Great Lakes Dredge & Dock Corp (GLDD) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2017 Great Lakes Dredge & Dock Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, August 2, 2017.

I would now like to introduce your host for today's conference, Ms. Abby Sullivan, Manager of Investor Relations. Ma'am, you may begin.

Good morning. Welcome to our quarterly conference call. Joining me on the call this morning is our Chief Executive Officer, Lasse Petterson; and our Chief Financial Officer, Mark Marinko. Lasse will provide an update on his first few months as CEO. Then Mark will provide an update on the quarter ending June 30, 2017. Finally, Lasse will provide an outlook for the second half of the year. 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 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 Lasse.

Thank you, and good morning. During my first 3 months as CEO in Great Lakes, I continue to immerse myself in company operations, meetings with many employees, shareholders and other stakeholders. It's been a busy quarter with both challenges and successes, including completing our senior notes refinance, closing out our TerraSea joint venture, completing final preparations on the new hopper dredge at Ellis Island and to see the continued improvements in our E&I business. However, we must do more to improve margins and increase our bottom line, as well as our backlog.

As mentioned in our earnings release, we're in the midst of a deep-dive review of all company operations. We will address asset deficiencies and align our production and support functions with the market opportunities. We'll complete the review in September, and we'll then provide a public update during our announcements of third quarter results. As such, we'll not be taking questions specific to this review during this call.

And with that, I'll turn it over to Mark for comments on the results of the quarter.

Thank you, Lasse. I will start with the consolidated results and then discuss results at the segment level. Total company revenues in the second quarter of 2017 were $176.9 million, which is an 8% decrease compared to the second quarter last year, with revenue just about flat in our dredging segment and down in our environmental & infrastructure, or E&I, segment. The revenue decline is primarily due to the absence of the revenue from the Terra services business, which was sold in November of 2016.

Total company consolidated gross profit for the quarter was $25.8 million, a 6% increase compared to the second quarter of 2016. Gross profit margin for the quarter was 14.6% compared to 12.6% in the prior year. Total company operating income is $8.3 million for the quarter, up significantly from the $3.8 million operating income in the second quarter the prior year. The improvement is a result of the stronger project controls and overhead and G&A cost reductions in the E&I segment, partially offset by lower than prior year operating income in the dredging segment.

Net loss from continuing operations was $1.1 million for the quarter compared to a net loss of $1.7 million in the prior year quarter. In the quarter, 2 nonrecurring items impacted net income: the final settlement of the TerraSea joint venture and the loss on extinguishment of debt related to our senior notes. Adjusted EBITDA from continuing operations was $17.6 million compared to $18.3 million in the second quarter last year.

I'd also like to provide an update on the net income from discontinued operations that we recognized in the first quarter related to our historical demolition business. As expected, the surety drew on our letter of credit in the second quarter. Pursuant to the terms of the sale of the historical demolition business, the company received an indemnification from the buyer for losses resulting from the bonding arrangement. We continue to aggressively pursue enforcement of those indemnification provisions for any losses suffered by the company and expect no further expense related to this issue.

At the segment level, the dredging segment's revenue decreased slightly from the prior year quarter with higher maintenance and coastal protection revenues offset by lower domestic capital in rivers & lakes revenues. Gross profit margin fell to 14.1% from 15.7% in the prior year quarter on project mix with lower margins, which were offset slightly by lower plant and overhead costs.

As noted in the press release in last quarter's communications, we expected gross profit to increase from the first quarter. While we did see significant improvement in the second quarter of 2017, we do not expect annual margins to reach the levels seen in 2016. Dredging's operating income decreased to $8.5 million for the quarter, which is a 20.2% decrease from the same period in the prior year, driven primarily by the lower gross profit margin as G&A was primarily flat quarter-over-quarter.

Our E&I segment's revenue decreased in the second quarter of 2017 compared to the prior year by $15.1 million. This decrease is the result of the loss of revenue on the divested Terra services business, as well as delayed work in the remaining core business due to flooding and standing water in Northern California. During the second quarter, the E&I segment continued to execute well with the segment's gross profit margin improving to 17.3% from gross margin of 0.5% in the prior year quarter. Gross profit in the second quarter of 2017 was $4.3 million compared to gross profit of $0.2 million in the prior year quarter.

In addition to improved project execution and reduction in overhead expense of $1.9 million, the segment also recognized a settlement of a project change order during the quarter, adding $2.5 million to gross profit. The segment reported an operating loss of $0.1 million in the second quarter, up $6.7 million from an operating loss of $6.8 million in the second quarter of 2016. During the second quarter of 2017, we continue to see the positive impact on operating results of the cost reductions across the segment, resulting in the improved operating loss. Although this segment does experience seasonality and we expect the summer months to pick up, the weather delays noted do have an impact and may push certain work into 2018.

Turning to our balance sheet, at June 30, 2017, we had $13 million in cash and had drawn $86 million on our revolver, leaving us with $99 million in availability. In May, we issued $325 million of 8% senior notes with a maturity date of May 15, 2022. In connection with this issuance, the company also retired all $275 million of its 3.75% senior notes, which are due in February of 2019.

We had $12.8 million in capital expenditures for the quarter, with $5 million for the Ellis Island. Total capital expenditures for the year were $32.4 million. We expect to have $12 million remaining on payments for the Ellis Island, which will all be during the third quarter.

The bid market year-to-date June 30, 2017, totaled $328 million compared to $348 million year-to-date 2016. Notable wins in the first half of the year included the $88 million Mississippi Coastal improvements project, $26 million Myrtle Beach project and an $18 million West Coast Hopper project which is inclusive of $2.7 million in options.

During the first 6 months of 2017, the company won 52% of the overall domestic dredging bid market. This rate is above our 3-year average win rate of 42%. Please remember the 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 next year.

During the first 6 months of 2017, Great Lakes won 58% or $88 million in capital projects awarded; 90.7% or $38 million of the coastal protection projects awarded; 34% or $41 million in maintenance projects awarded; and 20% or $3 million of the rivers & lakes projects awarded for which we have submitted a bid. Contracted dredging backlog at June 30, 2017, totaled $386 million compared to backlog at December 31, 2016, of $468 million. The E&I segment's backlog was $53 million at June 30, 2017, versus $38 million at December 31, 2016.

With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward.

Thank you, Mark. As stated in the last earnings call, our new hopper dredge at Ellis Island is scheduled to start commercial operations in the third quarter. She is expected to begin sea trials in mid-August with delivery from the yard to Great Lakes a few days after the trials are complete. Final payment on the Ellis Island of $12 million will also be made in the third quarter, resulting in a total spend of $159 million.

Systems commissioning has progressed steadily in the second quarter, and we look forward to the vessel commencing work in the Mississippi Coastal Improvement Program, delivering sand to Ship Island off the Mississippi coast.

Domestically, there continued to be positive market catalysts that make the dredging industry attractive. Subsequent to the end of the second quarter, the dredging division won a $13 million coastal protection project in Maryland. We're currently working multiple maintenance and coastal protection projects in locations such as Dare County, Myrtle Beach and on the West Coast. The reoccurring maintenance and coastal protection market is about 45% of our revenues in any year. That fits well with our fleet composition and industry experience.

We see positive movement also in the capital deepening market, with 3 significant projects bidding in Jacksonville and Charleston in the coming weeks, and the Boston deepening project expected to tender before the year-end. As with all capital projects, each of these port deepenings represent unique challenges in terms of complexity, soils to be dredged, environmental restrictions and execution time windows, and for Great Lakes, provide a great opportunity to add to our backlog position.

In Washington, D.C., the House Appropriations Committees have passed a record Army Corps of Engineers budget for the 2018 fiscal year, exceeding USD 6 billion. The Senate has held its subcommittee meetings with approval expected soon.

In the international markets, we have seen improvements in the bid market over the last few months. We signed a land reclamation contract valued at $67 million for work in the Middle East, which is in the final stages of permitting, and we expect this project to be added to backlog in third quarter.

The E&I segment continues to see improvements as a result of enhanced project execution processes, implementation of new project risk controls and overall cost reductions in the core business. Subsequent to the end of the second quarter, we have been awarded 3 new projects totaling $28 million. As we stated, we did experience some delays in project awards and start-up due to the flooding and standing water in Northern California during the second quarter, and that has pushed work into 2018.

As we look to the third quarter and the remainder of 2017, we are keen to see the Ellis Island in commercial operations, and we are optimistic in a positive outcome on the bids on the multiple port deepening projects, as well as continued steady improvements in our E&I business.

With that, we'll open up the call for questions.

(Operator Instructions) And our first question comes from the line of Andrew Casella from Deutsche Bank.

I guess, can you talk a little bit about your margin outlook for the second half? I know you're saying, I think, for the full year of '17 that you're going to comp either flat year-over-year to '16 or down a little bit. So that implies, I guess, second half is -- I guess, with the ATB coming online, that was supposed to be a pretty big tailwind. So can you just talk about what's the source of some of that margin decline, if that's just lower sales or if that's coming from a mix issue? Just curious if you could help us bridge that gap.

Yes. Sure, Andrew. Thank you. Yes, it is a project mix for us, in particular when you compare against the prior year. So yes, we do have the Ellis coming on; working, as we said, the Mississippi Coastal Improvement project. But yes, our other project mix has margins at a lower level than we saw in 2016.

And I guess, when we think about the ATB, when that comes online in August, I mean how quickly does that start contributing to EBITDA in that kind of $20 million to $30 million run rate? Is that still kind of your estimates? And is there a ramp-up period as you kind of switch out the assets that, I guess, it's replacing?

Yes. What we will see is the commercial operations start now in third quarter. We do see a ramp-up period to make sure we operate the vessel in the best possible way, and I think the first quarter will see a full benefit from a full commercial operation with the first quarter next year.

Okay. Got it. So the full $5 million to, I guess, the run rate of $20 million to $30 million, that will be in the run rate as of first quarter, not fourth quarter?

Correct.

Okay. Can you talk a little bit about your surety bond? Just wanted to make sure I understood that. It was drawn, and does that mean it's now been funded under the revolver? Or is that cash outflow expected to occur in the second half? Or has that already occurred? I know the financials aren't posted yet.

Yes. The letter of credit was drawn, $20 million -- slightly over $20 million. So that is -- then, yes, on our revolver in the second quarter. So we funded it from our revolver. That's correct.

Okay. Got it. And then just final question for me. Can you talk a little bit about, I guess, some of the trends going on in backlog? I mean, clearly, the book-to-bill ratio looks like it was a little bit weaker in the second quarter and backlog's down. I mean, anything to be hopeful for, for the second half? I know there's a couple of projects that you're hopefully going to tender on, but can you talk about maybe the quantification of those or anything else in the pipeline just so we kind of can think about that for our model going forward?

Sure. Sure. So the going -- yes, as we mentioned, about $350 million of bid margin in the first 6 months of the year, pretty flat with last year. And then you generally see, first of all, the back half of the year, a stronger bidding level, which we did see last year. But we saw -- now with these capital deepening projects coming in, you have Charleston, South Carolina; Jacksonville, Florida, which are going to bid in the next couple of weeks; and then you have Boston in the fourth quarter. The low range of those, just those port deepenings, those 3, are about $500 million. And then you'll have additional amounts on top of that. So we're looking at the domestic bid market to be close to about $1.1 billion this year when you really just had $350 million in the first 6 months of the year.

Okay. And to be clear, the $500 million, is that in aggregate? Or is that inclusive of, I guess, the first phases of those projects that are being let out?

It's really just those bids. So there's a -- and within Charleston, there's 2 phases that would come out in this bidding cycle here this year, the first one and second one. Jacksonville is the first phase and then Boston, so it -- but those would be the amounts bids. And these are advertised out there by the -- you can see it on the advertised bid list at the Army Corps. And that's the lower end of the range.

And our next question comes from the line of Jon Tanwanteng from CJS Securities.

Can you tell me what was the reason for the falloff in capital dredging revenue this quarter? Was there a major product runoff? Or was it more of a scheduling and mix issue? And do you expect that to pick back up as we go forward?

Yes. So, yes, capital, you're kind of -- you just really have the big, I'll call it, the Savannah deepening, which has our windows. And I'm not sure what time frame you're looking at, just in the quarter or 6 months, but you're going to see that, obviously, that capital piece go way up now in the second half of this year with these 3 port deepenings coming online. So it's a timing issue of the bid process, number one. But also, there is some project mix going on here as well. But I'd say that bid market is the bigger piece of it.

I see. And then on the port deepenings, you mentioned that they're all being bid in a relatively small window. Can you work on all 3 major deepenings at once? Or if you, say, win 2 of them, could you lose capacity to work on a third? Just kind of help us understand there.

Yes. Sure. Yes, we can do all 3. They have very long windows to complete. One was 1,000 days, so over 3 years to complete. So yes, we do have the capacity to do that. And obviously, with the Ellis Island coming on, that adds to our capacity to work some of those port deepenings as well.

Got you. That's helpful. And on the foreign side, you mentioned the $67 million land reclamation project. Is that expected to start in Q3 or a little bit later than that?

That -- we have to wait for -- we're just waiting for the permitting on that. I would -- I want to say that's probably going to start -- with the permitting time frame we're in, about almost in the middle of third quarter now, probably the fourth quarter start.

Got you. That's helpful. And then just to clarify a previous question. You've talked about the full year potential for the ATB, but what level of profitability can it contribute in this year as you're still ramping?

Yes. So we don't want to give any -- that one, Jon, we want to be careful about because it's competitive working on this project. We really probably don't want to give that information out, unfortunately.

Okay. That's fine. And finally, the flooding issues in the E&I segment, is that now resolved? And how much revenue was pushed out approximately?

Yes. So we have -- it is resolved. It's -- we can go back to work, but it did 2 things. It pushed back the start date, obviously, on certain jobs that we were anticipating starting, but also pushed back some current work. The piece that's probably moving is about $20 million of revenue potentially into Q -- into 2018.

Okay. Got it. And then just a commentary on being breakeven in that segment or close to breakeven. Is that solely from this push out? Or do you see the pipeline in that business as weaker than you might have expected maybe 3 months ago?

Yes. It was -- we had a -- it is not solely related to this. There was one project that we bid that then went out for rebid that got pushed back, which we did ultimately win. That is one of the ones we've won in this quarter. So it's a mix of those 2 items. The bid market is still good for us.

(Operator Instructions) And we have our next question from the line of DeForest Hinman from Walthausen & Co.

Miscellaneous questions. On the Jacksonville, Charleston, Boston tenders, have we done any historic work on those ports in terms of having understanding of the geology there that could be beneficial?

Yes. In Jacksonville, in particular, we have very good understanding of that mix of sand and rock there. We know what portions are cutter work versus hop work. So yes, worked there many times. Boston worked many times as well. Now that's got a glacial till there, so we know about that work there. And in Charleston, now this is a -- we've worked all 3 of these. So yes, we have very good understanding of those ports.

Okay. And I think I missed part of it, but on the E&I side, is that where -- you mentioned a change order was there?

Correct. Correct. If you recall, last year, the job -- it was actually a Terra remediation job, not a Terra services job, but a Terra remediation job that was in Hammond, Indiana. We called it, referred to it as the [Glenpox] job, an EPA job. That was -- so that's been settled now. That job was in a loss position last year, but we picked up the $2.5 million and finalized that to close out of that job.

Okay. And how did we account for that? Is it an offset to COGS? Or is that just a revenue gain with no associated COGS?

Yes. Essentially a revenue gain and all goes to the bottom line.

Okay. So if we back that out of the E&I business, the margins are -- you said that was $2.5 million, is that correct?

Correct. So I think our margins were $17 million there. So I did this math. I want to say that puts the margin at about 7.5%, 8%, if you take that out.

And has -- I guess, when I look at that segment, the margins -- the gross margin need to improve quite a bit to get that business to breakeven. Is that breakeven type of outlook, was that inclusive of that item? Or is that excluding that item?

No. We had that in our -- our forecast for the year was inclusive of that. We expected to get that and get that amount.

Okay. So I guess, the second half gross margin for that business should be meaningfully improved, and we're seeing pretty good project -- or progress now that business is performing. Is that the correct way to think about things?

Yes. And because you do see -- we mentioned this before, the seasonality of the business. Q3 is their strongest quarter of the year.

Okay. And you mentioned picking up the business win in the Middle East, which is positive. We had been thinking about maybe some of the longer-term positioning of some of the assets there. Has any of that -- or maybe just give us an update on that thinking in terms of some of those vessels that were servicing the international markets.

Yes. So as you know, when we did -- obviously, we took out the Reem last year. We have the Noon as an asset held for sale at the end of last year. But we do still see a lot of reclamation work coming up, some small ones but one large one in the Middle East area. So we still feel that, as we mentioned last quarter as well as this quarter, again, we are seeing an uptick in the bidding from where we were a year ago. So still feel kind of cautiously optimistic related to the -- and we don't have a lot of vessels there, but the size of our fleet is right for this, what's coming out to bid coming up here.

Okay. And can you update us on your thoughts with utilization of free cash flow? What are the priorities there? And then your thoughts on any other meaningful capital expenditure projects, if there are any or not.

Yes. So at this point in time, once we finish this final $12 million on the Ellis Island, from a cash flow perspective with CapEx being one of our major free cash flow items, right, so we expect that to go back down in this kind of $40 million range where we've been in the past. It's really our kind of maintenance CapEx to keep the fleet going. We want to -- as we improve the results here to delever, we do want to bring the debt down from this cash flow. So we do not have any major capital expenditures outside of our normal CapEx slated in the near term.

Okay. And you mentioned that the resolution of the TerraSea was a charge of $1.5 million. Is that JV structured LLC, is that -- or whatever structure it was, is that dissolved? This no longer exists?

Yes. We are in the process of dissolving it. There's no more activity in that. This closes it out, final settlement. It's a JV with a U.S. arm of an international partner that we've worked with, and it's good for our relationship going forward in terms of the international business and continuing to work with them. So it's a -- even though we had to take a small hit in the quarter, it's good, positive for us in the relationship moving forward on potential jobs in the future internationally.

So I guess, in a roundabout way, are you saying that if you did partner with this group again, you would just reform a new JV, a new subsidiary structure?

No. This was a domestic JV. When we talk about an international job, we don't generally have an equity JV in those types of deals. So we probably would not have an equity JV.

On a go-forward basis?

Correct.

And we do have a follow-up question from the line of Andrew Casella from Deutsche Bank.

Just want to quickly ask again about the joint venture line item. Anything we should expect in the second half? I mean, not sure how to think about that number, but it sounds like that was a onetime charge in the second quarter. So just curious how we should think about that going forward.

Yes. No more JV, just dissolving it, it's the final settlement on an old JV, a domestic JV we had. So no, you should have nothing going forward in the P&L on these JVs.

And we do have a question from the line of Thomas Caruso from Ameri.

It's Tom Caruso from Ameriprise Financial here in Virginia. This question is a little different than the other ones. I'm looking at what opportunities does Great Lake have looking forward, 2018, '19, '20, in the area of ports where, when the United States start to export more of natural gas and oil across the world, I'm just thinking of what possibilities of business that you all might have.

Yes. Clearly, the big change in the energy situation in the United States is the shale oil and gas. The ports being expanded to handle the increased volumes of LNG being exported out of the U.S. Now we're currently working for Cheniere down in Corpus Christi on that project, and there are several other LNG export facilities that are in the construction and being planned. So that gives us opportunities going forward. Clearly, also with the increasing volumes on the oil side where the oil product is being exported, that requires ports and hubs to be modernized and expanded. So I think that is a good development for us and a good market opportunities in the coming years.

And I am not showing any further questions at this time. I would now like to turn the call back over to Ms. Abby Sullivan for any 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 again during our next earnings discussion in November.

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