Great Lakes Dredge & Dock Corp (GLDD) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Great Lakes Dredge & Dock Company year-end 2004 update call, moderated today by Ms. Deborah Wensel. At this time, participants are in listen-only mode. After the presentation, a question-and-answer session will be conducted, and instructions to participate will be given at that time. (OPERATOR INSTRUCTIONS) I would now like to introduce you to your moderator, Ms. Deborah Wensel. Ma'am, you may begin.

Good afternoon. This is Deb Wensel, Chief Financial Officer of Great Lakes, and I welcome you to our quarterly update call. The purpose of this conference call is to provide you with a summary of Great Lakes fourth-quarter and full-year 2004 results, financial results, operating and bidding activities, market outlook, debt and liquidity levels, and other relevant information. Following the presentation, you will be given an opportunity to ask any questions you may have. Before I begin, however, I need to remind you that certain matters discussed may be considered forward-looking statements, and participants in this call are cautioned not to place undue reliance on such forward-looking statements. Furthermore, any forward-looking statements speak only as of the date hereof, and Great Lakes assumes no obligation to provide any future updates.

Now turning to our overview, revenue for the quarter ended December 31, 2004 totaled 108.3 million, which compares to 96.6 million for the same period in 2003, and reflects a significant improvement over the second and third-quarter levels. We had anticipated an increase in revenues for the fourth quarter due to the improved bid market in the second half of 2004, coupled with the commencement of certain Army Corps of Engineers projects in the Company's backlog. Performance on certain of these projects had previously been postponed by the Corps due to a lack of funding. Although fleet utilization and revenues increased in the fourth quarter of 2004, much of the work performed in this period generated lower margins than in prior years, due to the highly competitive environment in which it was bid. Therefore, our gross profit margin declined to 8.6 percent for the quarter ended December 31, 2004, compared to 20.1 percent for the same quarter of 2003.

Also the gross profit margin for the fourth quarter of 2004 reflects approximately 1.5 million or 1.4 percent of the quarter's revenues of additional depreciation expense, resulting from the revaluation of the Company's operating assets in connection with the sale of the company in December of 2003. As a result of the mix of projects performed in the fourth quarter of 2004, the Company generated EBITDA for the quarter of 8.6 million compared to 16.1 million for the same quarter of 2003, which does exclude the impact of 10.6 million of nonrecurring expenses related to the Company's sale, which was concluded in December of 2003.

Revenues and EBITDA for the year ended December 31, 2004 were 350.9 million and 31.7 million, respectively, which compared to 2003 levels of 398.8 million and 60.4 million, again excluding the impact of sale-related expenses. The reduction in '04 revenues was attributable primarily to reduced domestic capital dredging revenue, which declined due to the Corps' postponement of certain capital project work within the Company's backlog, coupled with a reduction in bidding activity that began in the latter half of 2003 and continued through the first half of 2004.

The decline in EBITDA for the year ended December 31, 2004 is attributable to a number of factors, including the reduction in domestic capital dredging revenues, the mix of projects performed during the year, some of which were estimated at inherently lower margins given the competitive environment in which they were bid, and some of which were negatively impacted by the hurricanes experienced, primarily in the third quarter, and the impact of fixed costs relative to the reduced level of utilization for the year. Additionally, the 2004 EBITDA reflects incremental expenses of 2.3 million for legal and other expenses related to the Company's response to the federal subpoena received in February of 2004, and 1.3 million for the anticipated settlement of an ongoing legal claim relating to the demolition business. I'll discuss these matters in a bit -- in a moment here.

Now I will review some of the specifics of the contracts performed during the fourth quarter within the context of the dredging markets we serve and our demolition segment. The breakout of revenue during the quarter included 70 million of capital, which includes 9 million of foreign; 6 million of beach work, 21 million of maintenance, 11 million of demolition, for a total of 108 million. The comparative numbers for the third quarter of 2004 was 40 million of capital, which included 9 million of foreign; 3 million of beach work, 14 million of maintenance, and 9 million of demolition for a total of 66 million. And finally, the comparative numbers for the fourth quarter of 2003 was 49 million of capital, which included 10 million of foreign; 16 million of beach work, 22 million of maintenance, 10 million in demolition, for a total of 97 million.

Our capital dredging revenues for the quarter totaled 70 million and were generated by the following. Work on 60 port projects which added 52 million in revenue to the fourth quarter of 2004, including the commencement of the Brunswick, Georgia deepening project, which was finally awarded in the third quarter of 2004. Our hydraulic dredge Texas has performed favorably, dredging the rock encounter to date, and is expected to complete the first portion of this project in the first quarter of 2005. As you may recall, we will not return to complete additional work under this contract until the Corps has available funding, which isn't likely to be until the first quarter of 2006.

We continue working on the Manatee Harbor project in Florida with our hydraulic dredge Alaska. This project has experienced cost overruns due to difficulties working with the subcontractor to construct dykes necessary to enclose some contaminated material. We will conclude on this project in the second quarter of 2005.

We continue dredging on the Houston Channel deepening with our electric hydraulic dredge California, which has performed in line with current estimates. We will continue working on this project into the first quarter of 2005. Dredging on the L.A. deepening project continued through the fourth quarter with the electric hydraulic dredge Florida. This project was completed at estimate in January of this year. We started the Oakland deepening project in the fourth quarter with our clamshell dredge 53. Our dredge Florida will continue on this project after mobilizing from the L.A. deepening project. It is expected to complete this year in the second quarter of 2005.

Finally, at Port Jersey deepening project began in the fourth quarter. This project has a substantial amount of upland disposal which requires a treatment facility to prepare the material for disposal. We have subcontracted most of this work to an operator that already had a treatment facility. This decision reduced our risk and enabled us to avoid incurring additional capital expenditures. During the fourth quarter we recognized approximately 15 million of revenue on this project, which was a mostly pass-through through to the subcontractor.

During the fourth quarter we concluded the Providence River project at estimate; this is another domestic capital project although not funded by the deep port program. Finally the majority of the 9 million fourth quarter foreign capital dredging revenue was generated by two projects, one being the Hidd terminal project in Bahrain which continued to apply our hydraulic dredge Carolina at estimated production. The project is now expected to conclude in the first quarter of 2005. The second project was a maintenance phase of the Itku (ph) Egypt project which is being performed by the hopper dredge Victoria Island and will continue through May of this year.

Beach revenue in the fourth quarter totaled 6 million primarily related to work on the West Hampton and Shinacock beaches in New York. Our hopper dredge Liberty Island was originally estimated to execute the project but given some other scheduling conflicts, the project was performed during the period with the dodge island a smaller, less efficient dredge and thereby impacting the project's anticipated margins. The project is expected to conclude in the first quarter of 2005.

Finally maintenance revenue in the fourth quarter totaled 21 million, and includes two rental projects in the Mississippi River, one at the Gulf outlet in St. Louis. As well as three typical harbor maintenance projects in Baltimore, Maryland, Mobile, Alabama and Wilmington, North Carolina. Additionally, the scope of our maintenance project in Tampa Harbor and the Alafia River has been expanded.

Turning to demolition NASD generated fourth quarter revenue of 11 million, representing a solid quarter for the demolition business. NASD had nine projects that each contributed revenue in excess of half $1 million to the quarter with the remainder being generated by numerous smaller projects. Overall NASD's gross profit margin improved in 2004 to 16.8 percent from 13 percent in 2003 due to the mix of projects performed this year. However, as I mentioned on the last call, the Company recorded a $1.3 million charge in the third quarter for the anticipated settlement cost of ongoing litigation asserted by the Boston Housing Authority against NASD. Thus as a result of this expense the 2004 EBITDA generated by the demolition business declined to 3 million compared to 3.5 million in 2003.

General and administrative expense for 2004 totaled 33.5 million compared to 27.9 million in 2003, which does exclude 10.6 million of sale related expenses. The 2004 expenses include approximately 2.3 million of incremental legal and other costs related to the provision of documents in response to the Department of Justice's subpoena. The 1.3 million demolition legal charge I just mentioned, and a non-cash amortization of 4.2 million relating to tangible assets established, in tangible assets established in purchase accounting with respect to the Company's sale in December of 2003.

If not for these incremental costs our savings and year-to-date general and administrative expense relative to 2003 would have been approximately 2.2 million, relating primarily to reductions in incentive pay and profit-sharing expenses. Capital expenditures for 2004 totaled 23.1 million. However, this includes 7 million related to the building of two barges, one of which was completed in the fourth quarter and was sold in leaseback under an operating lease with GE Capital. The second barge will be completed and also sold in leaseback under a similar operating lease arrangement in March of this year.

Additionally the year-to-date spending includes 3.2 million related to capital improvements on our mechanical dredges. We restructured the long-term operating lease for one of these dredges and (indiscernible) funded these improvements in a sale leaseback which was also affected in the fourth quarter. Finally, our 2004 spending also includes 1.9 million related to the final construction of another barge, which was funded by proceeds held in an escrow account from the sale of two tugboats 2003 as part of a like kind exchange transaction. We are permitted to adjust for the items noted as well as other proceeds in calculating our capital expenditures for purposes of covenant compliance. Therefore, our 2004 full year spending was within the 10.5 million permitted by our CapEx covenant.

Looking at debt and liquidity, our 2004 cash interest expense of 17.9 million related to our senior and subordinated debt declined by approximately 1 million from the 2003 expense. As a result of the lower interest rate debt put into place at the time of the Company's purchase in December, 2003 coupled with a 500,000 cash benefit received on the interest rate swap we entered into earlier in the year to swap a portion of our fixed-rate debt to floating.

As of December 31, 2004 we were in compliance with all debt covenants, which were revised effective September 30, 2004 to allow us additional flexibility to work through this period of reduced earnings. In December 31, 2004 our interest coverage was 1.79, and our senior leverage was 2.46. Our total leverage ratio has been waived through 2005 and replaced with a minimum EBITDA measure, with which we were also in compliance at year end.

At December 31, 2004 we had outstanding performance letters of credit totaling 15.1 million, therefore under the revised terms of our credit agreements we had remaining (indiscernible) availability of 19.9 million which should be sufficient to accommodate the letters of credit necessary for the additional foreign work we expect to be taking on. At year end we had no outstanding revolver borrowings, so our borrowing availability under the revised terms of our credit agreements was approximately 15 million, which we believe is sufficient for all the Company's current operating cash needs.

Turning to some other matters, as you are aware, and we previously disclosed, in February of 2004 the Company was served with a subpoena to produce documents in connection with the federal grand jury convened in the United States District Court for the District of South Carolina. The Company believes the grand jury has been convened to investigate the United States dredging industry in connection with work performed for the Army Corps of Engineers. We continue to comply with the Justice Department's requests and believe that we have provided substantially all of the documents that have been requested to this point.

In addition to the documents requested certain employees of the Company have been interviewed by attorneys from the Department of Justice and then subpoenaed to testify before the grand jury. In connection with the investigation, the Company has incurred significant legal and documentation production costs totaling 2.3 million through December 31, 2004. And also as I have previously mentioned, our union contract with local 12 in Southern California had expired in August of 2004 and that we were in negotiations to review this contract. The contract terms have been agreed to and a new contract was signed that is effective through July of 2007.

Looking at the fourth quarter bid market, the 2004 domestic dredging bid market representing work awarded during the period totaled 221 million. This followed a strong third quarter of bidding activity and brought the full year bid market to 738 million. This is a solid improvement over the 2003 bid market which is lower than typical totaling only 425 million. It also compares favorably to the five-year average from 1998 through 2002 of 650 million. The 2004 market does include the award of the $66 million deep port project in Brunswick that bid in 2004 but was not awarded until 2004.

After considering this project the 2004 bid market concluded at a level on par with historical averages, and the Company won 43 percent of the 2004 work in line with this historical market share of 41 percent. If you may recall, starting in the second half of 2003 and continuing through the first half of 2004 domestic bidding activity slowed down due to a variety of factors influencing the funding and bidding of the course projects. This slowdown contributed to a period of excess capacity within the industry. As a result, pricing for work bid in recent quarters has been very competitive as the various industry participants drive to gain utilization for their equipment.

While we remain hopeful that the bidding activity will continue to normalize, and will still take some time for pricing to return to historical levels, as the industry approaches historical occupancy and participants regain confidence in a more predictable market. I will discuss some more of the dynamics that appear to be driving the market in a moment, but first let me discuss some specifics with respect to the fourth quarter bidding activity. The fourth quarter activity included award of the final phase of the 43 foot Arthur Kill deep port project, Arthur Kill 2, which was bid in the second quarter. This project was ultimately awarded to the second low bidder, Don John Marine as a result of the bid protest. However, as awarded we have a subcontract with Don John valued approximately 34 million to perform all of the rock work. We are pleased to have this portion of the project as we have the optimal spread of equipment for this type of work. We expect to complete our portion of the project in the second and third quarters of 2005. The remainder of the is primarily upland disposal which will be handled by Don John.

During the fourth quarter six beach nourishment projects were bid with a value of approximately 72 million, bringing the 2004 beach bid market to 110 million, which is in line with historical averages over the last five years. Great Lakes was low bidder on two of these projects with total value of 27 million. However, the $24 million Broward County project was pending award at year end, so it is not reflected in the Company's year end backlog. There are approximately 20 maintenance projects bid and awarded during the quarter bringing the year-to-date maintenance bid market to 291 million, which is in excess of the five-year average annual market of approximately 200 million.

Some of the maintenance work may have been expedited given increase shoaling resulting from the hurricanes in the Southeast. Looking at backlog, our dredging backlog at December 31, 2004 totaled 280 million, which is comparable to the September 30, 2004 level of 279 million, but is significantly higher than the 2003 year end level of 190 million, given the improved domestic dredging bid market during the past two quarters. Additionally our December 31, 2004 recorded backlog does not reflect 128 million of low bids pending award and other options pending on projects currently in backlog.

Our backlog by segment at December 31, 2004 and some recent comparative periods include at year end here we had 181 of domestic capital, 43 of foreign capital, 23 of beach, 33 million of maintenance for a total dredging backlog of 280, adding 11 million for demolition to a total Company backlog of 291. The comparative numbers at the end of the third quarter of '04 were 207,000 million of domestic capital, 15 million of foreign capital, 24 million of beach, 33 million of maintenance for a total of 279 million in dredging, adding again 11 million for demolition for a Company total of 290 million.

And this compares to where we were at the end of 2003 where we had 102 million of domestic capital, 30 million of foreign capital, 40 million of beach work, 18 million of maintenance for a total dredging backlog of 190 million, again adding 11 million for our demolition segment for a total Company backlog of 201 million.

The demolition services backlog at December 31, as I said, totaled 11 million and includes three new projects each valued in excess of 1 million as well as a typical complement of midsize projects. The economy in the New England area appears to be improving and NASD recently expanded its operations to Florida and completed two large projects there in 2004. NASD management continues to target a number of demolition projects in these markets in the $1 to $5 million range to be bid throughout 2005. So given these opportunities we believe NASD has a potential to grow its backlog and continue to improve its margins to levels that we were seeing two to four years ago.

Our market outlook, first looking at deep port, I do mention or have always mentioned the Water Resources Development Act word of legislation, which forms the basis for authorizing the Corps civil works projects, including the deep port projects. Ultimately no Act was passed in 2004. Word of legislation is expected to be reintroduced in 2005, with authorizations to continue the next deepening phases for certain of the major ports. However, passage of a new worded Act is not crucial at this point since the court continues to schedule and bid the deep port projects which have already been authorized by previous Water bills. We will continue to track the progress of these authorized deep port projects that may provide bidding opportunities in the near-term, which include New York Harbor or KVK, which again is the largest of the authorized deepenings and does have secured funding. Work on the 45 foot project concluded in 2004 at a total cost of approximately 350 million. The first phase of the 50 foot deepening just bid in January of 2005 was won by a competitor for 79 million. We bid approximately 94 million on this project, and therefore we believe it will be a challenging job, and we will occupy their backhoe dredge for the next two years. The total 50 foot deepening project is expected to have a cost substantially in excess of the 45 foot project due to the additional amount of rock to be drilled and blasted before removal. We expect the next 50 foot project to bid in 2006.

Next in Arthur Kill, New York as I mentioned the final Phase to bring the channel down to 43 foot was awarded in the fourth quarter to a competitor. They are subcontracting the work to us as we have optimal equipment to perform that portion of the deepening, and will enable them to meet the timelines set forth by the Corps and the New York/New Jersey Port Authority. This channel is also authorized to go to 50 feet, which will provide substantial future work with the first phase likely to be bid next year in 2006.

Port Jersey, New Jersey the final segment of the 43 foot channel deepening bid in December and we were the low bidders at approximately 35 million. Port Jersey is also been authorized to go to 50 feet and the initial phase of the 50 foot project is currently expected to bid in the second quarter of 2005. As this channel goes deeper it will require the use of backhoe dredges to handle the harder material.

Moving to North Carolina, the final large project for the inner harbor at Wilmington is planned and is now expected to bid in 2006. The Port of Miami 45 foot deepening project finally bid in the third quarter of 2004 by RFP. Great Lakes was awarded $38 million contract and will complete it in mid 2005. The Miami Port has already been authorized to go to 50 feet, however appropriations for this work are still likely to be five or six years away.

Brunswick, Georgia this $66 million project which I mentioned had originally bid in 2002 to deepen the entrance and inner channel to 36 feet was finally awarded to Great Lakes in the third quarter of 2004. We will be completing the first portion of this project in the first quarter of 2005 and will probably not return until 2006 and beyond to complete the remainder of the project, depending on the amount of available funding in each of the next two years.

Columbia River, Oregon, this $180 million project to deepen the Columbia River channel, shipping channel to 43 feet has encountered many permitting and environmental delays. But finally we understand these issues have now been resolved and the first phase is expected to bid later in the first quarter of 2005 with a second phase following in 2006.

Oakland, California, we won the next phase of this project to deepen the harbor to 46 feet in the third quarter of 2004 for approximately 26 million. The 50-foot deepening project is expected to bid at the end of 2005. There are additional projects in Norfolk, Virginia, Tampa, Florida and San Diego, California; these smaller deepening projects are underway and are likely to generate a few additional projects over the next couple of years.

At this stage we have identified deep port projects valued at approximately 115 million that are expected to bid in 2005. A number of deep port projects done in prior years are currently being performed by Great Lakes or by competitors, for example in Miami, Brunswick, Wilmington, Arthur Kill, KVK and Oakland and are likely to utilize the Corps' 2005 allotted funds for this work, so it is not too surprising that additional phases of these projects are not yet being bid given the Corps recent pattern of not bidding work much beyond that for which it has visible funding.

Additionally we have recently submitted proposals for over 50 million in dredging services solicited by private customers, primarily for the development of L&T terminals along the Gulf Coast of Texas. This private market appears to be gaining momentum and as the global supply of liquefied gas is increased and importation of fuel becomes more cost competitive given the higher prices of domestically produced natural gas. Therefore it is likely that some of this work will materialize in the near future as the private contractors work to develop the infrastructure necessary for the LNG terminal.

Now turning to beach there continues to be uncertainty with respect to the future of the federal funding of beach project. The Corps' fiscal year 2005 budget was finally passed although no specific funds were appropriated for beach renourishment. Therefore the beach work which has recently come out for bid and that which is expected to bid in the near-term is being funded by an emergency supplemental bill passed towards the end of 2004 that contains 372 million for the Corps to pay for much of the damage from the recent hurricanes. Of this 56 million has been specifically identified for emergency beach restoration.

As you may recall, the federal government funds only a portion of the beach renourishment funding with the state or localities funding the remainder. Given the active hurricane season experience in 2004 much of the work currently scheduled to bid is beach work with projects valued in excess of 200 million identified for 2005 bidding. The majority of these projects are in Florida and while it is unlikely that all this work will be bid as currently indicated, we do anticipate that this will comprise a good portion of the 2005 market.

Federal funding of beach renourishment has often been a political hot topic and although no funds have been appropriated in the current fiscal year budget, we believe that Congress will push to restore some level of funding given the relative low-cost versus the justifiable benefits attributable to the tourism and development along their states' coast lines. In addition to the typical beach projects, we still expect the first project of the Louisiana coastal restoration plan to come out in early 2005. This project has secured funding through the National Oceanic and Atmospheric Administration or NOAH so it should not be subject to the Corps funding issue. This is a long-range plan and the next phases would not be expected to bid until 2006 or 2007.

Looking at the maintenance as I mentioned earlier, the 2004 maintenance market exceeded the most recent five-year market average although some of the maintenance work may have expedited given the increased shoaling resulting from the numerous hurricanes in 2004. We anticipate that the 2005 maintenance market should again achieve levels consistent with historical averages. And the fiscal year 2005 Corps budget contemplates this.

However, we expect that one of our competitors, Manson Dredging, will be commissioning a new hopper dredge at the end of 2005. This dredge is over two times the size of our most recently constructed hopper dredge the Liberty Island, and is well-suited for the maintenance rental market along the Mississippi Gulf outlet. So it is likely to impact the bidding dynamics within this market once it comes online.

We have recently added substantial foreign dredging backlog with the award of a project in Ocean Cave Bahamas which will utilize a large hydraulic dredge in 2006. Additionally, we will start in 2005 and go into 2006. Additionally we have also signed a multiphase contract for a land development project in Bahrain. We began the initial phase in the fourth quarter of 2004 and the project will provide backlog for two years for multiple dredges. The contract will be performed in a joint venture with the same Bahraini contractor that we partnered with for the Hidd contract and this country will perform the civil works. Given this work we expect to have good utilization of our foreign-based fleet throughout 2005.

Also we are a minority partner in a consortium that has won a large land reclamation project to expand the airport in Doha Qatar (ph), although due to scheduling conflicts little of our equipment is planned for the execution on this project. Certainly 2004 was a challenging year for the Company. As I discussed over the past couple of quarters, the domestic dredging bid activity declined in the latter half of 2003 through the first half of 2004, which we believe was attributed in part to the diversion of Corps resources and funds to the reconstruction efforts in Iraq, as well as the Corps internal reorganization efforts with respect to how it allocates funding. With our own equipment utilization decline significantly in the second and third quarters of this year as a result of the lower level of bid activity. Along with the Corps deferral of certain projects and our backlog due to the funding shortfall.

At this time the rest of the industries dredging fleet was also underutilized, leading to intense competition for the work that was bid and compressing margins accordingly. As these events unfolded and the reduction in our activity became apparent we took cost-cutting measures over the summer to help mitigate the situation to the extent practical. Fortunately the bidding activity accelerated in the latter half of 2004 and the year concluded with some attractive bidding opportunities although still reflecting very competitive pricing. We won a reasonable volume of work in the third and fourth quarter and were able to perform on certain of the Corps projects, which had previously been postponed, so we did experience a significant improvement in utilization in the fourth quarter. But earnings were down given the lower margins.

Consequently, given the low levels of utilization in the second and third quarters, and the impact on margins given the competitive environment in which work has recently been bid, the Company's 2004 earnings were down significantly from what has been typical for the Company over the last few years. As I mentioned previously, the Corps 2005 fiscal year budget was finally passed at a level consistent with recent years, however, the federal government continues to operate at a deficit to and our military's ongoing presence in Iraq invariably requires additional funding. So while we remain hopeful, given the recent improvement in the bid market, that the domestic dredging market will continue to improve in 2005, pricing has still been unpredictable in recent bids, and even if the bidding activity appears to be normalizing there still seems to be uncertainty surrounding the Corps ability to obtain funding for its authorized projects.

Therefore it will still take time for the industry to regain confidence in a more predictable market, and this will inevitably continue to impact pricing. As a consequence even though we began 2005 with a solid backlog level, the margins on much of this work are not yet at historical levels. Given this, along with a continued uncertainty within the industry, we have taken a cautious view of our 2005 expectations and developed an EBITDA budget in the range of 38 to 42 million. At this level of EBITDA we still expect to generate sufficient cash flow to meet our current annual debt service requirements of approximately 20 million and to fund our necessary capital expenditures.

As of December 31, 2004 we were in compliance with all debt covenants which were revised effective September 30, 2004 to allow us additional flexibility to work through this period of reduced earnings. We continue to keep our banks well-informed and our bonding company up-to-date with respect to state of the industry and our performance therein. As such we feel comfortable with these relationships and their respective willingness to work with us as we return to more typical levels of performance.

This concludes the formal portion of the update. But I would also like to note that we will provide a summary of the operating and backlog information provided herein as well as a reconciliation of our EBITDA, which is a non-GAAP measure to net income, a GAAP measure in the financial section of our Company's website at GLDD.com. And now I would like to open up the call for your questions.

(OPERATOR INSTRUCTIONS) Lionel Jovalt (ph) with Goldman Sachs.

First of all regarding your last point and the guidance you gave for EBITDA in 2005, 38 to 42 million for the full year, how much are you looking for for the first quarter of '05 since that is really when your covenants will be the tightest.

You know what, in past practice we have never given guidance on a quarterly basis. But again, I think the comment and keeping our banks informed and working with them is generally how we feel about how we will go through this year.

So you don't expect any -- you don't think that you will need any waiver in 2005?

You know, again, we are cautious about what we are guiding, and I've given you that guidance, I don't think there is any other comment that I can necessarily make regarding this.

Just moving on to the backlog, you have a pretty good backlog to start 2005. I was just thinking how much of this backlog will you transform into revenues in the next twelve months?

There's a good portion of that revenue that will be worked off this year. I don't have again, it's an estimate of what we might work off. Again, there is the issue as to will the Corps fund all the work that we would expect to come out this year. So again, it's a good level. We would expect a good portion of it to roll off.

Moving back to the fourth quarter results, obviously your revenues were pretty good, pretty high. Your margins were relatively weak. You clearly mentioned that pricing was weak. Is it purely pricing, or did you also see some cost increases during the quarter?

I think that in the second and third quarter we had the biggest impact of what we would consider the fixed cost to the level of utilization that we have. That was more normalized in the fourth quarter. So we think the biggest impact in the fourth quarter would clearly just come from the margins on the particular work that was performed.

Okay, and when your market started to slow down (inaudible) more than a year ago. Do you think that it is starting to improve in particularly in terms of pricing, are you seeing an improvement in the pricing environment, and do you think that the contracts your winning today are basically won at a higher price than what was won a few months ago?

No, I think I pretty much indicated that we still see some intense competition here. There is just uncertainty in the market, and I think until we can all feel comfortable that we are back into a more normal bidding scenario I think the margins will be tight.

And last question, you indicated that one of your competitors will bring a new dredge in the market in 2005. It seems to be a pretty large dredge. What will be the impact on the industry? Do you think it could increase or reduce the level of utilization for the industry and put additional pressure on pricing?

Clearly will increase the capacity of the industry. And so depending upon the level of work that comes out, obviously we will have (technical difficulty).

Sarah Thompson with Lehman Brothers.

A couple questions. One, I just wanted to make sure I understood something first. You said the Port Jersey contract is 35 million in size, and 15 million of revenues in the fourth quarter were basically pass-through?

Yes.

Is the other 20 that is left basically work you're going to perform, or is the balance of that pass-through?

It will be a balance and it will be a pass-through as well.

That will be as well, okay. So when you're looking at your backlog, we should basically look at the 20 million as not really having any margin on it?

That's correct.

Okay, and then I know we went over this on the last call and I just don't remember the number. On the Brunswick project, the 66 million in size, how much is the first phase of that?

It's approximately 18 million.

Okay. And then last question, you had just mentioned obviously that the budget is what the budget is, but it sounds like maybe there is still some trouble getting -- the Corps getting cash in their accounts. And I guess I'm just trying to reconcile this to where we had thought about it before, which was it sounded like before you had kind of felt better that the Corps had money because they were letting projects out to bid. Has that changed?

You know, I don't know if it has changed. Clearly, we see more projects coming out to bid, so that's a positive. We do know that on Brunswick that they've broken it up now into sections, because they don't have the funding. But we have seen a couple of the other projects that they had postponed, they are coming up with funding. I guess generally speaking, the only other issue that we see out there is everything that is, I guess, out in the press right now regarding the deficit spending, and how deep will they spend. And I guess our feeling is that the Corps is involved in a lot of activities and one of the biggest activities being over in Iraq. So we don't know that there won't be some impact from that. We don't know that there will be, but it concerns us.

Okay. No, that is totally fair. But I ask in terms of the stuff that you have won, I just want to make sure the stuff that you have won more recently, there is no reason to believe that you've won the bids and the projects are being pushed out at all. You haven't heard any new delays.

No, we haven't done that, and I guess we are hopeful that now that they are more cautious in putting out the work that, hopefully, they have the funding for it. But again, until we see it, I guess we can't be certain. (indiscernible), right.

Sure, that makes sense. And then last question is, the sale leaseback that you're going to complete in March, how much is that for?

That will be approximately 4.8 million.

Okay, perfect. That's all I have. Thank you so much.

Thank you.

Melinda Newman (ph) with Post Advisory Group.

I just wanted to go back to the question of margins again. It seems like your EBITDA guidance, if we run rate this level of revenue which might be wrong, but it seems to assume a pretty decent margin. Can you talk a little bit about from bridging the backlog in third quarter to this quarter, how much older, higher- margin work has run off versus newer, lower-margin work coming on? Because when I go through, and I know the Corps of Engineers website is not the most accurate, but it seems like as you indicated, there were a lot of bids and a lot of sort of low bid versus the Corps estimate wins in the fourth quarter of this year. So it seems like there is risk that margins could contract further, but that isn't -- it doesn't seem like your guidance incorporates that, unless you are expecting the top line to grow.

There was a lot in that question. I guess I'm not sure what quite to focus on.

Maybe if you could just start with what happened in the backlog, what higher margin business ran off and what lower margin business came on.

Yes. Obviously, we built up the backlog here in the third and the fourth quarter. So that that work that we took on there that we performed in the year was, again, at lower margin. I think you'll still see that in the first quarter. You know, I think if you look at -- if we look at this job that bid in KVK, which is a big capital project, you saw a very low bid there, I think, which is sort of indicative here that there's still low margins being bid on all the work that's coming out.

So if I look at your estimate of 38 to 42 million of EBITDA, if we assume that revenue -- it just seems to me -- are you expecting a much better second half than a first half?

I think we should see improvement. I think we will have some good utilization here in the first quarter. I think we even look at second quarter as probably improving somewhat. I think generally speaking, we are predicting that we will have more utilization in 2005 than we had in 2004. Again, the big impact in the '04 numbers was the reduction on the utilization.

Right, but you had an 8.5 percent margin, gross margin in the fourth quarter. Are you expecting that your margins will improve from this year? It seems like since you have now filled the backlog with lower margin work that gross margins will come down.

When you look at those margins that you're looking at in '04, the utilization impact or the fixed cost impact is in that number.

But it's not in the fourth quarter.

So as we bring up utilization, absolutely we would expect that margins in '06 would be higher.

Okay. It seems like not winning this -- you were expecting to win this -- it's the Kill Van Kull, right? That was where you were the low bidder and it actually turned out that it was awarded to someone else; that must be a -- seems like a big disappointment.

It's Arthur Kill.

Oh, Arthur Kill, sorry. Is it KVK or KDK where -- one of them was one where you were expecting to win because you were the low bidder.

We were the low bidder, and there were some issues that were resolved there. No, we're very pleased in getting the work that we are going to do there. There were two segments of work; one was the rock work which is what will do, and then there is the upland disposal. And the rock work is what we like to see. Our equipment's fit for that. That is the part of the project that we are most interested in. So, no, we're not displeased.

Did you give an '05 CapEx number? I'm sorry, I might have missed it.

No, we did not.

Can you comment a little bit on how much longer you think you could rely on sale leasebacks to help with liquidity?

Well, what we have been able to do whenever we build new equipment, we've done a sale leaseback. Anything that has been improvements to our current fleet or ancillary equipment we do to our normal cap spending. So it's only when we are building additional equipment.

Do you expect to build -- are there orders placed in '05 that -- are you still building equipment?

We do not have currently have any orders outside of the barge that will be finished in March.

Okay, thank you.

Tricia O'Connor (ph) with (indiscernible) O'Connor.

Good afternoon. Just in terms of the EBITDA guidance, 38 to 42 million, is that based purely on your backlog, or are you kind of assuming that there will be some additional wins during the year?

We assume that there will be some work bid and won and performed during the year in that number.

Can you give any sense of how much of that number is really pretty ironclad because of the backlog?

You know, no. We do a lot of in the office about what if certain project would come up, and they might come in before we would work off some backlog. So nothing is ever set in stone with backlog. You get a certain amount of time, and if other opportunities come up in between, they could push off backlog. So it is not a pure we have backlog and we'll work off of it the next 12 months. There is a lot of other scenarios that can work in there, and this is just the scenario that we've come up with which we think is somewhat reasonable.

In terms of legal expenses for the federal investigation, you said those are pretty much done you think for now, or there could be another (indiscernible)?

It's an ongoing investigation.

Have they given you any more sense what they are really looking at? It's a fair amount of money to be having to spend.

You know, basically I have, as in the past, I kind of pass on any additional questions regarding that. That is the information we know and that we feel that needs to be reported. And I guess I won't comment any further.

And in terms of Arthur Kill you mentioned, how much was that originally? Do you have like 34 million now, you said?

Yes, we will do approximately 34 million of work.

How much was the original award?

Well, our bid was, I believe, in the $70 million range.

Okay. And then what are you paying on the bank line right now?

I'm sorry?

What are you paying on your bank line right now?

You mean amortization?

Actually, I was going to ask both; interest rate and then what the amortization requirements are.

We have a pricing grid that we use for our credit facility, so it depends upon -- I believe it is a total EBITDA -- I mean a total debt to EBITDA measure. And there are no required paydowns on our senior credit facility. There is approximately 2 million of paydown required on our equipment debt facility.

I guess I'm asking the interest rate or your interest expense seems a little higher than I would expect, given that most of your debt is the 7 3/4 notes. Is that all cash interest, the 5.3 that was in the quarter? (indiscernible) there's nothing (indiscernible) kind of amortization or charges in there.

You're talking about a quarterly number?

Both. I think you mentioned in annual debt service.

If you're looking at the quarterly interest number, that is not just cash.

Okay.

And we do have this interest rate swap arrangement on our fixed debt, which we are -- and so we are marking that to market, and that can give us some negative impact on the interest expense line, but it is not cash.

So what do you expect your cash interest expense to be?

This year it was 18 million, and we wouldn't expect it to -- I guess the only thing that would impact it next year is the underlying LIBOR rate.

And then you talked about the Florida beach renewal and how much was authorized this year. I'm just curious how that compares to historical numbers.

I'm sorry?

I think you talked about how much has been allocated or budgeted for the hurricane cleanup in Florida and the beach renewal work there.

There was a supplemental authorization put out there for emergency work. And from that there was, I believe, 56 million specifically identified for dredging, the federal portion of the dredging work to be done down there. And then I also talked about the fact that we see on the horizon here a number of beach projects, a pretty significant number, that are being indicated that they will come out. Now, again, we think that they probably won't all come out, but still it seems that there is a sizable amount of beach work out there that will probably come up for bid this year.

Can you compare it to other years that there haven't been hurricanes, but yet maybe there weren't as many budget pressures? I guess what I'm trying to get at is because of the hurricanes are you getting a lift to what otherwise might be a horrible year, so it's averaging out to be a pretty normal year?

There is a positive impact that is coming -- I mean for our industry -- coming from the hurricane situation. So yes, I do think that there is some aspect of that clearly that is coming out in this beach number.

Actually, along the same lines, is there any potential -- not necessarily for you guys, just (indiscernible) dredges you have -- but work to be done due to the Tsunami?

No, I don't think so.

Not a lot of beach damage that would have to be cleaned up?

Yes, but not probably in the manner that we do dredging. We're really not aware of any substantial work that we would think that would come out there. That would be something we would take a look at.

And then last question, the last caller asked about how you would fund '05 CapEx, but I don't know if you actually gave a number.

I didn't. We don't have that budget number yet. But clearly at the level of our EBITDA, we feel comfortable that we'll do what cap spending that is necessary.

So basically just a maintenance number?

Yes.

Okay. Thank you.

Clark Orsky (ph) with KDP Asset Management.

Hi. I just wanted to go back to the margins. I mean the 8.6 percent, is that a good number to look at moving into the first quarter?

You know, it is a very difficult question to answer. When you look at the -- and I'm thinking maybe there's a little confusion here about when we talk about margins and improvements in bid margins and that. When we bid a project, a project is charged with its direct to variable costs and an allocation of fixed costs. And we look at that as contract margin. So when we look to bid, we're looking at contract margins. So we are saying that the contract margins have been lower on our current bids.

Now when you get down to the 8.6 percent, you not only have the contract margin that is being affected, but you have over or under allocated your fixed costs. And to the extent that you're significantly underallocating your fixed cost because you don't have so much utilization, that has an impact on the margins as well. So when we talk about going into next year, if our contract margins aren't improving all that much but our utilization is, then our overall margin will increase.

Okay, that's helpful. I guess the other question was just in general; you said you were hopeful but cautious. How is your visibility now versus a couple quarters ago on your business in '05?

I wouldn't say that it is much better, because we have about the same amount of visibility. And I would say we've had the same amount of visibility all through '04 as we might have had in '03. But our visibility does not always turn out to be as accurate as it used to be in the past, I guess is kind of the way to look at it. The Corps schedules work to come out to bid off in a schedule, and then we've seen that they're not bidding them. Again, in the past, it wasn't unusual because there was just a postponement. Now there is no funding.

So I don't think the visibility has changed any from 6 months ago. All we can see is that right now, they have generated more work. There is more work on the docket, but we don't know how reliable it is.

Okay. Your comments about -- the concerns about budget pressure, are you getting any body language from them at all, or is that just sort of observing domestic budget pressure that trickles down to the Corps and everybody else?

Right, I think we are just more sensitive to it now, so when we hear it in the public domain we say, hey, that can trickle down to us.

Okay, appreciate it.

Sarah Thompson of Lehman Brothers.

Just two follow-up questions. One is, what is in the 128 million of low bids that weren't in your backlog at the end of the year?

A number of projects.

But nothing big? Because there were a bunch of big ones in the third quarter if I recall.

Yes. One of the big ones would be the work in Bahrain that we have signed up a portion of and we expect that to increase. That's probably the biggest one I can think of offhand.

But nothing substantial. Nothing in the like 50, $60 million number?

Probably not in that range, but in the 20, and that is substantial.

Right, okay. Second question is, you made a comment earlier that you stayed within your covenants for CapEx for the bank agreement of 10.5. Do you have a covenant for 2005 on CapEx?

Yes, we do, and I believe it is in the range of 12.5.

Okay, so we could use that. I know people keep asking you the question and you don't have a number, but we could use that as a proxy?

Yes.

Great, that's all I had. Thank you.

Ms. Wensel, there are no further questions at this time. If you would please continue.

Well, if there is no further questions, I thank you for joining our year-end update, and I look forward to conducting my next conference call for the first quarter of 2005, the week of April 18th. Thank you.