Great Lakes Dredge & Dock Corp (GLDD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Great Lakes Dredge and Dock Corporation earnings conference call. My name is Chris, and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to Ms. Katie Hayes, Director of Investor Relations. Please proceed.

Morning, this is Katie Hayes, head of Investor Relations for Great Lakes, and I welcome you to our quarterly conference call. Deb Wensel, our Chief Financial Officer, will begin our discussion by presenting the financial highlights for the quarter ended March 31, 2010. Then Doug Mackie, Chief Executive Officer of Great Lakes, will share his market overview. Following their comments, there will be an opportunity for questions.

During this call, we will be making certain forward-looking statements to help you understand Great Lakes and its business environment. 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 the filings with the SEC including our 2009 Form 10-K and subsequent filings.

During this call, we will furnish certain non-GAAP financial measures including EBITDA, which are explained in the net income EBITDA reconciliation attached to our earnings release and posted in the investor relations section of the Company's website, along with certain other operating data. I will now turn the call over to Deb Wensel.

Thank you, Katie. I hope that all of you have had a chance to review our press release this morning which includes financial highlights for the period. We had a strong start to 2010 with higher operating margins offsetting lower revenues, producing EBITDA of just over $28 million, matching our robust performance for the first quarter of 2009.

Total revenue for the quarter was $161.4 million, down 10% from $179.2 million during the first quarter of 2009, predominantly due to the increase in foreign dredging revenues from a very strong first quarter last year.

Domestically, a healthy first quarter for beach work offset declines in capital and maintenance revenues. Demolition revenue in the quarter was $12.4 million, on par with revenue a year ago.

Despite the decline in revenue, gross profits for the first quarter of 2010 increased by 13% to $30.5 million from $27 million, resulting in gross profit margin increasing to 18.9% versus 15.1% in 2009. The higher margin resulted from several factors, including a greater weighting of domestic dredging work in the project mix for 2010. In addition, during the first quarter of 2009, we agreed to allow the customer on the Company's DR project to separate the remaining contracted backlog into two pieces. A significant amount of work yet to be completed on that project was reclassified from backlog status to that of options.

As a result of the reduction in the project size, our margin on the base work was reduced and a negative adjustment was reported during the quarter. Also, 2009 gross profit was negatively impacted by a write-off in the demolition business related to a large development contract that had been delayed due to the economic downturn.

Operating income increased by 18% to $19.4 million versus $16.4 million for the first quarter of 2009 as the higher gross profit more than offset a $0.6 million increase in G&A costs. Net income attributable to Great Lakes Dredge and Dock Corporation for the quarter was $9.3 million or $0.16 per diluted share, versus $7.3 million, or $0.13 per diluted share, a year ago.

During the first quarter of 2010, $211 million of work was awarded in the domestic bid market which included two significant capital projects and numerous maintenance projects. Great Lakes won the only beach project awarded in the quarter for $10.4 million as well as 29% or $22.4 million of the maintenance work. This resulted in a 16% win percentage of the first quarter's bid market for the Company, which is down from our average win rate of 46% over the last three years. However, variability in contract wins during any particular quarter is not unusual, and generally not indicative of the win rate the Company will achieve for a full year.

As a result of a strong first quarter operating performance, and the lower level of market awards taken on during the quarter, the Company's dredging backlog decreased to $296 million as of March 31, 2010, compared with $344 million a year earlier.

The current backlog includes over $30 million more of domestic work than was in backlog at this time last year. In addition, we have been seeing encouraging signs during the first quarter in our demolition business. Demolition services backlog at March 31, 2010 was $51.2 million compared with $24.1 million at March 31, 2009. This increase reflects the success the demolition business has had in expanding into other markets, predominantly in New York.

Capital expenditures for the quarter totaled approximately $3.8 million. Despite this lower-than-typical level, we continue to expect full year capital spending to reach $25 million. In addition, as Doug will discuss later in the call, we have decided to move forward with the upgrade of our Dredge Ohio that was purchased in 2007 and then mobilized to the Middle East. This undertaking will cost approximately $18 million and will be substantially completed by year-end. This redesigned dredge will be a world-class hydraulic cutter suction dredge, similar in size and capabilities to our Dredge Texas.

During the quarter, we paid down the $11 million of outstanding borrowings on our revolving credit facility and increased our cash and cash equivalents to $20.9 million as of March 31, 2010. Outstanding at quarter end was our $175 million of 7.75 senior subordinated debt and $35.3 million of performance letters of credit, including $19.6 million on the Company's $155 million revolving credit facility. Therefore, at quarter-end, the Company had $125.4 million of borrowings available under this facility after excluding $10 million which is unavailable from Lehman Brothers, a defaulting lender.

We are currently working towards removing Lehman as a party to the agreement and reducing the facility to $145 million. Leading positions in our credit facility are held by Bank of America, GE Capital Corporation, RBS, Fifth Third, and PNC Bank.

At quarter-end, our total leverage was 2 times, and interest coverage was 5.4 times. As we begin 2010, we have been able to maintain lower levels of working capital as our work has shifted to more domestic projects and the customer on our DR project in Bahrain has been paying us according to the agreed-upon payment schedule. At this point, I'll turn the call over to Doug Mackie, our CEO, who will give you an overview of what's going on in the dredging markets.

Thanks, Deb. As we noted last quarter, the President has introduced his 2011 Federal Budget, and while it is down from the previous year, we believe it is just a starting point as historically budgets have been increased [and what] has been initially presented. As we also noted, the apparent change in the settlement by the Administration towards increasing appropriations for beach projects is an encouraging positive, and we have already seen an increase in Federally-funded beach projects being advertised as here.

Additionally, operating under an approved budget as opposed to a continuing resolution, helps the Corps fund and bid work more efficiently.

Recently, identical bills were introduced in the House and the Senate with strong support on both sides of the legislative aisle relating to the Harbor Maintenance Trust Fund Initiative. The objective of these bills is to ensure that the Fund's revenues are set for their intended purpose, primarily maintenance dredging, which has not been consistently the case.

A new water bill, the Water Resources Development Act, currently appears to be on track for introduction as well and it is likely that the Harbor Maintenance Trust Fund Legislation will be attached to it. We continue to be hopeful for passage of the bill in the fall this year.

However, we are now aware that since the 2011 budget has been introduced, any additional funding provided by the passage of the Harbor Maintenance Trust Fund legislation will not be accessible in 2011 without a supplemental appropriation bill. Absent this, we may have to wait until the 2012 budget or the fourth quarter of next year to get the full impact from the Harbor Maintenance Trust Fund. Nevertheless, the increased focus on infrastructure and port work is a positive sign that Congress and the administration recognize the importance of funding these types of projects.

Focusing on capital work as we have previously mentioned, the expansion of the Panama Canal continues to heighten the need for the US to deepen its east and gulf coast ports. Recently, we have increased discussion of expansion plans with several ports in addition to the $350 million deepening project in the Delaware River, the first phase of which was bid last year, and the $600 million deepening project that is planned in Jacksonville, Florida. Projects in Savannah, Boston and Miami look likely, although they may not impact the bid market until 2012.

In the shorter term, we see domestic capital projects on the horizon such as deepening another section of the New York Harbor, work for the Navy in Norfolk and Florida, and a couple of other deepening contracts along the Gulf Coast. These capital projects could add more than $100 million to the domestic bid market by the end of the year.

In addition, with regard to the Supplemental Appropriations Act of 2009, which appropriated $400 million for Barrier Island, an ecosystem reservation along the Mississippi Gulf Coast, the Corps is expected to schedule for bid the first related project in the first quarter 2011.

There are currently several other sizeable coastal restoration projects, primarily in Louisiana, that have been advertised. Whether they will be bid this year or in 2011 is not yet known.

As I mentioned in the relation to the Federal budget, the Administration has indicated willingness to reverse its previous opposition to funding beach projects. Given the administration's position and the willingness of Congress to request additional beach funding in its version of the budget, we would expect potentially a large Federal beach market than in recent years. Currently, we see over $100 million in beach projects scheduled to be bid in the next 12 months.

Our current backlog in the Middle East will occupy our large hydraulic dredge and a few smaller dredges into the third quarter of 2010. We also see several other dredging opportunities in the region in the near term. In the longer term, we are optimistic about opportunities in the Middle East, as it appears customers there are beginning to feel more confident in moving forward with infrastructure projects, although not of the massive scope as was previously the case.

Consequently, as Deb mentioned, we are upgrading our Dredge Ohio to a world-class cutter suction dredge, which is suitable for these types of projects. Plans to upgrade the Ohio were put on hold at the start of 2009 when it was unknown if there was enough work for a vessel this size. We now expect the Ohio to be operational at year-end.

Elsewhere in the international market, there are a number of bid opportunities for the deployment of our international fleet.

In summary, there is very positive movement with regard to the Harbor Maintenance legislation and we currently foresee this legislation being passed before the year-end. Harbor Maintenance Trust Fund legislation is passed, it should add $250 million to $400 million to the dredging opportunities each year, which should begin to impact the domestic market in the fourth quarter of 2011 or early 2012.

In addition, we currently see increased planning for the deepening of our nation's east and gulf coast ports and anticipation of the completion of the Panama Canal.

And finally, in the Middle East, we are excited to be moving forward with the upgrade of the Dredge Ohio. Although we currently anticipate significant down time for our dredges located in the region in the second quarter and into the second half of the year, the longer term prospects in the region appear to be very good.

We are pleased that our strong 2010 start as a result of the working off of the healthy backlog in place at the end of 2009 and positive contribution from the demolition segment, even though we had a lower than average win percentage in the first quarter's domestic dredging bid market, the current backlog should produce a solid second quarter but probably not at the same margin levels experienced in the first quarter.

At this point, we still do not have visibility to the amount of the work that will be put out by the Corps in the back half of the year. Therefore, as we did at the end of 2009 first quarter, we are not giving specific guidance at this time. But, as the year progresses and the market dynamics become clear, we expect to be able to provide more clarity on the full year EBITDA for 2010. We do believe that 2010 can be similar to 2009 predicated upon a reasonable 2010 domestic bid market, winning and commencing some additional foreign projects and improvement over last year in the demolition business.

This concludes our prepared remarks. I would now like to open the call for your questions.

(Operator Instructions) Our first question comes from the line of Richard Paget. Please proceed.

Good morning, everyone.

Morning.

Good morning.

I wonder if we could just get some clarifications on the Harbor Maintenance Trust Fund issue. If I remember originally it was attached to awarded 2010, and then they separated it and made it its own bill, and now you're saying you expect it to be put back on that? Did something change, or did they realize, I mean I've been tracking this and seeing a lot of both Democrats and Republicans in the House and Senate kind of jump on it as co-sponsors. What are your lobbyists telling you that this is going to be part of the water bill for it to go forward?

Well, I think that it is still an independent bill, but -- and we would like it to be attached to the water bill. It's -- we think it's an easier way to get it through Congress and to the Administration, and that's mostly because of the infrastructure product we have going through the legislation. So, we're still, we are still, we'll still be able to do an independent bill, but we think it'll be a stronger bill if it is attached to the water.

Okay, and then also, just to be clear, you're saying just due to the budgets getting set for 2011? Even if it were passed tomorrow, that the HMTF monies couldn't be put into the budget until 2012 unless there was another special stipulation on it?

That's correct. Once the bill was put in place by the administration, we would have to get an appropriations bill in addition to revenue for the Harbor Maintenance Trust Fund in 2011. Which is not -- which is possible that we could get that bill.

Okay, and then moving on, to with the oil spill in the gulf, any potential impacts either on the positive side or the negative side for you guys?

We haven't seen anything negative at this point. It has not affected any of our projects. We have had in the past probably about four years ago, when there was a tanker that spilled in the Mississippi River area, and we were able to get some clean-up work for our hopper dredges, but at this point we have contacted the insurance companies and the Corps and we're just waiting to see if they need our help.

Okay, and any particular projects that you're currently working on that we should keep an eye on in that area, just so if the oil is shutting down ports or areas that are at risk for you guys?

Most of the oil is drifting east, and we really only have one project in that area which is I guess it would hit possibly Alabama and the Panhandle. But at this point, there is no call to stop the work.

Okay, and I'll ask one more question before I get back in queue. On the NASDI side, I know you said the backlog up significantly and part of that's going into the New York market. I mean, is that just you winning share there? Or, is that market actually coming back? I wonder if you could talk a little bit more about the competitive dynamics and what you're seeing there.

I think what we talked about in the New York market was their opening for NASDI to come in and take market share there with some difficulty with the demolition companies that had been working in the New York area. So, NASDI came in and successfully have taken on some work in that area, and continues to look for additional work and has done well. And we've talked about this in the first quarter, picked up quite a bit of backlog in the first three months of this year.

Okay, so I guess what I'm getting at is, is this kind of a one-time bump, or do you think this level of work is somewhat sustainable here?

Well, we're hopeful that they'll be able to maintain their presence in the New York market, but as far as for the rest of the year, this is a positive sign for us but at this point in time it's hard for us to know, will this be sustainable through the rest of the year or not.

Okay thanks, I'll get back in queue.

Our next question comes from the line of [Guillaume Sho], please proceed.

Hi, good morning Doug, Deb, Katie.

Good morning.

Good morning.

Thanks for taking my question. On the DR project, is there a time line on the resolution on the part that was deferred to option status right now?

Yes, some time this fall, they have to make that decision. They can award us the option through the end I believe of August, September time frame. After that, then it would be an open project, and it would be something they could either go out and bid, or we could renegotiate with them.

Okay. Thanks. On the Dredge Ohio, are you upgrading it now to bid on any specific large jobs in the Middle East coming up in the near term? Or is it like an overall improvement in the region?

Well, there is overall improvement bidding in the region, and we're not really focusing on any one project right now but we see good work coming out in 2011 throughout the Middle East area.

Okay. You have what, is it seven dredges in the Middle East right now? One hydraulic and six hopper? Or am I thinking about it wrong?

We have nine that are operational, now that the Ohio is laid up for being upgraded, but that would--we would have-- when the Ohio comes up, we will have 10, we will have two large cutter head dredgers, two smaller cutter head dredges, and then six hoppers.

Okay, and is it possible to quantify roughly the utilization rate in the Middle East in the first quarter, and if not, maybe you can tell us how many of them are actually working on a job, right now actually?

We have most of the fleet working in the first quarter.

Okay.

And then I think here as Doug commented or made in his comments, we've got the big hydraulic and some of the smaller vessels working into the third quarter right now with backlog.

Okay, okay, gotcha. And finally can you update us again on what areas of the world you're bidding on projects, and is there anything possible in 2010?

We are bidding throughout the Middle East, that's our focus. We're looking at India, but a lot of what we're focusing on right now are in Brazil, throughout South America, Central America, Colombia still looks like a very good market for us.

And so in general, what size jobs would you need to justify mobilizing a dredge to say, Brazil? I know you build that into the cost of mobilization, in your bid, but there's also the expense and opportunity cost to pull that vessel out of the region after the job is done assuming you can't have any follow-on work.

Well, we think that it depends on the type of project. If it's a hopper dredge, which we use in the Middle East, or coming out of the US market, it is not an expensive mobilization. It's just one vessel. If we're talking about cutter-head dredges, then it becomes maybe four times the cost. So, we're -- we feel that we have the ability to take the equipment there and compete. We've put in several different proposals, in Brazil and throughout Central America, and we're hopeful to land at least a few jobs.

Okay, thanks guys.

Our next question comes from the line of [John Rogers] of D.A. Davidson, please proceed.

Hi, can you hear me?

Yes.

We can.

Oh okay, good, good morning. A couple of things, just so I'm clear, with the Ohio this takes your CapEx this year up to $43 million?

That is correct.

Okay. And then, Deb, do you have operating income by segment between the, or between the dredging and the demolition business?

For the first quarter?

Uh-huh.

I believe we post that.

It's going to be in the Q.

I'm sorry, it will be in the Q. I don't have that in front of me, but if we looked at NASDI in the first quarter of last year, I believe they were negative, and this year--

Right.

So there's a fairly good swing for that part of the business.

Okay, but it was profitable?

It was profitable in the first quarter.

Okay. And then, can you talk a little bit more just about the market opportunities? You cited $211 million in bidding, but Q1 was at 16% of the market that you bid on, which was low. I mean, one, can you give us a little more color on why that win rate was lower, and then also kind of the pace of bidding activity that you see coming this year?

Well, the bid market in the first quarter was dominated by two capital projects. In fact, it was $110 million made up more than half of the bid market. So.

That was one, in--?

Unfortunately, we were within 1% or 2% of our competitors on the wrong side. And other than that I mean, this is, this first quarter is fairly similar to last year's first quarter bid market, and we do have a budget so we're pretty positive about work coming out through the rest of the year, and we'll just have to see as we go through the second quarter how much work the Corps will put out.

But Doug, it should roll out at the same sort of pace based on the budget that you're aware of now? I know these projects can move around a little bit, but.

I mean, there are, they are, don't always come out on a regular basis.

Right.

I mean, they come out in slugs. So, we're through four months, and we had some good success in April. We just want to see, we'll be looking forward to it increasing.

Okay. And on the beach nourishment work, particularly, and I know this is all a ways out there, but if this oil in the Gulf ends up along that coastline, does that stop beach nourishment work the next season?

That's a really good question. We've heard all kinds of ideas. I mean, right now they're doing a lot of dispersing because the oil is coming from a long way, 50 miles offshore, versus in the channel when they had the oil, so it's, I mean it's not a thick oil that's hitting the shores at all yet. I think it's dispersing, but we really don't know. And most of the beach nourishment work is east coast. We don't expect problems on the east coast.

Okay, and that typically bids more later into the year, is that right?

That's correct.

That's correct.

Okay, okay. Thank you.

John, can I, and I'd like to correct my answer on the NASDI. We actually had a slight operating loss for the quarter for NASDI, but they had positive EBITDA.

Oh, okay.

That's where they ended up.

Okay, so it was a slight loss.

But much better than what they had done in the first quarter of last year.

Significantly.

Okay. But it also then implies that the margins for the dredging business were better than last year as well?

Yes, that's correct.

Okay, thank you.

(Operator Instructions) Our next question comes from the line of [Tim Priadle] of West Creek Capital, please proceed.

Hey, good morning. I just had a few quick questions. I want to talk a little bit more about the margins in the quarter, and the EBITDA margins were close to 17.5%, which is higher than I've seen previously. Is that one of the best quarters on an operating margin basis that you guys have had?

It certainly is in recent history, that's correct.

Okay. And then just for comparison purposes, to the first quarter of last year, could you quantify what those two one-time items, the Bahrain write-off and the development contract were, so that we could get a better understanding of how the margins this year compared to last year?

Well, I think if we would adjust for those two items, the gross profit margin would have been closer to 18% or a little over 18% for the first quarter of last year.

Okay. Just so that--this year was better than last year?

Was still better than last year, margin-percentage-wise, that's correct.

Okay. And so could you just help me think about that, is that because the foreign work is lower margin than some of the domestic work. Is that because beach is much higher margin than the other stuff? Why was the first quarter so good?

Again, we had certain projects that had good operating efficiencies on them. It's just the mix of the projects that were there. Again, we had more foreign work in total last year, but the mix now this year was weighted towards domestic versus foreign, and those margins are typically higher.

Okay. So, can I hope for 17% margins on a going-forward basis? I understand that the projects are kind of lumpy, but is that sort of the new reality?

Well, we obviously achieved that in the first quarter, and it's dependent upon the particular projects that are being bid. We would hesitate in saying that we would be doing 17% going through the rest of the year, but it is, it's something achievable. And we got asked this same question at the beginning of last year, as well. And we show that the certain project mix can produce these better margins, but not necessarily every quarter.

Okay. And then could you just talk about this, what sort of return on investment do you guys require in making capital expenditures like the $17 million?

Well you know, that's not an indicator that we normally talk about. We do have that within the Company, we work with our Board, whenever we are going into any big capital expenditure. And so, of course we did that with regard to our upgrade for the Dredge Ohio.

Okay. And so, you touched on it briefly, but obviously you guys are, although you're not saying you're bullish about the foreign markets, the fact that you're willing to put $17 million into that dredge suggests that you're optimistic going forward, is that correct?

That's correct.

Okay, thanks a lot, Deb.

(Operator Instructions) Our next question comes from the line of John Rogers of D.A. Davidson, please proceed.

I just want to follow up, in terms of your depreciation this year, how should we think about that? It should be level with the rate we saw in the first quarter?

Again, our depreciation for the full year should approximate last year or probably a little bit higher.

Okay.

And again, quarter that depreciation does fluctuate because we do match those certain fixed equipment expenses based upon revenue.

Right, okay. And interest expense this year, I mean, saying that--?

Yes, at this point of time of course we've generated cash and while we don't get a big return on the cash, we don't have any revolver borrowing and given our outlook for the year wouldn't have expectations that we would have significant borrowing.

Okay.

So, here we generally have the $175 million of the senior subordinated at 7.75.

Okay. And the, one other just line item, the other income, or expense in the quarter and I'm sorry if you said this, what was that? This $720,000?

Okay, Katie's looking quickly.

Oh I'm sorry, it was the equity income. Never mind, I've got it.

Oh, okay.

Sorry, sorry, thank you.

Okay, very good.

There are no further questions at this time. I would like to turn the call back over to Mr. Doug Mackie.

Well thank you, and thanks for all of you for joining our first quarter update. We're excited about the dredging opportunities we see on the horizon. Great Lakes, as you know, has the largest and most diverse fleet in the United States, and a significant international presence. This positions us well to take on a range of domestic projects we see in the near term, and long term, and especially the complex capital projects and offshore beach projects as well. We look forward to talking to you again after the second quarter, in August. Thank you for participating.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, have a great day.