Great Lakes Dredge & Dock Corp (GLDD) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Great Lakes Dredge & Dock Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Ms. Abby Sullivan, Manager of Investor Relations. Ma'am, you may begin.

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 an update on the overall themes of our third quarter, then Mark will continue with an update on our financial results.

Finally, Lasse will continue with commentary on the market and 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 risk 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 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 other certain operating data. During this call, we will also exclude our restructuring costs 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 our third quarter earnings statements released this morning.

Finally, beginning in 2018, the company has chosen to account for plant overhead in the same period in which costs were spent as opposed to the accrual deferral method previously used. As required by guidance, the company has recast the prior year as if this accounting standard has always -- had always been in place for all periods presented. And with that, I'll turn the call over to Lasse.

Thank you, and good morning. First, I'd like to start with comments on safety and then discuss our improved results for the third quarter.

Safety is a core value in Great Lakes, and we work hard to keep all of our employees safe, every hour, every day. As we continue our journey to an incident- and injury-free workplace, I'm proud to announce that this quarter and year-to-date, Great Lakes has achieved a strongest safety performance since the inception of the IIF program 13 years ago. Our [cultural safe] work is truly embedded throughout the company in all our operations.

Turning to our financial and operational results. This morning, we announced a strong adjusted EBITDA from continuing operations of $35.9 million. This is an increase of $22.8 million over the same quarter last year and the highest quarterly adjusted EBITDA achieved since the company went public in 2006. The third quarter of 2018 was marked by high equipment utilization, solid project execution and continued savings from our restructuring plan.

In Charleston, South Carolina, we had 3 of the largest dredges in the United States deepening the outer access channel to 54 feets. And despite delays caused by hurricanes Florence, Michael and Gordon on our projects, both on the East Coast and in the Gulf had good performance, enabling us to deliver strong results ahead of expectations this quarter.

Our newest dredge, the ATB Ellis Island continued to meet our plant designed criteria. She will be finishing her current project, rebuilding the Mississippi coastal barrier ship island during the fourth quarter before mobilizing to the Charleston project late this year. The high levels of activity have continued into fourth quarter for 2018. However, compared to third quarter, the fourth quarter does include some planned events affecting equipment utilization, such as scheduled regulatory dry docking of one dredge and the plant transition of equipment in Charleston, demobilizing the cutter dredges and mobilizing the hopper dredge, including the Ellis Island, for the total window season this winter. Overall, we are confident to continue the quarter-over-quarter -- over prior year's quarter improvement trend.

Our restructuring efforts continued to impact results positively with $22.5 million of cost savings achieved year-to-date. As included for in our plan, we recognize a $4.5 million charge related to our restructuring efforts, $3.2 million of which impacted adjusted EBITDA from continued operations. We expect to meet our target of $40 million in run rate savings by the end of 2018.

Our strong operations and cost savings initiatives has allowed us to make significant progress on debt reduction and delevering of our balance sheet. Since year-end 2017, we have decreased our net debt by $85 million and plan to continue to reduce our net debt as we finish the year.

Turning to the environmental and infrastructure of our E&I segments. We continue to see the impact of the lower-than-expected new work in this segment but have delivered quarter-over-quarter margin improvements. Over the last 12 to 18 months, we have restructured operation in this segment to reduce costs, and the team is focused on winning new work and executing it flawlessly. But we recognize that we must continue to improve the financial performance of this segment. We believe that with these changes, we are positioning the E&I business segment well for the future. With those updates, I'll turn the call over to Mark to discuss the results of the quarter and for an update on bidding activity and award activity.

Okay. Thank you, Lasse. Consistent with our most recent earnings releases, some of the financial results released this morning were in a slightly different format than prior years. 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.

Turning to our financial results for the quarter. 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 will provide specific commentary on the restructuring charges near the end of my comments.

For the third quarter 2018, revenues were $204.3 million, net income was $15 million and adjusted EBITDA was $39.1 million. Total company revenues for the quarter represented a $41 million or 25.1% increase compared to the third quarter of 2017. The revenue increase is a result of $44.8 million increase in the Dredging segment, which was offset by a $4 million decrease in the E&I segment.

Total company consolidated gross profit was $44.2 million compared to $20.1 million in the third quarter of 2017, a 120% increase. Gross profit margin was 21.7% compared to 12.3% in the prior year quarter. Total company operating income was $27.9 million, which is a $23.8 million increase over the prior year quarter. The increase is driven by lower plant and overhead expenses, which were direct result of the Dredging segments, asset rationalization program and high utilization during the third quarter of 2018.

General and administrative expenses across the company were slightly increased over the prior year quarter. The increase is mainly a result of an increase in incentive pay in 2018 due to improved operational performance. General and administrative expenses also include reductions in labor and technical and consultancy expenses due to restructuring savings initiatives.

Net income from continuing operations for the third quarter of 2018 was $15 million, which is a $17 million increase over the prior year quarter. The current quarter net income includes net interest expense of $8.1 million and income tax expense of $5 million. In comparison, net loss from continuing operations in the third quarter of 2017 included $6.4 million in net interest expense and $0.5 million of income tax benefit. The current quarter interest continues to be elevated over the prior year quarter because a portion of the interest in the prior year quarter was related to the construction of the Ellis Island and was capitalized. The prior year quarter included $2.2 million of capitalized interest.

Adjusted EBITDA for the quarter was $39.1 million compared to $15.1 million in the prior year quarter. At the segment level, the Dredging segment's revenue increased from the prior year quarter by $44.8 million. The increase is a result of an increase in the domestic capital market, slightly offset by a decrease in the maintenance market.

The coastal protection, foreign capital and rivers and lakes markets each experienced minor variances when comparing to the prior year quarter. In the domestic market, we saw positive results at our Charleston 2, Myrtle Beach and La Quinta projects. In the international market, we completed one project in the third quarter and have been working in fourth quarter to finalize permits for our next project, which we expect to start later in the fourth quarter. Gross profit margin in the Dredging segment increased to 23.3% in the current quarter from 14.8% in the prior year quarter on lower plants and overhead costs related to our rationalization plant as well as strong equipment utilization during the quarter.

Dredging's operating income increased by $21.6 million when comparing the current quarter to the third quarter of 2017. This increase was mainly as a result of the higher gross profit margin as general and administrative expenses were relatively flat when comparing the current quarter to the prior year quarter. Our E&I segment's revenue decreased by $4 million in the third quarter of 2018 as compared to the third quarter of 2017 on the continued issue of lower-than-expected new work. The E&I segment's gross profit margin increased to 9.9% in the current quarter from 0.9% in the prior year quarter. Although the segment is still experiencing lower-than-expected volume of new work, we achieved better project execution and lower overall plant cost, thus improving the margin percentage. The segment reported an operating loss of $1.2 million in the third quarter of 2018, a $2.2 million improvement from the prior year quarter. The improvement is a result of the improved gross profit, which was slightly offset by a $0.4 million increase in general and administrative expenses.

During the quarter, we also recorded restructuring charge of $4.5 million. The charge is comprised of $3.1 million of accelerated depreciation as well as $3.2 million of expenses related to cost of contract revenues, general and administrative expenses and sales of assets.

Next, we turn to our balance sheet, where at September 30, 2018, we had $23.1 million in cash and had drawn $31 million on our revolver, leaving us with $161 million in availability. During the first 9 months of 2018, we also reduced our net debt by $85 million as compared to year-end 2017. We plan to continue to pay down a revolver and expect to have a minimal balance remaining by the first quarter of 2019. Our total capital expenditures for the quarter were $2.3 million versus $12.6 million in the prior year quarter, mainly driven by the completion of the Ellis Island construction in 2017. The 2018 bid market is on track to be the strongest we have seen in recent years with the potential for the year to cap out close to $2 billion. The total bid market to-date is $1.6 billion, of which we were awarded 43% or $679 million. Please remember that variability in the percent of contract wins is not unusual, and the win rate is not indicative of the win rate the company is likely to achieve next year.

The third quarter specifically had a strong win rate of 49% mainly as a result of the awards of the projects in Jacksonville and Tampa. During the third quarter of 2018, we were awarded 49% of the overall bid market comprised of $298 million or 70% of the capital projects, $26 million or 37% of coastal protection projects, $43 million or 13% of maintenance projects and $70 million or 100% of the large scale rivers and lakes projects that the company targets.

Contracted dredging backlog at September 30, 2018, totaled $654 million compared to backlog at December 31, 2017, of $511 million.

The E&I segment's backlog was $35 million at September 30, 2018, which is flat with backlog at December 31, 2017. With that, I will turn the call back over to Lasse for his remarks on the outlook moving forward.

Thank you, Mark. The domestic dredging market continues to show strength with recent awards of large port deepening projects in Jacksonville and Tampa. We expect a strong market to continue to positively impact our operations.

Looking forward, we expect a solid market with multiple port deepenings and channel deepenings for new LNG projects scheduled to bid over the next 12 to 18 months.

In Washington, D.C, the budget for the U.S. Army Corps of Engineers was passed at another record level. And the Water Resources Development Act of 2018 was signed into law in October.

In addition, there has been various supplemental appropriations to mitigate the impact from hurricanes Harvey, Irma, Maria and Florence, which we expect to provide a strong pipeline of domestic project opportunities.

To conclude, with a high activity level of the third quarter expected to continue into the fourth quarter and even with a vessel in dry dock and the planned vessel transition in Charleston, we are optimistic that we can continue our quarter over prior year quarter improvements as we finish 2018.

And with that, I'll turn the call over to -- for questions.

(Operator Instructions) Our first question comes from the line of Jon Tanwanteng from CJS Securities.

Can you talk about the impacts that you're thinking about from the demobilizations and maintenance in Q4 as well as the impact from Hurricane Michael in the south?

So yes. So John, thanks. So -- yes, we [call in] -- this was obviously an extraordinary quarter for us. And as we look into the fourth quarter, there is really 2, call it, major items that would be different than the third quarter. The first one being, we do have our major vessel that goes into dry dock that worked in the third quarter. And then secondly, on Charleston, we finish up the mechanical dredges and cutter dredges working in Charleston, and then we're beginning in December to move into the hopper. So we'll still be working in Charleston but not every day like we did in the third quarter. So I think one of the things, as Lasse just pointed out, that's important as we do expect even with those to have our year-over-year improvement better than fourth quarter last year obviously, which is just not to the level of Q3 this year.

Okay. Got it. And did you have any shutdowns from weather?

We did, but obviously, the weather is -- we do have weather delays in our estimate. So as long as we don't exceed those, it really -- it's part of the estimate, doesn't impact the estimate to a big degree -- to a large degree. So at this point in time, we had those weather delays in our estimates.

Got it. And then just from a debt and leverage perspective, you've done a good job paying down $85 million this year. Where do you expect to stand by the end of the year? And kind of what are your expectations or hopes for 2019?

Yes, as one of my comments, we expect it to be minimal in the first quarter of '19. When I say minimal, I mean, that means close to 0. We can have -- there is certain times of the month where you may have payment, large payments, for a period of time or we make our interest on our senior notes payments, so those types of things. But otherwise, we expect it to be a minimal balance by the end of first quarter 2019.

And for the end of 2019, is there a target that you're trying to get to?

I mean, right now, we think we'll be about another $10 million down. So [we had] $31 million closer to the $21 million number.

2019?

I'm sorry, they said '18, sorry. Yes, so -- no, once we're at 0, we expect to remain at that level for the rest of next year, barring any type of major investment.

Okay. I'm sorry, I was confused. I was trying to get the level of debt that you're trying to exit '19 with relative leverage level?

Oh, okay. So you would still be at 0 on the revolver and still have our senior notes at $325 million.

Got you. Okay. That makes sense. No worries. And then finally, just talk about the backlog in the E&I segment? And kind of what movement needs to happen there for you to actually get profitable in that business next year?

Right. So we're at a $35 million backlog. That really needs to be closer to the kind of $50 million, $60 million range. We like that revenue to be in that kind of $100 million range. Again this year, there was a couple of -- we need a couple of larger projects to move [that one]. When I say larger for E&I, that's in this kind of $20 million to $25 million range as opposed to a $5 million or $10 million range.

Okay. And do you have that pipeline being developed right now? Are you hopeful to get there -- to that range?

Yes, there's a lot of bidding activity in the market. There are jobs of that size that we are bidding. So there is the opportunity to do that.

And our next question comes from the line of DeForest Hinman from Walthausen.

On the margin discussion, fourth quarter lower than third quarter, we had a lot of volatility in the margins recently. The good news is they've been moving upwards year-over-year as a huge positive. Is the fourth quarter margin outlook something similar to what we saw in the second quarter? Or is it lower than that when we have these changeovers and dry dockings and things like that?

Yes, so the margin, as we would be better than fourth quarter of '17, we expect that to continue. When you look at the early part of the year, it's a little bit better than the first half of the year but not to the level of the third quarter.

Okay. That's helpful. And then when we think about the backlog, the improvement has been very nice to see, but the bid discipline is important. And can you just update everybody on how we're bidding our work? And is the margin, let's say, for the full year of '18, in terms of what we end up seeing there, is that the type of thing that shareholder should be anticipating when we think about that backlog that we've built? Is that bid discipline going to show through next year?

Yes, that is one of our strong focus areas, to make sure that we have a disciplined approach to new projects and new work and we have good systems for risk management when we do evaluate new opportunities. Clearly, in the Dredging segment, it's a strong market right now, and we are adding a new project to the backlog, which has, let's say, suits our equipment and our skill set with our deepening projects in particular. And in E&I, we have the same approach. However, we -- our risk management systems there are resulting in good margins on the work that we execute. But we just need to convert more projects to backlog.

A little bit more of a focus on the E&I side. It's still losing money. It's been losing money for some time. I guess, decent progress on the gross margin side year-over-year. Did we have any problematic contracts that we should be calling out in that segment in the third quarter?

This is Mark. No, we did not. They are executing very well on the projects. That is why you see that margin improvement there. Where we did last year, at this time, had one project that went into a loss position. So this year has been very good from that standpoint. It's a matter of now winning some additional volume here to cover those fixed costs. But from an execution standpoint, the team has done very well.

Okay. And then I think, maybe it was a year ago, the expectation was for this business to be breakeven or profitable, I believe, in 2018. I don't think we're going to be able to achieve that this year. But when we start to think about next year, can you give us some sort of benchmark, as shareholders, that we should be thinking about for that business?

Yes. So that's [rose.] We're kind of going back to Jon's original question about how much backlog you need to get to. We need this business to have, like, $100 million or a little more than $100 million of revenue to be in that kind of breakeven at the operating profit line, little more positive on the EBITDA side, obviously. So it's really -- when we look forward to next year that type of improvement where we're in the single digits on the -- positive operating profit and a little bit more on the EBITDA side is what we're looking for.

Okay. That's helpful. And then the capital management side, very impressive, debt paydown, looks like we think the revolver goes to 0 in the first quarter of '19. Beyond that, can you help us think about capital deployment?

So -- yes, one -- so as we move forward here as part of our overall restructuring plan we took out a number of vessels, we have also mentioned that over time we would like to refresh the fleet prudently. It depends on the market. And so we don't have anything that any major new builds contemplated in the short term here. But in the long term, continuing with this kind of strong port deepening market, it's something that we have to take a really hard look at, but there is nothing right now in the short term on a new build.

Maybe more specifically on the bonds, is there any desire to take down some of that balance? Or are we comfortable with that? Is kind of a -- what intermediate funding situation?

Yes, I think that's a good way to say, at this point, we're comfortable. There -- we can't call them until 2020, May 2020. So not really anything happening in 2019. So we'll take a look at -- a harder look at that later, end of next year, depending upon the free cash flow we regenerate and see how the market is at that point in time. But yes, no -- at this interim, I think those words you used were well, kind of, intermediate, that's okay.

Okay. So the outlook, kind of, reading between the lines, is that we should anticipate the cash balance just kind of building over the next few years once the revolver is paid down. Is that correct?

Correct.

And our next question comes from the line of Nelson Obus from Wynnefield.

A question about the long-term prospects in the environmental business, I mean, there's such a conflict in terms of -- or contrast rather, in regard to the macro aspects of the businesses. From where I sit, of course, it's not a very informed level, but do you see a path forward in environmental that would make it a keeper? Because we all know that the contract, in and of itself, is more demanding because of its results requirement that you have to buy into when you initially put the contract out, in terms of granular analysis of the finished product that you can't predict and initiations. So how do you look at that? Is that something that makes sense for what is otherwise a wonderful business model that you are executing on very nicely now?

Yes, Nelson, we are, as I said on the last call, we are actively looking at the E&I segment. And the restructuring that has been done on E&I over the last 2 years has been very well executed. And we -- our target was to first bring the business back to -- be an EBITDA contributor in the company and then decide on where do we take that business going forward. And we are executing on that plan right now.

Fine. By the way, your debt reduction is exemplary, and really creates a whole different relationship between risk and reward -- the risk and rewards. So I compliment you for that.

(Operator Instructions) Our next question comes from the line of Poe Fratt from NOBLE Capital Markets.

Looking at your CapEx for the third quarter, it was low again. Can you give us a total for the 2018 time frame and then maybe even into 2019?

Yes, so year-to-date, this will be in the Q when it comes out. We spent about $15 million. We had this dry dock and some other items in the fourth quarter. Go back to these, I've said in the past, kind of, this historical $40 million of what we spend on a CapEx basis. And we'll be back at those types of levels, barring any kind of new build that we have. So we kind of been talking about that range for a period of time. We are watching that number closely. So we are fairly low. Right now, we do have some additional expenses in the fourth quarter. So as you look forward, it can be more in this $40 million type of range, kind of, high $30s million range.

How about for 2018 though?

Yes. So we have a --I'd say, it's going to be in the high $30s million. We have the dry dock we have to do. We got a couple of scows that are related to our port deepening, a smaller dredge related to the port deepening. So we do have some additional amounts at a much higher level in the fourth quarter.

So it's close to $20 million mark in the fourth quarter?

That's right.

[It's going to be okay. So finally, a catch up]. And then when you look at the E&I bidding level, I think, in earlier calls you had indicated bidding levels in the sort of [$115] million range. Can you give us an update on what the bidding bucket is for E&I right now?

So the bucket is -- yes, so we look at a -- we try to get a $30 million -- I'm sorry, a 30% capture rate on what we bid. So working backwards, that's kind of in this $300 million to $400 million a year of what we bid. Obviously, the market is much larger than that. But we focus on the areas that we do well, I think that's in terms of, like, this gross margin improvement that's helped us this year. So it's going to be in that type of level of bidding we need to do on an annual basis to drive that revenue we want.

Okay. What -- do you have a level of asset sales, just on a gross basis, that you didn't complete it in the third quarter?

In the third quarter, I'm just -- I don't have that number off the top of my head, sorry. But we did sell one, I think the proceeds for the quarter, and I might have this number a little bit wrong about $5 million from what we sold. There was one dredge in there. This was all part of the rationalization plan that made up about -- almost $1.8 million of it, $1,750,000, the other things were smaller. So I'm sorry, I'm doing a little bit off the top of my head, but it's in that range.

Okay. And then looking at the awards that you talked about for the quarter, it totals $437 million, was that all put in the backlog? Or was there anything that will be essentially deferred into the fourth quarter as far as adding the backlog?

Yes, so options that haven't been awarded yet would be not in backlog.

But included in that $298 million are the options for Jacksonville and Tampa?

In the -- yes.

Okay. And Tampa, you expect by the end of the year, but Jacksonville is a year out?

Correct.

Okay. What -- when you look at the -- you're implying that the fourth quarter bidding activity or bidding market is going to be $400 million to $500 million. Is there a mix out there that we can sort of guide to as far as any major capital projects that are out there on the horizon? Or is it more maintenance in coastal?

No, it's still -- as Lasse said earlier, it's still the port deepening market. It's Corpus Christi; Charleston, the third phase of that, are larger jobs that make up the bulk of that.

And given the back and forth right now with Corpus Christi, what's the sizing on that award that potentially is looming?

Yes, so it's between -- around -- call it between $80 million and $90 million on Corpus.

That's your RFP mark?

Yes, so now that's moved to an RFP now. From originally, it was an IFB that everyone was over the corp -- the core estimate. So yes, now it's an RFP. So we're waiting to hear on the RFP. We submitted that on October 15.

Okay. Great. And when -- sort of, just a couple more, if you wouldn't mind. On the restructuring, to get to the $40 million run rate, it looks like you're going to have to do $18.5 million in the fourth quarter to get to that level if my math is correct? Where are we going to see -- one, is that correct? And then two, where we're going to see that as far as where it hits the operations?

Yes. So first of all, no, it's -- so when we talk about our $22.5 million savings year-to-date, that is actual in the financial statement. So run rate is currently higher than that, and run rate would be your annual number. So we don't have to achieve $18 million of new. But all the additional type of restructuring savings is really above the gross profit line. It's the operational sort of last kind of swim stream we had to work on. There's very little left on the kind of G&A side.

Would you talk about the current run rate then? You said $22.5 million is actual. Where is the current run rate then?

Yes, it's in the mid $30s million.

Okay. So you're almost there anyway. And then any other major -- you talked about Corpus Christi, Charleston 3, any other major projects out there that you expect to bid on over the next 12 months or so?

Over the next 12 months, yes. There is a number of large port deepenings. You have Savannah, the next kind of part of that, but it's in the Inner Harbor. There'll be a phase 2 of Corpus Christi. And there's a second phase of the Savannah Inner Harbor. We've got another phase on Mississippi, which is where the Ellis is working today, that's phase 3. We've got Jacksonville. And later in the year, Jacksonville, another contract as well as there is a fourth piece of Charleston. So these bids are in the back half of '19. But they're all large port deepening's for 2019. So just reiterating what Lasse said that the market, its port deepening market, is still strong for the near future.

And then you alluded to that you're going to have to spend capital on fleet renewal at some point in time. Do you have sort of a ballpark number that you're looking at? Or that you're willing to talk about at this point in time? I know that it's probably over a multiyear time frame, but any sort of working estimate on fleet renewal?

No.

No, we -- as we have said earlier last year, we focused on restructuring the fleet and the company, and we are delivering on that plan. Our plan is to continue to delever end of this year and into next year. We do have plans for fleet renewal, and that is further out in time. We're looking at different options for both hopper, cutter and mechanical equipment that we will need to renew over time. But as Mark was saying, we do not have any concrete plans or any CapEx investment in new equipments in the short term.

Okay. And just as far as international, last quarter, you pushed down the international potential recovery into 2020. What's your current thinking on international?

We finished off a project here in the third quarter, and we are going to start up a new project in Bahrain here in fourth quarter. That has been a little slower to come than what we were expecting. It was an option that we are now starting to execute on. But we do see a recovery in bid volumes. But we -- for our operations, we do not see a large pickup until 2020 as we said before.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Ms. Abby Sullivan 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 again during our next earnings discussion in February.

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