Great Lakes Dredge & Dock Corp (GLDD) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q3 2017 Great Lakes Dredge & Dock Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Abby Sullivan, Manager of Investor Relations. Please begin.

Good morning, and welcome to 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 continuing comments on our recent business update. Then Mark will provide an update on the quarter ending September 30, 2017.

Finally, Lasse will provide an outlook for the remainder of 2017. 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, Abby, and good morning.

As communicated in our recent business update, during the last few months, we have completed an extensive analysis of our current operations and the markets we operate in, with a goal of improving the company's performance and results.

We have announced a restructuring plan to be implemented over the next 18 to 24 months, with a targeted EBITDA cost savings of approximately $40 million, fully realized by the end of 2019. These savings are the results of a combination of operational improvements from projects, optimization of our fleet by retirement of old and underutilized assets and upgrades to our most productive units and reduction of corporate and divisional overhead and G&A cost.

During the third quarter of 2017, we initiated implementation of this plan and recognized approximately $2 million of restructuring charge, all related to severance. We expect that the full restructuring charge will be between $42 million and $47 million, with the majority recognized in the third and fourth quarter of 2017.

As certain assets are still finalizing their service on projects, going into 2018, the associated charges will be recognized in the corresponding period.

As communicated, the majority, between $39 million and $44 million, of these restructuring charges will be noncash.

Third quarter was a difficult quarter operationally, as we were impacted by a number of major hurricanes in the south and southeast regions of the country.

In Louisiana, Mississippi, we demobilized the work sites, as Harvey caused havoc in the south. And in the east, we were impacted by Maria and Irma when they traveled up the coast. We sustained no personnel injuries or damage to our vessels from the hurricanes.

The delays caused by the stand-downs has impacted our results for this year. However, the work has only been delayed and will be executed in 2018.

In our environmental & infrastructure segment, we had good progress in California and Florida on multiple projects. And we are targeting these areas in particular for new work. As announced, we have been awarded both, the Charleston Phase 1 and Phase 2 port-deepening projects, totaling $260 million, with an additional $65 million of options expected to be awarded in the next few months.

We are also preparing for bidding on the Boston Harbor Deepening project this quarter. As Mark will detail later in the call, the bid market expected for the remainder of 2017 and into '18 has regained strength, with a focus on port-deepening projects as well as beach rebuilding work from this year's active hurricane season.

We expect the bid market in 2017 to be approximately $1.3 billion, which is $400 million higher than 2016. With 2018 expected to be high as well.

The international market is continuing to slowly, but surely improve. We have contracts in place in the Middle East that will ensure utilization of our fleet for 2018 and with options for further work.

During the quarter, we have also been keenly focused on the completion of the ATB dredge Ellis Island. As noted in our release this morning, a mechanical issue involving the port side gearbox on the Tug Mackie delayed delivery of the ATB.

All systems on the barge portion, however, has been commissioned and are ready for operation. The ATB is scheduled to reconvene sea trials this week. Upon successful completion of sea trials, we will take possession of the ATB, and she will sail to the Mississippi Coastal Improvement program, where she will begin work.

We will have a better assessment of the specific delivery date once sea trials are completed.

With those updates, I'll turn the call over to Mark to discuss the results of third quarter.

Okay. Thank you, Lasse. I will start with the consolidated results, and then discuss results at the segment level.

The company's total -- total company revenues in the third quarter of 2017 were $163.3 million, which is an 18% decrease compared to the third quarter last year, with revenue down 13% in the Dredging segment and 33% in the E&I segment.

The revenue decline in dredging is primarily due to project mix and the impact of the hurricanes, while the decrease in E&I is a combination of the absence of revenue from the divested Terra Services business as well as lower volume in the core E&I business.

Total company consolidated gross profit [$16.7 million] a 17% decrease compared to the third quarter of 2017.

Gross profit margin for the quarter was 10.2% compared to 10.1% in the prior year.

Total company operating income was a loss of $1 million for the quarter, a decrease of $13.9 million from the third quarter in the prior year. The decrease is mainly the result of the noted decrease in gross profit as well as the $8.6 million benefit related to the reversal of the potential earn-out in restricted stock units, that was recognized in the third quarter of 2016.

And finally, $1.7 million of severance related to the restructuring actions impacted G&A in -- during the quarter.

Net loss from continuing operations was $4.9 million for the quarter compared to net income of $4.6 million in the prior year quarter.

In addition to the lower operating income, net interest expense was also $1.6 million higher during the current quarter.

Adjusted EBITDA from continuing operations was $11.3 million compared to $29.1 million in the third quarter last year.

At the segment level, the Dredging segment's revenue decreased from the prior year quarter on lower foreign capital, domestic capital and coastal protection revenues, which were offset by higher maintenance and rivers and lakes revenue.

Gross profit margin increased to 12.3% from 10.7% in the prior year quarter on lower plant and overhead costs, offset by slightly decreased direct contract margins caused by project mix.

Consistent with our messaging throughout the year, we have seen improvement in margin during the year, but do not expect annual margins to reach the levels that were seen in 2016.

Dredging's operating income decreased to $2.7 million for the quarter, which is $2.8 million below the same period in the prior year, driven primarily by the lower gross profit as well as costs associated with the restructuring that are impacting G&A.

Our E&I segment's revenue decreased in the third quarter of 2017 compared to the prior year by $14.9 million. The decrease is a result of the lost revenue on the divested Terra Services business as well as delayed work and lower volume of work in the remaining core business.

During the third quarter, E&I segment gross profit margin decreased to 0.9% from 7.9% on significantly less volume as well as higher direct contract costs.

Additionally, during the quarter, the segment recognized a $2.9 million loss related to one project. The year-to-date impact of this project loss is $3.6 million. The segment did benefit from lower plant and overhead expenses during the quarter. The segment reported an operating loss of $3.7 million in the third quarter, an $11 million decrease from the prior year quarter.

Please note that the prior year quarter included the $8.6 million credit in G&A related to the reversal of the potential earn out in restricted stock units. The credit was partially offset by a decrease in other operational G&A related to the divested Terra Services business, and overall cost cutting within the segment.

Although operating income has improved in the segment year-over-year, we expect that it will remain in an operating loss position for the full year 2017.

Turning to our balance sheet. At September 30, 2017, we had $10.5 million in cash and had drawn $90 million on our revolver, leaving us with $101 million in availability.

We had $12.6 million in capital expenditures for the quarter, with $8.5 million for the Ellis Island. Total capital expenditures for the year were $45.1 million. We expect to have $11 million remaining on payments to the Ellis Island during the fourth quarter.

The bid market year-to-date, September 30, 2017, totaled $809 million compared to $668 million year-to-date 2016.

Notable wins 9 months of the year include the $88 million Mississippi Coastal Improvements Project, the $47 million Charleston 1 project, the $26 million Myrtle Beach project, and an $18 million West Coast Hopper project.

During the first 9 months of 2017, the company won 40% of the overall domestic dredging bid market. This rate is in line with our 3-year average win rate of 42%, and does not include the $213 million awarded for Charleston 2. 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 next year.

During the first 9 months of 2017, Great Lakes won 55% or $136 million in capital projects awarded, 47% or $90 million of the coastal protection projects awarded, 28% or $99 million in maintenance projects awarded and 20% or $2.6 million of the rivers & lakes projects awarded.

Contracted dredging backlog at September 30, 2017, totaled $428 million compared to backlog at December 31, 2016, of $468 million. Again, this backlog does not include the recently awarded $213 million Charleston 2 contract.

The E&I segment's backlog was $58 million at September 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.

We believe the strategies that we have outlined for the next 18 to 24 months would put us in the best position to win exciting new projects in a very active domestic market as well as in the international markets that are expected to recover in 2018 and '19.

With execution of our restructuring plan, upcoming delivery of the Ellis Island and E&I starting to contribute positively, we see this as a turning point, and we look forward to generating results that will enable us to reduce our debt, improve our return on invested capital and begin planning for necessary reinvestment in our fleet.

And with that, we will open the call for questions. (Operator Instructions) Your first question comes from the line of Andrew Casella of DB.

I guess first, is there any way to quantify the potential impact from the hurricanes? I mean, is there a way to call out the utilization rates or off-hire days? Or any way to kind of get a sense of the amount of revenue that's missing from the quarter? And then just how we should think about that flowing through the system as we progress into the fourth quarter, and also in 2018?

So in the quarter, we had about 4 projects that were impacted by the hurricanes with a number of days, I'd say, from 4 to about 12 days of delay related to those 4 different projects. And we've quantified that as about a $2 million impact in, what we call, contract margin, it's above the gross profit line for the quarter. A lot of that will shift to the prior -- to future quarters, but one thing that could impact that whether you get it all back is the weather delay. So we have an estimated amount of weather. We've taken some of that now. We prorated those weather days into the estimate for the future. So as long as we -- if we stay below those weather days, assuming the hurricane was the big impact, we would pick that back up, because, you do have additional costs from the delay. But otherwise, if you have the same number of weather days that you would lose some of that, but the impact to the quarter is about $2 million.

Okay, that’s helpful. And then I wanted to ask a little bit about the cost benefits that you guys are looking to get in 2019. If you could kind of talk about the ramp? And how we should see that progress as we get into that full run rate by 2019, of that $40 million?

Yes. So it's really broken into, I'll call it, 3 buckets, as we stated in the press release. Some G&A and overhead costs, the assets rationalization and then some operational improvements. The first bucket of that, as we've mentioned, is kind of a severance that happened. A lot of that is, obviously, that's personnel and that's in the -- most of that is in G&A. Little bit in overhead, which is above the gross profit line. So you'll see that ramp-up this year. We -- it's about $2.2 million favorable impact in the fourth quarter this year. The other items will come in, in 2018 and 2019, as the vessels are -- some have to finish projects. And as they finish those projects, we begin to recognize those savings going forward. But as we looked, as we've said, about this $40 million to be fully realized in 2019, as you look forward into 2018, it's about half of it would be impacting the full year 2018.

Okay, that's helpful. And then just for the asset disposals, is that netted against the cash restructuring charges? Or is that an additional inflow we should think about?

Yes, so when we calculate the charge related to the vessels, it's net of proceeds. Some of those... yes, yes.

Okay. No, no that's helpful. And then moving on to capital expenditures, So I know when you guys brought the bond deal, and kind of, I guess, on the call, you had kind of talked about a sustaining CapEx number of about $40 million to $45 million. So if you pull out the quartered numbers of $12.6 million, you take out the Ellis Island payment, you're run rating at a number well below that. So is that timing, like would you call out that, that number is actually too high on a sustaining basis? Or how should we think about that number going forward?

Yes. So yes, we are below it this year, and we expect to be below it this year. And some of these things are timing related to dry dock year. So this year's -- we had some dry docks earlier in the year, but we've other years that are larger. And when we talk about '18, it's not a high dry dock year. But we do have -- we are estimating right now that next year would be about in this $40 million range related to -- we have deferred some things for this year a little bit, because this is a year we are spending a lot of money on the Ellis Island. So we're projecting about $40 million for next year.

Okay, that’s helpful. And then just final question for me and I'll get back in the queue. I know you guys had said on the last call that you were expecting second half margins to be below that of 2016. And I think year-over-year, you guys actually comped a little higher. So how should we kind of think about the fourth quarter? I know you're still expecting that number to be lower on a full year basis. But I mean, it seems to me like you'll only be marginally below that? If there is any additional color you can provide there.

Yes, I mean -- we're -- right now the -- with the fourth quarter, we expect to be similar to this quarter. But you have to take out -- we did have the sit on the E&I side, this job of $2.9 million. You have to adjust for that as you move forward.

I'm sorry, that number, will that drag down the gross margins for this quarter, right? So you're saying add that back and then that should be the right margin?

Right.

(Operator Instructions) Your next question comes from the line of Ben Klieve of NOBLE Capital Markets.

A couple of questions here. Lasse, one question I have about the restructuring plans you announced a while ago, and the decision to close out your Brazilian operations. Wondering what was it about those operations that made you feel like you need to leave that market? And second, how do you see that market differing from your current position in the Middle East right now? What gives you confidence that as you want to maintain operations abroad in the Middle East, but closeout those in South America?

Yes, as I said, we looked at our market, in the markets that we operate in, both domestically and internationally, and the Brazilian market has been small for us. And we -- going forward, we've seen that it has been difficult to cover the cost and then the overheads that are associated with being in Brazil with the volume award that we saw coming. The situation in the Middle East is very different. It's a large market. It's slow right now. We've been in the Middle East for 25 years with quite a number of vessels. We ship them back and forth between the U.S. and the international markets when we need capacity in these different markets, but we've been there for a long time, and we have excellent knowledge of the whole region. So we believe that, that market is a good market for us going forward.

Okay. Very good. And also have a quick question here on awarding. You said that the bid market in '17 was higher than '16, and you said that you expect next year to be higher as well. Did you mean that you expect next year to be an improvement beyond 2017 or higher than 2016?

What we see, in general, is that we have this port-deepening program that is ongoing as a consequence of the deepening of the Panama Canal. So the ports are targeting larger vessels and higher volumes of trade. And these programs will go for the next 3, 4 years as we see it. And we, as Great Lakes with our fleet and our very diverse operations are ideally suited for these projects. So these projects started back couple of years ago, with Miami being deepened. We are now active in Savannah. We have one Charleston, and then this continues with the Boston, potentially also Jacksonville, and so forth. So we see that program being a very good base for our company in the next couple of years. So if you're thinking about the market, I would say we expect next year to be in line with 2017.

And your next question comes from the line of [Michael Clancy] at [Investment].

Can you just provide a little bit of color what the issue was at the Ellis Island and how material you think it may be?

Well, we encountered some problems with the port side gearbox during sea trials, and these repairs have been carried out. We are -- in these days, we are putting the final touches on closing up the gearbox, and we will recommence our sea trials end of this week. And as you know, when you're taking out a new vessel and you go into commissioning and then sea trials, there are -- there may be issues coming up and that is what we have experienced, and we will know when we can go to the project sites when sea trials are completed with -- in the next days.

Okay. So assuming no other issues, sea trials will be completed in next week or so? Is that...

Well, we....

Or you're not sure yet?

In our announcement, we gave our program -- our program on last announcement. Unfortunately, we got delayed compared to that. But we're going out to sea and do the testing with both, the tug and the barge here in the next couple of days. And then, after that successful trials, we go to the project.

And your next question comes from the line of Rick D'Auteuil, a private investor.

Just on the E&I loss that was called out this quarter, what was the nature of that? I know, we were trying to be a little more diligent in not taking on loss projects, and yet we're still calling out projects. What was the nature of that?

Yes, so with that project, it's a -- really 2 issues related to that project. Water on the site as well as the differing soil conditions. And it's a -- in that different soil conditions, we had to put in a mix design to -- in-situ stabilization situation. And with those differing soil conditions, the mix design wasn't working properly. So I want to be -- we do have a negotiating change in -- change origin claims for that going forward. It's the only project that's in the E&I portfolio that's at a loss. The other ones are all performing at or above the bid estimates. So it is this one job that has caused an issue for those 2 reasons.

Okay. And then, while we're on that subject, the prior period, we had several years of project losses with change orders. Were there any recoveries this period and what is still being pursued?

No, not this period, but we did earlier last quarter pick up a claim. I think it was $2.5 million. I'm forgetting the number, off the top of my head, I think, it was $2.5 million related to a job in Indiana, that we had losses in '16. So yes, this would be the only other major claim or change order that we have. We have maybe little ones, but that's the only big one we have on the E&I right now that we're negotiating.

Okay. So you settled off past ones and are no longer pursuing them?

Yes. That's correct.

And Savannah, what's the status of that?

So we'll finish that job in March 2018. That job has been -- it's about a 3-year job, right? So we have the [turtle] windows we have to work through. So yes, we'll be done with that one in March 2018. An excellent project for us.

Is there -- are there future phases of that, that are still to be bid or that is the end of that project?

Yes, no, there's actually 2 major phases of Savannah that, as Lasse was mentioning, these port deepenings, we talked about, obviously, Charleston, we just won and then Boston coming up. But then even in Jacksonville, Savannah and Charleston have additional phases. So there's a lot of additional work. That's why we're pretty bullish on the 2018 market.

What does -- my last question, what does the 2018 port-deepening bid market look like?

So Jacksonville would be the big one in 2018.

Okay.

Oh yes. And there is Corpus Christi as well. It has been one that has been recently discussed in the press.

And your next question comes from the line of Jon Tanwanteng of the CJS securities.

The first one, the $21 million of push outs you disclosed in the press release, is that new or increased or different from what you previously expected?

Say that again, what, John, Sorry?

The $21 million of pushed out revenue in E&I segment in the press release. Is that new or changed from what you previously said before?

No, it's not a -- it's a -- no, we expected to have -- we knew things were coming out to bid, or something we did, one has been postponed. So those really were new items in the quarter. They have either -- we expected to have something and it's been deferred or a win has been postponed. So that's the impact. It's really new news.

Got it. And just for the ATB and the delays associated with the mechanical issues there. When do you actually expect it to start generating full run rate revenues? After the sea trials and after you've done kind of the first phase of work to see if it actually performs as advertised?

Well, what we have said before, is that it goes to the Mississippi Coastal Improvement Program once the sea trials are complete. And then we start -- we have a run-in period, where we are starting the dredging. And what we have seen is that we need a month or so, maybe 2, to kind of run in the units on the project. And then we should, after that, have the full production in place.

Got it. And if you could, just a bit more color on the Boston and Jacksonville projects coming up to bid? First, what do you feel like are the relative chances of winning each one? And then just what are the relative sizes of the bids that we're talking about here?

So on Boston, it's a -- the relative size is about well, it's a big range, $100 million to $250 million, big range on Boston. It's clamshell work, which, is we've had a lot of stuff -- or backhoe work, sorry, backhoe work. And a lot of these other ones, we've either done with cutters or hoppers. So it's a nice piece of equipment we have. It's a good opportunity for us and for the market. And then on Jacksonville, it's about $200 million, $250 million project. That one is a mix of cutter and hopper work.

Okay. And you feel your changes are relatively good at each one, or how should we think about the competitive landscape for those?

Well, I think that, as I said the fleet that we have available to us, at Great Lakes is very versatile. And the combination of these different types of dredges on these major projects puts us in a very good position, both for winning the project and executing the project.

Okay. Got it. And you mentioned Corpus Christi as the one that comes up next as well as additional work on Savannah, what's beyond that in terms of ports that need to be deepened, are there any others?

Yes, I don't think it's in additional ports and with sequences that are coming out. There's a lot of press around the different ports that are planning to expand and deepen their ports, but clearly, it's also a function of the Corp of Engineers' budgets and additional funds being made available for these projects. But as we see it now, we have Boston coming up this year. Next year, we're looking at -- additional work on Savannah, and we're looking at additional phases of Charleston. We're looking at also Corpus Christi that has been announcing a major expansion of the works there. So it's a good market and it will continue here over the next at least 3 years.

Okay, great. And then finally, just on the Mid East work that you're seeing, is that keeping your fleet there 100% utilized going forward or is that only going to be after you dispose of some of the assets that are there as part of your restructuring plan?

Yes, we have contracts that cover those units for 2018, and we also have options on these contracts to take that further.

Okay, just to be clear, are you reducing your asset base in the Middle East at all?

Yes, we are. We -- due to all the work that is coming up here in the U.S. we have decided to take one unit -- to take one unit away, considering to take one unit back here to the U.S. And that will -- the remaining fleet in the Middle East are then utilized on the contracts that we have.

And your next question comes from the line of Andrew Casella of DB.

Just 2 quick ones. As we think about the port-deepening work, what's the typical duration of some of these contracts, I mean is this, how should we think about, I guess, the allocation of once you win the project, how much will benefit, and like your 1, 2, 3, just as we've kind of think about your wins going forward?

Charleston is going to be 3 years. And that is typically between 2 and 4 years on these deepening projects. And there is flexibility in the contracts on when we can execute the work. So it gives us a very good baseload for utilization of the fleet for the next couple of years.

Okay, perfect. And then Mark, just a quick question on, was you guys will flow through these restructuring line items, it doesn't look like you're adding them back to benefit EBITDA. So I just want to make sure on a headline basis EBITDA is going to be understated, I think, as we go forward and you guys take the charges related to the restructuring program, is that the right way to think about it?

Yes.

And your next question comes from the line of Kurt Probe with Liberty Park Capital Management.

I was just wondering how much of the impact is due to the B-tree build from the hurricane versus the improved port-deepening outlook.

The improvement you mean in the bid market?

Yes, in the bid market how much is a result of [B-tree build from the hurricane?

Yes, right now, we don't know -- we don't have that really as we talk about it. We don't have any of that expectation in the bid market as we think -- move forward. We do -- they still have to assess that and that will take some time for the Army Corp to do, a number of months, but we do believe there will be an opportunity, but as we've been talking, we're mostly talking about the opportunities on these deepening projects because they are so large.

And there are no further questions at this time. I'll turn the call back over to Abby Sullivan.

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 February.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.