipment. On December 29 last year, the Omniverse Appropriation Bill for fiscal year was signed into law, which included another record budget of $8,700,000,000 for the U. S. Army Corps of Engineers' Civil Works Program, of which $2,300,000,000 is provided from the Harvard Maintenance Trust Fund to maintain and modernize our nation's world.

Speaker 2

In addition, the Disaster Relief Supplemental Appropriations Act for fiscal year 2023 was approved, which include 1,500,000,000 for the Corps to make necessary repairs to infrastructure impacted by hurricanes and other natural disasters and to initiate beach renourishment projects that will increase coastal resiliency. The increased budgets and additional funding support our expectation for a stronger bid market and dredging market in 2023 2024. We expect these budgeted appropriations to support the funding of several delayed capital quarter improvement projects, including Sabine, Houston, Corpus Christi, San Juan and additional phases of Norfolk. Although the core was significantly delayed in bidding these capital projects in 2022. The 1st 4 months of 2023 has already seen bids for the port deepening projects on Norfolk and Freeport, which we have won.

Speaker 2

Included in our low bids pending are 2 liquefied natural gas projects that has been waiting notice to proceed from our clients. Last month, FERC approved the Brownsville LNG projects for next decade to proceed, which will enable completion of financial Financing, followed by the issuance of EPC Construction and Dredging contracts. FERC also approved the Texas LNG project to proceed with potential final investment decision later this year. Earlier in the quarter, Sempra made a decision to proceed with the Port Arthur LNG facility and bids for dredging service are expected to be decided in the next few months. Based on this recent positive news, we are optimistic that dredging on 1 or 2 LNG projects would start in the second half of the year and dredging to continue throughout 2024.

Speaker 2

In March 2023, President Biden released the President's fiscal year 2024. This is the starting point for negotiations in Congress or what will eventually become the actual federal spending figures. And the proposed amount for the core is targeted at $7,400,000,000 which is a record amount for the President's budget. And we are hopeful that in line with recent history, Congress will increase the course budget for fiscal year 2024 when it is passed. At the end of 2022, the Water Resource Development Act of 2022, the VERDA 22, was approved by Congress and signed into law by of course projects for flood and hurricane protection, dredging, ecosystem restoration and other construction projects.

Speaker 2

The law features, among many other things, authorized for amongst other things, the New York and New Jersey shipping Tunnel to be deep into 55 feet, estimated at $6,000,000,000 as well as the Coastal Texas Protection and Restoration Program estimated at $34,000,000,000 which includes Dune and Marsh restoration to sites safeguard at Texas Gulf Coast from hurricane surges. In 2021, the current administration announced an ambitious goal of 30 gigawatts of offshore wind power generation installed by 2,030 and provided $3,000,000,000 in federal loan guarantees for offshore wind projects. As stated previously, Equinor and BP has already awarded Great Lakes to the rock installation contract for the Empire Wind 12. We have tendered and are in discussions with several other wind farm developers for projects commencing rock placement in 2025 beyond to ensure that we have a good the various challenges that the delayed bid market in 2022 has presented us with and with the goal of delivering improved year over year results. Combined with the delivery of the Galveston Island and the cost reduction and operational improvements initiatives we have in place, we are confident we can continue to manage through the current difficult market situation and return to a more normal operating conditions toward the end of this year and beyond.

Speaker 2

And with that, I'll turn the call over for questions.

Operator

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

Speaker 4

Good morning. Thanks for taking my questions.

Speaker 3

Hey, Joe.

Speaker 4

So I wanted to start a little bit on The competitive environment, looking at some of the awards that The DoD releases, it looks like Dutra got a $68,000,000 award for Norfolk, Got Cashman and got a big one in Baltimore. Some other ones, obviously, we saw in the last week Galveston Harbor for you guys. Just a little bit more if you touch on what that competitive environment looks like today and Seeing these awards coming out, it seems to be a fair number of them going to some of the smaller participants. Are you guys getting a indication from the core that they're looking to kind of spread out some more of the bids to some of the smaller companies out there? Or is it still just normal operating environment on that side and it's just they happen to have been awarded those bids?

Speaker 2

Yes. I guess the question is, if there is a conscious policy from the Army Corps of Engineers to spread out the bids to smaller contractors. And there is no change in their way of contracting out this work. Larger projects are normally split into 1, 2, 3, 4, 5, 6 different phases For two reasons. 1 is to, as they say, increase competition on these bids because If they awarded a large contract, it will probably just be the Great Lakes and potentially weeks who could bid those projects.

Speaker 2

And secondly, it has to also correspond to the Omnicorp Engineers budgets for that fiscal year. But there's no change in the way that they are bidding out the work in that respect.

Speaker 4

Okay. Okay. Thanks for that. And we've talked in the past last year about those 3 large projects that you had some unusual claims on. Maybe you could give us a little update on where we stand on those claims resolutions?

Speaker 3

Yes, Joe. So yes, as you recall, we did decide to call out 3 because they were unusually large in the scope of claims that we typically see. Not much different from what I said last quarter. The 2 larger ones are moving through. We have not changed the way that we feel about those and Think that those look to get resolved in Q2, if not early Q3.

Speaker 3

So they're moving as expected. As I warned last year, these things just take some time to go through, but it's moving as expected. And then as I mentioned, the third one, which is the smaller of the 3 is a project that is not done yet and it is not a core job and our expectations are that one is going to take a little longer to resolve.

Speaker 4

Okay. And maybe on the capital expenditures, I was kind of surprised. I think If I heard you correctly, pardon me, you did $28,000,000 $29,000,000 of CapEx in the quarter and last You were looking more for that $70,000,000 to $75,000,000 in the Q1. And I know things shift around, That's a pretty big delta there. Maybe you could give us a little more color on the CapEx.

Speaker 3

Yes. And it's exactly what I warned last year, we were in the midst of progress payments on the new builds. They're big payments. And if you have 1 or 2 of those slip a few weeks, it goes from Q1 to Q2. So as I mentioned, our $175,000,000 that we guided at the beginning of the year total CapEx that doesn't change.

Speaker 3

Again, it's just timing. These things do naturally move to the left and to the right a few weeks.

Speaker 4

Okay. Fair enough. And maybe one more for me and then I'll let someone else ask. On the wind projects that you tendered bids on for additional work, any kind of timing as to when we might see some progress or some awards on that?

Speaker 2

Yes. The wind projects are moving forward. As I said, we already have are positioned on one of them for 2025 and 2026. In the marketplace, there has been A slight movement to the right on one of the projects that we have bid. And It's due to permitting, it's due to supply chain issues, it's due to changes in design on these wind projects where Everybody wants to have larger turbines in because that's the most economical solution.

Speaker 2

But we are We believe that one of these projects that we have tendered will be awarded also this year And then for execution potentially in 2025, 2026, 2027.

Speaker 4

Great. Thank you very much.

Speaker 5

Thank

Operator

you. Thank you. One moment for our next question. And our next question comes from Adam Thalhimer of Thompson Davis. Your line is open.

Speaker 6

Hey, good morning guys. Congrats on the improved results versus Q4. Hey. Good morning. Do you have any line because the bidding environment that you guys talked about is pretty compelling.

Speaker 6

Do you have any line of sight to bringing the cold stacked vessels back into service?

Speaker 2

Yes, we do. And We have to adjust our capacity that we have out there in the market to the bid market that we see. And we are Optimistic to bring those vessels back into operations as soon as we are now starting to work on these new projects that are coming in. So the answer is yes. We are that is our plan.

Speaker 6

Okay, good. That's what it sounded like. And then You said Q2, Q3 margins below normal. So my question is, what are you guys thinking about as a normal margin? And is there a chance that we that that's achievable as we look out to Q4?

Speaker 3

Yes. We've always said Normal does is in that high teens 20% range, but with the mix of projects that we have right now, It's just not going to be there. So even with this Freeport award, lots of said these jobs take some time to get started. We're probably full blown on that, possibly the end of Q3, but it's going to be Q4. I mentioned we're at $120,000,000 in change of capital backlog right now.

Speaker 3

This is the work we're going to be executing over the next two quarters. So I would not expect to see a huge deviation from what we saw this quarter on margins until we start executing on more capital work.

Speaker 6

Understood. Okay. And then utilization rate ticks down in Q2, up a little in Q3 and then up more in Q4?

Speaker 3

That sounds fair.

Speaker 5

What are your thoughts on kind

Speaker 6

of Q3 utilization versus Q1?

Speaker 3

Yes. I mean, so right now, there Still is some white space in Q1, but that's I mean in Q3, but that's not unusual. At the end of Q3, we still have some. As we see some of these projects We are seeing some book and burn coming out. We feel we will get those utilized again.

Speaker 3

I don't know how I'm going to compare it to Q1 right now, but we have a number of vessels that are already completely fully booked For the rest of the year, including Q3 and we have a little white space to fill, but we're not concerned about it at this point.

Speaker 6

Is it too early to start getting even more excited for 2024?

Speaker 2

Yes. It's interesting to look at this market even though it's quite depressing at times. When we as the largest dredging contractor in the U. S, Our focus has always been on the large and complex projects. And the bid delay from 2022, and I just want you to understand the dimensions here.

Speaker 2

It was a whole year's revenue of bid projects that got delayed from 'twenty two That is now coming out to bid in 'twenty three. And that had a significant impact on us. I'm very optimistic about, as I said on the last call, on our bid market here for 2023, the signs for Q1 What we see for Q2, Q3 looks very good, which then ends up with a very good 2024 when it comes to execution. So I'm optimistic. And with the development that we see on the LNG side, where we already have 2 projects, where we have negotiated contracts.

Speaker 2

One of them is most probably going to be executed late this year and onwards. And that is a good situation to look at.

Speaker 6

All right. Good color. Thanks a lot.

Operator

Thank you. One moment for our next question. And our next question comes from Jon Tanwanteng of CJS Securities. Your line is now open.

Speaker 5

Good morning. Thank you for taking my questions. I was wondering, What is the risk here from the debt limit if the U. S. Defaults and just the impact on budgets and government?

Speaker 5

How are you planning for that if something does happen?

Speaker 3

You're referencing the Title 11 financing that we're applying for?

Speaker 5

No, just the operation of the Army Corps and what happens if With their budget, sorry.

Speaker 2

Well, the debt limit, as we have seen in previous years, the politicians are Using this situation to negotiate a lot of different issues. I think the probability or my expectation is that So no, the debt limit will be raised and hence there is no impact on the financing of the U. S. Government. I do believe that the discussion that is coming up here towards the end of the year when it comes to approving the Federal Budget for 2024, you will see more of these discussions and potential continued resolution for a while as we I've seen in previous years.

Speaker 5

Okay, great. And then what are the other capital projects that could still make it into Q4 this year? You have some of the LNG projects that could start. You have Freeport. What else is in the pipeline that could actually still start this year and get that margin back up?

Speaker 2

Yes. There is we are hopeful that some of these coastal protection projects that was part of the supplemental funding could come to bid and be executed towards Q4. That is good work, good margin work, and we do those projects well. So in addition to the port deepening projects, the caution protection projects that was in that bill could come out and get executed in Q4.

Speaker 5

Okay, great. Scott, could you I don't know if you Could you give us a better cadence for the remaining capital spending in the year?

Speaker 3

Yes. Again, subject to slip to the left or the right a bit, but to round out roughly $175,000,000 Looking at about $55,000,000 each of Q2 and Q3 and then about $35,000,000 in Q4.

Speaker 5

Understood. Thank you. And then lastly, just looking at lower utilization in Q2, are you planning to stack coke stack more dredges or are you going to keep them hot, Just expecting a bit more work in Q3 and then going to Q4.

Speaker 3

Yes. I mean, we do have, as I mentioned, there is some white space to fill. We are going to be, as we mentioned, aggressive taking costs out and putting vessels on the dock if we do not see anything. So we'll continue to monitor that, but we are not going to keep spending money if we don't have clear visibility of a vessel quickly going to work. But as we have mentioned, we can get these things out of cold stacked very quickly and efficiently and bid them and get them to work.

Speaker 5

So as it stands now, you have 2 in storage and no plans to put anymore at this point?

Speaker 3

Yes, we'll monitor as we have vessels roll off of contract if we feel that there is something on the horizon for them or not, we'll make the call at that point. It's not We have to spend a lot of time planning to do. We can shut them off quickly and turn them back on just as quickly.

Speaker 5

Okay, fair enough. Thank you.

Operator

Thank you. I would now like to turn the conference back to Tina Bagdinskas for closing remarks.

Speaker 1

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.

Operator

This concludes today's conference call. Thank you for participating and you may now

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Great Lakes Dredge & Dock Q1 2023
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