Great Lakes Dredge & Dock Corp

NASDAQ:GLDD

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Q1 2024 Great Lakes Dredge & Dock Corp Earnings Call Conference Call. [Operator Instructions]

Please be advised that today's conference call is being recorded. I would now like to hand over the conference to our first speaker today, Tina Baginskis, Director of Investor Relations. Go ahead, Tina.

[Tina Baginskis, executive]

Thank you. Good morning, and welcome to our first quarter 2024 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, 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. 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 2023 Form 10-K 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.

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

[Lasse Petterson, executive]

Thank you, Tina. Great Lakes concluded the first quarter with good financial results, marking the best EBITDA quarter since the fourth quarter of 2021. During the quarter, the majority of our fleets were active on projects and performing well.

Additionally, our new hopper dredge, the Galveston Island was successfully commissioned and started operations contributing to the project performance in the first quarter. After suffering the after effects of COVID and delays in bidding on major projects from the core -- omnicore of engineers in the last 2 years, we are now back to more normal operations. In 2023, we secured five major project awards, including the Freeport Channel deepening project, the Sabine-Neches Waterway channel improvement project, the Port Arthur LNG Phase 1 channel improvement project and the Brownsville Ship Channel project for next decade Rio-grand LNG product. Subcontractor work to build and improve the containment areas has started on both LNG projects with main dredging operations expected to commence midyear of 2024.

In 2023, we were also awarded a large reservoir with Dredge project in Puerto Rico. We have mobilized our dredge and pipeline in the reservoir and dredging operations started during the second quarter. Our dredging backlog is strong. At the end of the quarter, it was $879 million with 77% of our backlog in capital projects. With a record 2024 U.S. Army Corp of Engineers budgets of $8.7 billion that was approved in the first quarter. The bid market is expected to be robust in the second and third quarters. providing us with a good opportunity to maintain a solid backdrop. Modernizing our fleet with our new build program is a key factor in continuing to be a competitive market leader for the long term.

We have made significant progress on our new program with the delivery of our newest mid-sized upper trench, the Galveston Island, which now is in operation and performing well. Her sister ship, the Amelia Island is expected to be delivered in 2025. In 2023, we were honored to have President Biden attend the steel-cutting ceremony for Great Lakes Offshore Wind Rock installation vessel, the Acadia. The Acadia is the first and only U.S. Flag [indiscernible] a compliant inclined for pipe vessel for subsea rock installation.

This month, we had achieved another significant milestone with her key laying at the [indiscernible] shipyard, marking the start of the assembly phase of the vessels construction. The Acadia's current schedule is to install rock foundations for Equinor's Empire win 1 in 2025 and rock protection for the subsea cables on Ørsted’s Sunrise project in 2026. In spite of the negative headlines on offshore wind in late 2023, we have this year seen new tendering rounds for power purchase agreements and offshore in leases. Our offshore wind initiative presents Great Lakes with a strong growth opportunity in a rapidly expanding industry, which will diversify our business activities and broaden our client base.

To support the newbuild program and provide additional liquidity for Great Lakes. In April, we entered into a $150 million second lien credit agreement with Guggenheim Credit Services. This also provides us with additional capacity to issue letter of credits for new tenders and contracts. As letters to credits are the most commonly required in oil and gas and offshore wind industries unlike the government works where performance bonds out of the preferred instruments.

I'll now turn the call over to Scott to further discuss the results of the quarter and provide more details on our financing, and then I'll provide some commentary around the market and our business.

[Scott Kornblau, executive]

Thank you, Lasse, and good morning, everyone. I'll start by walking through the first quarter, which resulted in the second consecutive quarter that EBITDA exceeded $40 million. In the first quarter, revenues were $198.7 million, net income was $21 million and adjusted EBITDA and adjusted EBITDA margin were $42.9 million and 22%, respectively.

Revenues of $198.7 million in the first quarter of 2024 increased $40.7 million from the prior year's first quarter primarily due to higher coastal protection revenue and higher capital revenue which more than doubled from the prior year quarter, aided by the startup of the Galveston Island, offset partially by a decrease in maintenance and rivers & lakes revenue.

Current quarter gross profit and gross profit margin increased to $45.6 million and 22.9% respectively, compared to $12.1 million and 7.7%, respectively, in the first quarter of 2023. The increase in gross margin is primarily due to improved utilization and project performance a larger number of high-margin capital projects and our continued focus on cost management. first quarter 2024 G&A of $16.1 million is $3.1 million higher than the same quarter last year, primarily due to higher employee benefit and incentive costs.

Net interest expense of $3.9 million for the first quarter 2024 was up from $3.4 million in the first quarter of 2023 primarily due to an increase in revolver borrowings during the current year's quarter. First quarter 2024 net income tax expense of $7 million compared to a $0.8 million of net income tax benefit in the same quarter of 2023 is driven by the higher current quarter income. Rounding out the P&L, net income for the first quarter of 2024 was $21 million up from a $3.2 million net loss in the prior year quarter.

Turning to our balance sheet. We ended the first quarter with $22.8 million in cash and $60 million drawn on our $300 million revolver, which doesn't mature until the third quarter of 2027 and as Lasse mentioned, in April, we closed on a 5-year $150 million second lien term loan, of which $100 million was funded at closing and $50 million is available on a delayed draw basis for a year. With the term loan proceeds, we fully paid off the revolver and are currently sitting with liquidity of over $325 million.

With this financing, our weighted average interest rate on our total debt is 7% with no maturities until 2029. We are now well positioned to complete our new build program with plenty of additional liquidity while maintaining the flexibility of pursuing alternative sources of financing, including Title XI. Total capital expenditures for the first quarter of 2024 were $13.5 million, made up of $7 million for the construction of the Subsea rock installation vessel the Acadia, $3.3 million for the completion of the Galveston Island, $700,000 for the Amelia Island and the remaining $2.5 million for maintenance and growth.

Full year CapEx guidance remains unchanged at between $170 million to $195 million, but can't change depending on timing of upcoming milestone payments. Looking forward to the second quarter, we expect utilization and revenue to decrease from the first quarter as two dredges will be undergoing regulatory dry dockings prior to commencing the LNG project in the middle of the year. This quarter, we will also begin a regulatory dry dock on a previously cold-stacked dredge and anticipation of work slated to commence towards the end of this year, and we will have another dredge down for about a month for planned maintenance.

The second quarter expected decrease in revenues and increase in costs compared to the first quarter is mostly related to the timing of dry docks and repairs. All of this was known and anticipated and doesn't change our view that 2024 will be a strong year and a return to normalcy anchored by a solid second half.

With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward.

[Lasse Petterson, executive]

Thank you, Scott. We continue to see strong support from the Biden administration and Congress for the dredging industry. In March, President Biden signed the energy and water appropriation build into law, which provides a record $8.7 billion in total funded for the U.S. Army Corps of Engineer’s for fiscal year 2024. The funding includes $5.6 billion for the core operations and maintenance work and $2.8 billion for the Harbor Maintenance Trust Fund to maintain and modernize our nation's water waste. In addition, $2.2 billion and flood and stone damage reduction were approved.

In addition, the Disaster Relief Supplemental Appropriation Act for fiscal year 2023 was approved, which includes $1.48 billion for the core to make necessary repairs to infrastructure impacted by hurricanes and other natural disasters and to initiate beach renourishment projects that will increase coastal resiliency. We expect this increased budget and additional funding to support a very strong bid market for 2024.

And as said before, we expect bidding to significantly increase in the second and third quarters and include the port deepening projects for Sabine and Mobile and a number of coastal protection and beach projects on the East Coast. The U.S. offshore wind market reached major milestones in the first quarter of 2024 with two commercial scale offshore wind farms becoming operational and supplying power to the grid in New York and Massachusetts. In February, the Vineyard Wind project of Martha’s Vineyard, completed installation of five turbines and supplying power to the New England grid while continuing to install additional turbines.

In March, we saw the completion of the landmark South Fork Wind project with all twelve offshore wind turbines constructed and the wind farm successfully delivered power to the Long Island and Rockaways. In an accelerated board bidding round in February of 2024, an additional 3 gigawatts of power awarded by New York. Empire Win 1 and Sunrise Wind were both awarded new powered offtake agreements as part of the latest New York solicitation round. Notably, Great Lakes has awarded Rock installation can have been awarded -- rock installation contracts for both projects, and we'll be using Acadia to protect and stabilize foundations and cables for those projects with a combined capacity of 1.7 gigawatts.

New Jersey awarded 3.7 gigawatts of PPAs in January of '24 with a fourth round of solicitation for up to 4 gigawatts on April 30. And the results of the earlier announced tri-state solicitation of 6 gigawatts or offshore wind as expected to be awarded in the third quarter of 2024. And then finally, New York State recently announced further plans for our fifth solicitation round for offshore wind after scrapping the fourth round after disputes related to the turbine supply.

Great Lakes has established a unique business position in the U.S. offshore wind market. And 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 onwards. So in conclusion, we entered the new year with a record backlog, providing us with a strong project pipeline. The outlook for the bid market remains promising and we have streamlined our cost structure. Our new build program is progressing and supported by solid liquidity. The first quarter results were very strong. So we are well positioned to deliver improved year-over-year results. And with that, I'll turn the call over for questions.

[Operator]

[Operator Instructions] Our first question comes from Joe Gomes with Noble Capital.

[Joseph Gomes, analyst]

The first question I want to ask on the Galveston Island, how much utilization did you get out of that in the first quarter?

[Lasse Petterson, executive]

Yes. She started operations in January. We were working her at the same time as we were doing commissioning and then she progressed to do each project on the East Coast. The exact utilization number I do not have. So if she was partially operational during the first quarter and our utilization is solid for the rest of the year.

[Joseph Gomes, analyst]

Great. And then you talked about the LNG project, subcontractor work is ongoing. Did you see any revenue in the first quarter from the LNG? Or do you -- is all that really kind of mid here and on?

[Scott Kornblau, executive]

Yes, Joe, we do book revenue when the subcontractor work starts, but the progression of subcontractor work is on the lower side of when we actually start dredging. So our expectation when those projects start in the middle of the year that we'll see a tick up in revenue related to those projects.

[Joseph Gomes, analyst]

Okay. And then you talked about the dry docking Originally, you're talking about vessels to be in dry docking beginning in Q1. Now it sounds like they've been pushed out to Q2. So was there anything behind that? Or just is that your typical just timing of when they could get in for dry docking?

[Scott Kornblau, executive]

Yes, that's exactly it. One of them did start in the first quarter and continued into the second quarter, just completed that one in the last week or so. The other one that we had anticipated to start in the first quarter had some additional work we were able to do in the quarter. So that got delayed to start in the second quarter and will run its duration for most of the second quarter, and then we'll be able to get ready for the LNG work, which should shortly start after that.

[Joseph Gomes, analyst]

Okay. Great. And one more for me, if I may. I'll get back in queue. You're talking a lot about the core budget and you think there should be some solid bidding going on and awarding in the second and third quarter. Do you see those contracts tending towards the bid in the book and burn type? Or do you still see some key capital project awards coming this year?

[Lasse Petterson, executive]

Yes. The bid market is improving and the deepening projects that are going on in the Gulf is now continuing well. There is several phases of Mobile, one that has been awarded. We see a second phase of Mobile also happening here in the second quarter. On the East Coast, there's a lot of coastal protection work. I think if you go back a couple of earnings calls, we were talking about that beach market being delayed, and those contracts are now coming out. .

So there's good bid opportunities on the East Coast and in the Gulf here in the next 2 quarters. We should be able to maintain a book and burn type of bidding, but that is difficult to say in with the exact numbers. But in general, the bid market looks strong for the next 2 quarters.

[Operator]

And our next question comes from John with CJS Securities.

[Jonathan Tanwanteng, analyst]

My first one is, could we possibly expect Q3 or Q4 to have performance similar to the one you just had? Or is there more white space to sell on the schedule or maybe more dry docking as we go through the year? Just any thoughts on how the second half might evolve?

[Scott Kornblau, executive]

Yes. So we will be executing a lot of the backlog that we have right now for the rest of this year, again, with the caveat on the second quarter, dry docks and repairs that I mentioned, we still have some white space to fill in the second half of the year.

But with the backlog we have, that number is fairly low. So again, we still work to win, but those 2 quarters are setting up to be a return to normalcy, what we've been preaching for the last year.

[Jonathan Tanwanteng, analyst]

Got it. And could you talk a little bit more about the domestic and international opportunities for the Acadia in '26 specifically? And if you're making progress towards filling the schedule for that year?

[Lasse Petterson, executive]

Yes. We have work -- the backlog is secured for 2025 when she comes out, '26, we see additional scopes coming out on the existing contracts. So that is developing for 2026. And then 2026 and '27 and '28. There is opportunities internationally, which we are looking at, at this point in time. At the same time, as you have seen, the bidding rounds and the PPA awards is quite fluid in the U.S. And some of the work that has been delayed is now being delayed into '26 and '27, and we just need to see how that pans out.

Clearly, Acadia is very competitive in the U.S. market. but we are also competitive on the -- in the international market due to our unique attributes. So we are working on those years. If you go beyond in the U.S., '28 and onwards, the market outlook is extremely solid. So good opportunities here. So that's kind of the details we have at this point in time.

[Operator]

And our next question comes from Adam with Thompson and Davis.

[Adam Thalhimer, analyst]

Scott, can you help out a little bit on that sequential? What did you say on the sequential from Q1 to Q2?

[Scott Kornblau, executive]

I said that we have two vessels in dry dock, one that will be completing a dry dock that started in Q. One that will be in dry dock for most of the second quarter. And then a new dry dock that wasn't contemplated at the end of the year, a previously cold-stacked vessel begin a reactivation for work that's expected to start towards the end of the year. And then we had some planned maintenance on a [indiscernible] that we knew about that we will bring in for 4 weeks or so during the second quarter to get that out of the way.

[Adam Thalhimer, analyst]

So I guess my question is, is the current consensus around the hoop or does that need to come down and then we'll just put some -- because it sounds like the back half is going to be really strong?

[Scott Kornblau, executive]

Yes. I mean, -- this is -- I mean, none of this is new to us. This is how we saw it playing out. Again, I don't recall, or everybody has consensus right now. A portion, a small portion of Q1 is timing from that one dry dock that flipped a month or so into the second quarter. So you may make a small adjustment for that. And again, we have this additional dry docking, which obviously is accretive at the previous cold-stacked vessel that will have utilization. But again, when I think about the year, again, nothing has changed. We've been saying for quite some time. This is going to be a solid year return to normalcy and it's exactly how it's still shaping up.

[Adam Thalhimer, analyst]

How do you expect backlog to trend?

[Scott Kornblau, executive]

Yes. I mean we -- when you have $1 billion of backlog coming into the year, it means you don't have that much availability as you normally do. So I think we've been pretty consistent to think that we would just maintain $1 billion in perpetuity is likely not going to happen because we are going to be rolling off a lot.

But as Lasse said, this market is extremely strong. There are a lot of opportunities coming up, and we do have availability in 2025. We also have some flexibility on some of the backlog that we plan on executing in 2024 that we can push to the right if we find opportunities. So we'll be consistent in fitting jobs at the margins that we need for our vessels, but there are a lot of opportunities getting ready to come up over the next few months.

[Adam Thalhimer, analyst]

Okay. More on the beach nourishment or capital. And then you mentioned LNG. There are a lot of opportunities.

[Scott Kornblau, executive]

Yes, there are.

[Adam Thalhimer, analyst]

And then any update on Title XI?

[Scott Kornblau, executive]

As -- not a lot. We continue to have dialogue with them. But as we mentioned in the last quarter, we're not going to wait anymore, and that's why -- we went ahead and did this financing, but this financing maintains a lot of flexibility with very favorable call provisions and this delay draw feature where we'll continue to work that. If we're able to do it, we can swap this out fairly reasonably. So dialogue continues, but I'm just done making predictions as to when we think that will finally go forward.

[Adam Thalhimer, analyst]

Okay. That's the last time I'll ask. And then just back half margins you've done low 20s gross and adjusted EBITDA margins for a couple of quarters in a row now. It sounds like it's not going to be that way in Q2, but you get back to that in the back half.

[Scott Kornblau, executive]

Yes. I mean the backlog is still mostly comprised of capital, over 3/4 of it is, and a lot of that will get executed during the remainder the year. As I mentioned, we have a little white space to fill. But assuming that gets filled, again, there's no reason to think the second half of the year is not going to look I would call normal when you have this much capital backlog, and I think the last couple of quarters demonstrates what we can do when we have the proper mix of backlog.

[Operator]

This concludes our question-and-answer session. I would now like to turn it back to Tina for closing remarks.

[Tina Baginskis, executive]

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