Great Lakes Dredge & Dock Corp (GLDD) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2013 Great Lakes Dredge & Dock Corporation earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Katie Hayes, Treasurer and Director of Investor Relations. Please proceed.

Good morning. This is Katie Hayes and I welcome you to our quarterly conference call. Jon Berger, our Chief Executive Officer; and Bill Steckel, our Chief Financial Officer, will discuss the operational and financial results for the quarter and nine months ended September 30, 2013. Following their comments, there will be an opportunity for questions.

During this call, we will make certain forward-looking statements to help you understand our business. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in our filings with the SEC, including our 2012 Form 10-K and subsequent filings.

During this call, we will also refer to certain non-GAAP financial measures, including adjusted EBITDA, which are explained in the net income to adjusted EBITDA reconciliation attached to our earnings release and posted on our investor relations website, along with certain other operating data. I would first like to turn the call over to Bill Steckel, our CFO.

Thank you Katie. We issued our press release this morning, which contained a great deal of information. This quarter we saw increased levels of business and the achievement of a record dredging backlog, so let's walk through some of the highlights.

As expected, dredging activity picked up after a slow second quarter, when several vessels were offline for scheduled maintenance and some projects were delayed into the second half of the year. Our dredging segment worked on 7 projects that each generated over $10 million of revenue in the quarter.

Our coastal protection revenue, which is typically lower in the third quarter due to environmental windows, was 150% greater than the same quarter last year, driven by projects funded by super storm Sandy relief funding. We also began dredging on our project in Australia at the beginning of the third quarter.

Our remediation business that we added in 2013, Terra Contracting, experienced a significant uptick in the quarter with nearly $32 million in revenue.

Our historical demolition business continues to struggle, as noted in our press release. We are evaluating all strategic options for that business. Jon will cover more about this business in his comments in a moment.

General and administrative expenses increased by approximately $7.6 million compared to the same quarter last year, related to headcount additions in our corporate office, legal and professional expenses primarily related to the revenue recognition issues discovered at year-end, bad debt expense, as well as the addition of the new Terra Contracting and its $2.8 million of G&A expenses.

With the increase in revenue and higher asset utilization in dredging at Terra, gross profits improved to over $22 million. On a percentage basis, gross profits improved to 11.2% compared to 4.8% last year and 3.4% in Q2.

The Company recorded an operating income for the quarter of $6.2 million. In addition, we completed the sale of a dredge in the Middle East for a gain of $3.2 million.

EBITDA of $19.6 million for the quarter, was more than double last year, while year to date EBITDA was $48.8 million, nearly a 25% increase compared to last year.

As we look forward, dredging has $509 million in backlog and another $95 million in low bids pending award; the highest backlog we have experienced for the dredging segment. We expect this book of projects to drive activity in the dredging segment for the remainder of this year and into 2014.

Domestic bidding activity for dredging in the third quarter nearly equaled that of the first six months, bringing the total market for the nine months ended September 30, 2013 to $1.1 billion compared to $678 million in 2012. The company won 55% of the overall domestic bid market through the first nine months, which is above our prior three-year average of 37%.

The combination of increased market activity and our win rate, which was driven by the award of the first phase of the PortMiami project and by capturing 57% of the coastal protection market, sets the stage for a busy remainder of 2013 and early 2014. In addition, the maintenance market picked up in the third quarter.

Please remember that variability in contract wins from quarter to quarter is not unusual and the win rate for one quarter is not indicative of the win rate the company is likely to achieve in the full year.

When we break down our win rate by type of work through the third quarter, Great Lakes won 75% or $232 million of the capital projects awarded; 57% or $231 million of the coastal protection projects awarded; and 33% or $107 million of the maintenance projects awarded. There were 7 rivers and lakes projects bid in the first nine months and we won 3 of them or approximately 44%.

To put this high level of bid activity and our win rate in perspective, the company's contracted dredging backlog without pending domestic awards of $509 million at September 30, 2013 compares to $389 million at December 31, 2012. Since September 30th, the company was also low bidder on $53 million of work, including a $30 million coastal protection project in South Carolina.

Demolition segment backlog was $97.1 million at September 30th, including $20 million from Terra, compared to $60 million at December 31, 2012.

Our focus on recovering investments and working capital resulted in an improvement at September 30th. Working capital decreased by $23 million and cash increased by $20 million. With the start of dredging in Australia, we began recapturing our Wheatstone working capital and we also improved the working capital in our domestic dredging operations.

We spent $38 million on equipment in the first nine months of 2013, including $15 million on the ATB vessel. As noted in our press release, we are in final negotiations with two shipyards to build this vessel. Although we do anticipate incurring increased [expenses], we can ultimately execute a long-term lease.

We remain in compliance with the covenants on our revolving credit facility. We are mindful of our remaining investment in working capital and we are actively working to increase our cash flow.

I would like to now turn the call over to Jon Berger, who is going to discuss some of our important activities and initiatives, as well as strategic and growth considerations.

Thank you Bill. As Bill stated, our addressable bid market was very active in the third quarter, bringing the market through nine months to greater than $1.1 billion. This puts us on record pace for our market in 2013 and as Bill said, we won 55% of this market and it has resulted in a record backlog.

Now let me turn to specific markets and address some updates since the August call. First, Sandy. As we expected, work needed due to hurricane Sandy has driven the increase in this market in the third quarter. There were 12 projects for coastal protection needed as a result of Sandy that were bid and we were awarded 6 of them for $111 million and additionally, we won 1 in September for $30 million.

As expected, we saw a shift in the Sandy projects to the Southeast, with 7 projects in Florida in the quarter. There were also 9 maintenance projects bid that were funded through the Sandy Appropriations Bill. We expect more projects in the Northeast will be bid in 2014 and that will be critical to rebuild and fortify the Northeast coast line.

Coastal restoration in Louisiana and the Gulf Coast; there continues to be a focus on long-term rebuilding of the Gulf Coast in Louisiana. We finished 2 large coastal restoration projects we won last year and expect several other projects to be bid on in 2014. We expect some of these projects to be funded with the $340 million that BP has agreed to fund for restoration projects, plus we expect to see an ultimate settlement with BP after the trials.

We had previously announced that we were the low bid on an $81 million coastal restoration project that was subsequently rebid in late October. We were not successful on this rebid. Although we're disappointed we did not win this rebid, we look forward to bidding and winning on other coastal restoration projects on the horizon for which we are well positioned.

Port deepening; as indicated by the passage of WRDA Bill by both the House and the Senate, infrastructure continues to be the focus of both Congress and the Executive branch. We expect continued support of capital dredging in the years to come. Our expectation is that Savannah is the next major port deepening to be bid and our expectation is that it will happen in 2014.

As with Miami, we also will see increase in state support for these projects. Florida has helped fund the PortMiami project and they could potentially help with other ports in that state, such as Jacksonville and Fort Lauderdale as examples. Georgia and South Carolina have also indicated they would help fund the port deepening needs in their states.

Let's turn to Washington for a minute. It was a busy month in Washington. The federal government was shut down for two weeks in October and as I think many of you can guess, there were no impacts to the projects we were working on at that time. Congress and the White House still have work to do to avert another shutdown in January, but ideally they work through to pass a budget that will keep the government running.

As I'm sure many of you are aware, the first piece of legislation passed by the House since the shutdown was the Water Resources Reform and Development Act of 2013 and it passed with an overwhelming majority of 417 to 3. This is the first WRDA Bill (inaudible) spent on maintenance dredging. The Senate passed its version of the bill earlier this year and we expect the Senate and House bills to be reconciled in conference soon and the White House already has indicated support for the legislation.

Many of you have read the legislation as it pertains to dredging and there is a ramp up over time that has to be reconciled because both the House and the Senate are not exactly the same, but ultimately it calls for a significant portion, over time, of the Harbor Maintenance Trust Fund to be spent. But that ramp up can be between five and 10 years, depending on the bills.

And as Bill mentioned, one last note on our dredging segment. We're in the final stages of selecting a new shipyard for our ATB. We expect this to be finalized before the end of the month. As you're aware, we separated from the shipyard we initially selected, but we have not slowed down and detailed engineering work has been scheduled to be done and maintain the orders for critical components for this important vessel in addition to our fleet.

We have been incurring cost for this vessel and we do believe it still is a good economic investment for the company, even though we believe the ultimate cost of construction will be higher. Although we're clearly behind schedule from which we initially expected to have the vessel in production, we expect to move ahead with delivery in 2016.

Now I'd like to turn to the demolition segment. As we've said, we will not allow the demolition segment to drag down our operations in 2014. We have made structural changes within the organization to improve operations and additionally are engaging the financial advisor to help us explore strategic alternatives. We believe the demolition business can be turned to profitability and contribute, but we want to be sure that we explore all strategic opportunities for the company and our dedicated employees, who have worked tirelessly to improve the operations.

As Bill discussed earlier, we have had too much capital tied up on our balance sheet; some intentionally, some as the known investment in inventory to allow us to win key projects in the Gulf and the known investment requirements for the early ramp up of the Wheatstone project. However, we have certain outstanding receivables in the Middle East and potential change orders in our demolition business that have our full attention and we need to get those turned around.

We have successfully reduced the investment of working capital in the third quarter and increased our cash balances, however, we still have a way to go and our management continues to focus on this as a key component to our end of the year. Additionally, I think Bill stated that our G&A has increased; some of that through the acquisition of Terra, but also through the legal issues that we've been dealing with. That has the full attention of management and we fully expect over time to reduce that back down to normal operating levels.

Finally, we will not be giving formal guidance at this time. With recent events and results in our demolition business, we feel it is prudent not to issue forward-looking guidance. We appreciate the support of our shareholders, employees and business partners and we thank you for joining us in discussion of the important developments and initiatives in our business.

With that, I'd like to open it up for questions.

(Operator Instructions) Jon Tanwanteng, CJS Securities.

Your dredging operating margins and profits were actually lower quarter-over-quarter. Despite all the headwinds and delays you had in Q2; what was the reason for that and do you expect this to improve either next quarter or year-over-year, given what you see in your current backlog?

Jon, can you repeat the question? I'm not sure I understand. You're talking about margins in dredging?

Yes. They were lower quarter-over-quarter.

When you say quarter-over-quarter, which quarter are you talking about?

Q2 to Q3.

I don't think so.

Is that not right?

No, I don't think that is right, Jon.

(Inaudible - technical difficulty) to much more normal levels in Q3 for the level of revenue that we had.

I'll come back on that one.

But to address that question with a little more clarity. Obviously, at the increased volume we're working at and also with the [kick in our] margins to solidify it at a higher range than we've probably had in the last couple of quarters.

On the SG&A, you spoke about it getting to a more normal level. What is that normal level and when can you hit that?

We're going to have to work through that probably through the first half of next year, with all the legal expenses, but it's got our full attention and as we go through the budgeting process this year, Bill and his team have strict instructions to work with every part of the organization to try to squeeze it down. So you'll have to give us a little time, because some of that is out of our control to be able to address as we walk through certainly the legal issues.

On some of your larger projects, Miami and Wheatstone, could you talk about the progress on those? Are they going as expected?

Miami is just starting out and I think we should probably start dredging in December. We're doing a lot of work now, but it's prep work. Our big dredge that will be working on it is in dry dock to get it repaired for this major project. We've got a team of people that are doing all the prep work, engaging the engineers, doing all final design work, getting our logistics set. So that's really just kicking off., In the last part of the fourth quarter we'll start dredging.

Wheatstone is moving along. It's a very very big project. It seems we're hitting stride right now. And so the answer is it's going along as expected. When we did our third quarter review, margins held tight to where we expected them to be. And so all in all, nothing goes as expected, but it's holding its performance right now very well.

Finally on coastal restoration. Have the majority of the dollars in the Sandy restoration been awarded yet or is there actually more coming next year?

No. There's a significant amount of additional work that will go onto Sandy, probably both next year and then there will be kind of planning and third phase work that will be done probably out a couple of more years. We are on the bidding docket for the next three to six months. There is good Sandy work out there.

Trey Grooms, Stephens, Inc.

A couple of questions. Number one, on the G&A build additional legal and consulting costs in the quarter, over and above headcount additions and other things; was that about $1.2 million? Or is that the way to think about it is just back out those other things?

Actually, I think it was a little bit more than that, Trey. It was a little more than that in the quarter.

Then so we should expect, if it is a little bit more than $1.2 million, whatever the number is, we should expect a similar number of kind of legal and consulting costs over and above what was kind of normal in Q4 as well or should that be less or more?

Well, we just don't have great visibility of that, Trey. As Jon said, it's just not something that you can really predict and nor would be giving guidance down to that level. I think that there are things that we have to deal with in this process. Jon described it pretty well; that it's something that's going to come down over time but it's not going to come down quickly and it's not a switch that gets flipped off. That's about it, really.

Well, is a good way to think about kind of normal levels of G&A similar to what we saw in the past plus what you guys are incurring for Terra?

Yes. We've also made some investments in some additional -- I'm new, for one. So there is some increases for some strategic things that we're doing. There is a significant trunk of that that is related to special things that we've got going on as a result of what we're dealing with right now. And we'll just see how this plays out over the new few quarters.

Can you tell us, Bill, what was the comparable margin in dredging last year, ex the work performed on vessels moving to Australia? You noted there was some stuff kind of one-time-ish going on in the year-ago period with margins in the 8% range. Do you know what it was, excluding those things, so we can look at it on more of an apples to apples to apples basis?

No. We generally don't identify those and in any given quarter we can have significant movement going on, significant downtime going on with our vessels. So, we have not disclosed a specific amount or percentage related to that movement.

Revenue in the quarter last year was lower than it was this year in dredging and margins, gross profits was a little bit lower last year also. So for the quarter to quarter, year-over-year, it's really more of a factor of the revenue.

Okay. And then with that, utilization, looking into Q4, it's going to be kind of late Q4 before we see Miami pick up, so should we expect utilization rates in the Q4 to be about the same as what we saw in the third quarter?

We're expecting the fourth quarter to step up again from where we were in the third quarter. If you remember from when we talked about it last quarter, we said that we would be stepping up in Q3 and stepping up yet again in Q4. So we should see some increased levels of activity based on all the bidding that we've got or that we've won. So it will be stepped up again.

And then another step up in the Q1 with Miami progressing?

Yes, I would think so. It's that time of year where we'll be laying out what the full year looks like next year in our budgeting process, but certainly on a macro level, you've got the right idea there.

Andrew Kaplowitz, Barclays Capital.

This is Vlad Bystricky on for Andy. On the demolition business, I realize that it's early in the process of assessing alternatives, but do you have at this point any sense of potential buyer in trust or any sense of timing as to when we could see a more concrete outcome on the demolition business?

The answer is, it's early in the process, so we do not. But we are working to expedite everything we can to deal with it quickly and efficiently and fairly to everybody. But at this point, like I said, it's just early in the process. On the Sandy related work, I realize you don't want to give guidance for next year, but could you qualitatively characterize your expectations for Sandy work in 2014 versus 2013? I know you said you see a significant amount of activity. Do you still think you could see revenue growth related to Sandy work next year?

There's a lot of Sandy work. I don't know the growth. We don't get enough visibility out to the Army Corpse for projects six, nine months from now, but we do know there were appropriations for upwards of $40 billion for Sandy related work. We certainly haven't spent anywhere near that kind of money. And understand that that money entails more than dredging; there are other types of things that need to be done. There will be a lot of coastal restoration studies and analysis of do you build dune systems, what other things can be done to protect the coast and those will be longer-term things. But I do believe that we could see volumes consistent with what we had this year.

Jack Kasprzak, BB&T Capital Markets.

On Savannah, how are you expecting that to come out? Is that a Miami type, where it comes out in a big chunk or is your expectation it might come out in phases?

That's a great question, Jack. We don't know yet. Estimates are it's somewhere north of 500. There's a lot of environmental work that has to be done. Savannah has a long river channel. So we don't know yet. But I think you might expect that it comes out in a couple of pieces. It wouldn't surprise me if that is the case, but it's too early. We have not heard or seen specific plans or specs yet discussed.

On Miami, do we still think that there's another phase or the last phase, I'm not sure how to describe it, of that project that is yet to be added, which should come out in early 2014?

Yes.

Those are options.

Those are options and the way it's designed, from my understanding from our key dredging people, is you can't really take advantage of the work that has been awarded to us if those options really aren't awarded. So we do fully expect those options to be awarded.

And we think that's, if memory serves, maybe $80 million or so or is that too high?

I think it's right around there, is it, Bill?

Yes, that's close.

On the Wheatstone project, you mentioned it's performing in line with expectations but it's just starting. Is that a project that in Q4 and beyond will show an improvement to margins versus where we are right now? I assume, in terms of a startup phase, it's not starting out at projected margins.

Jack, first of all, the way our projects work is we record margins based on the profitability of the project in total. Clearly with it just starting up this quarter, there will be some increase in activity but it's not going to be huge step functions up. We ramped up this quarter. We're now up kind of performing at a certain level and that's where we'll be theoretically until the project completes and with the caveat of weather delays and all the typical dredging things we have to deal with. But we just need to remember that the margin that we record early in the project is the same margin we record at the end of the project if nothing changes.

Okay, so it's kind of a typical percentage of completion. I didn't know if there was an early contingency or anything. That's great. And last question, on demolition, you made some comments. I know it's early, but as you go through the process, is there anything that's not on the table? For example, if you get to the point where it just makes sense to finish what you're doing in the Northeast and not bid more work and it just sort of stops, is that part of the opportunity set?

Everything is on the table, Jack.

Scott Levine, Imperial Capital.

I think I heard you say that you expected dredge utilization to pick up in Q4 and perhaps into 2014, but I'm not sure if you touched on or could elaborate on the margins that you're seeing in the work that you booked recently and general competitive trends in the market and should that imply any improvement in margins versus what you've been running through your P&L in recent quarters?

Certainly utilization and the level of activity is a significant driver of margins and that's why we saw margins pick up this quarter relative to Q2. I think overall, what you're really trying to get at is margins in the marketplace are they sort of strengthening based on the fact that there's a lot of work out there or weakening. And I think overall, it's fair to say that the margins are not weakening and may be strengthening a little bit. And we've consistently said as a company, that we like to look at things and make sure that we target margins that we like and we are not going to go out and dive to the mat just to get work on low margin jobs. So I think overall, it's a positive picture when it comes to margins.

Sticking with the margin subject but shifting more to the demolition side or maybe the Terra side, obviously a big uptick in revenues there. Could you comment on the margins on your remediation business or aspects of what you guys included within your demolition business that you'd expect to retain, irrespective of what you're doing with the traditional demolition business and how do those compare with your dredging margins?

I think what we're trying to do in the demolition business we're trying to look at projects that we like the margin and we like the customer. That business is still challenging in terms of getting it fully turned around and I think we've been pretty clear on that. In the remediation side of the business, I think we see opportunities for reasonable margins, good margins, certainly margins that look more attractive than a traditional building knock-down sort of old style demolition type projects. So if you want to talk about kind of the remediation side of the house, that's probably better margins than call it traditional.

And part of that, you need to understand, especially in the bigger remediation projects, we tend to have more third party services. So the big project we're working on right now, we're building for trucking of soils out after we remediate it. We only get a small mark up on that, but the self-perform work, the margin is attractive for us. There is some third party work, like I said, that you don't get the same margins. So on the self-perform work on some of these bigger projects, we've been happy with the margins where they are. Our acquisition will exceed plans by a little bit; 5%, 10% of what we expected this year to do. And we expect it to continue to perform. But it depends a little bit on the nature of the project.

One last one then if I may on the international side. It sounded like you're making some progress but it's slow with getting some of this work in the Middle East. Could you comment more on what you see there and also it sounded like you were pursuing some work in Brazil with the clam shells, an update on what's going on there?

Internationally we are seeing increased bidding activity but in the Middle East it's a slow process. We've started looking at additional places to bid and there is dredging work out there to be had. But we have some work to do. In Brazil, we were pleasantly surprised about the opportunities, now that we have our clam shell out there and we are actively bidding additional work. So I think that ultimately will be a good investment and a good decision we made to get that clam shell package down there. In the Middle East, we are bidding some nice projects. They take a long time to get in the boat. But short-term, there's a little bit of a gap we need to fill, but we're working hard at it.

Stuart Goldberg, Kettle Hill Capital.

You had a good increase in quarter to quarter margins and I was wondering if you could give us some commentary on the margins that are going into backlog as you hit a new record again this quarter? Any kind of quantitative or qualitative commentary on the guidance or commentary on the backlog?

As is always the case, it's type of work specific, the capital and some of those things having better margins. What we've seen is we're overall happy with the dredging side of the business with what's gone into backlog. We like the projects we bid on. We like the ones we've won. We like where we've been on the bid margin on that and I think overall we're seeing, again, a favorable trend in that regard.

Is it conceivable to go back to historical margins, mid-teens over the next couple of years then, as you have this perfect storm of Sandy and the port projects?

Yes, that is certainly something that as projects fall into line, we expect to keep improving our margins.

I'm showing no further questions at this time. I would now like to turn the call back over to Katie Hayes for any closing remarks.

Thank you very much for joining us today. We look forward to speaking with you at our year-end conference call. Thanks and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the presentation and you may all disconnect. Everyone have a great day.