Great Lakes Dredge & Dock Corp (GLDD) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to today's quarter one 2006 update conference call. Just a reminder, this call is being recorded. At this time, I would like to turn the call over to Deborah Wenzel. Please go ahead.

Thank you. This is Deb Wensel, Chief Financial Officer of Great Lakes and I welcome you to our quarterly update call. The purpose of the conference call is to provide you with a summary of Great Lakes first-quarter 2006 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.

Looking at our overview, revenues for the quarter ended March 31, 2006 were $108.4 million as the Company continued to experience good utilization of its dredging fleet and compares to $99.9 million for the first quarter of 2005. Along with an increase in fleet utilization, margins in 2006 also improved over the 2005 period. The Company's gross profit margins for the quarter ended March 31, 2006 was 10.7%, compared to 7% for the same quarter in 2005. The lower profit margin generated during the first quarter of 2005 was a result of performing on work that was won during the first half of 2004 when there is a slowdown in bidding activity.

During this period the environment was highly competitive due to the uncertainty over funding constraints within the Army Corps of Engineers. The bidding activity levels improved throughout 2005 and pricing improved, although not to levels seen in years prior to 2004.

The margins in the first quarter of 2006 continue to reflect the improvements seen in the second half of 2005 but were negatively impacted by a $2 million increase in self-insured claims reserves that I will discuss later. The Company achieved EBITDA of $10.2 million for the quarter ended March 31, 2006 compared to only $5.2 million for the same 2005 period.

Now I would like to give a general overview of contracts contributing to the quarter's operations within the context of the dredging markets we serve and our demolition segment. Revenue during the quarter included $40 million of capital of which $17 million was foreign; $41 million of beach work; $16 million of maintenance; $11 million for demolition for a total Company revenue for the quarter of $108 million.

The comparative numbers for the fourth quarter of 2005 were $60 million of capital which includes $15 million of foreign; $22 million of beach; $16 million of maintenance; $12 million of demolition for a total revenue of $110 million.

And the comparable numbers for the first quarter of 2005 were $36 million of capital, of which $6 million was foreign; $22 million of beach, $30 million of maintenance, and $12 million of demolition for a total of $100 million.

Our capital dredging revenues for the quarter as I said totaled $40 million and was primarily generated by the following. We began work on the next phase of our Brunswick, Georgia deepening project utilizing the Hydraulic Dredge, Florida. Work also began on our LNG terminal project in Freeport, Texas with the Dredge Texas. We continue to work on our other deepening projects in New York and Wilmington, North Carolina. And finally, we continued work on the Durrat land development project in Bahrain, using our hydraulic dredges in Carolina and California.

Beach revenue in the first quarter totaled $41 million. Beach revenue continued to represent a large proportion of our revenues as it did in 2005 which is to be expected given the beach work comprised 41% of the domestic bid market in 2005 and 51% of the bid market in the first quarter of 2006. During the quarter the Company's beach revenues were substantially generated by four large projects in Florida, Broward County, Destin, Palm Beach, and Captiva Sanibel Island.

Maintenance revenues in the first quarter totaled $16 million, which is consistent with our quarterly average over the last year. The majority of the quarter's maintenance revenues relate to two rental projects along the Mississippi River which were completed in the quarter utilizing two of our smaller hydraulic dredges as well as two mechanical dredging projects, one in Baltimore Maryland and the other in Grays Harbor, Washington.

NASDI had another strong quarter, generating approximately $11 million in demolition revenue. NASDI has consistently generated this revenue level over the last five quarters. The activity in the demolition sector has been solid with an increase in both the number of projects and the number of larger projects in the range of $1 million to $5 million.

Capital spending for the first quarter totaled $8.3 million. The quarter spending included $2.6 million to purchase the dredge of Victoria Island which had been operated under a long-term operating lease arrangement. The lease allowed for an early buyout in February of this year and we exercised that option. This will reduce ongoing rental expense by just under $1 million annually. Also included in this quarter spending was $1.1 million for the completion of the new barge for one of our boosters. (technical difficulty), a quarter a booster provides additional pumping capability which is needed in many of the beach projects which requires sand to be pumped from bar sites far from shore And an additional $1.2 million in new demolition equipment.

Excluding the purchase of the dredge of Victoria Island, capital expenditures for the year are still expected to be similar to last year's total spending of approximately $14 million.

Our maintenance expense in the first quarter totaled $8.9 million. Again these are equipment related costs that are expensed in the year occurred. Our first-quarter spending was up from typical historical average quarters due to the timing of maintenance requirements on certain vessels. Our 2006 annual maintenance spending is anticipated to be in line with our annual historical spending average of $28 million as we expect utilization to be on par with historical levels.

The Company's general and administrative expenses totaled $7.7 million for the quarter ended March 31, 2006, which was in line with the same quarter 2005. Expense related to the federal subpoena was down $0.5 million as little activity has occurred related to this matter which I will discuss later.

Our 2006 first-quarter cash interest expense of $5.2 million compares to $4.9 million of cash interest in the first quarter of 2005. The increase in expense is due to the increase in underlying interest rates. In the 2006 first quarter, total interest reflects a non-cash expense of $0.6 million due to the valuation of the Company's fixed to floating interest rate swap which compares to a non-cash interest expense of $1 million for the 2005 quarter on this same swap.

The Company incurred a net loss of $1.5 million for the first quarter 2006 which compares to a net loss of $4.7 million for the comparable 2005 quarter.

Turning to debt and liquidity, we are in compliance with all financial covenants at March 31, 2006. At quarter end without adjustments allowed by our senior credit agreements, our total leverage was 5.7, senior leverage was 1.76 and interest coverage was 2.15. At March 31, 2006, the Company had total debt of $253.3 million, of which $2 million was current. Total cash and equivalents of $0.5 million and outstanding performance letters of credit totaling $17.6 million.

At March 31, 2006 the Company had $5 million of revolver borrowings outstanding. We continue to experience some timing issues on our core collections including our Tampa receivable which has necessitated a higher level of revolver borrowings during the quarter. However, effective February 1, 2006 the Company's revolver borrowing availability reverted back to the full $60 million allowed under the original terms of its credit agreement with its senior lenders. Based on the attainment of a certain financial ratio at 12/31, '05 in accordance with the terms of the September 2004 amendment to such agreement. Therefore the Company had $37.4 million of borrowing availability at March 31, 2006. Company management believes that the new level of borrowing availability will be sufficient for foreseeable operating cash needs.

Now turning to some other matters, there is nothing new to communicate with respect to the federal subpoena matter. As I noted on the last call, the term of the grand jury that had heard all the testimony has expired and a new jury was seated in January of 2006. To date there has been no indication that our matter was carried forward to the new jury, but there has been no indication it will not in the future. Therefore the matter continues to remain open and we are continuing to incur legal costs as our attorneys are still covering this matter; however, these costs have been reduced significantly in recent months.

With regard to the new hopper dredge commissioned by Manson Dredging we have heard that in performing sea trials the vessel has encountered difficulties and we have not heard when it will be ready to enter the market, although it would be expected to be sometime this summer. As mentioned previously this drench is over two times the size of our most recently constructed hopper dredge to Liberty Island and is best suited for rental maintenance rental market in the Mississippi Gulf outlet. It is difficult to anticipate how much affect to pricing the entrants to the market this dredge will have.

As we spoke last quarter about the long large clamshell bucket dredge that another competitor, Weeks Marine, is looking to construct. The vessel has been engineered but it appears that it is still not under construction and there is no update as to when this vessel may enter the market.

Due to the recent significant rise in fuel prices, we continue to incur increased fuel costs, however our new contracts take into account the increased cost and we use fuel commodity forward contracts to reduce the impacts of changing fuel prices from the time of contract award through contract completion. Our exposure under our hedging method is in the time between contract bid and award, which typically is not a long time frame. We believe this procedure has adequately enabled us to manage our fuel pricing risk.

Last quarter and I mentioned the increasing cost of insurance and injury claims related to our hourly workforce. I noted that in 2003 and '04, while incident rates were somewhat typical, the severity of claims increased. Therefore during 2005 we had to add to our deductible reserves for these claims and for 2006 we were given notice of a significant increase in premium due to the unfavorable experience from '03 and '04.

Beginning in 2004 we began an extensive safety awareness program aimed at reducing incidents and injuries and we'd hope to see in 2005 some results from our efforts. In most of our operations there has been good progress; however, in one area we have identified a situation of concern. There are two Texas law firms which are aggressively pursuing personal injury claims on behalf of a certain sector of the industry's workforce to a degree never seen before. An unprecedented number of lawsuits are being filed for incidence that would not have likely escalated to claims in the past. However aggressive legal representation and medical advice is increasing the seriousness of claimed injuries and the amount demanded in settlement. Based on the outcomes of three lawsuits we settled in 2006 to date and statistics gathered from other companies in the industry, we recorded a $2 million charge to increase our reserves for our self-insured portion of these liabilities.

Additionally should these trends persist we could continue to be impacted negatively in the future. This is not a problem unique to us. All the dredging companies operating in the Gulf are being impacted by these two law firms. Our experience reveals that 80% of our current claims liabilities are being generated by less than 15% of our workforce. The industry is compiling data which appears to indicate similar trends for our competitors' experience. Ultimately this will become an issue for the Army Corps of Engineers who eventually will have to fund the increased cost to the U.S. dredging industry as these costs are incorporated in the future bid price.

We plan to vigorously defend against these claims to ensure fair and equitable outcomes for both the Company and the employees. And we as an industry are looking into whether the actions by these two law firms violate any professional standards or laws.

Let's turn to the bid market for the first quarter. The first quarter 2006 domestic dredging bid market representing work awarded during the period total $55.1 million. This is a small bid market compared to previous quarters, but Great Lakes did win 42% of the market. In addition, Great Lakes was low bidder on a beach project in Florida for $14 million that was awarded in the second quarter.

Of the 10 projects bid in the quarter, three were beach projects and Great Lakes won two of these for a total of $21.7 million. The remainder of the first quarter bid market was maintenance work with no deep port work bid this quarter.

While the 2005 bid market was substantial at $727 million, a sizable portion of the market, 41%, came from the beach nourishment sector, which was expected given the hurricane activity and the special appropriations to fund this work. Previously beach work averaged only 15% of the market. Offsetting this increase in beach work in 2005 was a decline in the amount of capital projects. Last year's capital market was just over $200 million and represented only 28% of the market. Previously capital work averaged just over 45% of the market.

In 2006, if the beach market returns to historical levels, the industry will need to see a greater amount of capital work to come out to produce a similar market level to the past two years. But as we saw this did not happen in the first quarter.

Our current assessment of work that is scheduled to come out on authorized deep port projects this year is valued in excess of $300 million and include the next phases of the Columbia River Oregon deepening project and the Oakland, California 50-foot deepening project. There is another phase of the Port Jersey, New Jersey, 50-foot deepening project and should be two more phases of the New York harbor 50-foot deepening project along with the Jacksonville Harbor Florida deepening project and several port expansion projects in the Tampa area.

However several of these projects are being postponed due to environmental and over depth permitting issues. And so it is not certain that they will all be bid this year. Given the recent dynamics in the domestic market in October of 2005 we positioned an additional hydraulic dredge overseas that will be utilized all of 2006 on our project in Bahrain. The uncertainty of the U.S. dredging market is making us look more aggressively to the strong market in the Middle East for additional opportunities to deploy potentially idle assets from the U.S.

Our backlog dredging due to the low levels of the bid market in the first quarter, our backlog decreased to $204 million at March 31, 2006. This compares to $261 million at December 31, 2005 in $242 million at March 31, 2005. The demolition services backlog at March 31, 2006 was $14 million, which compares to $17 million at December 31, 2005 and $15 million at March 31, 2005.

In the first quarter NASDI added three sizable projects totaling approximately $3.4 million to perform selective interior demolition. In addition NASDI is looking at several good-sized projects in the range of $1 million to $5 million individually that should become backlog in the near term. Our backlog by segment at March 31, 2006 was $81 million of domestic capital; $74 million of foreign capital; $44 million of beach; $5 million of maintenance for a total dredging market of 204 -- I'm sorry, total dredging backlog of $204, adding $14 million of demolition backlog for a total Company of $218 million.

The same numbers for end of the fourth quarter of 2005 were $95 million of domestic capital; $90 million of foreign capital; $61 million of beach; $15 million of maintenance for a total of $261 million in total dredging backlog, adding $17 million of demolition for a total Company of $278 million.

And comparable numbers for the end of the first quarter of 2005 were $154 million of domestic capital; $38 million of foreign capital; $37 million of beach; $13 million of maintenance for a total dredging backlog of $242 million adding $15 million of demolition backlog for total Company backlog of $257 million.

As I noted in the last call, the Corps 2006 fiscal year budget was passed at a level even higher-than-expected and certainly higher than in prior years. However the industry has seen only $211 million in work awarded to date for fiscal year 2006. In addition there are special appropriations related to the cleanup and reconstruction efforts along the Gulf Coast due to the destruction from Hurricanes Katrina and Rita. But as I mentioned for the last two quarters, the dredging work related these funds has not materialized and has not added much to the bid market.

The latest issue in stalling the progress of getting jobs out to bid is the use of the continuing contracts clause in Corps contracts. Congress has mandated that only projects that are fully funded can go forward. In the past a project could be bid if there were appropriations for the current year only and the contract could be continued into the next year. The remaining funding would be taken out of the following year's appropriations. The restriction on the Corps right to utilize the continuing contracts mechanism has thrown the procurement process into disarray. The Corps and industry are presently in debate about how to accommodate these new requirements. Ultimately the work has to come up for bid but this is just one more road block over come in the near term that is disrupting the orderly flow of activity in the bid market.

The Water Resources Development Act or WRDA legislation, which includes authorization of the Corps civil works project still looks good for passage of a bill in 2006. As I indicated in the last call, the positives for the industry included in the current WRDA are the retirement of the Corps dredge McFarland, which should add work for the industry; the reduction in local cost sharing required in project that go below 50 feet; and authorization for 12 priority projects under the Louisiana coast and restoration plan, as well as the authorization of various additional harbor deepening projects. Passage of this bill will give assurance of continuing commitment to capital dredging work out in the future.

Although the 2005 beach nourishment market benefited from the supplemental federal funding passed in 2004, the support for federal beach funding continues to be uncertain. The President's fiscal year 2007 budget includes some beach work but clearly does not support beach work where the benefit is considered to be only local. Fortunately more beach communities are developing funding sources to meet their beach nourishment needs and current schedules indicate beach projects valued at approximately $100 million for biddings through 2006.

Finally dredging work related to the development of LNG terminals continues to progress, particularly along the Gulf Coast of Texas. We are involved in three project solicitations with private customers for work valued at over $50 million that looks promising for starting by year end.

And in the foreign markets we now have two large hydraulic dredges working in Bahrain on the Durrat development project which will provide employment for these vessels for the next nine months. We continue to follow a number of large land reclamation projects in the Middle East, particularly in Qatar and Bahrain. Given the volume of work being generated in the region, there appear to be opportunities for employing equipment which may otherwise become idle in the U.S. due to overcapacity. We are carefully assessing the funding issues in the U.S. and exploring opportunities in all markets to try to ensure higher utilization of a fleet.

Finally the outlook. The first quarter of 2006 was a solid quarter from operations and while down somewhat from the third and fourth quarters of last year it was a substantial improvement from the first quarter of 2005. Our rolling fourth-quarter EBITDA at March 31, 2006 continues to show improvement despite our added expense related to our self-insured claims reserves and based on our current backlog our second quarter should continue this trend. While the low level of bidding activity for the first quarter is concerning, there is work that is currently scheduled to come out that should provide adequate opportunities to add backlog for this year.

Also pricing in the industry has seemed to be stabilizing at more reasonable levels, although not to the pre 2004 levels. We think there are some very good opportunities to add foreign backlog as well to enhance utilization for some of our current domestic fleet. Therefore we continue to feel that our expectation for the year 2006 of $45 million to $48 million of EBITDA is still reasonable. At this level of EBITDA, we expect to generate sufficient cash flow to meet our current annual debt service requirements of approximately $22 million to fund our necessary capital expenditures and allow for continued pay downs on our senior debt.

This concludes my formal portion of the update, but I would 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 website at gldd.com. I will now open up the call for questions that you may have.

(OPERATOR INSTRUCTIONS) [Matt Vitorioso], Barclay's Capital.

I was wondering if you could just give us a little more color on the pricing environment that you saw in first quarter '06. I know that you said the won 42% of the bid market and the bid market was a bit smaller than normal. Were you able to maintain the pricing improvement that you saw in the second half of '05?

Yes, I would say that we did.

Okay, so even though the bid market was smaller and you are still gaining market share, you are maintaining your prices?

Yes. Yes, we did.

Thank you.

Larry Taylor, Credit Suisse.

A couple of things, Deb. One is in terms of the Gulf Coast and what is going on there? What is the total size of the appropriations? Secondly, I think turning the clock back just a couple years ago it seemed like there were some things that were distracting the Corps. And are there activities either in the Gulf Coast or elsewhere at this time that you think are keeping the Corps from pushing through normal -- "normal capital projects" domestically or no?

I think and there's two questions. The work in the Gulf is probably not considered capital work but there was some bid appropriations related to not just dredging activities but other activities. I talked a little bit I think over the last couple of quarters how there were issues there because there was some constraints on the size of projects that they wanted to put out and they had put out -- pre qualifications for the dredging companies and we all did that. But it seemed to not progress very well and few projects came out. But I don't think the size that we would've thought that would've come out. The appropriations are still there and I think we're hopeful that more of that work will come out here, but again it's not coming out very orderly.

I think from a capital projects perspective I do think that some of the same issues are there, the funding issues. They are still sort of working through that, but this new issue about continuing contracts is a problem because capital projects tend to be bigger projects. So if you find out what your need is for a particular project and it is more than what you have for an appropriation this year, you have a problem. Do you break it up and bid part of it this year or do you wait until next year until you can get more appropriations and do everything?

So again I think that there's just procedural problems in letting the Corps get the work out that needs to be done because the budget seems to be there, the appropriations seem to be there for more activity to be happening. So yes, I do think that they are still working through the issues. Yes, they do tend to impact more of the capital projects than the other types of projects.

Is there anything out there that is going to resolve this continuing contracts issue or is that --?

Oh yes, it will have to be resolved. The work has to be done so they will figure out the best way to put the projects out there. Worst-case is that they now know that they have to have all of the money so they will make sure that if you've got a project this year and you can't bid it, you've got to make sure you have your appropriation for next year so that you can put it out.

Okay, then one last question. When you look at margins on some of the foreign work that you're evaluating, the foreign capital work, to the extent that you're reallocating equipment there, how would you compare those margins to historical domestic capital margins and also to margins that we have seen more recently over the last year or 18 months?

Typically the foreign work has not had the high margins that we see domestically. But it was always a good source of additional utilization. I think now with the U.S. market where it is and pricing being better but not at levels we've seen before and the improving situation overseas, improving by meaning that there is a lot of work coming out, I think that our margins are improving over there over our historical foreign margins and they are getting closer to what we're seeing here in the domestic market.

But they are better -- the margins you are seeing in the foreign work now are better or worse would you say than the margins were when you had the capacity problems in the states?

After 2004?

Correct.

I don't know specifically but generally speaking I would think that they are better than what we had in 2004 in a general sense.

Okay, thank you.

[John Parker], Jefferies.

Can you talk about the nature of the lawsuits, the class-action lawsuits? What are they suing about?

I'm sorry, could you repeat?

Can you talk about the nature of the lawsuits that are coming out of the Texas law firms, what the reason for the suit is?

Yes, this is all related to personal injury from our hourly workforce. So it relates to individuals who are working on projects who were injured.

Okay. You mentioned a $2 million adjustment to reserves. Is that a onetime deal? I guess you can't really say it's a onetime deal because if these continue you could see more of these down the road, but --.

I think that's a fair assessment. Obviously at any point in time we need to reserve for what we think our best guess. So that's what it is, but clearly there can be some impact to us going forward.

Okay. In the last call you said that margins in the first half looked similar to the second half of 2005 and I guess if you look and see that they are not up to that levels because of this $2 million amount, is that fair?

Fair to say I think our operational margins were on par with what we saw in the second half of last year definitely.

This is different from -- you also had an increase of 1.4 in annual insurance premiums. That is a different item. Is that correct?

It's the premiums related to our insurance for these types of claims, but again that we knew was coming and that was incorporated in our budget for this year.

How often do you evaluate your reserve? Every quarter or --?

We'll evaluate at least every quarter or sooner if it warrants it.

Okay, that's all. Thank you very much.

(OPERATOR INSTRUCTIONS) Lawrence (indiscernible), Lehman Brothers.

It's Lawrence in for Sarah. I just wanted to talk about the bid market, the domestic dredging bid market. I know it was low in the quarter. As I look back at last year in each of the four quarters it was between 150 and 215 million range for a total year about 727, which was basically flat with '04 and '03 was significantly lower. Can you just give us a sense for -- you highlighted this a little bit in your prepared comments, but just give us a little bit more color if you don't mind on where you see the next few quarters coming in because obviously it is a very tough start to the year.

It is. It is low and that's concerning to start off the year that way. That being said, I do think there's a lot of beach work that seems to be scheduled and it seems to be funded, so that is good. There isn't a special appropriations for beach work so we would not expect to have the excessive year that we had last year, so that is kind of for the beach side of it. Maintenance I think given the appropriation level that we have I think you'll see a similar level of maintenance work.

So it really comes down to what's going to come out on the capital side and as I said it looks to me like there's some schedule of work that could be $300 million plus, but again those are the project that seem to be impacted by these delays and in fact a couple of these projects have different delays related to permitting issues, which is not unusual. These big capital projects require various permits and they are much more complex projects. But in I guess adding that all up if a good portion of that capital work comes out I think it will be a reasonable market. If it continues to get postponed, then I think the market could be down.

Okay, just on your covenants, I'm not sure I got the right numbers. Did you say total leverage from covenant EBITDA was 5.7 or 4.7?

5.7, which is just total debt over our EBITDA.

Because isn't that right up against your 5.75 times covenant?

Yes. That is why I made the point in saying that it does not include adjustments that are allowed by our credit agreement.

Okay so you're technically not that close to your covenant?

That correct.

Because you would think with debt flat sequentially from the end of the year, and an improvement in EBITDA I would've thought that it would have -- we had 5.2 times at year end. I would've thought it would've been down from that.

I don't know how you calculated a 5.2. Again you need to look at what we report as EBITDA and use that number and that's what I'm using comparatively. There are adjustments that are allowed under the credit agreement that change that EBITDA number.

Can you give us a sense for how close you are to the 5.75 times covenant?

I guess the easiest thing is to remind you last year that we had a $5.7 million charge related to goodwill impairment in non-cash charge, so that is something that was a non-cash charge that's specifically allowed in the credit -- or allowed to be excluded in the credit agreement. So that probably gets you to the number that you are looking at.

Okay, but you're not concerned about breaching your covenants at this point?

No, we were well in compliance at the end of the first quarter.

Okay, thank you.

[Todd Gilbert], Guggenheim Partners.

It's actually [Eric Schram] with Guggenheim. A couple of quick questions. One just on the Manson hopper that's coming on, when were you guys looking for that to come on initially? You said there were some changes and now it's going to come out a little bit later than you thought.

I think we thought it would be in the bid market already here. I think originally we had thought it was maybe the end of last year. But building these big vessels, that's not unusual to have difficulties early on, so it takes a while to sort of work out those.

And you guys are looking for that early summer, late summer, or it's hard to tell?

Hard to tell.

Just a housekeeping item, would you mind just running through the CapEx numbers again that you spoke to? I just missed a couple of those.

Sure. Our total spend for the first quarter was $8.3 million. That included $2.6 million to purchase the dredge of Victoria Island. It included $1.1 million for the completion of a new barge for the booster and $1.2 million for demolition equipment. So our total spend for the year exclusive of that purchase of the dredge of Victoria Island should be similar to last year and last we spent $14 million.

Okay, great. That's all I had. Thank you.

Ms. Wensel, we have no questions at this time.

Okay. Thank you for joining our first quarter update and I expect I will conduct the next call for our second quarter 2006 results the week of July 24. Thank you very much.

That will conclude today's conference. Thank you everyone for your participation.