Great Lakes Dredge & Dock Corp (GLDD) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Great Lakes Dredge & Dock Corporation First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Katie O'Halloran. Ma'am, you may begin.

Thank you. Good morning. This is Katie O'Halloran, and I welcome you to our quarterly conference call. Joining me on the call this morning is our Chairman of the Board, Bob Uhler; our new Chief Executive Officer, Lasse Petterson; and our Chief Financial Officer, Mark Marinko. Bob will be making a couple of opening comments, and then having assumed his position as CEO just 2 days ago, Lasse will make a brief introduction. Then, Mark and I will discuss the operational and financial results for the quarter ending March 31, 2017. Following their comments, there will be an opportunity for questions. During this call, we will make certain forward-looking statements to help you better understand our business. These statements involve a number of risks and 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 2016 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 from continuing operations, reconciliation attached to our earnings release and posted on our Investor Relations website, along with certain other operating data. With that, I'll turn the call over to Bob.

Thank you, and good morning. As Katie mentioned, we were excited earlier this week to announce Lasse Petterson as our new CEO. But first, I want to thank Mark Marinko for being our interim CEO and doing a great job of creating stability and improving morale while doing 2 critical jobs for us. Thank you, Mark.

Thanks, Bob.

As Chairman, the Board welcomes Lasse to the Great Lakes Executive management team. It's been a pleasure working with Lasse on the Board of Directors since he was appointed last year. The time has been well spent to onboard and orient him to the company, which enables a much faster CEO start. Working with Lasse over the last few months has made us even more confident that we have the right individual in place to lead Great Lakes forward. His input and insights have been invaluable. And I expect as CEO that he will create a positive and impactful movement forward. With that, welcome Lasse, and I'll turn it over for him to make a few comments.

Thank you, Bob. Good morning, everyone. I've had a big 2 weeks. I gained my U.S. citizenship last week and I became the Chief Executive Officer of Great Lakes just this past Monday. Since the Board of Directors chose me for the position a few months ago, I'd look forward to assume the role and I'm pleased that the day now has come. Some of you may ask, what about Great Lakes and this opportunity that appealed to me. I joined Great Lakes in part due to its position as the leading U.S.-based dredging company, but mostly for the opportunities, I believe, the company has going forward. I was attracted to the idea of leading a company whose history spans over more than a century and whose impact on America's infrastructure has been impressive, and to take it to its next chapter, building on and leveraging people's expertise and professionalism. I believe that Great Lakes brand is well-known and well-respected within the marine construction industry, both in the U.S. and internationally. And it is now also gaining traction in the company's more recent business venture, the environmental, remediation and infrastructure industry. As said, I look forward to lead the Great Lakes management team, taking the company to its next chapter, in which an important step would be adding the state-of-the-art new build Ellis Island ATB to the Great Lakes dredging fleet later this year. As a member of the Board of Directors for the past few months, I've been getting up to speed on the company's operations, financial drivers, culture and employees. Going forward, my priority will be to ensure that the vision and direction for the company is firm and a solid road map is created, ensuring the company's continued leading position, building and maintaining environmental, coastal and marine infrastructure. Thank you for listening. I'm looking forward to speak to you again on future earnings call. I now turn the call over to Katie O'Halloran.

Thank you, Lasse, and welcome aboard. The first quarter of 2017 was in line with management's expectations, and management is encouraged that most of the uncertainties that existed in 2016 have been closed out. I'll start with the review of the consolidated results and then discuss results at the segment level. Total company revenues in the first quarter of 2017 were $171 million, which is a 5% increase compared to the first quarter of last year, with revenue up a bit in our dredging segment and flat in our environmental and infrastructure or E&I segment. Total company consolidated gross profit for the quarter was $16 million, a 19% decrease compared to the first quarter of 2016. Gross profit margin for the quarter was 9.5% compared to 12% in the prior year. Total company operating loss was $624,000 for the quarter, down a bit from the smaller operating loss of $90,000, we recorded in the prior year quarter. This loss is the result of lower gross profit in the dredging segment, which was somewhat offset by an improvement in the E&I segment and an overall reduction in G&A. Net loss from continuing operations was $3.7 million for the quarter compared to net loss of $4 million in the prior year quarter and adjusted EBITDA from continuing operations was $14.2 million, a $1.2 million increase compared to $13 million in the first quarter last year. Net loss from discontinued operations in the current year was $13 million. The loss related to a historical demolition project, for which a surety bond remained in place. The surety provided notice to us that the bondholder terminated the underlying contract, and as a result, the surety is likely to draw on the letter of credit that we provided to the surety at the time of the sale of historical demolition business. As we stated in the press release, we do not expect any significant additional losses related to this project. Mark will discuss this item in greater detail later in the call. At the segment level, dredging segment's revenue was up 6% in the current year quarter to $153 million with domestic -- higher domestic capital and foreign capital revenue, partially offset by lower maintenance and coastal protection revenue. The dredging segment's gross profit margin decreased to 9.5% in the first quarter, leading to $14 million in gross profit. Compared to the prior year quarter, this quarter results were primarily driven by higher plant costs due to the acceleration of dry docks for several dredges. The first quarter of 2016 also benefited from a strong performance domestically. As the year progresses, we expect dredging gross margin to improve compared to the first quarter of 2017. Dredging's operating income decreased to $2 million for the quarter, which is an 80% decrease from the same period in the prior year, driven primarily by the lower gross profit. Our E&I segment's revenue was flat compared to the first quarter of 2016 at roughly $19 million. Although, we divested off certain Terra assets, revenue was able to remain flat as a result of significant contracts being executed within the remaining core business. The E&I segment continued to execute well with the segment's gross profit margin improving to 9% from negative gross profit margin of 18% in the prior year quarter. Gross profit in the first quarter of 2017 was approximately $2 million, a $5 million increase compared to negative gross profit of over $3 million in the first quarter of 2016. In addition to improved project execution and reduction in overhead expense by $3.8 million positively impacted E&I, primarily as a result of improved absorption of our downsized equipment spread as well as lower labor and benefits expense. The segment reported an operating loss of just under $3 million, an $8 million improvement compared to a loss of approximately $11 million in the first quarter of 2016, primarily due to the improvement in gross profit margin and lower G&A cost of approximately $3 million, primarily labor and benefits. Please keep in mind that the business experiences seasonality with winter months being slower. For the year, we expect this segment to be profitable. At March 31, 2017, we had $7 million in cash on our balance sheet and had drawn $115 million on our revolver and leaving us with $45 million in availability. Total capital expenditures for the quarter were $20 million with approximately $12 million for the Ellis Island, our new ATB hopper dredge. We've approximately $13 million in CapEx remaining for the construction phase of the dredge. Turning to bid results. The newest dredging bid market for the 3 months ended March 31, 2017, totaled $178 million compared to $126 million in the first quarter of 2016. In the first quarter of this year, the $88 million Mississippi Coastal Improvement Project made up a significant portion of the market. In total, the company won 63% of the overall domestic dredging bid market so far in 2017, which is above our prior 3-year average of 49%. Please remember that variability in contract wins from quarter-to-quarter or from year-to-year is not unusual and the win rate is not indicative of the win rate the company is likely to achieve for the full year. During the first quarter of 2017, Great Lakes won 86% or $88 million in capital projects awarded, a 100% or $11 million of the coastal protection projects awarded, 19% or $12 million maintenance projects awarded, and we didn't win any of the rivers and lakes projects awarded that we did submit a bid on. Contracted dredging backlog at March 31, 2017, totaled $457 million compared to backlog at December 31, 2016, of $468 million. In April, we were awarded a $17 million project on the West Coast that includes $3 million of additional potential options. We also have $7 million in options pending award related to a coastal protection project in North Carolina. And in April, we were low bidder on a $10 million maintenance project in Louisiana. We expect this contract to be awarded soon. The E&I segment's backlog was just under $60 million at March 31, 2017, up from $38 million at December 31, 2016.

With that, I'll turn the call over to Mark for his remarks on our performance and outlook moving forward.

Thank you, Katie, and thank you to Bob and Lasse for joining us this morning. Lasse, I want to welcome you to the Great Lakes management team. We're excited to have you on board and look forward to working with you. We are pleased with the results in our refocused E&I segment. As Katie mentioned, this business does experience seasonality, but performance during the first quarter was an excellent improvement compared to the first quarter of 2016 and fully met our expectations. With the backlog we currently have in place, we expect this business to be a positive contributor to the company's annual results. Let me point out that the $13 million loss from discontinued operations is not related to the legacy Terra business and is in no way related to our environmental & infrastructure segment. As Katie mentioned, it is related to a surety bond that we had in place on a historical demolition project at the time of sale of the historical demolition business. It is our understanding that the potential default on the bond was triggered as a result of the contractor, the entity we sold the historical demolition business to, being terminated from the project. Pursuant to the terms of the sale of the historical demolition business, the Great Lakes received an indemnification from the buyer for losses resulting from the bonding arrangement. We intend to aggressively pursue enforcement of those indemnification provisions for any losses suffered by Great Lakes. Moving to dredging. Domestically, our dredging segment's results were impacted by more severe weather conditions than anticipated on both the East and Gulf Coasts and unplanned mechanical repairs. In addition, there were several dry docks done in the first quarter, which drove results due to downtime for the vessels and additional maintenance cost. We expect fewer dry docks in the remainder of the year, which is why we expect margins will improve. But we do not expect them to improve to the levels reached in 2016, primarily as a result of project mix. Internationally, we're encouraged by what we're seeing. It appears that the market is slowly picking back up and we are pursuing more opportunities than we have over the last year or so. Nonetheless, as we stated during our last earnings call, we continue to evaluate certain underutilized assets located internationally. Regarding construction on the ATB, the hopper dredge, Ellis Island and Tug, Douglas B. Mackie are at Eastern’s Nelson Shipyard undergoing final outfitting and system integration. The vessels are now operating on shore power and we expect the Ellis Island to commence coastal protection dredging operations in the third quarter. We continue to expect that the Ellis Island will be a game changer for our company, with the operational efficiencies alone estimated to generate over $20 million in incremental EBITDA annually. Regarding the domestic bidding market, the number of bidding opportunities during the first quarter was somewhat lighter than normal considering the Mississippi Coastal Improvement Project accounts for close to 50% of the total bidding market. But we believe that was a function of the heavy bidding market activity in the fourth quarter of 2016. However, we remain comfortable with the backlog we have in place given what we see as upcoming opportunities later in 2017. Domestically, there continues to be positive market catalysts that make the dredging industry attractive. We continue to expect to see ports along the East Coast pursue deepening projects in the next few years, many of the projects are progressing nicely and we're encouraged that the state and local governments are acknowledging their important roles in facilitating investment in federal projects. In fact, there are 7 states with active legislation to begin or improve funding for port and coastal work including Texas, Louisiana, Florida, South Carolina, North Carolina, New Jersey and Connecticut. It still appears that Jacksonville will likely be the next port that tenders a bid, now most likely in the third quarter of this year. Charleston and Port Everglades continue to look promising to potentially kick off their projects next year and Boston recently held an industry day. In the Gulf of Mexico, we continue to be encouraged that there will be opportunities in the future, leveraging the funds available from the $18 billion BP oil spill settlement. The timing of these projects is uncertain, but we continue to expect the BP fines to be an additional source of funding for U.S. domestic dredging work beyond the Army Corps' annual budget. In Washington, DC, Congress recently passed the budget for fiscal year 2017. We expect it to be sent to President Trump, for his signature later this week or next. Despite the delay in passing the budget, we are quite pleased that Congress has reached an agreement as it provides for a record budget for the Army Corps of $6 billion and exceeds the increase in Harbor Maintenance Trust Fund spending for maintenance dredging as required by the 2014 Water Resources and Development Act. Congress has done its job so far meeting the goals for increasing the amount of this trust fund revenue, so that it is used for its intended purpose of maintaining our nation's navigable waterways. We expect them to continue to do so in the near future. There has been a lot of talk about President Trumps' focus on infrastructure. We continue to be encouraged by the new administration's focus on repairing and rebuilding America's infrastructure, including our nation's ports and waterways. However, this massive legislation is a work in progress. While the overall build will be very diverse, we expect ports' freight movement and coastal work will be part of any eventual bill. With that, we'll open up the call for questions.

(Operator Instructions) And our first question comes from Jon Tanwanteng from CJS Securities.

Can you talk about the expected run rate of the projects you have now in the Middle East. When do they currently expect to end and what is the expectation for filling the backlog out there?

So actually -- this is Mark Marinko. Yes, we are still working the job in Saudi Arabia, actually, just added some variation orders to that job. We'll work through the end of -- near the end of '17, this year. With that, and as I mentioned just earlier, there's a lot -- there's an uptick in tenders. We are currently looking at a maritime yard. There's a tender for maritime yard in Saudi Arabia. So the opportunity for a new port in Kuwait, that will happen in 2018 and there are actually 2 other bids in the region we're currently working on. So I mentioned, we are starting to see this begin to uptick internationally.

Okay. Great. And then just moving on to the E&I division. You put some nice projects into the backlog, you set at a high margin. Can you just qualify or quantify what those margins look like in the backlog and when do you expect to recognize those -- or work through those?

Most of that work will be done this year. Although, some of it will flip into 2018. Some of the margins -- I'm just looking at something real quick. The margins and backlog on some of these new projects are probably in the 15% to 20% range for contract margin.

Okay. Is that a gross margin or operating?

That's just above contract -- above gross margin, so that's before the equipment allocation.

Got you. Okay. And then just an update on the timing of ATB, you said in Q3. Should we expect them more towards the end or beginning of the quarter, just in terms of how that contributes to the year?

Yes, it will start in the middle of the third quarter, contributing.

Got it. And then, Mark, you mentioned dry docks and unexpected mechanical issues. Did you pull any spending forward from the rest of the year when you did those or is it just a regular run rate going forward?

Yes, there was one of the -- the larger dry dock was scheduled in the Q1. So when you compare it to the first quarter of last year, we really didn't have any major dry docks in Q1 of 2016. We did bring a smaller one worth about $1 million forward into the quarter.

And there was also some -- that's CapEx investment and there were some maintenance expense -- additional maintenance expense related to those as well.

Correct.

Okay, got it. And then finally, on the underutilized assets that you're exploring. What's the total value of those or the number of assets and boats that you're talking about here?

Yes, there are about 4 vessels we're looking at internationally. As we mentioned, we put -- one of them is assets held-for-sale at the end of '16. The total value of these assets is between about $13 million to $15 million.

Okay, great. And then finally, I noticed that you guys have returned to the West Coast for the first time in a while. Can you just talk about that job and what the margins look like if you have to transit the Panama Canal?

There's a job that we have done before on the West Coast. It's a good -- it's good margin despite the fact that we have to mold over the West Coast, but we've done it before, it's material that we're familiar with. So it will be a nice contributor for the year.

(Operator Instructions) And our next question comes from DeForest Hinman with Walthausen & Company.

Just a little bit more clarity on the disclosure on the demolition business for the surety bond. Is the charge that we booked on a discontinued basis, is that the cash outflow that were required to put forth?

Yes, essentially it's -- we had to -- we had a bond in place when we sold that business a letter of credit backing that up. And that would be the anticipated draw on that letter of credit. The letter of credit has not been drawn yet.

And is that the number that we talked about in the 10-K or the Zurich thing?

Correct. Yes, that we disclosed at year-end, yes.

Okay. And then -- I mean, this is kind of fairly long dated relative to when we sold this. Are there other demolition projects that are still not completed or they mostly all finished?

Yes, so good question. So this one project went through a essentially a 2-year delay, that's why it's coming up now. But all the other projects are complete or substantially complete with the exception of one, and that other one is only not complete because there was additional follow-on work added. So we do not expect any significant additional losses from any of these historical demolition projects.

Okay. And then, I guess, you said we have an indemnification agreement within the sales contract. But I believe we sold the disclosure to some sort of private entity. Is that business still around, are they financially viable, is there any chance of reasonable recovery on that indemnification?

So correct, that indemnification is from the sale agreement. The business is still around. I can't tell you exactly whether they're financially, they're privately held, but that business is still around.

All right. So are we going to actively litigate that going forward?

Yes, we are.

And then when we look at the E&I business, backlog was up sequentially. I'm mindful that we've struggled with that business and Chris Shea is doing his best to kind of improve that business. Is there a backlog number that we're targeting within that business or was it more along the lines of we're just going to be very careful with the projects we select, if they're available. They're in our wheelhouse. We have been on them if the margin is appropriate or are we saying there's some set number we want to target for the backlog?

I never saw and said there was a -- we have a budget every year obviously and there's a -- we understand the level of backlog we have to in terms of the time frame of how quickly we work those jobs off. But the backlog is tracking where we wanted to be right now. But I do want to say Chris has put in a, and we've talked about this before, a robust risk profile. We want to make sure we grow smartly and that these projects we bid on, we don't have the history we did before where we had projects that lost money. So I would just say we're being much more prudent in our risk profile. But there are a lot of jobs and a lot of opportunities available that are in our wheelhouse, I liked the word you used, and those tend to be the ones we're winning. So we feel pretty confident that the backlog is where we wanted to be right now. It is tracking and that will be a profitable contributor this year.

Okay. And I apologize I'm kind of bouncing around, but back on the surety disclosure. Is the first quarter abbreviated balance sheet that we put in the press release, is that reflective of that $13 million payment?

Well, yes, there's a liability related to that $13 million that's out there.

We have not made the payment yet. They've not drawn on the LC as of today even, it's that they intend to and that's why we have booked this in the first quarter.

Okay. So there's an accrual on the balance sheet?

Correct. Correct.

And then we did disclose additional spending on the capital side on the ATB. You're saying it's going to be doing work in the middle of third quarter. How much additional capital spending is left on ATB?

There is about $13 million left to spend on the ATB.

At this time, I'm showing no further questions. I'd like to turn the call back over to Ms. Katie O'Halloran for closing remarks.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.