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

Welcome to the C-suite series presented by Channelchek and NOBLE Capital Markets. NOBLE is an SEC-registered, FINRA-licensed broker dealer and a source of the equity research available on Channelchek. Today's interview features Great Lakes Dredge & Dock Corporation, NASDAQ ticker symbol, GLDD. NOBLE Senior Research Analyst, Joe Gomes, interviews Great Lakes Dredge & Dock President and CEO, Lasse Petterson; and SVP of Offshore Wind, Eleni Beyko. Visit Channelchek.com or click link in the description to access equity research, news and advance market data on Great Lakes Dredge & Dock, all at no cost. And now, here's Joe, Lasse and Eleni.

With us today is Lasse Petterson, President and CEO of Great Lakes Dredge & Dock Corporation; and Eleni Beyko, Senior Vice President of the Offshore Wind division. Good afternoon, Lasse and Eleni, and thanks for taking the time and sit down with us.

Good afternoon. Thanks for having us.

Good afternoon.

For those in the audience unfamiliar with Great Lakes, can you talk a little bit about the company's history and what you do?

Yes, I can do that. Great Lakes Dredge & Dock is the largest provider of dredging services in the United States. We have been in business for the last 132 years. We are, today, mostly active in the United States, deepening the ports and navigation ways throughout the nation, both on the East Coast and in the Gulf. We have also had, over the years, quite a substantial international operation headquartered out of Bahrain, in the Middle East. But that market is not so active at this point in time. The work that we do includes port deepenings and expansion. We do coastal restoration, rebuilding beaches after winter storms. Coastal protection, which is in the south, where we have hurricanes come in and break down barrier islands, and we rebuild the islands after that, and we then also provide habitats for birds and sea life to prosper after the -- as part of the marine environment in that area. We also do some maintenance dredging, which is providing the navigational depth of existing channels, but that market is something that we do when we have available capacity as the margins in that market is slower than for capital projects. We have, over the last 5 years, gone through quite a restructuring. And as we now have a very solid balance sheet, we have substantial cash. We have no draw on our revolver and we are in the midst of rebuilding our dredging fleet and renewing the fleet. We are also now investing into offshore wind, which Eleni Beyko has joined us to head up, and it has been quite a journey, and I will let Eleni talk a bit about that.

Sure. Let's dive right in there. You talk about the offshore wind. This is a new market for the company, and you commission the building of a subsea rock installation vessel. Can you talk about the offshore wind market, the timing, the size of the opportunity?

Yes, the question is very relevant to the U.S. at this point. The U.S. offshore wind market is booming and accelerating with a target to build 30 gigawatts of offshore wind energy by 2030. This has been a pledge from the Biden administration for U.S. offshore wind, and it is an ambitious target for the U.S., starting with offshore wind developments in the East Coast. At the same time, the global markets are booming in offshore wind. Just a few weeks ago, there was a pledge to build 150 gigawatts of offshore wind energy in the North Sea by 4 European countries. So it is -- the market is accelerating and booming, both in the U.S. and globally at this point at a very fast pace.

So how much offshore wind is there today compared to that 30 gigawatt you talked about? And I know you guys have talked a little bit about in the past, you've done some international work. Presumably, you would be focused here on the U.S. initially, but maybe down the road, would the international market also be a potential market to grow into?

Currently, there is very little offshore wind installed in the U.S. There is only the Block Island offshore wind development that was developed more than 10 years ago. It is in the range of 30 megawatts versus 30 gigawatts target for 2030. So the first commercial -- so we would call this the pre-commercial phase of offshore wind in the U.S. But now the U.S. is moving into commercial offshore wind farm developments. The opportunity is here in the U.S., and it is definitely here globally, and we're in the right position as a marine contractor because there is a huge need for offshore installation vessels and marine equipment to build out all of these commercial wind farms, both in the U.S. and globally. So the opportunity is there.

So you mentioned about the opportunities and the need for vessels. You currently have a ship under construction specifically for this market. What kind of details can you provide about the vessel? When do you expect it to be delivered? Have you had the opportunity to begin prebooking time on the vessel? What's the competitive environment for that vessel today? And are other firms moving forward with similar builds?

Yes. So let me tackle these multiple -- multiquestion here. So the vessel is a specialized top of the line, high-technology rock installation vessel. So rock installation is a big part of installing the foundations for these fixed offshore wind developments. There's large quantities of rock required for scour protection around the foundations in the offshore wind farm. Each commercial size offshore wind farm could be as much as 100 foundations installed, and each one will require scour protection. This vessel has specialized equipment and a full pipe, tremie pipe that is actually automated. It is motion compensated, and it is specialized to work in the U.S. market and deposit the rock with a lot of accuracy as required by the developers of offshore wind farms. The vessel is also the latest in terms of low emissions. It has Tier 4 engines. It has a battery system. So it is what you would call a hybrid diesel and battery propulsion system. It has dynamic positioning system, so it can position itself with a lot of accuracy within the wind farm and do the work with a lot of accuracy required working next to a number of monopiles and foundations and working in an area with a lot of other vessels installing. So it is a large vessel. It is almost 140 meters long. And currently, it is contracted to be built at the Aker Philly Shipyard in Philadelphia. We are in the process of doing the detailed engineering and producing the shop drawings for the vessel. The planned date for the vessel to -- for the build to be completed is in the fourth quarter of 2024. So we are currently bidding for work and projects that have installation dates in 2025 and beyond after our vessel comes out of the build. In that respect, we were very happy to announce our first major project award just a few weeks ago with the Equinor, the Norwegian oil and gas developer. The developer, Equinor, works in JV with BP for these large developments offshore in the State of New York. So we won the rock installation with a partner. It's a joint bid with top-of-the-line European rock installation company, Van Oord, and we will be installing for the Empire Wind 1 and Empire Wind 2 wind farms in offshore, in the State of New York. So we already have an award in the bag and potentially more work coming from Equinor. And that's why, I mean, also today, and I'm talking to you from Oslo, doing start-up activities for the project. So we are, at the same time, bidding for a number of other offshore wind projects, installing in '25 and '26, and we're starting discussions about installations in 2027 and 2028 and building a solid backlog for the vessel. Did I catch everything or something I missed?

I guess the one was the competitive environment. And are other firms here in the U.S. commissioning the same type of vessels? Are you guys kind of the only ones, once this vessel is complete, that you would have that type of ability to do for the rocks?

That is correct at this point. There has not been any announcement for any other rock installation vessel in the U.S. There is a wind turbine installation vessel, Jones Act wind turbine installation vessel in build at the Keppel Shipyard in Brownsville, Texas. But that's a different type of specialized offshore wind vessel. So there will be at least 2 to 3 rock installation vessels required in the U.S. to install the 30 gigawatts that are planned in this decade.

And can we draw that line from point A to point B and say, Lasse, that, that is something that if things go well with the first vessel, you would look at building another vessel?

We have currently a contract with Philly Yard to build one vessel and also with an option to build another vessel as we see the market develops. As Eleni was saying, the 30 to 35 gigawatts of ambition over the next 10 years require 2 to 3 vessels to complete in that time frame. However, if there are some delays in these developments, we can adjust the timing of our second vessel.

Maybe talk about where do all these rocks come from? Do you -- are they onshore, then you bring them offshore? Do you pick them up offshore? Maybe you can give us a little detail on how that all works. And I don't know if you can kind of size the opportunity in an installation, what percentage of the cost of that installation does the rock protection account for?

Yes. So let me start with the supply chain for the rock. So there's plenty of quarries in the East Coast, which have up-to-date being supplying the civil construction, other types of construction. So the challenge here is that we need to supply the rock loaded from each particular state and load it to our vessel, which can load up to 20,000 tonnes of rock, and then transport the rock to the offshore site and install it there with our fall pipe system. So for example, let's take the State of New York. The State of New York, while they're building out the Empire wind farms that we were just awarded, they would like to develop the state's supply chains and the quarries and the loading docks and the stevedoring of whole supply chain for rock supply chain for New York. So we have plans to pick up the rock up the Hudson River at a New York quarry that has appropriate loading facilities for our large vessel, and the vessel is a low draft vessel, so you can go up the river and pick up the rock and then go back to the offshore wind site. So that has been the process. And each state, when they award offtake agreements to the developers, they would like to see some local content and local rock being utilized. So we've had an extensive effort over the last couple of years identifying the quarries in each one of these states, so we can offer local content for these developments. And some states are more strongly encouraging such behavior. Maryland being one of them that are requiring local Maryland rock from local quarries.

In addition to doing the rocks, are there other adjacencies, so to speak, that you could possibly also bid on these projects?

Yes. So let me address that, and that has to do with the second part of your previous question as well that for the rock installation, we're bidding as part of the foundation installation package for each one of these developments. So the foundation installation package includes driving the monopile in, it includes laying the intralay cables between the foundations. So it has several subpackages within that one bigger package. So our scour protection in prelay before laying the foundation, there is typically a one layer of rock that we lay down, and then the monopile foundation is being driven in, and then we go back and put more stabilizing scour protection, armor rock around the foundation, larger rocks around the foundation. So there is a number of packages and scopes of work that need to happen as part of the installation package. At this point, we are bidding for the scour protection part of it. And we're looking to work with other contractors that bid the rest of the packages. Sometimes we bid directly to the developers. We get a direct contract, like the Equinor contract that we won. And sometimes we go through the main contractor. So that's how it works. There is a lot of adjacent packages that are part of the same foundation installation.

So the offshore wind opportunity sounds like a very exciting time for the company.

Yes, it is a very exciting time. We, as a company, have about a 40% market share in the dredging market in the United States. So the opportunity to grow our business in that segment is limited. So a couple of years ago, once we had restructured the company, we looked for the growth opportunities, and offshore wind started to develop in the United States at the same time. And that we saw as an adjacency to dredging. We are building that capability at this point in time, and it is our first step into that industry. And once we have taken this first step and got that on its good way, there are other opportunities in the offshore wind market that we are looking to pursue. I just want to say that if you look at the large international contractors who are active in this market, most of them started out as dredging contractors, and they developed into offshore wind installation contractors as a second part of their business. So by pulling to some degree, we are following them in their footsteps when it comes to developing as a company.

Great. So Eleni talked about the Jones Act. Maybe you could provide a little more detail about that, how that might provide some barriers to entry in the U.S. market for both the offshore wind and maybe the overall dredging market?

Yes. The Dredging Act and the Jones Act require that all vessels carrying goods between 2 U.S. points has to be built in America, it has to be owned by American citizens, and it has to be crewed, flagged and managed by U.S. citizens. So this policy provides stability for the U.S. maritime sector, and it has significant economic benefits to the nation. It also have national security implication that we are able to maintain a vibrant maritime sector that can assist the nation, should it be required in a time of crisis. So the Jones Act is a very good, let's say, protection that makes sure that we do have a dredging industry in the United States and also maintains the maritime industry in the United States.

With respect to offshore wind, if I might add, it was early last year that it was made into law that offshore wind is part of the mineral resource that the Jones Act applies to. So now Jones Act does apply to offshore wind overall by law.

Let's switch gears for a second and just talk a little bit about the dredging market. There seems to be some nice growth in there. What's driving the growth in the various parts of the dredging market?

There are several parts that drives that growth. The Panama Canal was -- there was new locks put in place some years ago in the Panama Canal that provided for much larger vessels to go through the canal. And that opened up for, first of all, container traffic to not be congested on the West Coast, but they could go through the Panama Canal and into the ports on the East Coast and also in the Gulf and offload the containers there and opening up a complete new way of getting goods into the middle of the country, to the coast in the middle of the country. So it started out with the Port of Savannah, the Port of Charleston, we just completed that deepening. We deepened the Jacksonville Port, just completed Boston, working on Virginia, the Port of Virginia. And as we go to the Gulf, it also provides for petroleum products exports and LNG exports out of the ports on the Gulf Coast. So deepening of these ports enables the export of these products, and these products can then go through the deepened and widened [indiscernible] markets in the -- in Asia. The other part that drives growth is climate change. And what we do see is more severe storms that hits the East Coast and erodes the beaches and the maritime environment there, and that needs to be rebuilt every year. And this also affects the Gulf where we have wetlands, barrier islands that get destroyed by hurricanes that then needs to be rebuilt. And we are also then improving the maritime environment in the Gulf through creation of wetlands that also protects from increased flooding. So there's good growth in the dredging market in the United States. 75% of revenues in dredging comes from the Corps of Engineers. And the Corps of Engineers has, over the last years, every year received increased and record budgets. So just this year, the budget for the Corps of Engineers was $8.3 billion that was just approved, and that was an increase by $548 million from the year before. So strong support from all parts of the political spectrums for infrastructure improvements, which then drives the budgets and the projects that are being bid for the Corps of Engineers.

You mentioned about a 40% share on the dredging side. How does the competitive market there look like today?

Today, we call it a big market share. So we look at the -- all the volume of the projects that come out that is in our market space. And we win typically 40% of that from year-to-year with some variations. The second largest dredging contractor is half our size. And the third largest dredging contractor is half of their size again. And then the rest is composed of myriads of smaller, mostly regional dredging contractors that owns 1 or 2 dredges. So it's quite a competitive environment. But when it comes to larger, complex projects such as port deepenings and navigation channel deepenings, it's typically where we as Great Lakes can excel. We have 20 large dredges of mainly 3 different types that we buy that equipment to its right use on the projects, which makes us more competitive.

Now you just announced the exercise of an option to build a second 6,500 cubic yard trailing suction hopper dredge. Why are you undertaking this build? And how will this ship and its sister ship, the Galveston Island, differ from the existing hopper dredges in the fleet?

Well, first of all, they are slightly larger than the smaller part of our fleet. We call this midsized hopper dredge. The Ellis Island we took commission of some 4 years ago was 15,000 cubic yards. And these 2 new vessels are 6,500, so it's a midsized vessel. And we have 3 smaller hopper dredges that are getting somewhat long in the tooth. They are -- will be, when we get to the delivery of the second vessel, maybe ready for retirement. But if the market is good, we can continue to operate these vessels also competitively.

Now there's been a lot of talk in the press recently about inflation, supply chain constraints and imbalance in supply/demand for employees. How is this impacting Great Lakes? And how is the company addressing these issues?

Yes. Let me answer the personnel question first. When it comes to people in Great Lakes, we have many of our employees just work for us throughout their life -- active lifetime. They join us after a university, come into our projects and stay for the rest of their career. So we have a very strong knowledge base in the company of experienced people. Then on the projects, as we are moving up and down the coast, we are recruiting people onto our projects. And today, we see it is more difficult than previously to find the right skill set in the workforce. However, we are a very attractive employer. We have a strong safety record. So people who join the company know that we keep them safe every day on our operations. And we -- our benefits and our salary structure is also strong. So we do find the labor, but it is, as I said, a bit more difficult these days than it has been before. When it comes to inflation, yes, we see some inflation pressures on the new builds that we are making. Steel is more expensive. We see delay in some equipment deliveries, hasn't really seen the delay of the end date or the delivery date of the vessel, but we get some equipment later than what we normally would. A large part of our cost on projects is fuel. And when we bid a project, we hedge the fuel, so that the exposure that we have to fuel price increases are contained.

Okay. So given where we are today, a lot of opportunity, a lot of potential growth out there, what do you see as the biggest challenges for Great Lakes going forward?

Well, you don't know what you don't know. So let's stick to the knowns. The knowns is really that we have great opportunity out there. The dredging market remains strong. The political sides of the aisle in Congress are supportive of all the infrastructure improvements, so funds are being made available to the Corps of Engineers who can then make sure that we are continuing to improve our maritime and the marine infrastructure. And now with the offshore wind opening up, I see a great growth opportunity for the company in that market space. So the future for the company is bright as I see it, and we just have to make sure that we perform well in these markets and is prudent when it comes to how we develop the opportunities in front of us.

Well, you kind of took away my last question, so I won't ask about your elevator pitch since you just gave a great elevator pitch for investors right there. Well, Lasse and Eleni, we covered a lot of ground today, got significant insight into what Great Lakes does, its markets and opportunities. We appreciate both of you taking the time to do the C-suite interview, and we wish you and the company the best in the future. Thanks again.

Thank you.

Thank you.

Thank you for joining us for the C-suite interview presentation brought to you by Channelchek. View our YouTube channel for more video content, including C-suite interviews, virtual road shows and conference presentation replays. New content is added regularly, so subscribe below to stay up to date. Visit Channelchek.com or click the link in the description to access equity research, news and advance market data on this and the 6,000 others more on microcap companies listed.