Great Lakes Dredge & Dock Corporation (GLDD) Earnings Call Transcript & Summary

Hi, everyone. This is Cameron Soelberg from the Global Industries Group and the Investment Bank at UBS. I just wanted to welcome you all to this session today. I appreciate you joining us this morning, remotely, of course. Just to make sure you're in the right place, it's the webcast for Great Lakes Dredge & Dock. As you may know, it's the leading dredging company in the United States and the only one with significant international presence. With us today on the line will be Lasse Petterson, who is President and CEO of Great Lakes; as well as Mark Marinko, who is the Chief Financial Officer. You should have access to the presentation. Mark will walk you through that shortly. But before we begin, just wanted to pass along a reminder that if you're in the webcast window, you should see a box where you can submit Q&A questions. I'll be monitoring those and then can relay those to the management team when we get to the Q&A portion of the discussion. So with that, Mark, I will hand it over to you.

Thank you very much, Cameron. Welcome, everyone. Appreciate you being on the webcast today. Look forward to explaining a little bit more about Great Lakes and exciting time for our company. I will walk through the presentation. I'm going to move to -- I should take about 15 minutes or so, 20 minutes, hopefully, then we have plenty of time for Q&A. We're going to move to Page 5, which is a snapshot of Great Lakes. So we are, as Cameron said, the largest dredging company in the U.S. We've been around for about 130 years, so have been around a long time. In this environment, we have been deemed an essential critical infrastructure service. So all of our projects, et cetera, have been going on like they were pre COVID. So we're still continuing to work. We are a -- the largest domestic dredging company in the U.S., and we do have a -- we're the only one in the U.S. with an international presence. We do multiple types of work in dredging. A lot of people just think of dredging as maintaining a port, meaning silt comes into the port, you clear the port of that silt, and it's at the depth that it was before to keep the traffic through, but we do multiple other things. We do capital work which consists of deepening a port. We do coastal protection, which is essentially where you re-nourish beaches. So as Mother Nature comes through and reduces the size of a beach through erosion, we expand those beaches, make them wider and put that protection along the coast. We do restoration, which can be barrier islands along the coasts. Those are important, particularly in the Gulf here in the U.S., where -- put a barrier island, maybe 10 miles offshore. And as a hurricane comes through, it reduces the force of a hurricane. We do barrier islands work. We do land reclamation work. So where you go -- you have to add land to a coast line, we do that work. So many multiple things that our vessels and our equipment perform outside of just what you maybe historically would know as just dredging a port or river or channel. And very important to us is our safety culture. We use an Incident and Injury-Free process, really trying to drive every day how important it is to be safe in our projects. We work with large equipment in -- out there on the water, dangerous situation. So safety is paramount in our industry and especially with our company. Over the last -- you see the financials there over the last 12 months, trailing 12 months, we have $737 million of revenue, $153 million of EBITDA and our company backlog last quarter was $475 million. Moving to the next slide on Page 6. A little bit more information about our company. As I said, we're leading dredging service in the U.S. Importantly, we are a Jones Act company. So we are required to have U.S. vessels work, U.S. crew. It's required here in the United States in this industry, and that does provide a significant barrier to entry, particularly from international dredging companies. Again, like I said earlier, we're the only company here in the U.S. that has international presence. We've been in the international business since the early '90s. Very importantly is our large and diverse fleet, and I'll talk a little bit more about that because it's a really important competitive advantage for us. Our clients are federal, state, local governments, foreign governments. We also have domestic and foreign private clients, such as utilities and energy companies. Our largest client is the U.S. Army Corps of Engineers. They make up between 70% to 85% of our revenues depending upon the year. The U.S. Army Corps of Engineers is responsible for all the navigable waterways in the U.S., and we have approximately 1,200 employees working right now. Moving on to the next slide, on Page 7. This gives you a little breakdown on the different types of work we do that I touched base on. You can see the 5 different areas, let's call it. So the first is capital. It's about 42% of our revenue. Port deepenings, coastal restoration, land reclamation fall into this category. These jobs are usually the largest and most complex particularly these port deepenings that we've done, and we'll talk more about that because that's a really important part of what's going on in the market right now, in the past few years as well as a few years coming up. Coastal protection is the second, it's 25%, that's rebuilding of the beaches. You can see on the picture there, where you see how we widened the beach. That's where we worked in that thinner part. At the top half of the picture, we have not got to that part. You can see how much sand we move to rebuild those beaches. The bottom part of the slide, we do maintenance revenue. That's just where you take the silt that's been put into the channel and bring it back to its depth that was before. That's the easiest type of work that we do, the most competitive. Foreign work. It's not a large percentage of our revenue right now, roughly about 7%. It has been bigger. Right now, our international operations are mainly in the Middle East, out of Bahrain. And then the last piece is rivers and lakes. Our Rivers & Lakes division, it's about 11% of our revenue. Those are smaller dredges that work on inland rivers and lakes. But they are work on large rivers, large lakes. We do not go and dredge the local golf pounds. So those are still fairly large projects, but not as large as the ones where we work on the coast, out in the Gulf and out in the ocean. The little pie chart on the right is very important. It's about how we look at the business in terms of reoccurring revenue or recurring revenue. About 55% of our business is recurring. It's not the traditional way you think of recurring revenue. What that means is because of Mother Nature and erosion done on the beaches or putting silt into channels, those areas need to be re-dredged every year or every 2, 3 to 4 years. So for example, Baltimore harbor, based on how the water movement works and the silt movement, that has to be dredged every year, where a different port might have to be once every 3 years. But about 55% of our work is recurring, driven by Mother Nature, moving sand. Moving on to the next slide on Page 8. This is about our fleet, and this is what I wanted to touch base on here, was how important this diverse fleet is and the competitive advantage it gives us. We have 3 types of dredges. First is hopper dredges. These are dredges that essentially have drag arms on the side of them, sucks sand off the bottom of the ocean. It puts it in itself, and then it either takes that sand and drops it off in designated area or can take that sand, for example, and pump it onto a beach. A hopper dredge is our most -- the most, I'll call it, flexible type of dredge. It can do multiple types of different types of projects very effectively. The middle one is mechanical dredges. These are clamshells or backhoe dredges. These generally can dig down, dig rock, pick up rock that's already been cut and put it into a scow to move it off to a designated area. The third piece are hydraulic dredges, which are also called cutter dredges. They have a large arm on the front of them, with a big turning teeth that cut down -- go down to the bottom of the ocean and cut through rock or hard clay. And depending upon the project, you want to match the particular vessel that's most cost-effective on those individual projects. So for example, a cutter dredge, well, like I said, will cut rock. So on a port deepening, we have to cut rock to make the port deeper. It can do that, but it can also do maintenance dredging and cut through sand. But a hopper dredge is much more effective and cost-effective in sucking up sand. It's easy, you don't need the power of all the cutter dredge. So Great Lakes has the most diverse fleet in the U.S., and it gives us a competitive advantage when we're doing a bid to put the right vessel on the right project. And in every one of these categories, we generally have the most powerful dredge in the U.S. competitively. Moving to the next slide on Page 9. It gives you a snapshot of kind of the awards that we've won and the different areas we've worked over the last -- this is about going back about 2 years or so. You can see these are projects anywhere in the range of $20 million to as high as $210 million, you can see that Jacksonville port deepening. Just again, a quick snapshot of these different categories. If you see the port deepening, there's actually 2 on there that are fairly large. Jacksonville, I said was $210 million. There's also, on the bottom there, Charleston Phase 2, $278 million. Both -- these port deepenings are driven by the Panama Canal being deepened, every port in the U.S. to take these larger depth ships as to deepen as well, and they've been deepened over 100 years. These channels keep getting deeper. These ports get deeper as the ships get larger. So those projects are very large, complex, some of the largest that the U.S. Army Corps has ever led out. And these other ones on here, you can see many are coastal protection, those are rebuilding the beaches. You do miles of a beach, you widen it, and they're generally in this $20 million to $50 million range. So they're all fairly large projects for this industry with -- again, the most complex ones being the port deepenings. Moving to -- we'll move 2 slides to some investment highlights on Page 11. As we said, this really is maybe the important drivers of our business, as we have seen over the last couple of years as well as moving forward. Again, we're the market leader, and that market lead is important, especially with our diverse fleet. We do see a robust market, and we have very high visibility into what's coming up, particularly over the next 12 months. With the U.S. Army Corps of Engineers being our customer, we can see the projects years or months before they come out. So we do know when these projects essentially are going to bid, and we can prepare for them. The third piece, which is really exciting for us at the end of '17, early 2018, we built the Ellis Island, which is the largest hopper dredge in the U.S. You see it's an articulated tug and barge. It is -- the largest is very important. In this case, big is better. It's been a game-changing vessel for us, and it's really contributed to the results that you've seen over the last 18 months or so in terms of how the company has performed. The fourth piece is we went through a restructuring program, which is now complete. We went through a reduction in costs of approximately $40 million. That was hit under 3 work streams. We went through and reduced our G&A expense. We went through and retired or scrapped old underperforming vessels. We actually took out about 115 pieces of equipment and 6 main vessels, which has really improved our margin improvement at the gross profit line. And the last piece is our experienced management team. A lot of the people that work in our operations, our engineers have been here 30 years. And that's really important because when we go to bid a job or one of these projects anywhere here in the U.S., many times, the company has worked on those projects multiple times. So if they go to do a beach on the New Jersey Coast, we worked that beach and replenished it probably 10x over the last 30 years. So our team knows the soil content, what makes up weather patterns there, what's the right type of equipment and the production of those equipment to put the best bid forward to win that job. So we've been doing this a long time. Moving to the next slide, a little bit about the -- this is on Page 12, I'm on now. Our leading franchise, since we are the largest and has diverse fleet, it does really give us competitive advantage. There's only a couple of -- I'll talk about the competition on the next slide. There's about 2 other national players and a bunch of regional players. I'll go through that detail in a moment. The fact that we work in the international market, there's actually been an advantage for us. There are some very large international dredgers, and we've worked with them on projects. So some of that expertise that we've learned there, we've been able to bring back here to the U.S. Moving to the next slide to talk about competition. It's a picture of our main competition. You can see Great Lakes has got about a 40% market share over the last 3 years. We've got 22 main dredges that work. You can see the next 2 are Weeks and Manson. They are really the 2 other national competitors here in the U.S. Weeks is about half our size and Manson about half their size. And then the other ones to the right are regional players. They generally have a couple of dredges that can compete with us on certain large projects in their regional area. But when it's a very complex project that needs multiple pieces of equipment to work at the same time, they really can't compete on those types of projects. So the most -- the largest, most formidable competitor we see is Weeks and then really Manson after that. Moving to the next slide. These are a little bit of our market drivers, and that's really been -- and we've actually seen this already occur in the market in the last couple of years. As I mentioned earlier, the Panama Canal deepening, so we have all these ports on the U.S. being deepened. It really started back in 2015 with the port of Miami, was the first one to deepen, after that was the Port of Savannah. And that really came -- that bid came about 18 months later. But what we're seeing now are multiple ports working at the same time. So right now, Great Lakes is working on the Charleston port deepening at the same time as the Jacksonville port deepening. And there's a number of additional ports to be deepened that are coming up over the next 2 to 3 years. On the Gulf Coast restoration, this is a market driver that we've seen a little bit, but not to its full extent yet. The RESTORE Act, if you remember, the BP Horizon spill, money from those fines went into the RESTORE Act, and those fines are to be used to restore the Gulf Coast. It's not all dredging work, but it has been dredging work. They're doing multiple other things in the states in the Gulf: levy work, flood control, things like that. We have seen a few projects come out, particularly barrier islands. And these barrier island jobs are in the $100 million to $200 million range. So they're fairly large projects, but there's still a lot more to go on the Gulf Coast restoration opportunity. And then the main driver of our, I'll call it, our regular funding of the budget for the U.S. Army Corps of Engineers is the Harbor Maintenance Trust Fund and WRRDA. What this is, is the Harbor Maintenance Trust Fund takes -- as ships come in, they pay a tax, that tax goes into a fund to -- that's supposed to be used for port maintenance, particularly dredging. In the past, only about 50% of those funds were used for port maintenance, so they were siphoned off for others. The WRRDA act changed that to at this point, almost 100% is now used for port maintenance, which is good for our industry. So a lot of positive market drivers. And we have seen it, if you go back to our market size in the last few years, about 5 years ago, our average market size was about $1.2 billion. Over the last couple of years, it has been about $1.7 million, $1.8 billion. So increased by about 50%. On the next slide, on Page 15 is the Ellis Island, which has been very exciting for us. It's the largest hopper dredge in the U.S. at 15,000 cubic yards. To give you a sense, it's our -- what used to be our largest hopper dredge is about half the size, the Liberty Island. What's very interesting about this vessel is articulated tug and barge. In that picture, it looks like one vessel, but actually, it's 2. In the back of it, it's a tug that parks into a notch on the barge and moves it around. What's important about that is when you look at the required -- the crew requirements for a vessel under the Coast Guard, it takes the motorized part, which is the tug. So we need about 17 crew members on that tug. As I mentioned earlier, the Liberty Island is about half the size, it has 17 crew members. So even though it's twice the size, it has the same labor costs. And what's really important about the size of these vessels -- in this vessel, in particular, is generally, the way the projects work are the Army Corps of Engineer send you to a designated area to pick up sand. So I'd say we're building a barrier island in the Gulf of Mexico. That barrow area could be maybe 5 or 10 miles away. It sucks up the sand. It goes to the barrier island, drops it off, piles it up, just like a child building a sandcastle on the beach, and it has to go back to the barrier island, and it just does the cycle over and over. And if you're twice the size, it's obviously half the trips. And the way we get paid from the Army Corps of Engineers is it's a price per quantity dredged. So the faster we can reduce that cycle or lower that cycle time, the competitive advantage we have from a cost perspective. So it's been a -- and we've said publicly many times that this vessel itself contributes between $20 million to $30 million of EBITDA a year. Moving on to the next slide. This is a restructuring program I touched base on. This -- again, it was $40 million. We finished it in 2018, essentially. I'll say this, this is the first time I've seen in my history or career of a restructuring program that we hit the targets and we did it on time, we actually finished early. So we actually hired BCG to help us get it set up, organize it. Then we went through a whole tracking process to make sure every initiative was completed. And it was very, very successful. And it's been shown through in the numbers that we've been reporting. Moving to the next slide, a little bit about the investment team on Page 17. Lasse has been with us since 2017, new CEO, but obviously an extensive career internationally as well as in the maritime industry. So he's been a great add to the company and a big reason for the change in the numbers we've had. Dave Simonelli, our Chief Operating Officer. He's been with Great Lakes for 40 years. Worked on projects internationally, in the U.S. He has essentially done everything. He's very well known in the industry, a real leader in the industry. I've been with the company -- it will be about 6 years actually in about a couple of weeks. So I'm a new but been here for a few years now. Katie Lavoy, our Chief Legal Officer, has been in the dredging industry for a while, but actually her whole family has been in the dredging industry. Her father was a former CEO of Great Lakes, so knows it well. And Annette Cyr has been with us for -- recently added a couple of years ago as our Chief Human Resources and Administrative Officer. So we've got a good mix of kind of old and new, which I think has been really helpful for the change in the company over the last few years. Moving on to Slide 19, just to give you a little bit of financial information over the past few quarters. On the revenue side, you can see in the last trailing 12 months has been -- it's a record for us. The increased market -- the increasing market has helped us as well as we have brought over additional capacity into the U.S. market. One was the Ellis Island that I've already talked about. Secondly, we brought the most powerful clamshell dredge from a competitor and moved that into our fleet. And we've actually brought over 2 vessels from the international, 2 cutter dredges, that Carolina in 2018, and we just brought the Ohio back. It's going to start working in a few weeks. Those -- so because of the additional market growth in the U.S., we've brought that fleet capacity here to the U.S. I mean you can see on the right-hand side our movement in adjusted EBITDA and margin. So again, we're at a record of adjusted EBITDA at $153 million over the last 12 months. But what's been even better is that margin percentage move. And I really say it's a couple of items have contributed to that. The $40 million restructuring cost has been permanent and been really a big driver there. But obviously, this market increase and bringing on the Ellis Island has really improved our margins to levels we've never seen before. On the bottom, I want to talk about capital expenditures. We are a capital-intensive business. We generally have about a $40 million CapEx every year to maintain our fleet. Our fleet has to go through regulatory dry docks to keep them in class. We do maintenance to them. We do improvements to them, and it's generally around $40 million. If you look on this slide, the bar chart on the left-hand side, it has some back in '16 and '17 was the one we were building the Ellis Island. We had our last payment on the Ellis Island at the end of '17. But generally, our normal CapEx outside of a new build would be about $40 million a year. Moving on to the next slide, a little bit on the, just quarterly numbers that just came out, a record quarter for us across the Board. Our revenue was $218 million in Q1 versus $193 million last year. And actually, the first quarter of 2019 last year was a record for us. So we had a really good improvement. Gross profit at $68 million, with a very high margin at 31% and an adjusted EBITDA of $61 million versus $44 million last year. Just related to the items I've already talked about, strong market, but we've had really good performance from our equipment, our employees over these last 18 months or so. Next slide on backlog. So as we try to then kind of look maybe a little bit about what's going forward for us. You can see our average backlog is about $591 million. It does fluctuate a lot quarter-to-quarter. Our high point has been $707 million in 2018. Right at the end of 2018, we won a large job, the Savannah port deepening, which then we've worked off. As we get at the end of 03/31, we were at $475 million. It's fairly normal to have a lower Q1. We do a lot of work in Q1, and it's a slow bidding time. The really accelerated bidding time for us is in Q2 and Q3, Q3 in particular. The reason for that is the U.S. Army Corps of Engineers' fiscal year ends at September 30. And a lot of bids are done and completed by -- in that third quarter. So we expect a very robust bid market in 2 and 3. And that if we win our share, we'll bring that backlog back up. But still a fairly strong backlog from where we were before 2015. Moving to -- just on the -- I won't go through the appendix for time. So we can leave some Q&A, but you can see the net income to adjusted EBITDA reconciliation. Happy to talk about that. But at that point, that's my comments on the slides. I'm happy to open it up for Q&A.

Okay. Great. Thanks, Mark. Again, just a reminder, if you want to submit questions on the webcast portal, there should be a box where you can do that and I'll pass those along. Mark, maybe first, if you could just talk a little bit more about the bid market opportunity that you see in the balance of the year and what that mix may look like?

Yes. Sure. And for anybody, they can see this publicly out on the Army Corps website or FedBizOpps. A lot of these items lay out there publicly for contracting purposes. But what we see coming up here in Q3, there's a very large -- it's Phase 3 or they call it C of the Jacksonville port deepening. We're actually working on Jacksonville B right now, and that project is estimated to be between $200 million and $275 million, and that's going to bid in the third quarter here. Sabine-Neches steepening in the third quarter as well between $50 million and $100 million in the third quarter. There's a few additional Charleston deepening contracts. We're working on Charleston 2 right now. Charleston 4 and 5 are coming out. Those are a little smaller, between $25 million and $50 million, but still a nice size project. What we also see coming up is Corpus Christi later this year or earlier next year. That's greater than $100 million, that's a deepening contract as well. Mobile Ship Channel deepening, that's between $200 million and $400 million, again, either late this year or early next year. Port Everglades deepening, that's the busiest cruise ship channel in the U.S. That first phase is $50 million to $100 million. So multiple ones coming out in the next 6 to 9 months. So those are just really the large port deepenings. I'm just giving you the largest ones. A really large one coming up more in 2021 to maybe early '22 is the Houston Channel Expansion. So that one is looking between $500 million and $750 million. So a lot of great opportunities, and I just listed the port deepenings. There's many beach projects that are coming up, one from -- either from natural erosion or as these hurricanes happen, they intensify, erode the beaches even more severely. We see a lot of that beach work as well, not to these levels of $100 million, but still very nice projects for us.

Thanks, and that leads into this, I think, follow-up question from the audience, just asking about -- you listed a number of sort of port deepening capital-type projects in that list. What's your capacity in terms of your fleet? Are you -- with all of that potential opportunity ahead of you, is the fleet large enough to cover those projects? Do you have to prioritize projects based on how you view profitability? Do you need to invest in more vessels? How do you see that playing out?

Yes, I'll talk about it. Maybe Lasse would want to talk a little bit more about it, too. But yes, so the -- what we really like about these large projects are they have very long lead times to complete. They are generally 2 to 3 years, and there are windows where you even don't work on them for environmental reasons, whatever it may be. So we take our vessels, they go there and work and then they move off and work at other times here. A good example of that is Charleston. There are certain times of the year in Charleston, we work the hoppers. There are certain times of the year, we work the cutter dredges or the mechanical dredges related to environmental windows. So we have a lot of flexibility in these really large projects, and that's why we like them so we can move them off, and then we can have them work other projects while they're in these windows. But there is a really long lead time to finish these. So we never need 3 years to finish them. There's plenty of time to go do other projects. But as Lasse mentioned and talked a lot about on the earnings call, we are looking at making a decision here in Q2 on building additional hopper dredge. And we look at that hopper dredge as picking up incremental market share. There's still more opportunity for us. That's how good the market is for us right now. And if we went further down the road or the market changed, and let's say, it came back down a little bit, we do have levers to pull in terms of -- we still have multiple dredges that are older, and we are going through this cycle of refreshing the fleet. We have a new Ellis Island. We have a new clamshell dredge. This will be a new shallow draft hopper dredge, the one I'm talking about that we're looking at right now. If the market did come back, we have vessels that are in those same categories that are over 40 years old. We look at retiring those. So there are levers to pull if the market changed the other way and went -- kind of went the other way. But yes, right now, from a capacity standpoint, the flexibility -- we have enough vessels to do the work and enough flexibility to do it.

Great. Related or follow-up to that, when you have these contracts with the Army Corps, are they usually on a project basis exclusive to one company? Or do, let's say, larger projects sometimes get divided between multiple dredgers?

Yes. Generally, it's one dredging company wins it and bids it. Great Lakes is large enough that we never or generally never have to have someone help us, another dredging company. It does happen, but rarely. Now what we do see is, on a large project, a port deepening project -- and when I'm talking about those regional smaller players, they may need multiple dredges, might need a hopper dredge and they don't have one. They may JV with somebody else. We've seen that, like on the port of Miami bid. So you do see that sometimes with the regional players getting together because they don't have the diverse equipment to work those larger projects.

Got it. It was something that was mentioned on your earnings call, and I think Lasse has talked a little bit in the past. Maybe you can comment a little bit on your initiatives around kind of the wind -- offshore wind market, what your plans are there and what -- how you view that opportunity.

Yes. Yes, I can do that. The offshore wind market is a very interesting and exciting opportunity. Some uncertainty around timing, as you have seen, the environmental impact studies and reports has been delayed. So there are plans for -- well, I lose track of the numbers now, but it's between 15 and 30 gigawatts of offshore installed capacity in the next 10 to 15 years. That is a huge amount of new turbines that needs to be built and installed. We can participate in that market with our current services and with some modifications to our vessels to do site preparation for -- before we put the monopile in to do trenching, to do rock placement as part of the foundation for these -- the monopiles and also ballasting of gravity-based structures and so forth. We are also looking at building into that market with new assets. But once the market gets going, sometime -- I think the construction phase will be starting in 2023 or '24. We have time to prepare and get the assets built and in place for that market. Huge opportunity, but it's a little out before we see the revenue generation for it.

Okay. Great. And we're getting close to the end here. So maybe just one last question. Despite everything that's happened in the first half of the year, with COVID and some of the concerns around social issues that we've been dealing with recently, I think it hasn't been lost on people this is also a political year in terms of the election cycle. To what extent does politics have any impact on legislative issues that may be relevant to the dredging industry? And are you agnostic as to which party may enough empower? Or does that potentially have an impact on infrastructure-related funding for dredging?

No. I think we are quite active on the Hill, stay in touch with the politicians, both in Senate and the House. And also the Corps of Engineers leadership is in Washington D.C. The -- both the Democrats and the Republicans are very focused on improving the nation's infrastructure, and so there's a bipartisan support for that. Clearly, they have different opinions on how to proceed. But in all, we do not see that as a large difference between the 2 parties and the election.

Okay. Well, thank you for those comments and the presentation. I think that -- I think we're out of time. That wraps it up for us. But thank you again for -- Lasse and Mark, for joining the conference and participating and also thank you to the audience. We appreciate your time. Everyone, I hope you have a great day.

Yes. Thanks, Cameron. Thanks, everyone, for checking in. Appreciate it. Thank you.

Thank you.