Great Lakes Dredge & Dock Corporation (GLDD) on Q1 2021 Results - Earnings Call Transcript
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: 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: 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 post 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 has 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. And it also pushed revenue from the first quarter into remaining quarters of 2021. Today, the projects and vessels that were impacted are back in operation and with our solid backlog, vaccinations increasing, and stronger performance expectations in the third and fourth quarter, we do not see adjusting our full year expectations at this time. Vaccinations now become available to all age groups. We have initiated an extensive effort of communication and education about crews and staff. We encourage them to get vaccinated as early as possible to keep themselves the fellow workers, family, and friends safe and be part of the effort to stop the pandemic and hinder new strains of the virus developing and spreading.
Mark Marinko: 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 first quarter of 2021. Lower revenue in the first quarter of 2021 was due to lower 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 in last year’s first quarter there were 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 had an unfavorable impact of $4.3 million on gross profit 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 that were impacted directly by COVID delays equated to $3.9 million of revenue and $1.2 million of gross margin that we expect to recoup later this year. Also 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, which is 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. The increase in general and administrative expenses for the quarter was due to higher relocation expense in the current year related to regional office and headquarter 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. Income for the first quarter of 2021 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: Yes. As our country is still facing the challenges of COVID-19, the dredging industry deemed as an essential service continue to operate on work on critical and needed infrastructure projects. The U.S. Army Corps of Engineers oversee 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, coastal protection on 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 be 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 deepenings in Corpus Christi, Norfolk and in Houston for the Houston ship channel expansion. And 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 adds to the recurring nature of our business and the need for more frequent coastal protection and port maintenance projects.
Operator: Thank you. Our first question comes from Jon Tanwanteng with CJS Securities. You may proceed with your question.
Jon Tanwanteng:
Mark Marinko: Yes. So there’s – we had some dry docks extended, some equipment repairs we needed to do. From an EBITDA perspective and 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: Okay, got it. And does that pull forward any expenses from future quarters at all or is that was all just emergency.
Mark Marinko: Could you say that again, Jon, sorry.
Jon Tanwanteng: I’m sorry. Did that pull forward any work from future quarter or was that all due to unexpected repairs and maintenance?
Mark Marinko: No, we didn’t pull forward anything from Q2 in the first quarter.
Jon Tanwanteng: Okay. Got it. And then just looking for the year, last year you mentioned, you didn’t have any change to your full year expectation. 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: No, it goes to our expectations for earnings. So we do see this a quarter as exceptional. We were heavily impacted from COVID and the infections and the off higher of our vessels and the schedule impact. And when you have these delays, the direct cost is something that you can estimate, but there is productivity impacts and other effects of these delays, which is 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 the ones who are positive to receive the vaccination. And I think by the end of second quarter, we’ll be at a stage where we have this vaccination up to the majority of our personnel, which then should for the remainder of the year eliminate that type of impact. And we have a strong backlog and I’m confident in our ability to perform the work that was being delayed from first quarter and also to our performance in the remain a quarters of the…
Jon Tanwanteng: Got it. And then just one question on the wind energy opportunity, I actually have the two-part question. One, can you talk about the discussion 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 that changes the return profile at all.
Lasse Petterson: I assume the latter question relates to offshore wind. But yes, we – 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 also from the first year installation contractors. And we are looking at participating and bidding for the upcoming wind developments that are now happening in 2020 or the construction phase in 2024, 2025, 2026. And 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 was at 10 gigawatts. And now the ambitions are increased by 200%. And hopefully, the majority of that is coming to fruition. So that should be a very strong market here for our services. We are in dialogue with both the developers and also with the first year installation contractors for our services. So it’s developing very nicely.
Jon Tanwanteng: Got it. And just on the ship construction costs and the potential return on the vessel.
Lasse Petterson: Well, we haven’t changed our expectation for the return on the vessel. As you know, steel prices had gone up somewhat here as all commodity prices has over the last six months. But we haven’t adjusted the estimate for the construction cost of the vessel as of today.
Jon Tanwanteng: Okay, got it. Thank you. I’ll jump back in queue.
Operator: Thank you. Our next question comes from Poe Fratt with Noble Capital Markets. You may proceed with your question.
Poe Fratt: Great. Good morning, Lasse. And good morning, Mark. Just to clarify, Mark, on the $6 million to $8 million of 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 unexpected costs. Or is there a lesser part that was unexpected?
Mark Marinko: No, there was – I hope I answered your question, but the $6 million to $8 million I’m talking about was the dry – some of the dry docks were longer than we expected. So that delayed our opportunity to earn money as long as the costs that – on top of the costs that were in there. So this would all be money that we expected, it absent the extended dry docks and absent the unplanned downtime.
Poe Fratt: And then when you highlight any downtime that you might have with your fleet for the rest of the year.
Mark Marinko: Yes, sure. So the number of dry dock days that we had in the first quarter planned you had some regulatory as well as unplanned. The second quarter is actually fairly similar to those number of days. And 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 lot stronger second half of the year than the first half of the year because of that. And on top of how other things, how the projects are scheduled.
Poe Fratt: 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: 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 2020. We expected the gross profit margin percentage to be a little bit lower than 2020 due to the really extraordinary performance we had in the first quarter of 2020. And they had G&A would be about $3 million higher and we were still at this point in time under those same expectations.
Poe Fratt: 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, and then including the money they expect to spend on hopper dredge and also the rock dumping barge.
Mark Marinko: Yes, sure. So we again – it’s the same that we talked about last quarter, $35 million of call it 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 $1.8 million on the multi-kit – I’m sorry, $18 million at one point, hey sorry about that, $18 million, sorry. That was in this 90 million range. I do want to add in the first quarter, we did do an $11 million lease buy out of an existing vessel the Terrapin. So, as we’re looking at the cash usage in first quarter that’s an important number.
Poe Fratt: Yes. You sort of preempted my next question, which is if you could do a cash walk, it looked like cash, death 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? You said $11 million on lease buyout, but yeah – any other…
Mark Marinko: Yes, sure. So it was $16 million in CapEx plus the $11 million in the lease buyout. And then you had on the working capital side $32 million if add – and then if so, 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 are seasonality, but there was $1 – $4 million payment we’re expecting that ended up coming in early April. But there was $26 million there and $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 that are our main drivers of the cash change in the quarter.
Poe Fratt: 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 it 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 to.
Mark Marinko: At this point we expect to just refinance $325 million, the market is still favorable. We do if we were to go today, we expect it to be below 6%, 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, 11 days away. And on your second question on the stock buyback yet, yeah. We’ll so that’s stock buyback has just actually expired. So we will again look at any opportunity where we think the stock is undervalued and we will make the appropriate moves as we did last August.
Poe Fratt: Great. And lastly, you highlighted that, there were a couple of big projects coming up, whether it’s Corpus or Houston or Boston or Norfolk. Can you quantify those and then also maybe, quantify some of the other state level projects that you might be competing on over the next couple of quarters, like, we’re going in the Louisiana.
Lasse Petterson: Yes. When we look at our, let’s say, a crystal ball here for projects. We are looking at the Corps of Engineers bid list. And if we pick the largest projects, let’s say the 12, 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. And clearly, there are some large bids for the marsh creation, which is bidding here in the second quarter. Corpus Christi, we are expecting that that’s the phase 3 of that project to bid in the second quarter. There are some workup on the East Coast and New Jersey was also bit a second quarter and then we have quite a lot of bid activity in the third quarter with shoreline stabilization projects and some deepening projects.
Poe Fratt: 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 penny, the award number that you could share with us?
Lasse Petterson: Do we have that point?
Mark Marinko: Yes. So 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. So if you add this, I’m trying to – what date do you want as of today? Because some thumbs have been awarded, right? So but a year-end over $500 million.
Poe Fratt: 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: Yeah. So, you know, the wins that were post get the Memphis rental and Captiva as you mentioned, where the two wins that were posted March 31 and then we had about $90 million of awards that were low bid before March 31 that were awarded post 3/31. And so between the two that were wins that was Memphis and Captiva, the total that’s about $39 million, almost $40 million.
Poe Fratt: Okay, great. Thank you so much.
Mark Marinko: Sure.
Operator: Thank you. Our next question comes from DeForest Hinman with Walthausen. You may proceed with your question.
DeForest Hinman: 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 secured, unsecured, early call provisions if we made a decision never to pay that off early. Any color there would be helpful.
Mark Marinko: Yes. Good question, DeForest. Yes, the – from where we – when we last launch season 2017, obviously our credit ratings improved in and we are seeing in the covenants much more favorable terms there, 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 our – it’s an eight-year tenure. So longer liquidity than the old one at five years with a no call three.
DeForest Hinman: 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 that could be provided by the government to fund the construction of the Jones built vessel?
Lasse Petterson: Yes. We have been investigating that on maybe Mark and give an update on that.
Mark Marinko: Yes. We’ve had a even before the recent news that the Biden administration talked about that last dimension, we did have conversation with the Department of Energy and they have loan programs related to new innovation and items that support renewable energy. And we had some favorable early conversations with them. This was a few months back. And yes, you – it looks like we could get more favorable financing than maybe you’d see in the general commercial markets.
DeForest Hinman: I mean can you expand on that in any way? Is it – would that be a very long-term financing coupled with an attractive interest rate? How would that work?
Mark Marinko: Yes, it’s a – you actually can 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 then the rate is a floating rate based on your credit rating, a LIBOR plus a number based on your credit rating, but 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: Okay. And then separately going on post question on the backlog with these very 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 will be able to disclose in our filings?
Lasse Petterson: Yes. What needs to happen is that the developer all the LNG facilities goes to definitive FID. So the final investment decision, we have been picked as their partners to execute the work when they go for FID. So the contracts are negotiated and they’re ready to go, but we are waiting for that final FID. And there I think the thing that needs to happen is that there’ll be some stabilization in the oil and gas market on some stable LNG prices, which we do see these days and based upon some more stability and higher LNG prices, there will be a possibility then for the developer to enter into longer-term delivery contracts. And when that is in place for the financing, then the FID goes ahead.
DeForest Hinman: 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 a update there in terms of what you’re seeing. Any thoughts on repositioning any of the vessels in the foreign dredging markets.
Lasse Petterson: And we have done our restructuring in of our foreign market exposure. And we have sold off some older vessels in the Middle East. And we have repositioned two dredges back to the U.S. markets, which is very active. The international market is still depressed. And but as oil prices are starting to come back and there will be some more stability in the Middle East. You could see that market improving with what we do need to see these large land reclamation or major infrastructure projects internationally go ahead, in order to get the international market back to where it was before 2014 and the oil price fall. So we are concentrating today on the U.S. domestic market, and also looking at the very promising offshore wind market coming to our shores. If the international market get back to its earliest strength, it’s a very attractive market when the activity is high and we know how to operate in the market. We’ve been doing this now for the last 25 years. Then we could go back to that market and participate. But at this point in time, it looks as bad as some years out.
DeForest Hinman: And maybe just some push that how many vessels are basically in those international geographies currently.
Lasse Petterson: Currently we do not have any vessels in the Middle East.
DeForest Hinman: Okay. Thank you.
Operator: Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. You may proceed with your questions.
Jon Tanwanteng: Hi Mark, I was just wondering if you could give a number for backlog schedule to liquidate in the quarter in Q2, number one. And then two, if there were any further COVID impacts that you saw so far into April and May.
Mark Marinko: Yes. So far, yes, the good news is that as that wave kind of slowdown and the third wave that we saw kind of January, February, we’re actually following kind of national trends and now things have stabilized as Lasse mentioned early all the vessels are back to work. And so at this point, it looks more favorable than it did in the first quarter. So that’s kind of the good news from a COVID impact. We still have some costs, but if we track as we are now, it wouldn’t be to the degree that we had in the first quarter.
Jon Tanwanteng: Got it. And the backlog schedule to liquidate.
Mark Marinko: So we – yes, as you look at Q2, we expect revenues to be – I was talking about a little earlier with the drydocks being similar as Q1, Q2 the revenue then would kind of fall close to the same number as Q1.
Jon Tanwanteng: 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 that’s going on…
Mark Marinko: 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: Okay. Got it. And if you make a – the decision to move forward is to do anything else it’ll fall into this year.
Mark Marinko: Depends on the timing of the decision, if we decide – yes, just depend when we start construction. So at this point, I don’t have anything in the expectations at this moment, but that if we to meet those loss, we’re saying, you know what year end 2023 delivery, we were going to have to start either kind of late this year, fourth quarter this year, or at the latest first quarter of 2022.
Jon Tanwanteng: Got it. Lasse just one question for you on you said that the scale of the opportunity as that was the increased by quite a bit. Is one vessel actually enough to support that industry or will people who are building these things have to rely on non-Jones Act by vessels in order to do that? Is there an opportunity to build more if it’s really that big of an opportunity?
Lasse Petterson: Yes, we are – as there is no vessels in this market today, we are starting out for this first one, which is going to be a state-of-the-art. It’s going to be the largest in that market. And we were looking at starting with one vessel and then expanding to address the full market. I do believe if the Biden administration’s ambitions is going to materialize. We do need more than one vessel even probably would have to have two to address the market, but it’s a ramp up from 2024 and onwards. So I think we have time to address that question.
Jon Tanwanteng: Got it. Thank you very much, guys.
Mark Marinko: Thanks, Jon.
Operator: Thank you. Our next question comes from Poe Fratt with Noble Capital Markets. You may proceed with your question.
Poe Fratt: Yes, thanks for the follow-up. I just had a quick question on Mark, that the refinancing you detailed that 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 programmed that’s right now 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 as far as sort of capital allocation.
Mark Marinko: Yes. So as today we’ve got these there were $177 million at the end of this quarter. You do want to obviously 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. And that second one, as we’ve mentioned earlier, would be what kind of replacement of two older vessels. And then we would also look at the potential cutter market down the road. So there are – this will stay with our original strategy that Lasse has played out of our capital allocation, first and foremost, refreshing the fleet. And then but we are also interested in these like the share repurchase program. So if we put another one in place, if we thought again our stock was undervalued. We would definitely be opens doing that again as we did last year. So there’s plenty of upcoming uses for that cash.
Poe Fratt: 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 that cost was sort of the working estimate?
Lasse Petterson: I think, well, what we said about the cost of the offshore wind vessel will be somewhere in the range of $140 million to $160 million in that range. Those are the estimates that we have been basing our calculations on. And that’s what we get from the market to when we go out to the yards.
Poe Fratt: Okay. Maybe a little bit higher than like a six months ago Lasse.
Lasse Petterson: No, it’s always been in that range at least in my calculations. And so it’s always been in that range and this is a larger vessel than the upper dredge that we are building a much larger vessel, but it’s – that’s complicated.
Poe Fratt: Okay. Great, thank you.
Operator: Thank you. I’m not show 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: 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: Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.
