Q4 2023 Great Lakes Dredge & Dock Corp Earnings Call
Participants
Tina Baginskis; Director - Investor Relations; Great Lakes Dredge & Dock Corp
Lasse Petterson; President, Chief Executive Officer, Director; Great Lakes Dredge & Dock Corp
Scott Kornblau; Chief Financial Officer, Senior Vice President, Treasurer; Great Lakes Dredge & Dock Corp
Adam Thalhimer; Analyst; Thompson, Davis & Company
Joe Gomes; Analyst; Noble Financial Capital Markets
Jon Tanwanteng; Analyst; CJS Securities
Brian Russo; Analyst; Sidoti & Co.
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Q4 2023 Great Lakes Dredge & Dock Corp earnings conference call. (Operator Instructions) Please be advised today's conference is being recorded.
I would now like to introduce your host for today's conference, Ms. Tina Baginskis, Director of Investor Relations. Please go ahead.
Tina Baginskis
Thank you. Good morning, and welcome to our fourth quarter 2023 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.
Lastly, I will conclude with an update on the outlook for the business. In 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 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 Lisa.
Lasse Petterson
Thank you, Tina. As expected, 2023 was a year of positive transition from the difficult 2022 and we ended the year strong with improved performance, stronger financial results and our record backlog of $1.04 billion, which does not include approximately $179 million of low bids and options pending award and approximately $44 million, our performance obligations related to offshore wind contracts. The bid market gained momentum throughout the course of the year in our preferred port deepening and coastal protection markets. We ended the year with 71% of our backlog and capital projects with four major awards, including the Freeport deepening projects.
It's Jeff. The notches waterway channel improvement project and two large port deepening projects related to liquid liquefied natural gas LNG projects, Port Arthur, LNG, Phase one and the next decade Corporation, Rio Grande LNG projects. The latter is the largest project ever undertaken by Great Lakes. These two projects are not impacted by the recent White House announcements.
Regarding a pause on new LNG export projects permitting as we have navigated the challenging market conditions in '22 and '23, we have remained focused on staying a competitive market leader for the long term, we have implemented cost reductions initiative, including strong reductions in our G&A and overhead cost structures. And we are modernizing our fleet with our ongoing newbuild program and retirement of older less productive dredges such as the Terrapin Island in '22 and the Dredge 53 in '23.
We have now taken delivery on our newest 6,500 cubic yard capacity, hopper dredge, the Galveston Island, and we did that in December last year. The sister ship, the Amelia Island is expected to be delivered in 2025. Also in 23, we took delivery of our two multicast, the cap Hatteras and the Cape Canaveral, which will now be efficient tools for mobilizing and demobilizing of PI pipelines as well as general operation support, and we took delivery of three new scope scales replacing older equipment last year towards the end of 2023.
The offshore wind market started to see growing pains, we saw several cancellations by developers of power purchase agreements or PPAs that were entered into in 2018 and 2019 before COVID inflation and interest rate increases were a reality. The East Coast states also continue to invite new bids for new PPAs, which included the opportunity to increase the base rates to the new realities and to include inflation adjustments going forward, our client Equinor BP joint venture decided to reset the plan for Empire Wind to wind farm and to cancel our rock installation contract scheduled for 2026.
Equinox is continuing the Empire one development as previously planned. And we will have the opportunity to re-tender the Empire Wind to contract when equity nor rebids the PPA for this develop in December of 23, we were awarded a new rock installation contract to perform rock protection over subsea power cables, a new utilization for this vessel on an offshore wind project on the East Coast of the United States. Going forward, we continue to pursue and bid a number of other offshore wind farm projects, both domestically and internationally for Rock installations planned for 2026 and beyond.
We believe the offshore wind market power generation market offers Great Lakes, a strong opportunity for growth in a rapidly growing market, which also provides us with an opportunity to diversify our business and our client base.
And I'll now turn turn the call over to Scott to further discuss our results for the quarter, and I'll provide further commentary around the market and a bit.
Scott Kornblau
Thank you, Lisa, and good morning, everyone. I'll start by walking through the fourth quarter, which resulted in the strongest EBITDA quarter we've had since the end of 2021. For the fourth quarter of 2023, revenues were $181.7 million. Net income was $21.6 million and adjusted EBITDA was $40.8 million. Revenues of $181.7 million in the fourth quarter of 2023 increased $35.1 million from the prior year fourth quarter, primarily due to higher utilization and higher coastal protection maintenance and offshore wind revenues, offset partially by a decrease in rivers and lakes project revenue. Current quarter.
Gross profit and gross profit margin increased to $38.7 million and 21.3% respectively, compared to negative $16.2 million and negative 11% respectively in the fourth quarter of 2022. The increase in gross margin is primarily due to improved project performance utilization and approximately $20 million of lower operating costs due to our continued focus on cost reductions and efficiencies. Fourth quarter 2023 G&A of $15.4 million is $3 million higher than the same quarter last year, primarily due to higher incentive and severance pay in the current year quarter, partially offset by our continued cost cutting initiatives.
Current quarter's operating income of $30.5 million improved $67.2 million from the prior year's quarter, operating loss of $36.7 million, driven by the improved gross profit, a $7.4 million gain related to the recently terminated offshore wind contract and the nonrepeating Fourth Quarter 2020 to write down of the hopper dredge Terrapin Island after she was retired, partially offset by the previously discussed increase in G&A net interest expense of $2.8 million for the fourth quarter 2023 was down from $3.1 million in the fourth quarter of 2022, primarily due to an increase in capitalized interest related to our newbuild program, partially offset by current quarter revolver interest expense.
Fourth-quarter 2023 net income tax expense of $6.2 million compared to an $8.4 million net income tax benefit in the same quarter of 2022 is driven by the higher current quarter income. Rounding out the P&L. Net income for the fourth quarter 2023 was $21.6 million, up from a $31.2 million net loss in the prior year quarter. Turning now to our full year results. Revenue for 2023 was 589.6 million. Net income was $13.9 million and adjusted EBITDA was $73 million despite a $59.2 million decrease in year-over-year revenue. Gross profit margin increased from 4.8% to 13.2%. Net income increased $48 million and adjusted EBITDA increased $56 million, driven by stronger project performance and improved efficiencies.
Turning to our balance sheet, we ended 2023 with $22.8 million in cash and $90 million drawn on our $300 million revolver, which doesn't mature until the third quarter of 2027. So far this year, we have paid down $15 million and currently have $75 million drawn against the revolver. During the fourth quarter, we closed on a sale leaseback of various support equipment, bringing in approximately $29 million of cash. Total capital expenditures for 2023 were $144.8 million, which includes $64.5 million for the construction of the subsea rock installation vessel, the Acadia $36.3 million for the Amelia Island, $24.8 million for the Galveston Island, $9.2 million for our recently delivered multi-cap and $10 million for maintenance CapEx. As previously discussed, a little over a year ago, we applied with the Maritime Administration or Mirage for Title 11 financing on our new vessel. The Acadian.
The recent offshore wind headlines, including the canceled PPAs lost I discussed earlier, has slowed down the progress of our Title 11 application. While we continue our conversations with Murad, we have shifted our focus and are actively pursuing other financing that can either be a bridge to a Title 11 loan or the primary funding source to support and complete our newbuild program. These discussions are progressing quickly, and I am confident we are on a good path to secure additional financing soon. I will provide updates in the future as appropriate.
Looking forward to 2024, we expect approximately 60% of our $1 billion backlog to be converted into revenue during the year. This can fluctuate higher or lower as vessel schedules adjust throughout the year. We currently have three regulatory dry-dockings planned for 2020 for two starting in the first quarter and a third planned for the second half of the year. But as always, the number and timing of dry dockings is subject to change. We expect full year 2024 capital expenditures to be between $170 million and $195 million, which includes approximately $20 million of maintenance CapEx. The timing of these payments is dependent on when certain milestones are reached on the new builds, but we expect the heaviest spend to occur in the middle of the year. Looking towards the first quarter, we have two dredges beginning the regulatory drydocking that will continue into the second quarter. Partially offsetting those down days is the addition of the Galveston Island, which began operations earlier this month.
With that, I'll turn the call back to Lasa for his remarks on the outlook moving forward.
Lasse Petterson
I guess, Scott, the U.S. dredging bid market for 2023 was at a record $2.8 billion, of which Great Lakes won 46%. This include the over $500 million of capital for deepening projects for LNG developments that Great Lakes was award. We continue to see strong support from the administration and Congress for infrastructure developments, including new maritime and port deepening widening and maintenance projects requiring dredging. In March of 23, President Biden released the president's fiscal year 2024 executive budgets.
The Post amount for the U.S. Army Corps of Engineers was $7.4 billion, which is a record amount for President's budget. And in June of 23, the House proposed an increased 2024 budget of $9.6 billion for the quarter, which is a $910 million above the fiscal year 2023. And in June, July of 23, the Senate committee for appropriations passed the budget, which includes $8.9 billion for the quarter.
This proposed budget is expected to provide for a strong 2020 for U.S. Army Corps of Engineers bid market, and we expect budget appropriations to support the funding of several previously delayed cases for capital abroad, airport improvement projects, including for the ports of Sabine used and mobile, which is expected to bid in the first half of 2024. Currently, the government is continuing Phase I is operating under a continuing resolution until the budget is approved, which we hope is done in March of this year.
I stated earlier towards the end of 2023, the offshore wind market started to see growing pains. However, the long-term outlook for the offshore wind market continues to be strong in the US and international, with global installed offshore wind power generation capacity targeted to reach 260 gigawatts by 2030, up from 40 gigawatts in operation in 2020 and in the US, the targets of 50 gigawatts by 2035. These are ambitious targets and it will challenge the existing supply chains at the same time as it provides strong growth opportunity for the industry.
Although New York rejected the developers' request for adjustments to their existing PPAs. The state continues to take steps forward in meeting their renewable energy goals. With the announcement in October last year of three new projects awarded for approximately four gigawatts of offshore wind power generation and a new accelerated fourth bid round for additional PPAs was announced for early 2024.
When you do win the first commercial scale offshore wind farm on the East Coast recently completed the installation of the first offshore wind turbine, which on January 2 of this year began delivering power to the New England grid In addition, South Fork wind, which will be the first offshore wind farm to supply power to the state of New York, has completed the installation of two of its 12 planned turbines on which one currently is operational now in January and recently also in January, the New Jersey Board of Public Utilities selected two projects to deliver 3.7 gigawatt of offshore wind power generation for the state for these awards, New Jersey has now 5.2 gigawatts contracted out of its goal of 11 gigawatts by 2040.
Great Lakes has established a unique niche business position in Europe in the US offshore wind market, and we continue to pursue and tender bids both domestically and international internationally on multiple offshore wind projects for the Acadia, the first and only Jones Act compliant, right, subsea rock installation vessel. We are also actively seeking for partners that share our ambition for growth in offshore wind and that will co-invest in assets to address this rapidly growing market.
In conclusion, our main focus this year was to keep managing through the various channels since that the 2022 delayed bid market presented us and we successfully delivered improved year-over-year results. And as we and as we enter the new year with a record backlog, improved fleet and a slimmer cost structure, we believe the Company is positioned to deliver improved year-over-year results this year as well.
And with that, I'll turn the call over for questions.
Question and Answer Session
Operator
(Operator Instructions) Adam Thalhimer, Thompson Davis.
Adam Thalhimer
Actually wanted to start with why what is the why did the mayor ad timing shift. I was kind of curious about that from them from a couple of PPAs that kind of surprised me that that would matter that much. And so let's start there about them?
Scott Kornblau
Yes. Good morning, Adam. So with we've as you know, we've been talking to Marriott now for over a year and our application has progressed. And as you saw a few months ago, we did kind of get to the final stage. However, as they were continuing their diligence during some of these negative headlines, it did change how they just look at the market in general today there there is a path for us to get something done now. It is not a term that worked for us. So I've been very transparent all along, we were not going to put all of our eggs in the myriad basket and we're working a number of things in parallel. We will now action those. We will continue our dialogue with Marriott. I do think there is a path to ultimately get there. But in the meantime, we'll secure the liquidity and hopefully be able to take it out at some point with Myriad. If not, we're very comfortable that we're going to be in a very good liquidity position soon.
Adam Thalhimer
Got it. Okay. That's fine. Just a little surprising on there. From their perspective B, Scott, how would you characterize margins? The margins are real gross margin 21% in Q4. That was completely unaffected by beyond cancellation payments. That's a real number, how do you think that trends going forward?
Scott Kornblau
Yes. So we started executing on the capital and coastal protection work during the fourth quarter. We also, though, were benefited by not having any drydocks during the quarter. We got them all out during the first three quarters. So we had a pretty clean cost structure. As I mentioned, we do have two drydockings beginning this quarter and will go into the second quarter. So as you know, that's kind of the double whammy and no, no revenue during that time. And then the cost to do that. But this has been our expectation all along when you have that proper mix of projects and the vessels are working and we execute in addition to the cost reset that we have done on the fleet. We've been saying for the last year, we thought that we were on this path to normalcy in 2024, and that's exactly how it's playing out.
Adam Thalhimer
That's good to see.And then did you I guess it will be in the 10 K, but did you guys give a figure for percentage of backlog that will burn in '24?
Scott Kornblau
Yes, I said roughly 60%. But again, as you know, that can move left to right as we adjust schedules throughout the year. But it's roughly 60%.
Operator
Joe Gomes, Noble Capital.
Joe Gomes
Good morning and thanks for taking my questions and good morning, Joe. So I just wanted to kind of get on the your expectations for the quarter? I mean, was really good, but on the revenue side, it seemed a little light on the Q you mentioned you should have burned about 19% of the dredging backlog in the fourth quarter, which would have been about $190 million plus.
Was there some weather issues there, some projects that may have been delayed and kind of at the same time on the capital projects, revenue was up about $7 million sequentially, kind of flat year over year. I was thinking maybe we would have been looking for a little bit higher run rate on the capital projects. Is there anything particulars there that I might have?
Scott Kornblau
It will reduce the revenue growth on that segment. Now, the big driver of the revenue you were expecting compared to what came in was really driven by some subcontractor work on the LNG project. It is now underway. We had we had thought it would start earlier in the fourth quarter. It started later. That's really was what's driving it. And you're right, the capital revenue was relatively flat but the coastal protection was way up. And those also have very, very solid margins and of the. So the capital work now will start getting executed of the just over $1 billion backlog, 71% of that backlog is made up of capital projects.
Joe Gomes
Okay, thanks for that. On the determination of the rock contract, obviously you got I think it was $7.4 million. Is there anything more there or is that all that you will get for that?
Scott Kornblau
And so you may have noticed, Joe, in the press release when we broke out revenue that there was an additional roughly $2.5 million of revenue that is related to engineering and project management services that had already been performed on Empire two prior to the date of termination. So once it was terminated, we went ahead and book that. So all in all for Empire to between determination and the services previously before it's roughly $10 million. And we do a similar construct on our other two contract related. There are some it's services that do occur before we lay rock.
Joe Gomes
Okay. And one last one for me, if I may. I'll get back in queue. You mentioned again some some additional asset sales in the quarter. You raised $29 million of cash. Do you see more of those here in 2014, kind of through with the asset sale?
Scott Kornblau
Yes, it's a lever we can pull, Joe, but I don't foresee us doing that as I mentioned, we're progressing rather quickly some longer-term financing for the newbuild program. So I do not see us doing anything more like that in 2024.
Operator
Jon Tanwanteng, CJS Securities.
Jon Tanwanteng
Hi, good morning. Thanks for taking my questions and great quarter on last, I was wondering if you could tell us if you guys internally have line of sight to full utilization on the Acadia and in the '26 timeframe or if that's still to be determined on and kind of how that squares the Americas? Thank you.
Lasse Petterson
Yes, we had cancellations of these PPAs over the last, let's say, six months has pushed some of that revenue to the right. So what we are looking at is '25 when the vessel comes out to the Empire Wind, one is going to be executed and then we have an additional contract for 2026. And also the delays in these other developments are pushing project revenues of project opportunities from '24 and '25 into '26 and '27. But this remains to be seen and we are looking for and bidding a number of projects starting in 2016 for Rock installation, but there is no firm commitments at this point in time.
In parallel, we are looking at some international work. There is a good strong market in Europe that we are evaluating and that we we may participate in this period.
Jon Tanwanteng
Okay, great. Thank you. And just relative to the segment, the percentage of the backlog that you are expect to book this year at. Can you remind me what your historical level of book and bill during the years are book-and-burn kind of what you go and get it within the year and revenue during the year?
Scott Kornblau
Yes. And John, I would say this this year is going to just be a little atypical because of the large backlog that we have right now. So we don't have as much whitespace entering a year that we typically would with over $600 million of 2024 revenue. Quote-unquote, in the bank right now. So I wouldn't necessarily draw a parallel to prior it years. I would say typically when we enter a year, we roughly have 60% like we do now of coverage, but it's on a much lower backlog. So again, the amount of white space we have in 2024 looks much different than it has historically.
Jon Tanwanteng
Okay. Great. That's there. And are there any remaining claims to be settled on all the projects that nothing materialized?
Scott Kornblau
We clear out. The big ones that we had previously talked about and now it's just kind of the normal cadence that pops up, but really nothing of note to call out.
Jon Tanwanteng
Okay, great. And last last one for me, and I'll leave it at that on just the year-over-year impact of drydocks, what do you expect that to be in '23 versus '24? I think you've disclosed the number, but I don't know if you have a revenue or EBITDA comparison comparator and kind of how that flows through?
Scott Kornblau
No. I mean just up, Mike, we're going to have three this year in 2024 that was comparable to what we had last year. So I would call it marginally a wash. I don't I don't see any big swings when it comes to dry docking '23 versus '24.
Operator
Brian Russo, Sidoti.
Brian Russo
You should just step back on the fourth quarter. If you look at the EBITDA margin excluding the gain was a little over 18%. When I look back at the fourth quarter for the years 2018 to '21, it was about 16% to 21%. So you're right smack in the middle of that range, but that's despite capital projects. And we generated 34% of the total 4Q revenue, which is below the 40% to 50% of the revenue in prior fourth quarters. So I mean, I'm just guessing is, is this fourth quarter in your opinion, considered normalized or is it still below? It's below the optimal kind of 50-50 mix that you guys target and we'll likely see in 2024 given the backlog profile?
Scott Kornblau
Yes. I'll reiterate what I said before, Q4 did not have any drydocks. And as you know, that does impact margins take a vessel out and have the additional costs. But if I just look not just look at for the whole year as opposed to quarter over quarter. We have that mix of backlog to get us to that. What we always aim for the high 10s operating margin in that mid 10s EBITDA, we are absolutely now setting ourselves up to return back back to normal. And I would call that the normal margins that we strive to get.
Brian Russo
Can you create and the $44 million of performance obligations that are excluded for the backlog for offshore wind, is that just Empire one? Or does that also include the second contract that I guess is pending FID.
Scott Kornblau
It is not pending FID. It is a it is a signed contract. It is included in there right now. We are under NDA to disclose who it was, but no, that is that is a signed executed contract. It will we'll do that work right after we finish Empire one at the end of '25.
Brian Russo
Okay, great. And just just curious on your thoughts. We've seen a lot of consolidation in terms of project developer ownership of offshore wind projects. We also saw utilities sell their stake last night too, our global infrastructure fund and MD&A. I'm just curious, is Great Lakes even better positioned now as a preferred preferred vendor of the consolidated ownership of these projects. Just wondering what you're kind of general thoughts are there.
Lasse Petterson
The general thought is that we are doing is to install the rock on the sea bottom and the ownership structure is really changing a lot over there a couple of months. But what we've seen is that Equinor and BP has parted ways and Ecuador is continuing with the Empire Wind one and they are reevaluating and PO into BP is looking at the Beacon Wind one and two. And we probably will see that to come to the forefront to the water to the end of the decade.
It's good to see strong companies such as BlackRock are getting behind some of these developments. It's huge capital outlays for them developing the offshore wind fields. So when stronger companies are coming into the market, we see that as positive. But in general, we know the developers, we have good contacts with all of them. And with the Acadia being at the Jones Act compliant vessel. We are very optimistic about the utilization and our engagement throughout the coming years.
Brian Russo
Okay, great. And then just lastly, when we look at 2024 and into 2025. Just your CapEx profile as the of the new vessel CapEx winds down, there seems to be an inflection point, right? As CapEx winds down your operating cash flow is normalized and is growing. We should start to see that inflection point kind of accelerate towards the end of the middle towards the end of 2025. Is that kind of a fair statement when we look over the next 18 to 24 months, sorry?
Scott Kornblau
Yes, that Brian 2025, we'll be finishing up the Acadian Amelia Island, but the CapEx, as you said, will be winding down from one of the advantages of having new vessels is that it keeps your maintenance CapEx down from where we historically were. So yes, you're thinking about about that, right? We've said all along, we had this big cash outflow as we build for the future that would wind down in '25 and beyond. We've quickly start building up the coffers again.
Operator
Thank you. And I would like to hand the conference back over to Tina Baginskins guest for closing remarks.
Tina 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. Thank you.
Operator
Concludes today's conference call. Thank you for participating. You may now disconnect.
