Great Lakes Dredge & Dock Corp (GLDD) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Great Lakes Dredge & Dock Corporation's second quarter 2015 earnings conference call. (Operator Instructions)

I will now turn the call over to your host, Mary Morrissey. Please go ahead.

Thank you and good morning. This is Mary Morrissey, and welcome to our quarterly conference call. Jon Berger, our Chief Executive Officer and Mark Marinko, our Chief Financial Officer, will discuss the operational and financial results for the quarter and six months ended June 30, 2015. Following their comments, there will be an opportunity for questions.

During this call, we will make certain forward-looking statements to help you understand our business. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors inherent in our business are set forth in our earnings release and in filings with the SEC, including our 2014 Form 10-K and subsequent filings.

During this call, we will also refer to certain non-GAAP financial measures, including adjusted EBITDA from continuing operations, 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.

Now I'll turn the call over to Mark Marinko, our CFO.

Thank you, Mary. And good morning to everyone joining us. I'd like to start off the call by speaking at a higher level about the quarter. Overall, senior management is pleased with the company's consolidated results. We expected the second quarter to be a major improvement over the first quarter and it was.

There were some one-time items that we benefited from, that I will point out to you later. Operationally, at the segment level, the dredging segment delivered a phenomenal quarter. And while the environmental and remediation segment showed an improvement over the first quarter, it is not where we wanted it to be.

As some of you may have seen in our press release this morning, we continue to expect our fiscal year guidance of adjusted EBITDA in the range of $97 million to $107 million. For the remainder of the year, all segments have secured the vast majority of backlog at margins that we continue to believe will enable us to achieve adjusted EBITDA in the range of $97 million to $107 million.

Moving to the second quarter financial results, total company revenues in the second quarter of 2015 were $239 million, which is a 29% increase compared to the second quarter last year and was a result of increased revenues in both of our business segments.

Total company consolidated gross profit was $32 million, an increase of 23% compared to the second quarter of 2014. Gross profit margin for the quarter was relatively flat at 14% year-over-year, with an improvement of margin in the dredging segment, partially offset by a decrease in margin in the environmental segment.

Total company operating income was $14 million for the quarter, up from operating income of $10 million from the prior year quarter, with an increase in dredging offset by a loss in the environmental and remediation segment.

I'll now walk through our results by segment, so you can get a better understanding of what is driving our consolidated results. The dredging segment's revenue was up 21% in the current year quarter at $190 million, with higher foreign, domestic capital and maintenance dredging, partially offset by lower coastal protection and rivers and lakes dredging revenue.

Dredging's gross margin profit improved to 16% from 14%, benefiting from strong contract margin on some of our dredging projects and improved fleet utilization and therefore, better fixed cost coverage.

Operating income increased to $18 million for the quarter, a 65% increase from the same period in the prior year, driven primarily by the gross profit margin improvement.

Our environmental and remediation segment's revenue increased 70% to $50 million for the second quarter, primarily driven by the inclusion of Magnus. As a reminder, we acquired Magnus in November of 2014. The segment's gross profit was 4% in the second quarter of 2015 compared to 12% in the second quarter in the prior year. With increased overhead, mainly as a result of the Magnus acquisition, and project losses, most of which are due to pending change orders and claims, impacting results.

The environmental and remediation segment reported operating loss of $4 million compared to a loss of just under $1 million in the second quarter of 2014, with the lower gross profit being the primary driver.

The second quarter operating profit results were impacted by two onetime items. First, as a reminder, when we acquired Magnus, the purchase price included cash at close, a seller note and a potential earn out. Due to our current expectation that Magnus will be unable to meet performance targets set forth in the note, we reduced the amount owed on it by $7 million. This reduction had a positive impact on G&A. As of June 30th, the note has been fully written off.

Second, we recorded a goodwill impairment charge of $2.8 million related to our Terra contracting services business. Project overruns, due to a change in conditions totaled $4 million during the second quarter. In some cases, these projects have been affected by unforeseen circumstances out of our control.

For example, archeological remains were discovered on a significant levee project in California, delaying the project. And the mine reclamation project in Washington State was delayed due to later than anticipated snow melt. Just this past weekend, the same project site had to be evacuated due to the Wolverine forest fire. The forest fire has not reached the project site, but due to the remoteness of this mine, the fire was approaching the one evacuation route. At this time, we're not able to estimate the length of delay and an extensive delay has not been factored into our forecasts.

In the situations where we can, we are vigorously working with our customers to recover the amounts from the outstanding claims and change orders.

Additionally, we are moving to improve the financial results of the E&R segment and we are finalizing a plan to materially reduce costs. Some cost reduction measures have already been implemented and will have an impact in 2015. But the full benefit of our cost reduction initiatives will be realized in 2016.

Moving to the balance sheet, at June 30, 2015 we had just under $15 million in cash on our balance sheet and had drawn $18 million on a revolver. Total CapEx for the quarter was just under $13 million with approximately $5 million for the ATB during the second quarter and the remainder spent on maintaining our fleet and other land equipment additions. To date, we have spent $68 million on the ATB.

Turning to bid results, domestic dredging bid market for the second quarter of 2015 was $201 million, which is about the same as the second quarter of 2014. This year's bidding market included the $77 million Shell Island West Coastal Restoration that Great Lakes was awarded during the second quarter.

In total, the company won 60% of the overall domestic dredging bid market during the second quarter of 2015, which is above our prior three-year average of 43% and is mainly due to the $77 million Shell Island West award. Please remember that variability in contract wins from quarter to quarter is not unusual and the win rate from one quarter is not indicative of the win rate the company is likely to achieve for the full year.

During the second quarter, Great Lakes won 100% or $94 million of the capital projects awarded; 20% or $6 million of the coastal protection projects awarded; 28% or $21 million of the maintenance projects awarded; and none of the rivers and lakes projects awarded.

Contracted drudging backlog at June 30, 2015 totaled $602 million compared to backlog at December 31, 2014 of $594 million. The environmental and remediation segment backlog was $149 million at June 30, 2015, a $74 million increase compared to the yearend backlog.

Now I will turn the call over to Jon Berger, who will discuss some of the results of the quarter, as well as provide an update on some of the broader market drivers that may affect our business moving forward.

Thank you, Mark, and good morning everybody. Thank you for joining us. We are quite pleased with our dredging segment's project execution and results, both domestically and internationally during the second quarter.

Domestically, as anticipated, we began working on several of the Sandy related coastal protection projects on the East Coast. In July, we were able to take some of our shareholders to visit a beach project in New Jersey that was decimated by hurricane Sandy; the Avalon Beach Project.

This was a $6 million project funded by the City of Avalon. Our shareholders were able to witness firsthand the complexity of dredging projects, bore the dredge at an offshore borough site and also see the beach operations where sand was being pumped to widen the existing beach. One of our hydraulic dredges, the Illinois, completed this project.

At a different coastal protection project in New Jersey, as some of you may be aware, our dredge, Liberty Island, experienced an engine failure early in the second quarter that required the dredge to be moved to a shipyard in Norfolk, Virginia for repairs. Given the breadth of our fleet and the complexity of the Sandy project that had been awarded, we've been able to address this unforeseen circumstance in stride. We do not expect this downtime to materially impact our results for the year.

I want to take a moment to commend our dredging team's ability to successfully minimize the impact of this engine failure. The more recent issue at the end of July that I know some of you saw in the news, related to a problem with our gear box bearing that needed to be replaced. We do not anticipate additional problems with the dredge's engine and we expect the dredge to be back in service next week.

Speaking in general, regarding our Sandy and other coastal protection projects on the East Coast, they are going well and we are on track or ahead of our schedule on the majority of these projects. Please do not forget, there is flexibility in the timing of completing the Sandy projects and we are utilizing this flexibility to manage our fleet, our current workload and backlog and work out for bid.

We continued to finalize our work on the Port Miami deepening project during the second quarter. The project has continued to progress well and we are scheduled to complete the work during the third quarter and this includes three additional scope modifications.

Internationally, as we have mentioned during the last call, the Suez project has been going exceptionally well and we have completed our portion of the dredging project well ahead of schedule. We are in the process of demobilizing our equipment from the site.

In fact, later this week, we will be participating in some of the festivities that are planned to celebrate the opening of the new Suez Canal in Egypt. I will be flying out right after this call, to represent GLBD on this historic project.

Regarding the bidding market, it was a big lighter than expected in the second quarter, with a modest decrease in lettings as compared to the first quarter. But, with the increased budget in 2015, the Corps has been able to get more projects funded.

As we told you previously, the State of Georgia committed its own funding to get the Savannah Harbor deepening project started. The Panama Canal expansion project is expected to be completed in early 2016 and we expect to see other ports along the East Coast pursue deepening projects in the next few years.

Let's look ahead to the bidding opportunities. We expect bidding opportunities to accelerate in the third quarter. We are estimating a significant number of projects at the moment and will be bidding on a mix of potential projects along the Eastern Seaboard and the Gulf Coast.

In the Gulf, as Mark mentioned, we were awarded the $77 million Shell Island West project that is being funded with some of the early NRDA money that BP set aside. This project will utilize the Empire Pipeline that we installed several years ago, that worked on the Scofield Island and the Shell Island East coastal restoration project.

Having the pipeline will play a critical role in executing this project, providing a cost savings to the state and enabling us to efficiently execute on this and the predecessor projects. Work will begin this fall and expected to be complete by the third quarter of 2016, at which time the pipeline will be removed.

Longer-term, we are very pleased that BP has agreed to a negotiated settlement in its case regarding the Deepwater Horizon oil spill. It is early in the process and many details need to be worked out, but this $18 billion settlement marks a major milestone.

At this stage, it appears that the money will be paid out over many years. Louisiana already has a master plan for rebuilding and restoring its coast and many other states in the region are developing similar plans. Ultimately this is a positive development for the dredging and the environmental contracting industries.

Despite low prices in the energy market, certain of the LNG projects in the Gulf that we have been tracking, still appear to be moving forward. On the East Coast, we anticipate seeing additional Sandy related coastal protection work to be tendered in the second half of the year and in 2016. These projects are funded by the $5 billion Sandy appropriations, not the Army Corps budget. Approximately $3 billion of these appropriations remain.

Internationally, with the Suez project wrapping up early, we continue to aptly pursue several opportunities in the Gulf region, with several opportunities in the negotiation phase.

In Washington, DC, despite the great news earlier this year that both the House and the Senate approved appropriations bill with strong support for the Army Corp's budget and higher spending for the Harbor Maintenance Trust Fund, it does appear that Congress is not going to pass a budget on time this year.

So therefore, we expect a continuing resolution, which puts the Corps' budget back at the previous year's level. We are disappointed with this outcome, but are hopeful then omnibus budget is passed soon after this continuing resolution takes effect. At this point, we don't know when it may be passed.

Regardless of the continuing resolution, we remain encouraged at the ongoing high-level of discussion and knowledge of the Harbor Maintenance Trust Fund in Congress. This is a very important initiative that not only impacts the regions closest to ports and waterways, but the entire country, since the majority of the United States foreign trade flows through our ports.

On to our environmental and remediation segment. As Mark stated, the environmental remediation segment showed an improvement over the first quarter of this year, but is not yet performing where we expect it to be. We are executing steps that Mark laid out, to realign and take out costs of the segment and believe they will be meaningful.

We are committed to executing these measures in a timely manner so that costs for this segment are in line with our expected revenues that we generate. We continue to have positive expectations for the environmental remediation segment and believe that it will be a valuable asset for the company.

In conclusion, we would like to take the opportunity to thank our stakeholders for your dedication and commitment and I'd like to reiterate our steadfast commitment to delivering a strong performance for the rest of the year.

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

(Operator Instructions) Our first question comes from Scott Levine with Imperial Capital.

So I guess just firstly with respect to the award pace you guys are anticipating for the back half of the year, bookings have been good in dredging first half, you guys have had a higher win rate than usual, but the bid markets kind of been okay.

Given your expectations for the Army Corps and some of the budget issues you highlighted. I mean, generally speaking you are expecting a more active bid market in the back half and if so, to what extent?

Certainly, we are expecting more active bid market in the second half. Our estimating team is working overtime on a significant number of projects to bid right now. The overall level of activity certainly will be higher, but I'm not sure I can give you an exact number of where it will be.

But there is a good bit of work out there; there is a couple of negotiated situations certainly with some private clients that we are looking at. And there are some chunky projects that hopefully will come out either late this year or the early part of next year along the coast, both the East Coast and in the Gulf.

Okay, so maybe a more of a biased toward coastal than not. Maybe a little bit more specifics around the international and some of these Mid-East projects and if you see a pick up there and your degree of confidence in that happening for you?

Yes, we've seen upticks internationally also, and as we said, we are in negotiations on a couple of those. Internationally, as you know, is not as easy a market to predict and until we get it in the boat, we're going to have to be cautious, just because as you know, it's a little bit more difficult market to predict there.

And turning to remediation, just a little bit more clarity; where there any new problem projects that kind of arose or the charges on projects that were in either lost position or maybe troubled to begin with? And in your view, are these charges kind of more indicative of kind of a normal nature of the business and its inherent lumpiness or is it proven to be a bit more challenging than you anticipated maybe prior to the Magnus acquisition? A little bit more color on your thoughts on just the nature of some of these issues and whether we can expect improvement and when?

So this is Mark. We did have a mix of some projects smaller fell into losses this quarter due to changing conditions, so we filed the change orders or claims related to that. One that was a little more material was not a changing conditions, but it did relate to that archaeological find with the Indian burial ground. We were just delayed longer than we anticipated. So, not an execution issue, but it's a timing issue that will push that project into 2016. We are mobilized and working there now, so that delay is stopped, but it did push some of it to 2016.

So you see a mix of both, but yes definitely, you have more change orders and claims than you would historically see in our dredging segment.

I guess I would just ask you, is that kind of a normal nature of this business or there is something that you can do with regard to your contracting strategy to maybe mitigate some of the issues here or is it not that simple?

No, I think the answer is, both. I think clearly, we've dredged, compared to dredging, we dredged the vast majority of these locations many, many times over our company history and there is a more clear path of how you contract with the Army Corps, than it is in most of these environmental remediation projects where you're starting from new.

And I think there is a combination; we can do, and one of the things we hope to do in the fullness of time, is to bring more sophisticated contracting to place with our clients than the individual companies were able to do in the past and we have to manage them better.

So I think it is a combination. As Mark said, I think the two big projects that got delayed, there is standby time that covers our kind of out-of-pocket costs, it doesn't provide profit, it doesn't cover all your overhead. And both of those are just kind of unforeseen; archaeological finds and then the slowness to get on that project started because of the late winter. So the long answer to a short question is, it's a little bit above.

One last one from me. On G&A, if I'm hearing you correctly, the $7 million write-off of the note receivables embedded with net $50.5 million numbers, so is the normalized number in the low-20s there then? Or am I not reading that right?

No, that's correct.

And is that a decent number to think about as a go-forward number, or do you think you can get some efficiencies as you integrate E&R and given some of the other cost projects, in terms of efficiencies you are working on now?

That's correct. That's our plan.

Our next question comes from Jon Tanwanteng.

Mark, what's the source of the higher level of depreciation and amortization in the quarter and what's the correct run rate going forward?

What we do, is we do match our expenses to revenue, our kind of planned expenses. So if you had higher revenues in the first half of the year, you'll move some of that depreciation forward. So in this quarter, for example, with dredging had much higher revenue than in the first quarter, we pull some of that depreciation forward to match it with the revenue. So it's not straight-lined across the quarters.

Okay, and in the Middle East, does a potential Iran deal open any new opportunities for you; is that a market that you getting into?

It's too early for us to tell, but there is some other government regulations that probably make it difficult for us to get in there. It's not full lifting, if I understand it correctly, of all the sanctions and things like that. So, I don't foresee that to be a credible market for us in the near-term.

Okay, and just with regards to the BP funds. How can we quantify the incremental opportunity there may be in the near-term? What portion will go to the projects that you could directly bid on?

Yes, we're all going to need a little bit more clarity there. There's a significant amount of work talked about, specifically in Louisiana, that we stated that has a very detailed plan. The other states are developing those. If you read the popular press, a significant amount of that revenue will come to dredging. I've always used that rule of thumb, let's just say 50% of it comes to work that we can bid on, over some time. So it's going to be meaningful.

I will say, in Louisiana, I've heard some early discussions of them bonding over the cash flows that come out over 15 years, to maybe accelerate those things over a shorter period of time. Which would tend to make sense, if you think about it from a politician's standpoint. It doesn't really do them any good to spend money in years 10 to 15, because they are going to be long gone from being governor and have expectations of going somewhere else.

So in Louisiana, which is probably farthest to long in their Coastal protection plans, there's been some discussions of trying to figure out a way of using the capital markets to accelerate some of that. But I think it's still very early until the judge approves the settlements and the cash flows are fully defined, before we have a full picture.

And then finally, can you tally up the total amount of potential change orders and outstanding claims that you have pending, I guess relative to potential to realize a little bit?

Yes. The total is about $7 million right now. Remember, some of that will be negotiated. I don't think you'd see the entire potential of $7 million there.

Okay, and is that all operating profit, if it comes through?

Yes.

Your next question comes from John Rogers with D.A. Davidson.

A couple of follow-up things. First of all, total depreciation for the year, you're looking at the low-50s. Is that right?

Yes.

And Mark, you went through these numbers faster than I could get them. But, can you go through the capital projects or the different segments of dredging, the bid markets and the percentages that you won?

Sure, so for the second quarter, we won 100% or $94 million of the capital projects awarded. We won 20% or $6 million of the Coastal Protection projects awarded. We won 28% or $21 million of the maintenance projects awarded. And then as I stated, zero of the rivers and lakes projects awarded.

And then I guess John, just on the environmental business at this point and given your experiences here, I guess, is there anything specifically that you are doing with the organization in terms of bidding strategies or market focus that to get this back on track? You've talked about it in the past and I know.

I mean we're doing it exactly a lot, some of which I am reluctant to share because it involves things that are in the middle. But the answer is yes, we're certainly focused on where we want to be, and where this business should be in the next couple of years. So that involves opportunities where we can cross-sell on to the water. Where we have great experiences, both from some of the predecessor companies and our own experiences. We like the market, again, in the energy sector, and we're in the process of finalizing, it is not onboard, a specific individual to lead our charge into utilities and energy sector.

The individual has vast experience. That's the type of client that we want. It's a good client, they generally have significant sized projects. And so, we are molding the business into what we believe we have to do.

And it takes some work to take two individual businesses that were growing very fast and put them together. And we spent a lot of time as a senior management team in doing that and as Mark says we think the fruits the labor come out both in the second half of the year in 2016.

Okay, so we should see some of that this year?

Correct.

Okay. And of the almost $150 million in backlog in that segment you have now, can you give us a sense of how much of that is work that needs to be finished off now at either very lower or no margin?

Just you know, the biggest individual chunk of that, probably 35% to 40%, is a time and materials project. And as you know, basically it's one where we don't take significant risks. It's time and materials plus margin. So we feel very good about that part of it. And how much is left to be done -- I don't think that's a significant amount, do you? That it would be low or zero margins backlog?

No.

No, I don't think there is any of it.

There is a little, but not much.

Little, but a very small amount, John.

Our next question comes from Rick D'Auteuil with Columbia. Your line is open.

Yes, just same line of questioning. In the quarter, were there any resolutions of change orders from the prior periods?

No.

Are there any short-term resolutions expected on any of these change orders?

Yes, there is one that were going to a negotiating session in the next few weeks, that we expect will result in a resolution.

Okay, of the $7 million, how much are on the path to litigation, as opposed to negotiated settlements?

I mean everyone involved, how do you get someone to the table. I don't believe that much is ultimately ends up in litigation through the process, but it's a dance that has to be done. So at the end of the day, I think our historical experience is that most of this never goes through to full litigation.

Okay, so it's a thought that between now and year-end a vast majority of that $7 million will have been negotiated. I know you're not going to get $7 million, but will have been negotiated and resolved?

I would say it's at least half, but it's hard to predict, because they're all in different phases with different types of clients.

All right. And again, that would be a 100% margin as it comes through, right?

Yes. It's accounting policy, as you all know, we take all the costs and so therefore it just really just drops to the bottom line.

A quarter ago, you talked about the E&R business needing to diversify geographically and you guys were pursuing better weather states to explore new business; any progress along those lines?

Yes. We like to call it the winter work, right, we want to win. That's slowest time, whether it's Terra or Magnus. So recently we won a smaller job, but its winter work.

We're bidding a big project in Miami in the near-term. And we've also, I guess the nice way to say it, we traded out some assets, if you will, marketing assets, that are now concentrated in the South. So we do expect we'll see some fruit from this in the next six months, yes.

Okay. I don't know if the Street has this modeled right, but when you say the third quarter is your peak quarter in E&R, I'd encourage you to at least review how the Street is modeling it, just because with all the moving parts and the Magnus acquisition, really history doesn't help us much here anymore.

So, we were originally thinking that this was going to be an okay business and it's not been. And I don't know if it's not been because of the seasonality and some unusual events, or it's not been because you made a mistake and you made acquisitions that don't help the overall model. But again, to the extent that these are good businesses still and they are going to start to show that in Q3 especially, I think it's important to get people on the right page if they are off base on that.

Yes, agreed.

(Operator Instructions) Our next question comes from Larry Callahan with Wheelhouse Securities.

In line with the previous line of questioning, can you give an example of what would be considered a positive surprise in environmental contracting? I think we've seen a number of negative surprises, so maybe is it possible that competition might at some point diminish for these projects, where the margin might build in some of these regularly unforeseen events? Thanks.

Part of our strategy, Larry, is to move to the type of client that I think provides more steady, responsible contracting, and a good example of that would be the utilities industry. Utilities industry and the energy industry has a significant amount of environmental work ahead of them.

And I think if you looked at 2013 and 2012 and part of 2014, the Enbridge contracts that we did, were excellent work, went well. I think we executed them above the expectation, and we perform well. And it was a very good client. And we continue to have that client and we expect them to be a client that we will have for a long time.

I think when we start looking at the utilities industry and all the coal ash work that is out there, that plays very well to our combined skills. There are companies that are looking for high level, well-capitalized, larger contractors, than some of this work that you end up doing for smaller clients or developers, and so, those are places where we have to move this business to.

And I think when you see that, you'll see responsible contracting with a good counterparty, long-term for us. So I hope that answered your question.

Mark, could you give an example of how your dredging business ties in with environmental projects, kind of a concrete example?

Sure. I'll give you a couple of examples. Right now, we're working on Lake Decatur dredging project. The disposal facility, which is the on land, where we're pumping the dredge soils to, is being managed and worked on by our contracting business.

When we did the Enbridge is an example, there was dredging. We took one of our small rivers and lakes dredges that dredged, and then took the materials to a site along the side of the river, a couple of sites, and we dewatered and processed that dredge material and then took it to disposal facilities. I think you'll continue to see projects like that and large-scale projects.

Many years ago before we owned it, our rivers and lakes division worked on the TVA ash pond spill in Tennessee. And we expect that our dredging skills can be valuable in working on some of these ash pond closures potentially. That would be joint projects.

A lot of the environmental dredging has upland processing of these materials and those are things that our environmental people do and do well. And a significant amount of the environmental work that certainly Terra has done over the years, is on the on the water.

And the joint knowledge skills and expertise and equipment that we might set in our rivers and lakes are in our engineering department of our dredging department, played very well in working together and bidding together and providing that technology and knowledge. So I hope that's a couple of good concrete examples for you.

Yes. Does this BP related or Gulf Coast work involve much of that?

Yes. I think certainly be the BP work, you are going to find, over some length of time, there will be environmental work there. I think there could be some levee work that certainly Magnus does a significant amount of levee work. The second-largest levee system, I guess, in flood control areas, Sacramento, and they're probably the dominant contractor in doing levee repair work there.

I think with all the money coming into Louisiana from BP, I think there will be that type of work. So the answer is yes, I think long-term, once that they start finalizing some of their plans, I think there will be environmental, on land side work that our environmental guys will be chasing.

Our next question comes from Shu Haur Tang with MSIM.

Q1 you gave a little bit of guidance in terms of capitalization, in terms of your senior notes and you mentioned that you might take a look in fall. Is this something still on the table, could you talk a little bit or give some update on that? Thank you.

Yes. And Mark will give you details, but clearly our notes have a step down at the end of January of 2016. So, we have been modeling and looking at is it a right time to refinance them out with the low interest rates and our notes trading above par.

So we are looking at just redoing our capital structure, just to take advantage of rates and timing, but our notes, my guess is that it would probably be a first quarter event of 2016.

Jon is right, the step down in end of January is 101 and change. And then there is another step down at par at the end of January 2017. So, we'll do the math and look at the rates to determine what's the best decision moving forward.

Our next question comes from John Rogers with D.A. Davidson.

Hi, just one follow-up. Mark, you talked about the depreciation pacing that you tie tot revenue, the lower depreciation levels expected for the second half of the year, should we think about or tie that to expected dredging revenue based on your work schedules?

Right. So if you think of matching the revenue and expense, we have a few additions, remember, during the year as well. So, it actually, knowing the second half of the year is, if we can do the math to get to $97 million to $107 million of EBITDA, it will look similar to the second quarter results on average. So they'll be fairly similar, with the little step up from just additions this year.

Okay, and that's just the dredging business, right?

Well, generally I speak overall, but it is really, the dredging is the main -- it's 90% of the capital spend, so it really is driven by dredging.

So in other words, we're not assuming the same drags in the environment business and stable on the dredging?

That's correct.

Our next question comes from Richard Shuster with Boston Partners.

I got a bunch of questions on the E&R. First one, does this mean that you are going to -- I assume you are going to make money in the third quarter in E&R?

Yes.

Okay. And what is the book value of that business at this point?

I don't have that in front of me.

Rough, you don't need an exact number, I mean, this has been such a problem business, I'm sure you think about it all the time.

Yes, so about 80 -- I think the carrying value is about $80 million.

Okay, and so you spend roughly $80 million, and in the last two years what is the combined losses of this business?

The last two years, I mean again, I don't have the rate in front of me. I'd have to do the math.

You must have some idea. This has been a real problem business. I'm sure you'll think about this all the time. What was the last year loss?

Operating income was -- I just don't have it.

You'll come back to me later. This year, so far we've lost $20 million in this business?

Operating income year-to-date is $20 million.

You lost $20 million. Okay, so when you have the $97 million to $107 million, when you forecast that, what we forecasting for E&R in the second half, when you're forecasting the $97 million to $107 million?

We don't give out publicly our EBITDA by segments.

But presumably, if we didn't have E&R, that number would be materially higher?

Correct.

Okay. Couple of other questions. In the 33.4 of EBITDA you show in the quarter, I assume we should take out the 7 for a normalized number and get to 26.4; that's how that works?

Right.

And loss of 4.1 in environmental, that doesn't include the 7?

No, it does.

So that loss would have been 11?

Right. And it also includes the $3 million for the goodwill impairment, so you net those two out.

So the actual loss would have been 8 in the second quarter?

Right.

Wow. If you would sell this business, right, I mean it has been such a disaster. If you were to sell this business today, what do you think you get? Do you think you'd get book?

I don't know. It's a good question.

What's your guess? I mean it has been such a massive -- and we're sitting here with a stock, where the enterprise value of, I don't know, 700, where the other business is producing looks like a 120 and this has got some value. I mean, it's clearly getting a massive negative value right now in the stock market. But you would get -- I'd assume you'd get somewhere close to book, right?

I don't think I can answer than on this phone call, Rich. Let's take it offline and we can go through it, but I just don't think that we should be answering that question.

One last question along these lines. How much more patience do you have with this business?

Yes, I mean, we just bought Magnus. The structure of the transaction worked exactly how we expected it to. We're in the business at a very modest multiple. And we are doing all the things we expected to do. We are doing all the things that we talked about with you doing to get it where we want to be. If we aren't comfortable with this, we will move on it.

We've been spending a lot of time, a lot of changes have been made to put it in a position to succeed. And I will tell you that at the end of the day, Magnus will do okay this year, and based on the purchase price we paid for it, we paid a very modest price. So, I'm not ready to throw in the towel yet on it.

I show no further questions. I will now turn the call back over to Mary Morrissey for closing remarks.

We appreciate the support of our shareholders, employees and business partners. And we thank you for joining us in the discussion this morning about our business and initiatives and the industry. We look forward to speaking with you during our next earnings discussion in November. Thank you.

Thank you. Ladies and gentlemen that does conclude today's conference. You may all disconnect. And everyone have a great day.