Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) Q4 2022 Earnings Call Transcript
Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) Q4 2022 Earnings Call Transcript February 15, 2023
Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 Great Lakes Dregde & Dock Corporation Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. . Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Tina Baginskis, Director, Investor Relations. Please go ahead.
Tina Baginskis: Thank you. Good morning, and welcome to our fourth quarter conference call. Joining me on the call this morning is our President and Chief Executive Officer, Lasse Petterson; and our Chief Financial Officer, Scott Kornblau. Lasse will provide an update on the events of the quarter and the year. Then Scott will continue with an update on our financial results for the quarter and the year. Lasse will conclude with an update on the outlook for the business and market. Following their comments, there will be an opportunity for questions. During this call we will make certain forward-looking statements to help you understand our business. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations.
Certain risk factors inherent in our business are set forth in our earnings release and in filings with the SEC, including our 2021 Form 10-K and subsequent filings. During this call we also refer to certain non-GAAP financial measures, including adjusted EBITDA, which are explained in the net income to adjusted EBITDA reconciliation attached to our earnings release and posted on our Investor Relations website, along with certain other operating data. With that, I will turn the call over to Lasse.
Lasse Petterson: Thanks, Tina. As seen in our financial results 2022 turned out to be challenging. We enter the year with a good backlog, solid cash position and a record U.S. Army Corps of Engineers budget of $8.3 billion. We had high expectations to return to normal operations after overcoming the challenges from COVID-19 in 2020 and 2021. Unfortunately, as the year progressed, we saw significant delays in the overall dredging bid market, and specifically large capital and 40 bidding projects were delayed, with bid days now moved into 2023. According to audit records, the overall dredging bid markets in the first 4.5 months of 2022 was less than 50% of previous years' averages, which severely impacted our fleet utilization in the second half of 2022.
As a portion of our annual revenues rely on projects bid and executed within the year, which we call booking burn. And typically, the majority of these projects are beach re-nourishment projects, or and coastal restoration projects, which carry higher margins. And overall for 2022 the bid market for beach re-nourishment projects are about only 73% of the 2021 levels and coastal restoration projects were at 57% of 2021 levels. To some extent, the lack of capital work was replaced by an increase in maintenance work. However, maintenance projects typically earn lower margins due to the nature of the work and the competitive landscape. As being picked up in the second half of the year, we won 47% of the big volumes, and ended the year with $375.5 million of dredging backlog, and $594.7 million in open auctions and projects pending award.
The U.S. Army Corps of Engineers is a largest client and during the year we held numerous and constructive discussions with the core leadership on what was impacting the bid market and how to resolve the issues and we have started to see positive developments for 2023. Other external issues also significantly impacted operations. High inflation impacted projects and dried up in cost and supply chain issues delay dried up incompletions. We experienced unseasonal and extreme weather conditions on some of our projects on the East Coast. We experienced more than normal, challenging soils and site conditions on projects. Claims related to these projects are still pending resolution, and revenue and profit recognitions are impacted until these discussions are completed.
The fourth quarter was impacted by the same issues as we have experienced this year, specifically we have significant further impacts on the some storms in the Northeast. An earlier than planned offer dredge requirements of the Terrapin Island dress, and both the Ellis Island and Padre Island has lengthy stays in drydock, which increased costs and delayed revenues into 2023. We have through the year been taking action to adjust to the current difficult market conditions as well as preparing for future years. We have temporarily called stack to dredges unrelated support equipment, which will reduce operating costs. Because sector edges can easily be reactivated when we see the bid market improve. In our fleet renewal and improvement program, the 20 -- the 42-year-old hopper dredge and Terrapin Island was scheduled for retirement following the delivery of the new hopper dredge Galveston Island mid-2023.
But a mechanical issues or major mechanical issue combined with a delayed in market led to our decision to retire her now in the fourth quarter of 2022. And correspondingly we have during the year been reducing our general and administration and overhead cost structure to reflect the current market conditions. Earlier this month, we had an additional 10% reduction in G&A and overhead staff and we target a further 5% reduction in 2023 through natural attrition. As we adjust to the current market situation, we remain optimistic in the long term outlooks for both dredging and offshore win markets. Our ambition is to continue to be the U.S. industry leader in our selected market segments. And an important part of our strategy is to keep our fleet renewal program moving forward as planned.
After decommissioning several of our oldest treasures in 2020 and 2017, we have invested in productivity upgrades to our best performing vessels. And our new hopper dredge the Galveston Island is on budget and is expected to be operational in the middle of 2023. And her sister ship, the Amelia Island is expected to be delivered in 2025. Our U.S. flagged d Jones Act-compliant in claim for both vessels for subsea Sea rock installation is on budget and expect it to be ready for operations the first half of 2025 to start working on the empire with one and two projects for Equinor and BP. And I will now turn the call over to Scott to further discuss the results of the quarter and the year and then I will provide further commentary around the market and our business.
Scott Kornblau: Thank you Lasse. And good morning everyone. Let me start by walking through our fourth quarter results, which include a non-cash $8.1 million writedown for the retirement of the Terrapin Island. For the fourth quarter of 2022 revenues were $146.7 million, net loss was $31.2 million and adjusted EBITDA was negative $24.2 million. Revenue of $146.7 million in the fourth quarter decreased $63.3 million from the prior year fourth quarter, mostly as a result of lower capital revenue, which was driven by a substantial decrease in the Army Corps capital projects bid in 2022 and lower coastal protection dredging revenue, partially offset by higher maintenance project revenue. Fourth quarter 2022 revenue came in lower than expected primarily due to longer than expected dry docking of the Ellis Island and Padre Island, the unexpected early retirement of the Terrapin island, production issues on a few jobs and significant downtime due to weather.
Current quarter gross profit and gross profit margin were negative $16.2 million and negative 11% respectively, compared to $53 million and 25.2% respectively in the fourth quarter of 2021. Similar to revenue gross margin was impacted by the unexpected drydocking scope increases which resulted in additional costs and delays for the dredges the Ellis Island and the Padre Island. So Earlier than expected retirement of the Terrapin Island and production issues on a few projects. The mix of projects also negatively impacted gross margin, as we had less than half the capital revenue in the fourth quarter 2022 compared to the same quarter of 2021, driven by the slow and unusual 2022 bid market. In addition, weather along the northeast coast continues to severely impact those jobs.
During the quarter, we were working three major northeast projects. Collectively, these jobs had over 40% downtime in the quarter due to inclement weather. We also worked several other smaller jobs along the east coast that were similarly impacted. Operating loss for the current quarter of $36.7 million decrease from prior year quarter's operating income of $36.5 million. The decrease is a result of the lower gross margin and the one-time non-cash $8 million charge due to the retirement of the Terrapin, partially offset by lower General Administration is straight of expenses compared to the prior year fourth quarter. Fourth quarter 2022 G&A of $12.4 million is $4 million lower than the same quarter last year, due to our continued efforts on cost reduction.
Net interest expense of $3.2 million for the fourth quarter of 2022. Payment as expected, and was down from $4.2 million in the fourth quarter of 2021 primarily due to additional capitalized interest on the new bills. Fourth quarter 2022 income tax benefit of $8.4 million compared to income tax expense of $8 million from the same quarter of 2021 was driven by the lower current quarter income. Rounding out the P&L net loss for the fourth quarter of 2022 was $31.2 million, down from $24.7 million of net income in the prior quarter. Turning now to our full year results. Revenue for 2022 was $648.8 million. Net loss was $34.1 million and adjusted EBITDA was $17 million. These results represent a $77.4 million decrease in year-over-year revenue, a decrease in net income of $83.5 million and a decrease of $110.5 million in adjusted EBITDA.
2022 results were greatly hindered by rampant inflation supply chain delays, less higher margin capital project, significant weather delays, production issues, unplanned maintenance and a high number of differing site conditions on projects. In addition to the slow bid market with left us with more than expected idle time during the year. During 2022 we also had a regulatory drydocking on five dredges including the Liberty Island and the Ellis Island, two of our largest and most productive dredges. In addition, we performed emission upgrades to the Carolina. Turning to our balance sheet. We ended 2022 with $6.5 million in cash and nothing drawn on our $300 million revolver. 2022 capital expenditures were $144.7 million, which included $42.9 million for the Galveston Island $42.4 million for maintenance CapEx and emission upgrades, $27.2 million for the construction of new scouts and multicast.
$16.8 million for the design and build of the subsea rock installation vessel and $15.4 million for the build of our second new hopper dredge the Amelia Island. I'll conclude with some commentary on the upcoming year and quarter. We are entering the year with $377 million of backlog. However, because of the unusual 2022 bid market, only $148 million of the backlog is made up of high margin capital work. This is 39% of the prior four-year average of $379 million of capital work in backlog entering the year. Because of this margins will be lower than historical levels during the first two to three quarters of the year. The past to normal margins returning in the fourth quarter of 2023 is contingent on the large port deepening and widening project bidding in the first half of the year.
Moving to the fleet. As Lawson mentioned earlier, we currently have two vessels cold stack with no crews and minimal costs. If follow on work does not materialize for a couple of other currently working older dredges, we will take similar call stacking actions on them to take out costs. When the bid market picks up, we can quickly and efficiently reactivate these vessels. We have other cost cutting initiatives ongoing, including the recent headcount reductions, further rationalization of support equipment, and a greatly reduced operating expense budget. 2023 will be a lighter dry docking years in 2022. Currently, the Ohio is in the shipyard for her regulatory drydock. The two other dredges are scheduled to go into drydock this year, one in the second quarter and one in the third quarter.
Timing of drydock are estimates and can move to the left or right depending on scheduling. Turning to capital expenditures, we expect $20.3 CapEx to be around $175 million, comprised of approximately $85 million for the SRI wind vessel, $35 million and $20 million, respectively, for the Amelia Island and Galveston Island new bills $10 million to finish construction of the multicast, and $25 million for maintenance CapEx. So far this year, we have drawn $65 million on our revolver to help fund the progress payments that were due in plant continue utilizing the revolver and operating cash flow to support the new bill program. However, in January of this year, we applied with the Maritime Administration, or MARAD, which is a unit of the Department of Transportation for title 11 financing, which typically comes with very attractive terms.
MARAD announced in 2022, that they want to facilitate more offshore wind construction, and have designated vessels like our subsea rock installation ship, as vessels of national interest, which will prioritize our application for review and funding through title 11. While we work with MARAD on the process, which can take up to nine months, we will continue to explore other sources of capital. Moving to the first quarter of 2023, utilization looks solid, as most of the available vessels have worked for the majority of the quarter. Both the Ellis Island and Padre Island are currently working following their drydock. In Ohio to complete her regulatory dry docking towards the end of the first quarter and will go straight from the yard to a job.
So utilization is strong, the first quarter will be negatively impacted by some remaining drag on prior year projects that are still ongoing. In addition, weather continues to be a problem on multiple projects in the Northeast. Finally, the projects we are working in Q1 consists of a high volume of lower margin maintenance work. With that I will turn the call back over to Lasse for his remarks on the outlook moving forward.
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Lasse Petterson : Thank you, Scott. We continue to see strong support from the Biden administration and Congress for the judging industry. And as you saw in December of 2022, the omnibus appropriation bill for fiscal year 2023 was passed, which included another record budget of $8.7 billion for the U.S. Army Corps of Engineers Civil Works program, for which 2.3 billion is provided for the Harbor maintenance Trust Fund to maintain and modernize our nation's waterways. In addition, disaster relief supplemental appropriations for fiscal year 2023 was approved, which include an additional $1.5 billion for the Corps to make necessary repairs to infrastructure impacted by hurricanes and other natural disasters, and to initiate beach re-nourishment projects that will increase coastal resiliency.
We anticipate bids for new phases for larger port deepening projects previously planned to be bid in 2022, to be bid in the first half of 2023. Expected core deepening bids include the ports of Sabine, Freeport, Mobile, and one Huston Corpus Christi and additional phases were north of it. Included in a low bid spending. Our two liquid natural gas project that has been awaiting notice to proceed for my clients. Several North American LNG export projects have been delayed in the past couple of years during the pandemic, but these LNG projects appear to be gaining momentum and are targeting final investment decisions in 2023. Oresteia while our expectation is that we will contract at least one of these major dredging projects this year. The increased budget and additional funding combined with expected bids for the delayed port deepening projects and LNG projects support our expectation for a strong 2023 bid market.
At the end of the year, the Water Resources Development Act 2022, or WRDA 2022, was approved by Congress and signed into law by the President. WRDA 2022 is on a two-year renewal cycle and includes legislation that authorizes the financing of Corps' projects for flood and hurricane protection, dredging, ecosystem restoration and other construction projects over the next five years. WRDA 2022 featured among many other things authorization for New York and New Jersey shipping channels to be deepened to 55 feet, estimated at $6 billion, as well as the Coastal Texas Program, estimated at $30 billion. Finally, a few comments around offshore wind. In 2021, the current Administration announced the ambitious goal of 30 GW of offshore wind by 2030 and provided $3.0 billion in federal loan guarantees for offshore wind projects.
As stated previously Equinor and BP have already awarded Great Lakes the rock installation contracts for the Empire Wind I and II Projects. They have tender and our in discussions with several other offshore wind farm developers. But projects commencing rock baseness in 2025 and beyond, which supports our plan to have a full work scheduled for the SRI vessels as you start operation in 2025. In conclusion, we have been managing through a very unusual and difficult environment in 2022. And we are starting 2023. We look forward to an improve in markets and dredging work volumes in the second half of the year and onwards. Combined with delivery of the Galveston Island, and the cost reduction and operational improvements initiatives we have in place, we are confident to manage the current difficult market situation and deliver improved results in 2023 and beyond.
And with that, I'll turn the call for questions.
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