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 resource of the equity research available on Channelchek. Today's interview features Great Lakes Dredge & Dock, NASDAQ ticker symbol, GLDD. Noble Senior Research Analyst Joe Gomes, interviews Great Lakes Dredge & Dock President and CEO Lasse Petterson; and Senior Vice President and CFO, Scott Kornblau. Visit channelchek.com, or click the link in description to access equity research, news and advanced market data on Great Lakes Dredge & Dock, all at no cost. And now here's Joe, Lasse and Scott.

With us today is Lasse Petterson, President and CEO of Great Lakes Dredge & Dock Corporation; and Scott Kornblau, CFO. Good afternoon, Lasse and Scott, and thanks for taking the time to sit down with us.

So I want to spend part of this interview delving into the rapidly developing offshore wind energy vertical and Great Lakes' effort to capitalize on a significant opportunity here. But first, let's review the main business. You stated in your last press release that your dredging backlog is at approximately $1.1 billion. Can you tell us a little bit about what work is included in the timing of the projects for 2023 and 2024?

Yes, we can do that. I'll let Scott run through the numbers and the description of the projects that is in the backlog. So Scott?

Yes. And thanks Lasse. Joe, thanks for having us. So if you have seen from the recent press releases we have put out, it's been an extremely busy 6 months for us on the bidding front, we have more than tripled our backlog since the first quarter, and we're sitting at a record backlog for us at about $1.1 billion. Just as important, over half of that backlog is made up of capital work, which typically comes with higher margins. As far as the mix of projects for the remainder of this year, we'll be executing the typical book and burn projects, and we also have some beach work in the near-term pipeline. We also have commenced the Freeport deepening project that we won earlier this year at about $160 million. Over the next 6 months or so, there are a number of beach renourishment projects that we will be performing. And also on the 2 LNG jobs, subcontractor work will begin this year and dredging will commence in the first half of next year.

Excellent. Thanks for that update. Now even with all that, you did guide that the third quarter still have its struggles or challenges. Can you provide us with any background on the reasons for this?

Yes. Since the beginning of this year, we had always projected that the third quarter would be relatively soft. So it's not a surprise to us. We had 3 vessels in the shipyard for regulatory dry dockings at various points during the quarter. We also had a handful of dredges that had limited utilization during the quarter. Those will begin working in the fourth quarter again. We had some minor impact from the recent hurricanes, but really nothing terribly material. Another impact for the third quarter is we had expected to take delivery of our new Hopper Dredge to Galveston Island during the quarter, but that is now scheduled to be delivered mid-fourth quarter, and she will go straight to work. So third quarter is turning out as expected. But fortunately, the fourth quarter is also shaping up as we had expected. It should be a solid quarter with high utilization as we start executing on some of the recent projects, and it's really setting us nicely for what appears to be a very robust 2024.

Excellent. Now as you mentioned, you recently received notice to proceed on 2 LNG projects, can you give us a little more detail about these projects?

Yes, sure. So the first one we announced a couple of months ago, the next decades, Rio Grande LNG facility. This is the largest project by far, ever won by Great Lakes. The dredging will take place from their LNG facility out to the Brownsville Ship Channel. Over the scope of this project, we will be deploying multiple dredges and multiple pieces of support equipment. Subcontractor work has begun on this project, and dredging is scheduled to start in the early part of 2024, and it's going to go through the middle of 2026. So a very important big project for us. The second one is Sempra's Port Arthur LNG facility. Subcontractor prep work will start in the fourth quarter of this year and dredging likely starts in the second quarter of this year. This job will keep one dredge busy for a little over a year. So 2 very important projects for Great Lakes.

With the LNG and other awards recently received, what is the status on vessels that you had previously called stack? And what is involved in returning these vessels to work?

Yes. So we have recently reactivated one previously cold-stacked vessel. She is now working, and she is fully booked, going out until 2025 now, we still have a couple of cold stacked vessels. For each of these, we develop individual reactivation plans, has a cost and a time line put to it. Usually with the cold-stacked vessel, there would be maintenance that we had deferred, we'll do that. It's all things. We have a very robust plan and things that we contemplate if we are going to bid these vessels into jobs, the cost is something that we're mindful that we try to recover within that next job.

Great. Thanks for the update on the main business. So let's switch gears and talk a little bit about the offshore wind business. Looking at the big picture, what is driving growth in the offshore wind vertical?

Yes. The offshore wind is an nascent market with huge opportunity for growth here in the United States. On the East Coast, in particular, the developments are proceeding and there is a large need for new power supply into the population and the very populated states on the East Coast. Difficulties in putting in new pipelines, difficulties in putting in new power stations, new transmission lines are not that popular either. So the opportunity to take and develop the offshore wind farms is a very good way of bringing renewable energy into these states. We have established in the offshore wind market, our first-mover advantage, and we are now building the first Jones Act compliant rock installation vessel to address this market. The Biden administration had originally set 30 gigawatts by 2030 as an ambition for the industry. New reports now are saying this could be more like 24 gigawatts. But by any standards, that's a huge growth opportunity for the U.S. contractors to participate in.

Okay. And so if we look at this market, you talked about you're investing in the first subsea rock installation vessel, how much has the company invested to date in the vertical? How much more is needed? Does the company have sufficient access to capital to fund the necessary investments here?

Yes. We have entered into a contract with Philly Shipyard to build this vessel with delivery in 2025. And this contract is $197 million. In addition to that, there are some mission crystal equipment that we are installing on top of this vessel, which drives up the investment to around $230 million. There is a major opportunity here for Great Lakes to drive both top line growth and bottom line growth by participating in these contracts. We have started out with the rock installation as the first activity for our business segments in offshore wind. There are other parts of the market that we would like to participate in over time. But rock installation is kind of the reverse of our dredging operation; in dredging, we take material off the sea bottom, and in rock installation, we are taking rocks from shore and putting it out in the ocean again. So a very similar type of operation with big vessels. We're in the ocean, and we know how to operate in this segment. We have sufficient funds to build the first vessel. But going forward, we had an option with Philly to build a second vessel that has been delayed due to some of the delays we now see in the market. But there is room for one more Jones Act vessel, and we are also looking at other business activities in offshore wind that will require capital. And as such, we are looking for partners to participate in this market together with us.

Okay. You mentioned Jones Act a couple of times. Why is the Jones Act compliant vessels so important here?

Well, the Jones Act vessel is important because it keeps the cost of the installations down. And it also provides certainty of service if the international offshore wind market takes off as planned where the international contractors may not prioritize the U.S. markets. So the rock installation vessel is used to stabilize the offshore wind farm structures, and it includes also substations, cables and the foundation for the life of the wind farm.

Excellent. Thank you for that, Lasse, but -- Great Lakes recently signed a first-ever subcontract procurement of rock for U.S. offshore wind farm with the U.S. quarry in the State of New York. Can you talk a little bit more about this contract and how it will benefit Great Lakes' effort in this space?

Yes. By entering into this contract, we are enabling U.S. content on these projects. The projects today are developed with a very high content of foreign deliveries, supplies and also contractor participation. But what we are doing with our rock installation vessel that is U.S. built, U.S. crewed and U.S.-owned. Together with the rock supply from the U.S., we are enabling U.S. supply on these contracts. Also, the cycle time for our operation is much shorter than for the international vessels since we can pick up the rock at nearby U.S. quarries. And it enables additional U.S. content at the quarry for the stevedores, for the pilots on the river and so forth. So by having U.S. rock supply, we are enabling the participation of U.S. industry in this market.

Okay. The government approval of Empire Wind 1 and 2 is expected this autumn. How are bookings for your vessel filling up? And can you give us an update on the overall market that is -- for the vessel that is anticipated to start in 2025?

Yes. We are putting together the pipeline of projects for the Acadia once she's being delivered in 2025. And we have actually tendered projects for capacity for the vessel that goes all the way out to 2030. And in this market, we see some movements here in the early phase of the market where there are some renegotiations ongoing on the power supply contracts. But the longer-term outlooks are very strong, and we are now looking at 54 gigawatts by 2035, which has just recently been published by a [ blogger ].

So you kind of alluded to it, Lasse, a recent news in the offshore wind space has had a yin-and-yang quality about it. The federal government recently approved a fourth major offshore wind project. They're on track to complete reviews of at least 16 offshore wind projects by 2025, which represents some 27 gigawatts of clean energy. Companies have quadrupled their U.S. offshore wind investments over $20 billion according to press reports, but also in the news has been a report from Danish renewable energy firm Orsted that delays in the U.S. offshore wind market could cause the firm to take a $2 billion write-down, that certain offshore wind developers are seeking to renegotiate or terminate power purchase agreements. Can you provide us with some color as to what is happening in the industry today and what you see as the near-term outlook?

Yes, we have seen some of these power supply agreements being renegotiated. And the early power supply agreements did not have inflation adjustments in their contracts. The newer ones do have that inflation adjustment included. So what we are seeing now is that the developers are trying to renegotiate their power supply agreements. And of course, there are being put strong pressure on the states in order to accept these adjustments. And I see this as a strong negotiation ongoing, and we have not seen any delays on our projects that we have tendered and that the operators are going ahead with business as usual for the time being.

Great. Now let's kind of take the opposite tack here for a second. And if some of these delays continue on -- the vertical doesn't develop as quickly as currently anticipated, what would be your plans for the subsea rock vessel once it was delivered?

Well, first of all, there is nothing in the market that indicates to me that the vessel that we are building will not be utilized for the next 5 to 10 years. There is a booming market for offshore wind and the long-term, let's say, outlook for renewable energy, offshore wind is strong. But if -- let's take the scenario, if this happens, that the developments in the U.S. are completely stopping, the developers that we are working for here and our contracts with here in the U.S. is international energy companies, and we have talked to them about the opportunity to participate on their projects in the North Sea, where we are looking at 200 gigawatts of developments by 2035. So I don't see this happening, but there's an opportunity to take the vessel and compete in the North Sea or in Asia. Our cost disadvantage is not large. So we can be very competitive in that market.

Okay. And you also mentioned previously that you have the ability to commission another offshore rock vessel for the wind space. Kind of where do your plans stand today about commissioning another vessel?

Well, as I alluded to earlier, we had an option with Philly Shipyard to build one more, a copy of Acadia due to the -- some of the delays that we now have seen happening on projects, we decided not to call off that option. We will build a second rock installation with vessel once we see the market firming up over the next year or so. But to do that, we do need partners, and we are looking for partners that can participate in this market segment with us in order to capitalize on the growth opportunities that definitely is out there for U.S. contractors in this U.S. industry.

Okay. And what do you see as the biggest challenges for Great Lakes in the offshore wind vertical going forward?

Well, there is -- the challenge is really to capitalize early enough on the opportunities that are coming, to build the [indiscernible](17:52) Acadia that takes 3.5 years and the yard capacity in the United States is not such that we can very quickly develop new vessels or equipment to participate in the market. So in order to have Jones Act compliant equipment, it will take some time in order to get that out in the marketplace.

And finally, Lasse, what else should investors be monitoring in the offshore wind vertical as it relates to Great Lakes?

Well, I think the vessel should be expecting for new contracts to be signed shortly in this segment. We are very hopeful that within the end of the year, we had more backlog secured for the vessel, and it is something that we are looking forward to announce and it's a very strong market that we see for this vertical.

Great. Well, Lasse and Scott, we covered a lot of ground today, got significant insight into the offshore wind market and how Great Lakes is positioned to capitalize on growth in this vertical. We appreciate you taking the time to do this C-suite interview, and we wish you and the company the best in the future. Thanks again.