Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) Q3 2023 Earnings Call Transcript November 7, 2023
Great Lakes Dredge & Dock Corporation reports earnings inline with expectations. Reported EPS is $-0.09 EPS, expectations were $-0.09.
Operator: Good day and thank you for standing by. Welcome to the Q3 2023 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. [Operator Instructions] Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Tina Baginskis, Director of Investor Relations. Please go ahead.
Tina Baginskis: Thank you. Good morning and welcome to our third quarter 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, 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 the 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 2022 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: Thank you, Tina. The third quarter, as expected, was a challenging quarter due to vessel dry docks and idle equipment due to the market delays from 2022 and the first half of 2023. Despite the challenges, we were successful in building a solid backlog for the fourth quarter and for 2024 and onwards. We continue to see positive developments with both a larger number of capital projects and a better mix of projects coming to the market, which provides us with confidence that we are on a path to return to normal operations going into 2024. Great Lakes ended the quarter with a record dredging backlog of $1.03 billion, which does not include approximately $50 million in performance obligations related to offshore wind contracts and $225 million in low bids and options pending award.
At the end of the third quarter, 71% of Great Lakes’ backlog consisted of capital projects. In the third quarter, we added $519 million in capital projects, which includes two LNG projects, the Brownsville Ship Channel project for Next Decade Corporation’s Rio Grande LNG project, and the Port Arthur LNG Phase 1 project. The Rio Grande Brownsville LNG project is the largest projects undertaken in Great Lakes history. Subcontract work on this project is anticipated to start later this year with a major dredging effort starting in Q2 of 2024 and lasting for proximately two and a half years. Our proven performance and safety culture allows us to win and execute these projects and support the growth of LNG exports in the US. In addition to these two capital projects, Great Lakes added $235 million in maintenance and coastal protection projects to our dredging backlog in the third quarter.
As we have navigated the challenges from 2022 and have seen the ramp-up in bidding in 2023, we continue to be proactive on cost reductions and fleet adjustments, and we have reduced our general and administrative and overhead headcount by more than 50% during the year. As we have stated previously, were temporarily cold stacked vessels to reduce costs and these vessels can easily be reactivated as the market improved as we did for one of our recent new projects. Our newest hopper dredge, the Galveston Island is expected to be operational later in the fourth quarter, and our sister ship, the Amelia Island, is expected to be delivered in 2025. In the quarter, we took delivery of our two multi-cats, Cape Hatteras and the Cape Canaveral, which supports our pipeline operations with a stable work platform for making pipeline connections safely and quickly in most weather condition, in line with our strong safety culture.
We are executing on our strategy to enter the US offshore wind market. In July 2023, we were honored to have President Biden attend the steel-cutting ceremony for Great Lakes’ offshore wind rock installation vessel, the Acadia, which marks another step forward as construction begins with expected delivery in 2025. In addition, we signed the first ever subcontract for procurement of US — with Carver Sand & Gravel, a US quarry in the state of New York. Both milestones solidify our entry into the offshore wind market, and we support Great Lakes awarded rock installation contracts for the Empire Wind I and II projects with estimated installation windows in 2025 and 2026. We continue to monitor our developments on related offshore wind power purchase agreements after the refusal by the New York State Energy Research and Development Authority to renegotiate the agreements for Equinor and BP’s Empire Wind projects and Orsted’s Sunrise projects.
We expect updates from Equinor in the first quarter on potential impacts to the development plans for the Empire Wind projects. The US offshore wind market has seen other projects delayed or canceled due to higher interest rates and inflation. However, on October 24th this year, the third round of PPAs for the state of New York saw 4 gigawatts of new PPAs awarded to three operators, and we continue to bid on projects with scheduled offshore installation windows in 2026 and onwards. 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.
Scott Kornblau: Thank you, Lasse, and good morning, everyone. For the third quarter of 2023, revenues were $117.2 million, net loss was $6.2 million, and adjusted EBITDA was $5.3 million. Revenue of $117.2 million in the third quarter of 2023 decreased $41.1 million from the prior year third quarter. The quarter-over-quarter decrease in revenue was primarily due to lower utilization for the hydraulic fleet as that segment of the market has remained soft. However, we do expect hydraulic utilization to improve during the fourth quarter. Despite the lower quarter-over-quarter revenue, including $36 million less capital revenue, current quarter gross profit and gross profit margin increased to $9 million and 7.7%, respectively, compared to $3.8 million and 2.4%, respectively, in the third quarter of 2022.
The increase in gross margin is primarily due to improved project performance and lower operating costs due to our continued focus on cost reductions. Third quarter 2023 G&A of $14.2 million is $900,000 higher than the same quarter last year, primarily due to higher incentive pay, profit sharing and severance pay in the current year quarter partially offset by lower costs due to our continued cost-cutting initiatives. Current quarter’s operating loss of $5.1 million improved $4.4 million from the prior year’s quarter net loss of $9.5 million, driven by the improved gross profit. Net interest expense of $2.8 million for the third quarter 2023 was down from $3.6 million in the third quarter of 2022, primarily due to an increase in capitalized interest related to our new build program, partially offset by current quarter revolver interest expense.
Third quarter 2023 net income tax benefit of $1.8 million compared to $3.3 million of net income tax benefit in the same quarter of 2022 due to the higher current quarter income. Rounding out the P&L, net loss for the third quarter 2023 was $6.2 million, an improvement from a $9.9 million net loss in the prior year quarter. Turning to our balance sheet. We ended the third quarter of 2023 with $14.1 million in cash and $55 million drawn on our $300 million revolver, which doesn’t mature until the third quarter of 2027. Total capital expenditures for the third quarter of 2023 were $46.6 million, which includes $28.4 million for the construction of the subsea rock installation vessel, the Acadia, $10.1 million for the Galveston Island and $2.2 million for the recently delivered multicast.
So, far in the fourth quarter, we have paid an additional $42 million for new build payments and currently have $85 million drawn on the revolver. Full year CapEx guidance of approximately $145 million is down $30 million from previous guidance due to the timing of milestone payments on the Acadia, which we expect to take delivery in the first half of 2025. As previously discussed, in January of this year, we applied with the Maritime Administration or MARAD, which is a unit of the Department of Transportation for Title XI financing on our new wind vessel, which typically comes with very attractive terms. The review is ongoing, and a few weeks ago, we hit a key milestone with the commencement of an independent financial assessment, which is the next step in the process.
But in parallel, we continue to explore other sources of capital. Post quarter end, we closed on a sale leaseback of various support equipment, bringing in approximately $29 million of cash. Looking towards the fourth quarter, we expect utilization to greatly increase from the third quarter as most of the non-cold stacked vessels are scheduled to work and there are no planned dry dockings. We should also see a larger amount of revenue coming from capital and beach projects, which typically come with higher margin than maintenance projects. With that, I’ll turn the call back over to Lasse for his remarks on the outlook moving forward.
Lasse Petterson: Thank you, Scott. For the nine months ending September 30, the bid market, not including LNG and offshore wind projects was $1.8 billion, of which Great Lakes 131%. The increase in the mid-market was driven by a strong market for capital projects, which has already seen seven bids for port improvement projects, including ports such as Freeport, San Juan and Norfolk. The total capital bid market for port improvement projects through the third quarter totaled $459 million, of which 39% of the market year-to-date was won by Great Lakes. We expect the budgeted appropriations to support the funding of several previously delayed capital report improvement projects that are still expected to bid before the end of the year, including Sabine, Houston, and Mobile.
We continue to see strong support from the Biden Administration and Congress for the dredging industry. In March this year, President Biden released the President’s fiscal year 2024 executive budget. The proposed amount for the Corps targets, $7.4 billion, which is a record amount for President’s budget. In June this year, the House proposed an increased 2024 budget of $9.6 billion for the quarter, which is $910 million above the fiscal year 2023, and includes $2.8 billion of the Harbor Maintain Trust Fund and the $1.5 billion for flood and storm damage reduction. In July, the Senate Committee for Appropriations passed the budget, which targets $8.9 billion for the Corps. This will move to the Senate floor for further deliberations and considerations.
This proposed budget is expected to provide a strong 2024 bid market, if passed by Congress over the next few months. Currently, the government is operating under a continued resolution until the budget is approved. Offshore wind has been recognized around the world as a reliable source of renewable energy. Globally, installed offshore wind power generation capacity is targeted to reach about 260 gigawatt by 2030, up from 40 gigawatts in place in 2020. In 2021, the Biden administration announced the ambitious goal of 30 gigawatts in the United States offshore wind by 2030 and provided $3 billion in federal loan guarantees for offshore wind projects. The administration support for offshore wind culminated in the Inflation Reduction Act, the largest Climate Mitigation Act ever passed by Congress.
As stated previously, Great Lakes was awarded the Rock installation contract for Equinor and BP’s Empire Wind I and II projects with estimated installation windows in 2025 and 2026. The developer requested adjustments to the power purchase agreements for these two projects, which New York rejected in October, and we are awaiting updates in the fourth quarter for potential impacts on the project schedules. New York continues to take a step forward in meeting their renewable energy goals with an announcement in October 24th, 2023, of three new projects awarded with a capacity of approximately 4 gigawatts of offshore wind energy and a new accelerated fourth bid round for additional PPAs that was announced for early 2024. Although the market is facing some short-term challenges, the long-term outlook for offshore wind in the US is optimistic based on strong fundamentals and commitments by the US to meet its energy independence and decarbonization targets.
Great Lakes has established a unique business position in the United States offshore wind market, and we continue to tender bids on multiple offshore wind projects for the Acadia our, subsea rock installation vessel currently being constructed. In conclusion, our main focus for the year has been to keep managing through the various challenges that the 2022 delayed market presented us with, with a goal of delivering improved year-over-year results. As expected, so far this year, we have seen strong overall bid market, including a number of large capital projects that finally got bid, leading us to a record backlog of over $1 billion. This, combined with the fleet adjustments and the cost reductions and production initiatives we have in place will continue to provide improved results in the coming years.
And with that, I’ll turn the call over for questions.
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Q&A Session
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Operator: Thank you. [Operator Instructions] Our first question will come from Joe Gomes of NOBLE Capital Markets. Your line is open.
Joe Gomes: Good morning. Thanks for taking my questions.
Lasse Petterson: Hey good morning Joe.
Scott Kornblau: Good morning.
Joe Gomes: So, I wanted to start off on the revenues. I mean, look back at the second quarter, your commentary there, and you talked about the delayed bid market was coming to an end, that the number of dredges were completely booked and very, very few had availability for the rest of the year. But then you came in at a revenue number, which is the lowest quarterly revenue number in at least five years and just trying to square that comment with the number that actually was generated in the quarter. I wondered if you could give us a little more color on that.
Scott Kornblau: Yes, Joe, what I had said — and we said that at the beginning of the year and the commentary did not change throughout was that even though we were continuing to see an improving bid market, and we were winning our fair share of those, really didn’t expect to see that turn into revenue until the fourth quarter and then going into next year. We’d always said the first three quarters would be somewhat muted. In addition, I’d also talked about last quarter, we had three dry docks scheduled for the third quarter as well. And we had talked about all year that the hydraulics market was still somewhat challenged, and we’re starting to see that recover now with the LNG. So, I think I laid all the pieces out that we thought revenue would be down in Q3.
Utilization would be down in Q3. And yet, you’re right, this is the lowest revenue we’ve had in a very, very long time and still outperformed prior year quarter with $40 million more revenue. So, I think this is proving out the things that we can control on the cost reduction is on production we are. The revenue is about to come forward with supported by $1 billion worth of backlog.
Joe Gomes: So, on that, I understand the backlog, and it’s a great — you guys have done a great job in the backlog, but we do have that continuing resolution there, how comfortable are you in the revenue actually coming into the fourth quarter, if that continuing resolution goes on further than I think it’s supposed to be next Monday or Tuesday — but next week.
Lasse Petterson: Yes, I think you’re asking how that will impact our revenues going forward. The good news is that the — it will not impact the revenue from the LNG projects that starts up in Q2 with the dredging. And also the capital project that has already been awarded that is in our backlog will continue to perform. So, the short-term impact of continued resolution that lasts for a long time as it did in 2022 is not really there. It will impact the ability for the Corps to issue new contracts on new projects, and that will have an impact towards the end of 2024 and not the first half. But we will just have to monitor what goes on in Congress and be optimistic about getting the continued resolution being short. As it normally is, it lasts two, three, four months, and that’s normal. But in 2022, we had eight months of continued resolution that created a problem.
Joe Gomes: Thank you for that Lasse. And on the wind segment, unfortunate that there seems to be these delays going on. What would be the plan — the Acadia if Empire I and II were not to go move forward anymore? I mean do you have some comfort level in some of the bids with some of the other projects out there that you’d be able to move the Acadia over to those projects?
