Great Lakes Dredge & Dock Corp (GLDD) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Q1 2018 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, Abby Sullivan, Manager of Investor Relations. Please go ahead.

Thank you. Good morning, and 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 commentary on the overall themes of the quarter then Mark will continue with an update on our financial results. Lasse will conclude the call with commentary on the outlook for the remainder 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 2017 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.

During this call, we will also exclude our restructuring cost from certain financial measures to allow the user of the data to better evaluate our financial results from operations as compared to the prior year. Reconciliations regarding these non-GAAP measures are included in the first quarter earnings statement released this morning.

Finally, beginning in 2018, the company has chosen to account for plant and overhead in the same period in which cost were spent, as opposed to the accrual deferral method previously used. As required by guidance, the company has recast the prior years as if this accounting standard had always been in place.

With that, I'll turn the call over to Lasse.

Thank you, and good morning. I'd like to begin with a special note on safety. Next week, we'll join over 70 other construction companies in celebrating National Safety Week. In this respect, I'm pleased to see that Great Lakes has worked incident and injury free throughout the months of March and April with 0 recordable injuries across our operations worldwide. This shows that 0 incidents are possible, and the 2 last months of safety performance is great encouragement in our drive for sustained safety excellence.

Switching over to our results for the first quarter. We are now seeing that our restructuring plan is starting to yield results with the first quarter adjusted EBITDA, excluding restructuring, increasing to $1 million from the prior year quarter of $11.7 million, even though revenues were down quarter-over-quarter.

As previously reported, we implemented last year a company-wide restructuring plan to rationalize old, underutilized and underperforming assets and to reduce our total overhead cost.

As Mark would detail later, we continued to recognize some restructuring charges in the first quarter. But most importantly, we are on schedule with all the planned initiatives and have started to realize the associated savings.

The Ellis Island hopper dredge went into operation in December of 2017 and went through a run-in period during the first quarter, while generating revenue on the Mississippi Coastal Improvement Project. She has contributed $14 million of revenues during this period and is on track to deliver her expected annualized EBITDA contribution as she is now performing at her designed capacity.

The addition of the Ellis Island to the Great Lakes' fleet at a cost of $168 million is testament to our commitment to the domestic dredging market and has solidified our position as the leading U.S. dredging company. In this respect, we also have added the Carolina cutting dredge and the Mechanical Dredge 53 to our domestic fleets from their previous positions in the international market.

We believe these actions will ensure that we have a strong capacity to undertake the new and challenging project that we have in backlog and see coming to bid in the next years in the ongoing domestic Harbor deepening and Coastal Protection Programs, while we are awaiting the anticipated recovery in the international markets in 2019 and onwards.

We will also continue our CapEx program to upgrade and maintain our dredging fleet. Keeping to our previously stated expected capital expenditure of $40 million for 2018.

This expense is important as we seek to maximize available revenue base in the fleet in support of our financial results.

During the first quarter of 2018, we did experience 1 major unplanned mechanical delay in our domestic fleet, which negatively impacted our results for the quarter, decreasing revenue by $12.3 million and gross profits by $4.3 million. The dredge is now back to work and we expect this revenue and profit timing delay to be recovered throughout the remainder of 2018.

Awards during the quarter included $65 million of options on the Charleston Phase II project, which at $278 million is now fully awarded.

We have mobilized on the project and rock dredging work is underway. The first quarter bid market was active, and we currently have $151 million in pending awards that we expect to add to backlog during the second quarter. We continue to be optimistic about the domestic EBIT market for 2018, and expect bids to be issued for the first phase of the Corpus Christi deepening, the Tampa Big Bend Channel deepening and the second phase of the Mississippi Coastal Improvement Program in the next few months. Further phases of the Jacksonville, Savannah, Charleston and Corpus Christi port deepenings are expected to tender later this year.

Turning to the E&I segment. This segment always experiences a slow first quarter because of the seasonality of the business. This segment performed as expected and finished the quarter on plan.

For those updates, I'll turn the call over to Mark to discuss the results of the quarter and for an update on bidding and award activity.

Okay. Thank you, Lasse. Consistent with our press release in February, the financial results released this morning were in a slightly different format than prior quarters. The results included the financials as reported, which includes restructuring charges as well as certain financial measures, excluding restructuring charges to allow the reader to better evaluate our financial results as compared to the prior year.

Also as Abby noted, beginning this year, we have chosen to account for plant and overhead in the same period in which costs are spent, as opposed to the accrual deferral method previously used. As required by guidance, all prior periods presented have been recast as if the standard was always in place.

In 2018, we adapted accounting standard revenue from contracts with customers Topic 606. Our Form 10-Q will have more detail on the adoption and impact. Overall, the update does not have a material impact on our business.

I will start with the quarterly consolidated results and then discuss results at the segment level. Please note that all results discussed will be operationally focused and do not include restructuring charges.

I'll provide specific commentary on the restructuring charges near the end of my comments.

So for the first quarter of 2018, revenues were $146.6 million, net loss was $4.6 million and adjusted EBITDA was $15.1 million.

Total company revenues for the quarter represented a $24 million decrease compared to the first quarter of 2017. The revenue decline was caused by $19.4 million decrease in the Dredging segment and a $6.3 million decrease in environmental and infrastructure, or E&I segment.

Total company consolidated gross profit was $19 million compared to $14.8 million in the first quarter of 2017. Gross profit margin increased to $12.9 million -- 12.9% compared to 8.7% in the prior year quarter. Total company operating income was $3.4 million, which is a $5.4 million increase over the prior year quarter.

This increase is driven by increased contract margins in the domestic Dredging segment, slightly offset by lower margin in the E&I segment.

Lower planned cost and general administrative expenses across the company, as a result of our restructuring plan, also contributed to the increase over the prior year.

Net loss from continuing operations for the first quarter of 2018 was $4.6 million, which is flat compared to the prior year quarter.

The current quarter net income includes, net interest expense of $8.7 million and an income tax benefit of $1.6 million. In comparison, net loss from continuing operations in the first quarter of 2017 included $5.6 million in net interest expense and $2.8 million income tax benefit.

The current quarter interest is elevated for 2 reasons. One, in the prior year quarter, we were able to capitalize $2.2 million of interest related to the construction of the Ellis Island.

Secondly, the current quarter interest expense is on $325 million in senior notes at 8%, while the prior year expense was on $275 million at 7.375%.

Finally, the current year quarter includes other expense of $0.9 million related to legal cost at our historical demolition business.

As we stated in this morning's earnings release, we received a favorable jury verdict on approximately $3.4 million, plus attorney's fees and cost, plus post-judgment interest following a multi-week trial.

The favorable verdict amount is not included in our quarterly results, and we do not expect expenses on this claim at this level going forward.

Adjusted EBITDA for the quarter was $15.1 million compared to $11.7 million in the prior year quarter.

Moving to the segment level. The Dredging segment's revenue decreased from the prior year quarter on lower foreign capital, maintenance and rivers & lakes revenues. These decreases were slightly offset by higher revenue in our domestic capital and coastal protection revenues.

Specifically, the major unplanned mechanical delay that Lasse noted, negatively impacted revenue for the Dredging segment by $12 million.

Finally, the first quarter of 2017 also included revenue of $6.3 million for 2 vessels that were part of our rationalization plan.

Gross profit margin in the Dredging segment increased from 8.6% to 13.8% on lower plant and overhead cost, mainly attributed to a recent -- recently rationalized assets. Dredging's operating income increased by $5.7 million when comparing the current quarter to the first quarter of 2017.

In addition to the higher gross profit margins, a decrease in general administrative expenses contributed to the operating income increase. Our E&I segment's revenue decreased in the first quarter 2018 as compared to the first quarter of 2017 on lower volume of work.

The first quarter of 2017 included 2 emergency projects in Northern California, which as expected did not reoccur in the current quarter. While the segment did complete the quarter in line with our expectations, our focus for the remainder of the year will be on winning and delivering projects in the coming months to ensure our volume of work is strong enough for a positive EBITDA contribution in 2018.

The E&I segment's gross profit margin decreased in the current quarter from 8.9% to 4.4% on a lower volume of work. This was slightly offset by lower plant and overhead costs. The segment reported an operating loss of $3.1 million in the first quarter of 2018, a $0.3 million decrease from the prior year quarter. The decrease is a result of the lower gross profit margin offset by a decrease in general administrative expenses compared to the first quarter 2017.

During the quarter, we also recorded a $6.4 million charge related to restructuring, $3 million of which was charged to depreciation. As we continue to rationalize assets throughout 2018, we expect an additional $6 million to $11 million in restructuring charges.

Next, I'll turn to our balance sheet, where at March 31, 2018, we had $12.7 million in cash and had drawn $91 million on our revolver, leaving us with $77 million in availability. During the quarter, we also reduced our net debt by $14 million as compared to year-end 2017. We continue to plan to aggressively pay down debt in the next 12 to 18 months to improve our balance sheet. Our total capital expenditures for the quarter were $6.9 million versus $19.6 million in the prior year quarter.

As we focus on debt reduction, we'll continue to make prudent investment in our fleet to keep it running effectively and efficiently, but expect this overall spend to be significantly lower than prior years due to the completion of the Ellis Island in 2017.

The 2018 bid market other than the Boston Harbor deepening in January had a slow start, but rebounded late in the quarter. Total awards during the quarter were $333 million, of which, we were awarded 24% or $75 million. $65 million of these awards are the outstanding options on the Charleston II project, which is now fully awarded, offshore rock dredging work is underway. We also currently have an additional $151 million in pending awards from the late quarter bidding activity and expect those awards to be added to our backlog during the second quarter. Once those are awarded, we expect to be back in line with our 3-year average win rate of 46%.

Looking forward in 2018, as Lasse noted, we expect to bid on several large port deepenings and other capital projects adding further strength to our backlog. Contracted dredging backlog at March 31, 2018 totaled $475 million compared to backlog at December 31, 2017 of $511 million. The E&I segment's backlog was $38 million at March 31, 2018 versus $35 million at December 31, 2017.

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

Thank you, Mark. As we look to the remainder of 2018, we remain focused on implementing our restructuring plan. As we prepare the company to take on the opportunities that we see coming to our various markets over the next few years. As has been the case for the last few company updates, we see the domestic dredging market continue to strengthen with focus on port deepening and coastal protection projects.

We also continue to be focused on the opportunities in our international dredging division. As expected, the international market continues to be slow in 2018, and we remain cautiously optimistic for its revival in 2019 and onwards. We have secured projects to keep our international fleet utilized for 2018, and we are seeing increased bid activities for 2019.

Turning to E&I, the focus now in this segment is on winning and executing new work in 2018. The market in the E&I segment remains robust, but delays in awards of new levy construction projects has posed challenges in timing. We plan to bid on approximately $150 million of new projects in the next 90 days, and we continue our disciplined approach to pursue projects but we have a strong -- but we have strong expertise of good client relationships and have had positive outcomes on projects in the past.

In conclusion, with an improved quarter behind us, a strengthening backlog, the Ellis Island performing at a designed capacity and encouraging domestic market conditions, we are optimistic about our ability to perform well for the remainder of 2018. We appreciate the support of our shareholders, employees and business partners, who have worked with us through the trough of difficult times and look forward to a successful 2018.

And with that we'll turn it over for questions.

(Operator Instructions) Your first question comes from Andrew Casella with Deutsche Bank.

I guess, first, can you talk a little bit about, I guess, the mechanical delay? What was I guess the issue there? And then when you think about -- I know you said, it's going to I guess come back in the rest of the year, I mean, I just want to make sure I'm clear on that. I understand the revenue days will come back, but will the revenue days contribute as profitably as that $4.3 million gross profit impact that you guys noted?

Yes, the -- as we have noted before, our fleet is aging and what we had was a failure of the driveshaft on one of the dredges. So whilst she was in dry dock, we had an extended dry dock period to get this driveshaft realigned and fixed. It's now performing as it should, and it's back to work. Mark, maybe comment on the other question.

Yes, so going forward now -- so that delayed, when we talk about moving forward and the timing, so that delayed the start of the Charleston project. So we will pick up that in -- some of it in 2018, obviously, the Charleston project goes more than 1 year. But what we've also seen with the -- as we mentioned there's $151 million of awards. We did have within their wins that we didn't originally have budgeted, so that's why we feel comfortable that we can get on our original expectations for the remainder of 2018.

Okay, so when you guys think about the $4.3 million margin impact. That's not all, I guess, the made-up business that's some other, I guess, unexpected wins kind of offsetting that, if I'm thinking about that [correctly] .

Right, right, you win, I mean, we'll get a big chunk of the $4.2 million back. We just won't get it all back this year because that project goes multiple years. And when you delay the start, it can push somethings into the next year.

Okay, got it. And then when we think about the Ellis Island, I know you guys said that they contributed -- sorry, the asset had contributed about $14 million of revenue. Do you have the EBITDA contribution of that asset, I guess, in the quarter? And then just to be clear, that's on the $20 million to $30 million adjusted EBITDA run rate, as we get into second quarter?

Yes, so when it's doing the run-in, we generally don't give the EBITDA by project, just for competitive reasons. But you can kind of do the math on our EBITDA percentage, how we perform. But in -- we expect better performance moving forward, as it did have a run-in period here in the first quarter, so it wasn't working every day moving up to designed capacity. So you'll see an improvement on that productivity as we go in the next quarters. But as it gets to designed capacity, it is performing where we expected to drive that $20 million to $25 million of EBITDA.

Okay. It's -- so just to make sure I understand, so in second quarter, it will be contributing, I guess, at full designed capacity or is there still a ramp-up that we'll see?

Correct.

Okay, that's helpful. And then final question for me, when we think about the cost-saving program of $40 million, what was the contribution in the quarter? And are you guys are still thinking about that $20 million in 2018 out of the $40 million that you realize in the period?

Right, so it actually contributed $5.7 million in the quarter. So it's actually slightly above where we expect. So we do expect to do this $20 million, possibly at this run rate, a little bit more. And then an additional next year. So as we do the -- when we get through the remainder of this year in terms of the additional cost savings, we have to do is, we have to take out -- more vessels will be rationalized as they finish off projects. And then also, we have operational savings coming in as we talk about third-party we cost, efficiencies, those things for the remainder of this year, that will really begin to impact in 2019. But right now, we are on track for what we expected.

Okay, and sorry, let me squeeze one more in here. When we think about that, I guess, favorable ruling, that $3.4 million. Is that anticipated to be a cash inflow at some point this year? And then also wanted to ask if there was an update or any association with that indemnification call back that you guys are trying to get from the tariff services business? I think, it's related to the letter of credit that had to be pulled.

Yes, sure. So on that -- first, on the first question of the favorable jury verdict we had, we haven't -- obviously, we haven't booked anything in the quarter yet. Whether we get the cash or not for this year, there is the opportunity to appeal that. So with these types of lawsuits, I can't give you an exact time of when that would come forward. But yes, that would be, obviously, cash in the door for us, I do not know the timing yet. In terms of the second question on the old demolition business, there's been no update to that yet, that's still proceeding along, they're finishing off that project but we -- they've cashed in our whole LC. We expect them to spend the entire $20 million on that. So that's kind of just proceeding along, but no really new news on that.

Your next question comes from Jon Tanwanteng with CJS Securities.

It's Pete Lukas for Jon. Just a question in terms of the margin profile for the U.S. dredging. You mentioned rationalization of assets had helped improve that and you look for that to continue going forward. Just want to know, is the margin profile on projects going forward similar to what you experienced in Q2 or how we should think about that? In Q1, I'm sorry.

Yes, so we -- actually, if you just think about, I will use the example of the Ellis Island coming up to designed capacity. We do expect a margin improvement of 1 or 2 points in the next quarters because of that. That's really a big chunk of business for us. So it should get better in the second quarter related to that. That would be the main reason.

Great. And to that extent, how would you say the Ellis Island performed during this past quarter with regards to your expectations. I know it's now you're saying up to full potential, but how did it compare to the quarter for what you had looked at for the start?

Well, we are happy with run-in period on the Ellis Island. It always takes a while to get new assets worked into the full design capacity, and I think we always said that it will take 3 months to get to that target. We have reached that target, and we are happy with our performance going forward.

And just 2 more for me. You mentioned international being slower than expected but just looking -- and U.S. strong, but are there any other current holes in your scheduling and utilization, and how likely would you be to fill those?

As I said in the text here, we have a current international fleet occupied for the remainder of 2018. And we have bids that we see come to the market here towards the latter part of the year that we are optimistic about continue to keep it busy also in 2019 and onwards.

And last one for me. You mentioned shifting couple of dredges from the international to the U.S. fleet. Just wonder any other update on asset sales, and if you're on target in terms of timing and pricing?

Yes, so this is Mark. In terms of that -- so what's interesting about -- we did move the Carolina back here and the Dredge 53, as Lasse originally mentioned. So the Carolina was not supposed to be rationalized it's here because we have all this port deepening work, it's a cutter jab, those type of things. But the 53 is actually working on a project here, we move that one, it's working on a project down in the Gulf. But in terms of the rationalization of the assets, we're really on target for everything we've expected up to this point. The -- moving forward as the few assets, we have -- a lot of them are going to be scrapped, if you remember, there were just a handful to be sold. So the risk would be getting those proceeds from those sales. So we would, obviously, generate the savings. It would change what the restructuring charge would be. So that would be really the only risk we see going forward. But right now, everything has been on track as we expected.

Your next question comes from Ben Klieve with NOBLE Capital Markets.

Mark, you talked about the first quarter impact of the rationalized asset. I'm wondering for those assets, what was the full year 2017 contribution on the top line?

Yes, it was $37 million, we kind of talked about that before. $37 million of the revenue. As I mentioned, we had, I think, it was $6-point-something million in the -- that these vessels contributed in first quarter of '17.

Okay, perfect. Sorry, if I missed that $37 million number before. Couple of other kind of miscellaneous questions here. What's the status of the Boston award you talked in the past about possibly protesting that? Where do we stand on -- in Boston?

So we did actually protest that job, it's currently on stay, on hold as they go through that. We protested with the GAO. Just -- we'll see how that plays out. We're not -- I would say we have a less than -- we talk about internally here, probably a less than 50% chance of that coming to fruition, but you just don't know till they go through this. So we're not counting on it. Some of the vessels that we're working or plan to work on that are working, going to work on other projects now. So it's -- still may happen, there's plenty of opportunities for that business -- for that equipment that was going to work on that. But yes, that was a nice job that we wish we would've had, but at this point, it will move those -- that those piece of equipment to other opportunities.

Okay, perfect. And one quick follow-up to John's question, you said you expect the gross margin improvement of 100 to 200 basis points in the second quarter because of the Ellis Island. Is that what I -- did I hear that correctly?

Yes. It's one -- he asked a question of whether, would it be better than this quarter. One movement would obviously be the Ellis working -- still working that same project at work, so we'll improve in the second quarter. But also second quarter, third quarter in particular, we have a lot of work as we start to work Charleston now. So we just said that's underway, that's a good project for us. So I did look at that, and we have a movement of a couple 1 to 2 basis points as we go into Q2 and Q3 versus Q1.

Okay, perfect and then one last question from me. Lasses, I'm curious, your take on the international market. With oil really stabilizing and pushing $70 a barrel here, I'm wondering what you're looking for that you think will really tip the international market to be more robust in 2019? Are there any metrics that you're really looking for? And do you have any visibility of kind of when that market will really tip towards being more constructive?

Well, clearly the oil price is a very important factor in the Middle East for starting with new land reclamation and new oil and gas projects. But what we will need to see is some major new investments going into infrastructure and that could be the Middle East, it could be Europe, could be the Far East, to let's say, absorb some of the capacity that is now available in the international market. We came off high when the Suez Canal was completed, and that combined with the oil price fall in 2014, really had a severe impact on the international markets. I do think that going forward $75 oil will make the new projects or infrastructure projects in the Middle East start to move. We see that the improvements in the markets that we are active in. But 2019, 2020 is probably the years that we see a major -- a significant recovery.

And there are no further questions queued up 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 again during our next earnings discussion in August.

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