Q2 2023 Great Lakes Dredge & Dock Corp Earnings Call
Participants
Lasse J. Petterson; CEO, President & Director; Great Lakes Dredge & Dock Corporation
Scott Lee Kornblau; Senior VP, Treasurer & CFO; Great Lakes Dredge & Dock Corporation
Tina A. Baginskis; Director of IR; Great Lakes Dredge & Dock Corporation
Adam Robert Thalhimer; Director of Research & Partner; Thompson, Davis & Company, Inc., Research Division
Joseph Anthony Gomes; Senior Generalist Analyst; NOBLE Capital Markets, Inc., Research Division
Peter Kirk Lukas; Former Analyst; CJS Securities, Inc.
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Second Quarter 2023 Great Lakes Dredge & Dock Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. (Operator Instructions). Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tina Baginskis. Please go ahead.
Tina A. Baginskis
Good morning, and welcome to our second quarter 2023 conference call. Joining me on this call this morning is 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, then Scott will continue with an update on our financial results for the quarter. Lasse will conclude with an update on the outlook for the business and the 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 2022 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 J. Petterson
Thank you, Tina. As we indicated in our last earnings call, the difficulties we faced in 2022 as a result of the severely delayed bid market for capital and beach restoration projects is now slowly coming to an end. The second quarter EBITDA is a result of an improved bid market and our cost-saving initiatives which resulted in improved project margins. All combined, this resulted in an adjusted EBITDA of $16.6 million, our highest EBITDA since the first quarter of 2022. Although not all of the challenges from 2022 are behind us, we continue to see positive developments in both a large number and a better mix of projects coming to bid which provides us with confidence that we are on a path to return to normal operations and results towards the later part of 2023 and into 2024.
The total bid market through June 30, 2023, was $930 million, of which we won $310 million or 33% of the total market bid. This is nearly 3x the amount won by the next closest peer. The first half year bid market saw several bids for port deepening and improvement projects totaling $350 million, of which we won 56%, including the $160 million Freeport Phase 2 project, on which we will utilize a varied suite of dredging equipment that only Great Lakes can provide.
We ended the quarter with $434 million of dredging backlog, which does not include approximately $50 million of performance obligations related to offshore wind contracts and $487 million in low bids and options pending award. Included in the low bid pending award were 2 LNG projects that have been waiting notice to proceed from our clients.
In July, post-quarter end, we received notice to proceed on the Rio Grande LNG projects, which will be now the largest project undertaking in our 133-year history. Work on establishing the dredge material containment areas is scheduled to start later this year, the major dredging networks starting in early 2024 and ongoing for the next 2 years.
Additionally, as stated previously, we've seen an increase in bids coming to the market. And post quarter end, we were low bidder on an additional $137 million of projects, which will likely to be awarded and added to backlog during the third quarter together with the Rio Grande LNG project, resulting in a total backlog exceeding $900 million today when all these projects have been included for and awarded.
As we stated, the company took swift and proactive action on cost reductions and fleet utilization adjustments. Last year, we retired a 42-year-old Hopper Dredge Terrapin Island, and we currently had cold-stacked dredges and various support equipment in anticipation of an improved dredging market in the latter part of 2023 and onwards. As we've previously stated, cold-stacked vessels can easily be reactivated as the market continues to improve. These initiatives have led to substantially reduced cost in 2023, which has allowed us to navigate impact on the delayed 2022 bid market. Correspondingly, we have reduced our G&A and overhead cost structures by more than 15% adjusting to the current market conditions.
On July 20 this year, we were honored to have President Biden attend the steel-cutting ceremony for Great Lakes offshore wind rock installation vessel, the Acadia. President Biden was joined by Congresswoman Mary Gay Scanlon, MARAD Administrator Rear Admiral Ann Phillips, Metal Trades Department AFL-CIO, Jimmy Hart and President of SIU, David Heindel, SIU crew of hopper dredges. Also present were senior executives from our current and potential clients.
Post-quarter end, we signed the first ever sub contractual procurement to our U.S. source rock with Carver Sand & Gravel LLC from a quarry in the state of New York. Both milestones solidify our entry into the offshore wind market and will support Great Lakes awarded rock installation contract with Equinor for the Empire Wind 1 and 2 projects with installation windows in 2025 and '26.
As we continue to adjust to the current market situation, we remain optimistic in the long-term outlook for the dredging market and our ongoing fleet renewal program is fundamental in our strategy to continue to be the U.S. dredging industry leader. At the decommissioning several of our older strategies back in 2017, we have invested in productivity upgrades to our best-performing vessels, and our new hopper dredge, the Galveston Island, is expected to be operational in the third quarter of 2023. And her sister ship, the Amelia Island, is expected to be delivered in 2025.
I now turn the call over to Scott to further discuss our results for the quarter, and then I'll provide a further commentary around the market and our business.
Scott Lee Kornblau
Thank you, Lasse, and good morning, everyone. For the second quarter of 2023, revenues were $132.7 million, net income was $1.7 million and adjusted EBITDA was $16.6 million. Revenue of $132.7 million in the second quarter of 2023 decreased $16.7 million from the prior year second quarter. The quarter-over-quarter decrease in revenue was primarily due to lower utilization as the recently retired Terrapin Island worked most of the prior year second quarter and 2 currently cold-stacked dredges that didn't work in the second quarter of 2023, were operating in the same quarter last year. Partially offsetting the decrease in revenue and utilization were less dry docking days in the second quarter of 2023 compared to 2022.
Despite the lower quarter-over-quarter revenue, current quarter gross profit and gross profit margin increased to $17.9 million and 13.5%, respectively, compared to $10.5 million and 7%, respectively, in the second quarter of 2022. The increase in gross margin is primarily due to improved project performance, lower operating costs due to our continued focus on cost reduction and fewer dry dockings in the current year quarter. In addition, during the quarter, we recorded a $2.4 million benefit to cost related to a legal settlement on a previously completed and closed project.
Second quarter 2023 G&A of $14.5 million is $3.7 million higher than the same quarter last year. The increase in general and administrative expenses from the prior year was primarily due to a onetime nonrecurring adjustment in the prior year quarter, higher office rent due to the expansion of our Houston headquarters and lower incentive pay in the prior year quarter, offset partially by a decrease in headcount and lower legal and recruiting expense. Operating income for the current quarter of $3.7 million increased $4 million from the prior year quarter's net loss of $0.3 million, driven by the improved gross profit.
Net interest expense of $3.2 million for the second quarter 2023 was down slightly from $3.4 million in the second quarter of 2022 primarily due to an increase in capitalized interest related to our new build program, partially offset by current quarter revolver interest expense. Second quarter 2023 net income tax provision of $0.8 million compared to $0.9 million of income tax benefit from the same quarter of 2022 and was driven by the higher current quarter income.
Rounding out the P&L, net income for the second quarter 2023 was $1.7 million, up from a $4 million net loss in the prior year quarter. Turning to the balance sheet. We ended the second quarter of 2023 with $42.1 million in cash and $55 million drawn on our $300 million revolver, which doesn't mature until the third quarter of 2027. Total capital expenditures for the second quarter of 2023 were $19.4 million, consisting of $12.5 million for the Amelia Island, $2.9 million for the multicats, $2 million for the Galveston Island, $1 million for the build of the Acadia and $1 million for maintenance CapEx. Full year CapEx guidance of approximately $175 million remains unchanged, but can increase or decrease depending on the timing of new build milestone payments.
As previously discussed, in January of this year, we applied with the Maritime Administration or MARAD, which is a unit of the Department of Transportation for Title XI financing on our new wind vessel which typically comes with very attractive terms, the review process is ongoing and progressing, but in parallel, we continue to explore other sources of capital.
Though our backlog and more specifically, our capital project backlog is drastically increasing, most of the new work starts towards the end of 2023 and the beginning of 2024, so we will not see a major impact from these projects in the third quarter. Costs will likely increase during the third quarter as we have 2 dredges that will be in the shipyard undergoing the regulatory dry dockings. Both dredges are expected to return to work in the fourth quarter. Also during the third quarter, we will have a previously cold-stacked dredge in the shipyard for reactivation as she is expected to commence work in the fourth quarter of 2023 on a recently won project.
With no further regulatory dry dockings or shipyard stays planned for the remainder of the year, a better mix of capital projects and backlog and the Galveston Island coming online, the fourth quarter is shaping up nicely, which should provide strong momentum going into 2024.
With that, I'll turn the call back over to Lasse for his remarks on the outlook moving forward.
Lasse J. Petterson
Thank you, Scott. We continue to see strong support from the Biden administration and Congress for the dredging industry. In December 2022, the Omnibus Appropriation Bill for fiscal year '23 was signed into law, which included another record budget of $8.7 billion for the U.S. Army Corps of Engineers civil works program of which $2.3 billion is provided for the Harbor Maintenance Trust Fund to maintain and modernize our nation's waterways.
In addition, the Disaster Relief Supplemental Appropriations Act for fiscal year '23 was approved, which includes $1.4 billion for the Corps to take necessary repairs to infrastructure impacted by hurricanes and other natural disasters and to initiate these renourishment projects that will increase coastal resiliency. This increased budget and additional funding has resulted in a strong bid market in the first half of 2023 which we expect will continue for the remainder of the year.
Support for the dredging market -- supporting the dredging market is also the increase in major works for private clients. As stated previously, we have been awarded NextDecade's dredging contract for their LNG project in Brownsville, Texas. And earlier in the second quarter, Sempra made the FID decision to proceed with the Port Arthur LNG facility and the award for dredging services is expected to be issued in the next few months.
In 2021, the Biden Administration announced an ambitious goal of 30 gigawatts of offshore wind energy by 2030 and provided $3 billion in federal loan guarantees for offshore wind projects. As stated previously, Great Lakes was awarded the rock installation contract for the Empire Wind 1 and 2 projects with installation windows in 2025 and '26.
In July of '23, the federal government further showed their support for offshore wind by providing approval for New Jersey's first offshore wind farm to begin construction. And also in July '23, the Department of the Interior issued the final sales notice for the first-ever offshore wind lease sale in the Gulf of Mexico, which will take place at the end of August. We have tendered bids for multiple offshore wind projects, rock placements in 2025 and beyond to support the work scheduled for the Acadia as she starts operation.
In conclusion, our main focus this year is to keep managing through the various challenges that the 2022 delayed bid market presented us. As expected, so far this year we have seen a strong overall dredging market, including bids for a number of large capital projects. This, combined with our fleet adjustments, cost reductions and productivity initiatives will ensure we continue to provide improved results for 2023 and onwards. And with that, I'll turn the call over for questions.
Question and Answer Session
Operator
(Operator Instructions). And the question comes from the line of Adam Thalhimer from Thompson, Davis.
Adam Robert Thalhimer
Congrats on the solid Q2. With the backlog kind of swinging from lowest in a while in Q1 to probably record here in July. When do you think you're going to be fully utilized again?
Scott Lee Kornblau
Yes. So Adam, thanks for the question. So a number of our dredges now are completely booked not only for this year, but well into next year. We have a couple of dredges that still have some availability for this year, but that is very, very, very few. Q1 is also getting pretty booked already for next year. So when are we going to get full utilization, that I can't say, I did mention, though, in my prepared remarks we are in the midst of reactivating a previously cold-stacked vessel that will work on one of these recent projects award that will start in the Q4.
So it is a good problem to have where a year ago we were figuring out what we were going to do with dredges, now we're trying to figure out with this a lot of work that's coming through how we're going to get it all in. One of the things I will mention, though, a number of these projects, the reason they're so attractive to us is there's a lot of flexibility in the timing to get them done. So it does allow us to strategically move vessels around and move certain scopes of work to the left and the right to try to fit all of this in.
Adam Robert Thalhimer
Okay. And then there were 2 super jobs that you called out in the release, one was New York, New Jersey deepening and one was the $30 billion plus Texas job. What are your thoughts on timing of those jobs?
Lasse J. Petterson
Yes. The New York is -- was included in the WaRDA. So the studies that the U.S. Army Corps of Engineers are executing is ongoing. And we assume that it would take some 3 to 4 years before the actual dredging to start. So that's kind of a time perspective. But it's important to also have a more longer-term view when it comes to these capital projects so that we see that there is a continuation of large projects as we go forward.
Adam Robert Thalhimer
Got it. And then lastly, the -- you had the legal gain in Q2 and then for the last year, we've been talking about, I think it was 3 jobs with differing site conditions. Are those 2 things related? And where do we stand on the differing site contents?
Scott Lee Kornblau
Yes. No, these are unrelated. This is a -- from a -- this one is very old. It's not a claim. It's just an old legal matter that has been settled during the quarter. So just some balance sheet cleanup and pick up. The claims, they are progressing of the 2 larger ones that I've called out. I'm very comfortable that at least one of those gets closed out in the third quarter. The second one, I'm confident, if not third quarter, it's fourth quarter, we're making very good progress on both of those.
Operator
And the question comes from the line of Joe Gomes from NOBLE Capital.
Joseph Anthony Gomes
So I wanted to start out on the Corps and kind of the sequencing here of the releases, listening to one of your main competitors last week. They continue to talk about a less than normal or less than historical level of award activity out of the Corps. And you guys mentioned some of the capital projects that have been coming in that were delayed in 2022, but kind of get a better feel of what you guys are seeing or what you're perception is on the award level of the Corps and do you think it's kind of getting back to a more historical level? Or do you still think there's more room for upside there?
Lasse J. Petterson
Yes. What we have seen is that the maintenance projects is coming out as scheduled from the Corps. And in addition, we have seen an improvement in the capital projects that are coming out. We still see delays on some of the larger dredging projects but combined now with the private client market, the dredging market turns out to be good and the bid market is good here for 2023. So in short, maintenance projects are coming out as scheduled and some of the projects or the capital projects has been bid, but there is still some delays.
Joseph Anthony Gomes
Okay. And on the NextDecade project, I was wondering if you might be able to talk a little bit more about that. You mentioned it's the largest, and I think you did give us some sizing in terms of what your previous largest project was. But I don't know how much detail you can go into on that in terms of the stages and what kind of, I know the revenue flow, I don't know if you can break it down as a percentage as you seen that come in for that project. With a couple of these large other capital projects that you have, if you were to win the other LNG, how will you stay at capacity-wise to be able to do all these at onetime?
Lasse J. Petterson
Yes. The NextDecade has asked us not to come out with the exact number for the project, so we are respecting that. The project is large. It's starting up now pretty soon with all the preparatory work that we need to do in order to build the containment areas for the dredge material. And then as we get to the end of the year, beginning of next year, we will start with the main dredging that then goes on for almost 2 years. It's a very good project. It utilizes our cutter dredges, which the market has been very soft for over the last, let's say, 18 months. There are a couple of other capital projects out there, as I mentioned, that we are bidding and in position to execute. If we are successful, we have capacity to do those projects as well. So there's not a concern on that side.
Joseph Anthony Gomes
Okay. And then one more, if I may. Just, Scott, we could talk a little bit about the CapEx here. We've talked about the $175 million guide for the year, in Q1 it was $28.7 million, even though the initial expectations were north of $70 million. In Q2, it was $19.4 million, even though expectations were $55 million that leads a significant number, roughly, let's call it, $125 million for the last 2 quarters here.
And we talked -- last time we talked, you mentioned some stuff slipping to the right in the first quarter for a couple of weeks, but it seems like it's up more than that the whole quarter, at least. And maybe you can give us a little more insight as to what is going on the CapEx spend? And how comfortable are you with the ability if you are to hit that $175 million with financing it in the last kind of rush here in the last 2 quarters of the year.
Scott Lee Kornblau
Yes. Thanks for the question, Joe. It is not unusual on these large capital projects that have milestone payments for those various milestone payments to slip. That is what's happened here. Q3 will be a high CapEx number. We have already made some of those payments that were expected end of June. They happened early July. So I do still stick by the $175 million. If one of the December payment slips and these are big payments, that would lower that for this year, but increase it for next year. The total amount we have left to spend on the new build program is still intact. And again, there's going to be these kind of ebbs and flows to the left and right.
To answer your second question, the timing of this CapEx, whether it was more geared towards the first half of the year, second half year doesn't change the full year. It doesn't change the way that we were looking at it. Even though we are working not only on Title XI but some other financing alternatives, nothing we need to do right now. Our $300 million revolver had $55 million drawn at the end of the first half, and we had cash on the balance sheet at the time. So we have plenty of liquidity to get us through end of the year into next year even with these large CapEx programs and as we mentioned, Q4 and into '24 is looking to be much stronger years, which will help on the cash flow side of things.
Operator
(Operator Instructions). And the next question comes from the line of Jon Tanwanteng from CJS.
Peter Kirk Lukas
It's Pete Lukas for Jon. You touched on in your prepared remarks in terms of cost reductions. Can you talk a little bit more about how much was permanent cost versus temporary? And what does this mean for your margin potential after Q3 when you return to better utilization and mix?
Lasse J. Petterson
Yes. What we have targeted was more than 15% reduction of our SG&A and overhead cost and that's on a permanent basis. So as activity is picking up, we will be careful not to add any SG&A and there may be some overhead cost that needs to come. But I look upon this as a permanent saving on an annual basis. Scott, do you want to have some details?
Scott Lee Kornblau
Yes. Yes. And then specifically for this quarter, we did have a dry docking that should start in Q2. It's going to start in Q3. So we will have some increased costs then. We just didn't have all the equipment. The dredge is working. So it just shifts, it doesn't really change anything for the year. It's just going to shift some costs into Q3 instead of Q2 and also the margin that we earned on the vessel, which was fully utilized during the quarter, we'll have to take her down.
I'll also say, not only have we been very aggressive on a lot of our initiatives that we're doing to reduce costs, if you recall last year, because of the unusual bid market, and we had a lot of dredges that were sitting at the dock, we did take advantage of that time to be proactive and invest in the fleet then. So times like now that we're starting to see utilization pick up again, we didn't have to take vessels down. So that also is what's keeping the cost down.
Peter Kirk Lukas
Very helpful. And then how much is left in potential change order settlements? And what is the potential timing on those?
Scott Lee Kornblau
Yes. So as I mentioned earlier, the ones that we called out last year because they were unusual by the size that we had. As I just mentioned, I do expect one of those will settle in the third quarter and the largest of them, if not in the third quarter, we're having very advanced dialogues. That one gets done -- that one I'd be very surprised if it does not get done this year. As we have said last year, between the 2 of them, we're in tens millions of dollars. So these were pretty large claims in the scope of things. Fortunately, the reason we called them out last year is because they were large in nature and unfortunately hit at the same time, we thought it was an anomaly, and that's holding out true. We have not seen those sort of claims like we did see last year.
Peter Kirk Lukas
Very helpful. And last one for me. What can we expect in terms of what are you seeing in terms of wind signings? And are you expecting Acadia to be working at 100% capacity?
Lasse J. Petterson
Yes. Acadia is scheduled to come out in 2025, and she goes to work on the Empire Wind project. And in addition to doing the rock installation, that is supporting the monopile we're also seeing a number of bids coming out for protection, so cables, which will then help with the utilization in addition to the main work, which is the foundation's support. So we are seeing good opportunities for having her fully utilized in 2026 and onwards.
Operator
Thank you. There are no further questions at this time. I would now like to hand the conference over to Tina Baginskis for any closing remarks.
Tina A. Baginskis
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 during our next earnings discussion.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
