Great Lakes Dredge & Dock Q4 2023 Earnings Call Transcript

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February 14, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q4 2023 Great Lakes Tredge and Dot 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 Please be advised today's conference is being recorded. I would now like to introduce your host for today's conference, Ms.

Operator

Tina Pagisakis, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to our Q4 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 and the year, then Scott will continue with an update on our financial results for the quarter and the year. 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 expected, 2023 was a year of positive transition from the difficult 2022, And we ended the year strong with improved performance, stronger financial results and a record backlog of 1,040,000,000 which does not include approximately $179,000,000 of low bids and options pending award and approximately $44,000,000 of performance obligations related to offshore wind contracts. The bid market gained momentum throughout the course of the year in our preferred port deepening and coastal protection markets. We ended the year with 71% of our backlog in capital projects with 4 major awards, including the Freeport deepening projects, The Cepri Natchez Waterway Channel Improvement Project and 2 large port deepening projects related to liquefied natural gas LNG projects, the Port Arthur LNG gas LNG projects, the Port Arthur LNG Phase 1 and the NextDecade Corporation Rio Grande LNG projects. The latter is the largest project ever undertaken by Great Lakes.

Speaker 2

These two projects are not impacted by the recent White House announcements regarding a pause on new LNG export projects permitting. As we have navigated the challenging market conditions in 2022 and 2023, we have remained focused on staying a competitive market leader For the long term, we have implemented cost reductions initiatives, including strong reductions in our G and A and overhead cost structures, And we are modernizing our fleet with our ongoing newbuild program and retirement of older less productive dredges such as the Terrapin Island in 2022 and the Dredge 53 in 2023. We have now taken delivery on our newest 6,500 Cubic Yard capacity hopper dredge, the Gabeston Island, and we did that in December last year. Our sister ship, the Amelia Island, is expected to be delivered in 2025. Also in 2023, we took delivery of our 2 multicast, the Cap Hatteras and the Cape Canaveral, which will now be efficient tools for mobilizing and demobilizing of pipelines as well as general operation support.

Speaker 2

And we took delivery of 3 new Scouse replacing older equipment last year. Towards the end of 2023, the offshore wind markets started to see growing pains. We saw several cancellations by developers of power purchase agreements or PPAs that were entered into in 2018 2019 Before COVID, inflation and interest rates increases were a reality. The East Coast states also continue to invite new bids for new PPAs, which included the opportunity to increase the base rates to the new realities and to include inflation adjustments going forward. Our clients, the Equinor BP Joint Venture, decided to reset the plan for Empire Wind 2, Wind Farm and to cancel our rock installation contract scheduled for 2026.

Speaker 2

Equinor is continuing the Empire 1 development as previously planned, and we will have the opportunity to retender the Empire Wind 2 contract when Equinor rebids their PPA for this development. In December of 'twenty three, We were awarded a new rock installation contract to perform rock protection over subsea power cables, a new utilization for this vessel on an offshore wind project off the East Coast of the United States. Going forward, we continue To pursue and bid a number of other offshore wind farm projects, both domestically and internationally, with rock installations planned for 2026 and beyond. We believe the offshore wind market, power generation market offers Great Lakes a strong opportunity for growth in a rapidly growing market, which also provides us with an opportunity to diversify our business and our client base. And I'll now turn the call over to Scott to further discuss the results for the quarter and I'll provide further commentary around the market and our business.

Speaker 3

Thank you, Lasse, and good morning, everyone. I'll start by walking through the Q4, which resulted in the strongest EBITDA quarter we've had since the end of 2021. For the Q4 of 2023, revenues were $181,700,000 net income was $21,600,000 and adjusted EBITDA was $40,800,000 Revenues of $181,700,000 in the Q4 of 2023 increased $35,100,000 from the prior year Q4, primarily due to higher utilization and higher coastal protection, maintenance and offshore wind revenues offset partially by a decrease in Rivers and Lakes project revenue. Current quarter gross profit and gross profit margin increased to $38,700,000 and 21.3% respectively compared to negative $16,200,000 and negative 11% in the Q4 of 2022. The increase in gross margin is primarily due to improved project performance, utilization and approximately $20,000,000 of lower operating costs due to our continued focus on cost reductions and efficiencies.

Speaker 3

4th quarter 2023 G and A of $15,400,000 is $3,000,000 higher than the same quarter last year, primarily due to higher incentive and severance pay in the current year quarter, partially offset by our continued cost cutting initiatives. Current quarter's operating income of $30,500,000 improved $67,200,000 from the prior year's quarter operating loss of $36,700,000 driven by the improved gross profit, a $7,400,000 gain related to the recently terminated offshore wind contract and the non repeating Q4 2022 write down of the Hopper Dredge Terrapin Island after she was retired, partially offset by the previously discussed increase in G and A. Net interest expense of $2,800,000 for the Q4 2023 was down from $3,100,000 in the Q4 of 2022, primarily due to an increase in capitalized interest related to our new build program, partially offset by current quarter revolver interest expense. 4th quarter 2023 net income tax expense of $6,200,000 compared to an 8,400,000 dollar net income tax benefit in the same quarter of 2022 is driven by the higher current quarter income. Rounding out the P and L, net income for the Q4 2023 was $21,600,000 up from a $31,200,000 net loss in the prior year quarter.

Speaker 3

Turning now to our full year results. Revenue for 2023 was $589,600,000 net income was $13,900,000 and adjusted EBITDA was $73,000,000 Despite a $59,200,000 decrease in year over year revenue, Gross profit margin increased from 4.8 percent to 13.2 percent. Net income increased $48,000,000 And adjusted EBITDA increased $56,000,000 driven by stronger project performance and improved efficiencies. Turning to our balance sheet, we ended 2023 with $22,800,000 in cash $90,000,000 drawn on our $300,000,000 revolver, which doesn't mature until the Q3 of 2027. So far this year, We have paid down $15,000,000 and currently have $75,000,000 drawn against the revolver.

Speaker 3

During the Q4, we closed on a sale leaseback of various support equipment, bringing in approximately $29,000,000 of cash. Total capital expenditures for 2023 were $144,800,000 which includes $64,500,000 for the construction of the Subsea Rock installation vessel, the Acadia, dollars 36,300,000 for the Amelia Island, $24,800,000 for the Galveston Island, dollars 9,200,000 for our recently delivered multicats and $10,000,000 for maintenance CapEx. As previously discussed, a little over a year ago, with the Maritime Administration or MARAD for Title XI financing on our new vessel, the Acadia. The recent offshore wind headlines, including the canceled PPAs Lasse discussed earlier, has slowed down the progress of our Title XI application. While we continue our conversations with Murad, we have shifted our focus and are actively pursuing other financing that can either be a bridge to a Title 11 loan or the primary funding source to support and complete our new build program.

Speaker 3

These discussions are progressing quickly and I am confident we are on a good path to secure additional financing soon. I will provide updates in the future as appropriate. Looking forward to 20 Approximately 60% of our $1,000,000,000 backlog to be converted into revenue during the year. This can fluctuate higher or lower as vessel schedules adjust throughout the year. We currently have 3 regulatory drydocking planned for 2024, subject to change.

Speaker 3

We expect full year 2024 capital expenditures to be between $170,000,000 includes approximately $20,000,000 of maintenance CapEx. The timing of these payments is dependent on when certain milestones are reached on the new bills, But we expect the heaviest spend to occur in the middle of the year. Looking towards the Q1, We have 2 dredges beginning the regulatory dry docking that will continue into the Q2. Partially offsetting those down days is the addition of the Galveston Island, which began operations earlier this month. With that, I'll turn the call back to Lasse for his remarks on the outlook moving forward.

Speaker 2

Thank you, Scott. The U. S. Dredging bid market for 2023 was at a record 2,800,000,000 of which Great Lakes won 46%. This include the over $500,000,000 of capital port deepening projects for LNG developments that Great Lakes Voice award.

Speaker 2

We continue to see strong support from the administration and Congress for infrastructure developments, including new maritime and port deepening, widening and maintenance projects requiring dredging. In March of 'twenty three, President Biden released the President's fiscal year 2024 executive budget. The proposed amount for the U. S. Army Corps of Engineers was $7,400,000,000 which is a record amount for a President's budget.

Speaker 2

And in June of 'twenty three, the House proposed an increased 2024 budget of $9,600,000,000 for the quarter, which is $910,000,000 above the fiscal year 20 And in July of 'twenty three, the Senate Committee for Appropriations passed the budget, which includes $8,900,000,000 for the core. This proposed budget is expected to provide for a strong 2024 U. S. Army Corps of Engineers bid market, and we expect budgeted appropriations to support the funding of several previously delayed phases of capital port improvement projects, including for the ports of Sabine, Houston and Mobile, which is expected to bid in the first half of twenty twenty four. Currently, the government is continuing is operating under a continuing resolution until the budget is approved, which we hope is done in March of this year.

Speaker 2

As stated earlier, towards the end of 2023, the offshore wind market started to see growing pains. However, the long term outlook for the offshore wind market continues to be strong in the U. S. And international with global installed offshore wind power generation capacity targeted to reach 2 60 gigawatts by 2,030, up from 40 gigawatts in operation in 2020. And in the U.

Speaker 2

S, the targets are for 50 gigawatts by 2,035. These are ambitious targets and it will challenge the existing supply chains at the same time as it provides strong growth opportunity for the industry. Although New York rejected the developers' request for adjustments to their existing PPAs, the state continues to take steps forward in meeting their renewable energy goals With the announcement in October last year of 3 new projects awarded For approximately 4 gigawatts of offshore wind power generation and a new accelerated 4th bid round for additional PPAs was announced for early 2024. Wynyard Wind, the 1st commercial scale offshore wind farm on the East Coast recently completed installation of the 1st offshore wind turbine, which on January 2 this year began delivering power to the New England grid. In addition, South Fork Wind, which will be the 1st offshore wind farm to supply power to the state of New York, has completed the installation of 2 of its 12 planned turbines, on which one currently is operational now in January.

Speaker 2

And recently, also in January, the New Jersey Board of Public Utilities selected 2 projects to deliver 3.7 gigawatt offshore wind power generation for the state. With these awards, New Jersey has now 5.2 gigawatts contracted out of its goal of 11 gigawatts by 2,040. Great Lakes has established a unique niche business position in the U. S. Offshore wind market, and we continue to pursue and tender bids both domestically and internationally on multiple offshore wind projects for the Acadia, the 1st and only Jones Ag compliant subsea rock installation vessel.

Speaker 2

We're also actively seeking for partners that share our ambition for growth in offshore wind and that will co invest in assets to address this rapidly growing market. In conclusion, our main focus this year was to keep managing through The barriers to channel since that the 2022 delayed bid market presented us, and we successfully delivered improved year over year results. And as we enter the New Year with a record backlog, improved fleet and a slimmer cost structure, We believe the company is positioned to deliver improved year over year results this year as well. And with that, I'll turn the call over for questions.

Operator

Thank And our first question is going to come from the line of Adam Solimer with Thompson Davis. Your line is open. Please go ahead.

Speaker 4

Hey, guys. Congrats on the strong Q4. That was great to see.

Speaker 2

Thank you.

Speaker 4

I actually wanted to start, why does the why did the merit timing shift? I was kind of curious about that from just from a couple of PPAs that kind of surprised me that that would matter that much. Well, let's start there. How about that?

Speaker 3

Yes. Good morning, Adam. So As you know, we've been talking to Murad now for over a year and our application has progressed. And as you saw a few months ago, we did kind of get to the final stage. However, as they were continuing their diligence during some of these negative headlines, It did change how they just look at the market in general today.

Speaker 3

There is a path for us to get something done now. It is not at terms that work for us. So I've been very transparent all along. We were not to put all of our eggs in the Murad basket and we're working a number of things in parallel. We will now action those.

Speaker 3

We will continue our dialogue with Murad. I do think there is a path to ultimately get there. But in the meantime, we'll secure the liquidity And hopefully be able to take it out at some point with Murad. If not, we're very comfortable that we're going to be in a very good liquidity position soon.

Speaker 4

Got it. Okay. That's fine. Just a little surprising on their from their perspective. Scott, how would you characterize Margins, the margins are real gross margin 21% in Q4.

Speaker 4

That was completely unaffected by The cancellation payments, that's a real number. How do you think that trends going forward?

Speaker 3

Yes. We started executing on the capital and coastal protection work during the Q4. We also though were benefited by not having any dry docks during the quarter. We got them all out during the 1st 3 quarters. So we had A pretty clean cost structure.

Speaker 3

As I mentioned, we do have 2 drydockings beginning this quarter and will go into the Q2. So as you know, that's kind of the double whammy, no revenue during that time and then the costs to do that. But This has been our expectation all along. When you have that proper mix of projects and the vessels are working and we execute in addition to the Cost reset that we have done on the fleet, we've been saying for the last year, we thought that we were on this path to normalcy in 24 and that's exactly how it's playing out.

Speaker 4

That's good to see. And then did you I guess it will be in the 10 ks, but did you guys give a figure for Percentage of backlog that will burn in 24?

Speaker 3

Yes, I said roughly 60%. But again, as you know, that can move left right as we adjust schedules throughout the year, but it's roughly 60%.

Speaker 4

All right. I'll turn it over. Great to see you. Thanks guys.

Operator

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Joe Gomez with NOBLE Capital. Your line is open. Please go ahead.

Speaker 5

Good morning. Thanks for taking my questions.

Speaker 3

Hey, good morning, Joe.

Speaker 5

So I just wanted to kind of get on Your expectations for the quarter, I mean, it was really good. But on the revenue side, it seemed a little light. In the Hugh, you mentioned you should have burned about 19% of the dredging backlog in the Q4, which would have been about $190,000,000 plus Was there some weather issues there, some projects that may have been delayed? And kind of at the same time, On the capital projects, revenue was up about $7,000,000 sequentially, it's kind of flat year over year. I was thinking maybe we would have been for a little bit higher run rate on the capital projects.

Speaker 5

Is there anything particular there that might have reduced the revenue growth on that segment?

Speaker 3

No, the big driver of the revenue you were expecting compared to what came in is really driven by some subcontractor work on the LNG project. It is now underway. We had thought it would start Earlier in the Q4, it started later. That's really what's driving it. And you're right, the capital revenue was relatively flat, But the coastal protection was way up and those also have very solid margins.

Speaker 3

And of the so the capital work now will getting executed of the just over $1,000,000,000 backlog, 71% of that backlog is made up of capital projects.

Speaker 5

Okay. Thanks for that. And on the termination of the rock contract, obviously, you got, I think, was it 7 point $4,000,000 Is there anything more there or is that all that you will get from that?

Speaker 3

So You may have noticed, Joe, in the press release when we broke out revenue that there was an additional roughly $2,500,000 of revenue That is related to engineering and project management services that had already been performed on Empire II prior to the date of termination. So once it was terminated, we went ahead and booked that. So all in all, for Empire II between termination and the services previously before, it's roughly $10,000,000 And we do have similar constructs on our other two contracts related. There are some services that do occur before we lay rock.

Speaker 5

Okay. And one last one for me, if I may, I'll get back in queue. You entered again some additional asset sales in the quarter. You said you raised $29,000,000 of cash. Do you see more of those here in 2024?

Speaker 5

Are you kind of through with the asset sales?

Speaker 3

Yes. It's a lever we can pull, Joe, but I don't foresee us Doing that, as I mentioned, we're progressing rather quickly, some longer term financing for the new build program. So I do not see us doing anything more like that in 2024.

Speaker 5

Great. Thanks for taking the questions.

Speaker 4

Thanks, Joe.

Operator

And one moment for our next question. And our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is open. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my questions and great quarter. Lasse, I was wondering if you could tell us if you guys internally have line of sight to full utilization on the Acadia in the 20 26 timeframe or if that's still to be determined and kind of how that scores of La Merit is thinking?

Speaker 2

Yes. The cancellations of these PPAs over the last, let's say, 6 months has pushed some of that revenue to the right. So what we are looking at is 'twenty five when the vessel comes out. The Empire Wind 1 is going to be and then we have an additional contract for 2026. Also the delays on these Other developments are pushing projects revenues or product opportunities from 2024 and 2025 into 2026 and 2027, but this remains to be seen.

Speaker 2

We are Looking for and bidding a number of projects starting in 'twenty six and for rock installation, But there is no firm commitments at this point in time. In parallel, we are looking at In international work, there is a good strong market in Europe that we are evaluating and that We may participate in this period.

Speaker 6

Okay, great. Thank you. And just relative to the 60% The backlog that you expect to book this year, can you remind me what your historical level of book and bill during the year is or book and burn kind of what you go and get within the year and revenue during the year?

Speaker 3

Yes. And John, I would say this year is going to just be a little atypical because of the large backlog that we have right now. So we don't have as much white space entering a year that we typically would with over $600,000,000 of 2024 revenue in the bank right now. So I wouldn't necessarily draw a parallel to prior years. I would say Typically, when we enter a year, we roughly have 60% like we do now of coverage, but it's on a much lower backlog.

Speaker 3

So again, the amount of white space we have in 2024 looks much different than it has historically.

Speaker 6

Okay, great. That's fair. And are there any remaining claims to be settled on all the projects?

Speaker 3

Nothing material. I'd say we clear out the big ones that we had previously talked about. And now it's just kind of the normal cadence that pops up, but really nothing of note to call out.

Speaker 6

Okay, great. And last one for me and I'll leave it at that. Just the year over year impact of dry docks, what do you expect that to be in 'twenty three versus I think you've disclosed the number, but I don't know if you have a revenue or EBITDA comparator and kind of how that flows through.

Speaker 3

No, I mean, just we're going to have 3 this year in 2024 that was comparable To what we had last year, so I would call it marginally a wash. I don't see Any big swings when it comes to dry docking 23 versus 2024.

Speaker 6

Okay, great. Thanks guys.

Operator

Thank you. And one moment for our next question. And our next question is going to come from the line of Brian Russo with Sidoti. Your line is open. Please go ahead.

Operator

Yes.

Speaker 7

Hi, good morning.

Speaker 4

Hey, good morning, Brian.

Speaker 7

Hey, so just back on the Q4, if you look at the EBITDA margin, excluding the gain, it was A little over 18%. When I look back at the Q4 for the years 2018 to 2021, It was about 16% to 21%. So right smack in the middle of that range, but that's despite The capital projects only generating 34% of the total 4Q revenue, which is below the 40% to 50% of the revenue in prior 4th quarters. So I'm just guessing, is this Q4 in your opinion considered normalized Or is it still below it's below the optimal kind of fifty-fifty mix that you guys target and we'll likely see in 2024 given the backlog profile?

Speaker 3

Yes, I'll reiterate what I said before. Q4 did not have any dry docks and as you know that does impact Margins, we'll take a vessel out and have the additional costs. But if I just look, not just look at for the whole year as opposed to quarter over quarter, We have that mix of backlog to get us to that, what we always aim for the high teens operating margin and that mid teens EBITDA. We are absolutely now setting ourselves up to return back to normal. And I would call that the normal margins that we strive to get.

Speaker 7

Okay, great. And The $44,000,000 of performance obligations that are excluded for the backlog for offshore wind, is that just Empire 1 Or is that also include the second contract that I guess is pending FID?

Speaker 3

It is not pending FID. It is a signed contract. It is included in there. Right now, we're under NDA to disclose who it's with, but no, that is a signed executed contract. We'll do that work right after we finish Empire 1 at the end of 2025.

Speaker 7

Okay, great. And just curious on your thoughts. We've seen a lot of Consolidation in terms of project developer ownership of offshore Wind projects, we also saw utilities sell their stake last night to Global Infrastructure Fund. And I'm just curious, is Great Lakes even better positioned now as a preferred vendor Of the consolidated ownership of these projects, just wondering what your kind of general thoughts are there?

Speaker 2

Well, the general thought is that what we are doing is to The ownership structure is really changing a lot over the couple of months. But what we've seen is that Equinor has and BP has parted ways. And Equinor is continuing with the EMPOWAR Wind 1 and they are reevaluating EMPOW Wind 2. BP is looking at The Beacon Wind 1 and 2, and we probably will see that come to the forefront to the end of the decade. It's good to see strong companies such as BlackRock getting behind some of these developments.

Speaker 2

It's huge capital outlays for them developing the offshore wind field. So when stronger companies are coming into the market, we see that as positive. But in general, we know the developers. We have good contacts with all of them. And with the Arcadia being The Jones Act compliant vessel, we are very optimistic about the utilization and her engagement throughout the coming years.

Speaker 7

Okay, great. And then just lastly, when we look at 2024 and into 2025, just your CapEx profile and as the New vessel CapEx winds down. There seems to be an inflection point, right, as CapEx winds down, your operating cash flow is normalized and is growing. We should start to see that inflection point kind of accelerate towards the end of or the middle towards the end of 2025. Is that kind of a fair statement when we look over the next 18 to 24 months?

Speaker 4

Yes,

Speaker 3

that's right, Brian. 25, we'll be finishing up the Acadia and Amelia Island, but the CapEx, as you said, will be winding down. One of the Advantages of having new vessels is that it keeps your maintenance CapEx down from where we historically were. So yes, you're thinking about that right. We've said all along, we had this big cash outflow as we build for the future that would wind down 25 and then we'd quickly start building up the coffers again.

Speaker 7

Okay, great. Thank you very much.

Operator

Thank you. And I would like to hand the conference back over to Tina Baginskas 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 about the important developments and initiatives in our business. We look forward to speaking with you during our next earnings discussion. Thank you.

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Great Lakes Dredge & Dock Q4 2023
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