Great Lakes Dredge & Dock Corp
NASDAQ:GLDD
Earnings Call Analysis
Q4-2023 Analysis
Great Lakes Dredge & Dock Corp
The company described 2023 as a year of positive transition with stronger financial results and a record backlog of $1.04 billion. This record backlog was further bolstered by pending awards and options valued at around $179 million and approximately $44 million in performance obligations from offshore wind contracts. Major capital project wins like the LNG-related Port Arthur and Rio Grande LNG projects signify robust market momentum. Notably, these projects remain unaffected by the White House's recent halt on new LNG export projects permitting.
Cost reduction initiatives throughout the year included significant cuts in G&A and overhead, contributing to leaner operations. Simultaneously, the company invested in modernizing its fleet, exemplified by the arrival of new high-capacity dredges and the retirement of older, less efficient vessels. The introduction of tools such as the Galveston Island and Cape series multicats exemplify the company's commitment to both efficiency and modernization.
The offshore wind market experienced turbulence with several Power Purchase Agreement (PPA) cancellations. However, the company adapted quickly, securing a new rock installation contract for an East Coast offshore wind project. Despite the cancellation of the scheduled Rock installation contract, the groundwork laid with Equinor offers potential for retendering the Empire wind 2 contract in the future.
Gross profit and margins saw a remarkable year-on-year increase, indicating strong project performance. While revenue declined compared to the previous year, net income and adjusted EBITDA both rose significantly, evidencing improved efficiencies. The increased margins highlight the company's successful cost reduction measures and favorable market conditions.
For 2024, the company forecasts capital expenditures to be in the range of $170 million to $195 million, with maintenance capital expenditures accounting for roughly $20 million. A record dredging bid market in 2023, with $2.8 billion in bids, saw the company securing 46% of the market share.
Proposed federal budgets for 2024 hint at a robust bid market, especially for Corps of Engineers projects. Several important capital port improvement projects are tipped for bidding in the first half of 2024, offering considerable market opportunities.
With over $600 million in revenue already secured for 2024, the company appears to have covered approximately 60% of its typical yearly revenue at the outset. This strong initial position supports the aim to return to historically high teens in operating margin and mid-teens in EBITDA, suggesting a confident outlook for the year ahead.
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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.
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. 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 2022 Form 10-K and subsequent filings. During this call, we also refer to certain non-GAAP financial measures, including adjusted EBITDA and 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.
Thank you, Tina. As expected, 2023 was a year of positive transition from the difficult 2022, and we ended the year strong, improved performance, stronger financial results and a record backlog of $1.04 billion, which does not include approximately $179 million of low bids and options pending award and approximately $44 million of 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 in capital projects with 4 major awards, including the Freeport deepening projects, the [indiscernible] notches waterway channel improvement projects; and two, large port [ deepening ] projects related to liquefied natural gas LNG projects the Port Arthur LNG Phase 1 and the next decade corporation Rio Grande LNG projects. The latter is the largest project that were 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 initiatives, 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 capacity [indiscernible], the Galveston Island, and we did that in December last year. sister ship, the Amelia Island is expected to be delivered in 2025. Also in '23, we took delivery of our two multicat, [ Cape ] Hatteras and the Cape Canaveral, which will now be efficient tools for mobilizing and demobilizing our pipelines as well as general operation support. And we took delivery of three new scales replacing older equipment last year.
Towards the end of 2023, the offshore wind markets 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 clients, the Equinor BP joint venture decided to reset the plan for Empire wind 2, wind farm and to cancel our Rock installation contract scheduled for 2026. Equinor is continuing the Empire 1 development as previously planned, and we will have the opportunity to retender the Empire wind 2 contract when Equinor rebids their PPA for this development. 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 off the East Coast of the United States.
We continue to pursue and bid a number of other offshore wind farm projects, both domestically and internationally, with 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. I'll now turn the call over to Scott to further discuss the results for the quarter, and I'll provide further commentary around the market and our business.
Thank you, Lasse, 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 2022 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 of 2023 was down from $3.1 million in the fourth 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. 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 $65 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 for our recently delivered [ multi-cat ] and $10 million for maintenance CapEx. As previously discussed, a little over a year ago, we applied with the Maritime Administration or MARAD for Title XI financing on our new vessel the Acadia. The recent offshore wind headlines, including the canceled PPAs lose discussed earlier, has slowed down the progress of our Title 11 application. While we continue our conversations with MARAD, 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 new build 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 2024, with two starting in the first quarter and a third plan 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 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 dry docking 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 Lasse for his remarks on the outlook moving forward.
Thank you, Scott. The U.S. dredging bid market for 2023 was at a record $2.8 billion, of which Great Lakes won 46%. This includes the over $500 million of capital port deepening projects for LNG developments that Great Lakes was awarded. We have 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. The proposed amount for the U.S. [ Omacor ] of Engineers was 7.4 billion, which is a record amount for our precedent budget. And in June of '23, the House proposed an increased 2020 for budget of 9.6 billion for the quarter, which is a $910 million above the fiscal year 2023. And in July of '23, the Senate Committee for our preparations pass the budget, which includes 0.9 billion for the quarter. This proposed budget is expected to provide for a strong 2024 U.S. [ omni Core ] of Engineers bid market and we expect budgeted appropriations to support the funding of several previously delayed phases of capital port improvement projects, including for the ports of Sabine Houston and Mobile, which is expected to bid in the first half of 2024.
Currently, the government is continuing -- is operating under a continuing resolution until the budget is approved, which we hope is done in March of this year. As 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 U.S. 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 U.S., the targets off 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 a step forward in meeting the renewable energy goals with the announcement in October last year of three new projects awarded for approximately 4 gigawatts of offshore wind power generation and a new accelerated fourth bid round for additional PPAs was announced for early 2024.
[indiscernible], 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 Utility selected two projects to deliver 3.7 gigawatts of offshore wind power generation for the state. With these awards, New Jersey has now 5.2 gigawatts contracted out of its goal of 11 gigawatts by 2040. Great Lakes, as to dublished a unique niche business position in the U.S. offshore wind market, and we continue to pursue an tender bids, both domestically and international internationally on multiple offshore wind projects for the Acadia, the first and only Jones Act-compliant 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 that '22 delayed bid market presented us, and we successfully delivered improved year-over-year results. 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.
[Operator Instructions]. And our first question is going to come from the line of Adam Thalhimer with Thompson Davis.
Congrats on the strong Q4. That was great to see. I actually wanted to start, why does the -- why did the MARAD timing shift? I was kind of curious about that from a couple of PPAs that kind of surprised me that, that would matter that much. Well, let's start there. How about that?
Yes. Good morning, Adam. So with -- as you know, we've been talking to MARAD now for over a year, and our application has progressed. And as you saw a few months ago, we did get to the final state. 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 is a path for us to get something done now. It is not at terms that work for us. So I've been very transparent all along. We were not going to put all of our eggs in the Marriott basket, and we're working a number of things in parallel. We will now action those. We will continue our dialogue with MARAD. 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 MARAD. If not, we're very comfortable that we're going to be in a very good liquidity position soon.
Got it. Okay. That's fine. Just a little surprising on the -- from their perspective. The -- Scott, how would you characterize margins. The margins are -- gross margin, 21% in Q4. That was completely unaffected by the cancellation payments. So that's a real number. How do you think that trends going forward?
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 dry docks during the quarter. We got them all out during the first 3 quarters. So we had pretty clean cost structure. As I mentioned, we do have two dry dockings beginning this quarter and will go in the second quarter. So as you know, that's kind of the double whammy, 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.
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.
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 Instructions]. And our next question comes from the line of Joe Gomes with Noble Capital.
So I just wanted to kind of get on your expectations for the quarter. I mean it was really good, but on the revenue side, it seemed a little light in the Q, you mentioned you had burned about 19% of the dredging backlog in the fourth quarter, which would have been about $190-plus million. Was there some weather issues there, some projects that might have been delayed and kind of at the same time. On the capital projects, revenue was up about $7 million sequentially. It's 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. Was there anything particular there that might have reduced the revenue growth in that segment?
No. The big driver of the revenue were compared to what came in is really driven by some subcontractor work on the LNG project. It is now underway. We had thought it would start earlier in the fourth quarter. It started later that's really 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 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.
Okay. And on the determination of the Rock contract, obviously, you got, I think it was at $7.4 million. Is there anything more there? Or is that all that you will get from that?
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 to prior to the data termination. So once it was terminated, we went ahead and booked that. So all in all, for Empire 2, between the termination and the services previously before, it's roughly $10 million. And we do have similar constructs on our other two 2 contracts related. There are some services that do occur before we lay rock.
Okay. And one last one for me, if I may, and I'll get back in queue. You entered against some additional asset sales in the quarter. I think you said you raised $29 million of cash do you see more of those here in '24 are you kind of through with the asset sales?
Yes. It's a lever we can't 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 Instructions]. And our next question comes from the line of Jon Tanwanteng with CJS Securities.
Great quarter. Last, I was wondering if you could tell us if you guys internally have line of sight to full utilization on the Acadia in the 26 time frame or if that's still to be determined and kind of how that scores a little merit is [ sinking ].
Yes, the cancellations of these PPAs over the last, let's say, 6 months, has pushed some of that revenue to the right. So what we are looking at is '25 when the vessel comes out, the Empire wind 1 is going to be executed. And then we have an additional contract for 2026. Also the delays on these other developments are pushing projects revenues or product opportunities from '24 and '25 into '26 and '27. But this remains to be seen. We are looking for and bidding a number of projects starting in '26. And for rock installation, but there is no firm commitments at this point in time. In parallel, we are looking at international work. There is a good strong market in Europe that we are evaluating and that we may participate in this period.
Okay. Great. And just relative to the 60% of the backlog that you expect to book this year. Can you remind me what your historical level of book and bill during the years or book and burn kind of what you go and get within the year and revenue during the year.
Yes. And Jon, I would say this year is going to just be a little atypical because of the large backlog that we have right now. we don't have as much white space entering a year that we typically would with over $600 million of 2024 revenue in the bank right now. So I wouldn't necessarily draw a parallel to prior years. I would say typically, when we enter a year, we roughly have 60% like we do now of coverage, but it's honey much lower backlog. So again, the amount of white space we have in 2024 looks much different than it has historically.
Okay. Great. That's fair. And are there any remaining claims to be settled on older projects?
Nothing material. I say 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.
Okay. Great. And last one for me, and I'll leave it at that. Just the year-over-year impact of dry docks, what do you expect that to be in '23 versus '24? You've disclosed the number, but I don't know if you have a revenue or EBITDA comparator and kind of how that flows through.
No. I mean just -- 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 see any big swings when it comes to dry docking '23 versus '24.
And our next question is going to come from the line of Brian Russo with Sidoti.
So just back on the fourth quarter. If you look at the EBITDA margin, excluding the gain, it was a little over 18%. And when I look back at the fourth quarter for the years 2018 to '21, it was about 16% to 21%. So right -- smack in the middle of that range. But that's despite the capital projects only generating 34% of the total 4Q revenue, which is below the 40% to 50% of the revenue in prior fourth quarters. So I'm just guessing, 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?
Yes. I'll reiterate what I said before. Q4 did not have any dry docks. And as you know, that does impact margins, we take a vessel out and have the additional cost. 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 teens operating margin and that mid-teens EBITDA we are absolutely now setting ourselves up to return back to normal. And I would call that the normal margins that we strive to get.
Okay. Great. And the $44 million of performance obligations that are excluded for the backlog for offshore wind, is that just Empire 1? Or does that also include the second contract that, I guess, is pending FID.
It is not pending FID. It is a signed contract. It is included in there. Right now, we under NDA to disclose who it's with. But no, that is executed contract. We'll do that work right after we finish Empire 1 at the end of '25.
Okay. Great. And 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 utility sell their stake last night to global infrastructure fund. And I'm just curious, is Great Lakes even better positioned now as a preferred vendor of the consolidated ownership of these projects. Just wondering what your kind of general thoughts are there.
The general thought is that what we are doing is to install the rock on the sea bottom, and the ownership structure is really changing a lot over the couple of months. But what we've seen is that Equinor and BP has parted ways. And Equinor is continuing with the Empire Wind 1 and they are reevaluating point BP is looking at the Beacon Wind 1 and 2, and we probably will see that come to the forefront to the end of the decade. It's good to see strong companies such as BlackRock getting behind some of these developments. It's huge capital outlays for them, developing the offshore wind field. 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 the Jones Act-compliant vessel, we are very optimistic about the utilization and her engagement throughout the coming years.
Okay. Great. And then just lastly, when we look at 2024 and into 2025, just your CapEx profile and as the new vessel CapEx winds down, there seems to be in an inflection point, right, as CapEx winds down, your operating cash flow normalized and is growing. We should start to see that inflection point kind of accelerate towards the end of -- or the middle towards the end of 2025. Is that kind of a fair statement when we look over the next 18 to 24 months?
Yes. That's right, Brian. '25 will be finishing up the Acadia and Amelia Island, but the CapEx, as you said, will be winding down. 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 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 then we'd quickly start building up the coffers again.
Thank you. And I would like to hand the conference back over to Tina Baginskis, for closing remarks.
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.
This concludes today's conference call. Thank you for participating. You may now disconnect.