GLDD - NASDAQ

Good day, and thank you for standing by. Welcome to the Q2 2022 Great Lakes Dregde & Dock Corporation Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tina Baginskis, Director, Investor Relations and Financial Planning. Please go ahead.

Good morning, and welcome to our second 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, 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 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.

Thank you, Tina. As stated in our earnings release, our second quarter results did not meet expectations. As we navigated a challenging environment, driven by external factors, including supply chain delays, inflationary pressures and adverse weather conditions, combined with some atypical dredging project challenges. During the quarter, we had three projects encountering differing and unanticipated site conditions, which negatively impacted production and internal margins. We are now working to resolve the cost impacts through contractual discussions with our customers. However, revenue and profit recognition is delayed until these discussions are agreed upon and finalized. We also had several projects impacted by unseasonably rough sea conditions along the East Coast. These weather events cost several vessels to stop upgrading a seek shelter, which extended completion time lines and delayed scheduled commencement to work on subsequent projects. Our product estimates include weather event days based upon historic weather records. Unfortunately, weather patterns seems to be changing, and we will, on future projects, adjust the estimates to include more frequent severe weather. Although these severe weather events caused short-term impacts to our projects, they also caused an increase in beach and barrier island erosion and sedimentation of shipping channels and ports that, in turn, need to be renourished and maintained in the following years, which add to the recurring nature of our business. During the quarter, we saw inflation impact labor, operating supply cost and the cost of dry dockings. Moreover, supply chain issues extended the duration of dry dockings and delayed mobilization on several projects. The high-earning Hopper Dredge Liberty Island had dry dock extended by several weeks as installation of her new system for automation and dredge process systems were delayed. Also the delivery of the Carolinas new emission reduction equipment was delivered late, which delayed her mobilization by about a month to the Houston Ship Channel project, where she eventually started work in third quarter in July. These extended idle periods increased the cost of the dry dockings. However, the following impact on the delayed start and scheduled completion of their assigned projects had a major impact on our Q2 results. Bidding for projects for the core was unusually slow in Q1 and for the two first months of Q2, resulting in delayed bidding for beach and maintenance projects that we have historically seen in the second quarter for execution in the current year. So since these bids for new dredge projects did not materialize as early as in previous years, two dredges were idle for part of the second quarter. Bidding is now picking up in Q3, and we expect the full year's bid market for the use in Army Corps of Engineers to be as strong as 2021. And in addition, the bid market for private and state and local clients will this year be substantial with the bids for Port of Houston Project 11 Phase II and potentially Phase III and the potential notice to proceed on one or more of the pending LNG projects. As we enter Q3, we are focused on ensuring that new projects start up and are executed on schedule as well as mitigating and resolving the contractual issues from the events in the first half of the year. However, we do not anticipate meeting a full year's expectation as the effect of the first half year event, it is not expected to be fully recovered in the second half of the year. Despite of the short-term challenges, the outlook for Great Lakes remains strong. We continue to see increased market demand from the U.S. Army Corps of Engineers backed by strong government support that we expect will benefit Great Lakes and our market position in the coming years. The energy situation in Europe is driving the LNG export facilities here in the U.S. towards final FID, which we expect to add to our markets in 2023 and 2024. Our new build program is on schedule with the new Hopper dredge, the Galveston Island, which is expected to be ready for operation in the first half in 2023. In addition, in June, we announced the exercise of the option to build the Galveston Island a sistership which will be ready for operation in 2025. After decommissioning several older strategies in 2017, we have invested in productivity upgrades to our best-performing vessels. Throughout our fleet -- or through our fleet renewal program, we are installing newer, more efficient port tier engines that will help conserve fuel and reduce emissions. Our fleet is already using low sulfur fuel and all our hydraulic systems are now using a biodegradable product to avoid environmental impacts from minus bills. We believe our ongoing fleet renewal program will position us well to meet the current and future market demands. Turning to our Offshore Wind initiative. It is gaining momentum with the formal signing of the Empire Wind Rock installation contract for Equinor this past month. We are now in discussions with several other developers for projects commencing in 2025 and are very optimistic to have a full work schedule for the vessel as it starts operation in 2025. I'll now turn the call over to Scott to further discuss our results for the quarter and the year, and then I'll provide further commentary around the market and our business.

Thanks, Lasse, and good morning, everyone. Let me start by walking through our second quarter results in which revenues were $149.4 million, net loss was $4 million, and adjusted EBITDA was $10.2 million. Contract revenues of $149.4 million for the second quarter of 2022 decreased $20.5 million or 12.1% from the prior year second quarter. The lower revenue in the second quarter of 2022 was primarily due to lower maintenance dredging revenue, partially offset by higher domestic capital project revenue. Second quarter 2022 revenue came in about 15% below the guidance given on the last earnings call due to a number of the reasons Lasse previously mentioned. The extended dry dockings of the Liberty Island in Carolina caused each dredge to operate about one month less than anticipated for the quarter. Additionally, like last quarter, the second quarter saw an unusually large amount of weather impacts. For context, the number of weather days we experienced in the second quarter of 2022 was over 3x the number of days we saw in the same quarter of 2021. And finally, we had production issues on a handful of projects, most relating to differing and unusual site conditions. So the process we go through with our clients, the results of impact these adverse conditions have on our projects. However, we don't record any potential benefit until we get closer to finalizing discussions, which can often lag multiple quarters after the initial differing site condition assessment. Current quarter gross profit of $10.5 million decreased $12.4 million from the second quarter of 2021. Gross profit margin this quarter was 7% compared to 13.5% in the prior year quarter and was lower than the guidance given on the last call, driven by the weather and production impacts that affected revenue. In addition, the extended dry dockings of the Liberty Island and Carolina came at increased costs, and we saw inflation impacting most of our operating costs. While we'll properly account for the increased inflation in ongoing and future bids, most of the projects we are currently working were bid prior to the large increases in costs contributing to the drag on margins. Fortunately, we mitigated the inflation impact of fuel, which represents a large portion of our operating costs as we hedge most of our estimated fuel usage at the time of contract award. Operating loss for the current quarter of $0.3 million decreased $9.1 million from the prior year quarter, primarily due to lower gross profit margin, partially offset by lower general and administrative expenses compared to the prior year second quarter. Second quarter 2022 G&A of $10.8 million decreased $3.4 million from the prior year second quarter, primarily due to lower incentive expense and lower Houston relocation costs. Second quarter G&A was also lower than prior quarter guidance primarily due to a one-time nonrecurring adjustment lower-than-expected incentive expense and a continued focus on cost savings. Net interest expense of $3.4 million for the second quarter of 2022 came in at guidance and was down from $6.7 million in the second quarter of 2021 primarily due to the lower interest rate on the senior notes which were refinanced in the second quarter of 2021 and additional capitalized interest for the new builds. Second quarter 2022 income tax benefit of $0.9 million compared to income tax expense of $0.8 million from the same quarter of 2021 was driven by the lower current quarter income. Rounding out the P&L, net loss for the second quarter of 2022 was $4 million, down from $2.1 million of net income in the prior year quarter. Next, we turn to our balance sheet, where we ended the second quarter of 2022 with $75.4 million in cash and no debt maturities until 2029. Our undrawn revolver was recently upsized to $300 million, and the maturity was extended until July 2027, providing us additional liquidity to support our new build program. Second quarter 2022 capital expenditures were $39.2 million, which includes $11.7 million for our new scouts and multicast, $9 million for the Galveston Island new build, $6.1 million for emission upgrades to the Carolina and the Booster Buster, $4.4 million for upgrades to the Liberty Island, $2.8 million for the Subsea rock installation vessel and $5.2 million in maintenance CapEx. After announcing the build of our second new hopper dredge earlier in the second quarter, revised full year CapEx is expected to be $180 million but can fluctuate greatly up or down based on timing of progress payments. I'll conclude with some commentary on the third quarter and second half of 2022. We expect third quarter revenues to be between $160 million and $170 million. The projected increase from the second quarter is driven by both the Liberty Island and the Carolina working the majority of the third quarter compared to being in dry dock the majority of the second quarter. In addition, one of the dredges that was idle most of the second quarter is expected to work the majority of the third quarter, partially offsetting the projected increase, the New York is expected to be idle for most of the third quarter after entering dry dock in June. Also the Texas is currently undergoing maintenance and repairs that are expected to be completed by mid-third quarter, and the Padre Island and Ellis Island are scheduled to begin their dry dockings towards the end of the third quarter. We expect third quarter gross profit margin to be in the lower teens with some remaining drag from the first half year weather and production impact. Third quarter G&A expense is expected to increase a few million dollars from the second quarter, mostly due to the nonrecurrence of the onetime second quarter adjustment previously mentioned and the gradual ramp-up of the offshore wind team. Finally, net interest expense should continue to slightly decrease each quarter throughout the year as more interest is capitalized as the new bills progress. As Lasse mentioned, we expect the second half of 2022 to be much better than the first. While I'm not ready to give specific fourth quarter guidance, the fourth quarter of 2022 is shaping up to be on par, if not higher, than our solid first quarter results, which will provide momentum going into what appears to be a strong 2023. With that, I'll turn the call back over to Lasse for his remarks on the outlook moving forward.

Thank you, Scott. But before I discuss the market, I'd like to take a moment and discuss the announcement that we recently made with the changes in our operations group. So we have announced that our Chief Operating Officer, Dave Simonelli, after having 44 years of service in the company, has decided to retire. And Dave worked on both domestic and international projects for us and has extensive experience. But with Dave's retirement, I decided to adjust our organization. I'm pleased to announce the appointment of David Johansen to the position of Senior Vice President of Project Acquisition Operations; and of Chris Constant, to the position of Senior Vice President, Project Services and Fleet Engineering. Both David and Chris have more than 30 years of dredging experience, and they will both report directly to me. We thank Dave for his many years of service and Dave Simonelli, will continue to work with us as a senior adviser taking on special projects as we see needed. In 2021, the domestic market reached $1.8 billion in projects bid. We expect that the 2022 bid market will be as strong as 2021, however, occurring somewhat later in the year, as mentioned earlier. We ended the quarter with a backlog of $373.8 million and with a backlog of $373.8 million and $54.9 million in low bids and options pending award, which compares to last year's second quarter of $454 million in backlog and $508 million in low bids and options pending award. As you know, in the late second quarter, the Port of Houston bid at the second phase of the Houston Ship Channel or widening project. At the end of 2021, Great Lakes won the first phase, but we were not successful on the second phase. The work in Houston has its challenges, and we bid the risks accordingly. There are several projects that are going to be active going forward, which includes the LNG projects that we have in our backlog as low bids and offshore pending awards. In addition, we have seen bid activities increased substantially in the third quarter, and we expect to see bids for multiple new faces on port deepening projects in Norfolk, Freeport, Mobile, Sabine and additional projects of the Houston Ship Channel project 11. And as I mentioned, bidding has picked up in Q3 and post quarter close in July, we were low bidder on $184 million of work, which represents 74% of the dry bid market. Included in our low pending awards, our two LNG projects that are still pending the notice received for pilot clients. Europe is currently reevaluating their sourcing of energy after the Russian invasion of Ukraine, which will require imports of large quantities of LNG. Both these projects are gaining momentum and based on the client schedules for FID dredging works should start in 2023. We continue to see strong support from Congress for infrastructure investments and for the trading industry. On July 28, the senate passed the version of the Water Resources Development Act of 2022, Alberta, as we call it, which includes legislation that authorizes about $25 billion to help finance 20 new and modified U.S. Army Corps of Engineers projects for flood and hurricane protection, dredging, ecosystem restoration and other construction projects. Since the House passed their version also recently, the legislation is expected to be conferenced and signed into law by President Biden in short order. This is the earliest passage of this legislation in recent history. As of June 28, both the Senate and House passed their respective fiscal year Corps of Engineers budget proposals for 2023. The senate proposal was $8.7 billion, and the house proposal was $8.9 million prior to sending to President Biden for Signature, the house and senate will meet to agree on a final amount, which will likely be another record budget for the core. And this increased budget and the funding from the administration's infrastructure build support our expectation for a strong market entering into 2023.In March 2021, the White House announced new initiatives that would advance the administration goal to expand the nation's offshore wind energy capacity in the coming decade by opening new areas of development and increased public financing for projects. As part of the initiative, the department for the interior, Energy and Commerce, committed to a shared goal of installing 30 gigawatts of offshore wind power generation capacity in the U.S. waters by 2030. In January 2022, the Biden administration announced plans to auction more than 480,000 acres in the New York blight for six new offshore wind energy leases and the administration's first wind sale and the largest lease area ever offered with potentially build out capacity of up to 7 gigawatts. We continue to maintain a strong focus on our future and our recently announced offshore wind award by Equinor and VP solidifies Great Lakes entering into the U.S. offshore wind market. With a major project award for our subsea rock installation vessel currently being built for the delivery late 2024. The renewable power generated by the two wind farms will power more than 1 million households in New York. The project team will be mobilized to stop working this year with the installation of the rock and scout protection starting in 2025. Great Lakes will, through this, be generating local content, employment and economic activities in the state of New York by purchasing rock from domestic New York quarters and using the marine logistics base in Staten Island for its operations. In parallel to the vessel build and the new contract, we are bidding for a multitude of offshore wind farm projects with rock installations planned for 2025 and beyond. Major wind farm developers like Equinor, Dominion, Orsted, Avangrid and the U.S. wind have already issued RFQs, and they are in the process of selecting suppliers for the wind farm developments. As the offshore wind industry is developing here in the United States, the global offshore wind market are focused to be booming with more than 200 gigawatts of offshore wind generation capacity expected to be installed globally over the next 10 years. And we expect this will keep the large international contractors involved in offshore wind, very busy for the next years keeping vessels and equipment demand high. And we have good opportunities ahead to add new projects to our backlog, providing solid activity for our vessel, from 2025 and onwards. In conclusion, although we are faced with a challenging second quarter, as we are addressing, mitigating and seeking contractual resolution to the issues encountered, we remain confident in the decisions we have made and the strategic initiatives we have implemented to enhance our fleet and grow our business. And with that, I'll turn the call over for questions.

Our first question will come from Joe Gomes with Noble Capital. Your line is now open.

Thank you, good morning. Thanks for taking the questions.

Hi, good morning, Joe.

The first one, I kind of wanted to throw out there is maybe we can get a little more color, detail on the projects that you are encountering difficulties in. You mentioned in the release and say that you will be negotiating with the clients. What kind of size or revenue impact in the quarter did that have, if you can? And also, are you through the difficulty or is it something that's also impacting the third quarter? Just any more additional color there would be appreciated.

Yes, Joe, this is Scott. So the three projects that we mentioned, we've identified the site conditions being deteriorated in the second quarter. So the way the accounting works is we need to take a catch-up hit to get to a percent complete at that point. So we'll have a bigger impact in the second quarter, but we will have to take that remaining drag until the project is estimated to complete until - unless we're able to resolve the dispute prior to the end of the project. So it will continue to drag the remainder of the project. These three in particular had a multi, multi multimillion dollar impact for this quarter. But I also want to kind of walk through. There were other claims in prior quarters that we're still seeing the drag-on right now. We have tens of millions of dollars of unresolved claims at this point that we are working through with our customer. We've been successful and our customers have typically been very open when we can demonstrate that the conditions that we bid the job on based on the information they gave us are not what the conditions are. These things just take time.

Okay, that's very helpful thank you on that. And then on the offshore wind, I think you mentioned that you're out there looking for additional opportunities. I think last quarter you had mentioned that you had open with half of the 2025 and half of 2026 with the rest going to the New York project. I guess, one is, where do you stand on filling the open time? And two I know you have an option to build a second vessel and obviously, the first one is not complete yet. But given that these take a while to build, the contracts are awarded two to three years ahead of time, when do you think you might be looking at a go-no-go on the option ship?

Yes the first vessel, as you know, we contracted back in December of last year, and it will be ready for delivery at the end of 2024. We are bidding a lot of work that is coming out here over the next six months. And so, we will have a fairly certain picture of the utilization of the first vessel by the end of the year or early next year. And we are optimistic to have that vessel fully utilized by that time. So based upon the outcome of those discussions, we will have to make a decision on our second vessel probably in the first half of next year. But I would also say that we have a partner going into offshore wind. We're doing this together with Van Oord. They also have rock installation vessels. However, they are internationally flagged. And as such, we'll have to go and pick up the rock in Canada to come down to the U.S. to install it, but it is an option for us to use the capacity that Van Oord has in case we run out of capacity overall.

Okay great on that, thank you. And one more, if I may I'll jump back in queue. You talked for a while here on the LNG projects. I understand the Russia and Ukraine and Europe starting to at least look for alternative supply. But I guess, kind of how confident are you and what gives you the confidence that these projects are actually going to take shape here and come to fruition in the near term?

Well, with the developments in Europe and what happened in Ukraine and continues to happen in Ukraine and the energy situation in Europe. And Europeans are looking for more diversification of their energy supply. So this all points in the right direction for the LNG exports here in the United States. As you know, we have two projects that we have included in our backlog or it is really awards that are pending a final investment decision. And according to what we hear from the developers and also what you can read in the press. These discussions are ongoing. And based upon the schedules that are being discussed from the developers, we will be looking at entering into final negotiations and contracts so potentially during this year, and then work will be executed in 2022 and 2024.

Great, thank you very much. I'll get back in queue.

Please standby for our next question. Our next question comes from Adam Thalhimer with Thompson Davis. Your line is now open.

Hi, good morning, guys. First, I just wanted to ask about the bidding environment. Obviously good result in July what do you see in the outlook for bidding for August and September?

Well, third quarter is always a very busy bidding season for us. Most of the work that we are bidding in Q3 will be for execution in 2023. But there are still some utilization that we would like to secure here towards the end of the year. As I said in my notes, we do expect the increased funding for the Corps of engineers to translate late into work that needs to be executed this year and next year. They have record budgets, and there has been some delay in getting those projects to the market. And although the first half of the year in totality is for the bid market for the U.S. Army Corps of Engineers has been similar to what we've seen in previous years, the bids came out very late in June. So there was a substantial delay here in the first half of the year. But we expect the bidding to pick up substantially in Q3 and also in Q4. So everything points to a very strong backlog development over the remainder of six months of the year for work to be executed in 2023 and onwards.

Okay. And I think I heard you, Lasse say that you signed Equinor formally in July. So will that go into the Q3 backlog?

Yes, it will.

Okay. And then last one for me. How easy is it to put inflation into the bids right now? Are you seeing your competitors do the same thing?

Yes, well cost is cost, and it has to be added to the cost of doing the project. So what happened here is we were hedging our fuel expenses, but the very rapid price increases that we saw during the end of last year and this first half of this year was just substantial. I can tell you wire ropes are up 100%, chemicals are up 40% to 50%. And if the projects that we executed here in the first half was bid before you saw this kind of explosive inflation pressure. So what we do now, we do update our expectation for cost increases on bids going forward. So I see this as a kind of passing issue. Scott, do you want to add to that?

No I mean, we're not - I mean, I'm not quite sure what our competitors are doing, but we have a certain margin that we want to hit. And we've got to make sure that when we build up our bid, we are not only getting the cost right, we're also pricing in the risk, and that's what we have done on our recent bids, and we will continue to do. And you did see the July results, that was based on this new model of getting costs where they need to be in, we still had a very successful month.

Got it, okay thanks guys, good luck in Q3.

Thanks Adam.

Please standby for our next question. Our next question comes from Jon Tanwanteng with CJS Securities. Your line is now open.

Hi, good morning guys, thank you for taking my questions. Just a follow-up on that last one I think I got the answers just want to clarify. The margins on the low bids you had in July that work is at - your target margin that you want it to be is that . It was more competitive or had issues due to deflation or anything like that may be just a little more color there?

No, that is correct. We are bidding the market as we see it, and we do expect a very strong bid market here in Q3, Q4 and for 2023. So yes, we are bidding as we always have.

Okay. How should we think of inflation and supply chain and dry docking risk for the rest of the year? Because obviously, it was something that was probably a little bit more unexpected than not, especially as concerns the equipment deliveries?

Yes, so on the inflation front, again, as we start rolling into the more recent projects that we have bid, we're hopeful that we have captured all of that and the impact should not be as much, but as I mentioned, we are still working on projects, and we'll continue to into the second half of the year that were bid prior to. So we will continue to see a drag, but hopefully, as new projects replace old projects that will decline. We do have three vessels left for dry docking for the second half of the year. We are doing everything we can to order what we know ahead of time to make sure that it's there. There's always risk that once we get into the yard and we find something else that we need, we need to do it, but we have done everything we can to properly prepare and have everything we need at the dry dock when we're ready to start.

Okay great. How should we think of your cash needs with the EBITDA not quite where you wanted to be and lots of investments underway and you extended your credit agreement. Should we expect that to be drawn down very soon or will you utilize some other kind of financing or do you expect your cash flow to kind of rebound to help you out there?

Yes, so as you said, our cash, we've been saying this - for the last few quarters, we will have a negative cash flow this year. And now with the addition of the second hopper, we will have negative cash flow in 2023 with the expectation it starts leveling off in 2024. And then once we take delivery of everything, cash flow should drastically ramp up in 2025. It is possible next year that we do have to tap into the revolver for some short-term bridge financing. We are exploring other options right now, just kicking tires just to know what's out there. But right now, we're comfortable, especially with the expanded revolver if we need to tap into it for a short amount of bridge financing until we start taking delivery and earning funds, we're fine doing that.

Okay great. And last one from me, and I'll jump back in the queue. What happened with the Houston bid? Have you done a post-mortem on that? Why didn't you win that one and what of the remaining Houston opportunity looks like?

Yes of course, when we have a large project, we always do a post-mortem to understand how we assess risks and production on the project and compare that to - what we believe our competition has been doing. We believe there is a strong market going forward for dredging both the rest of this year and next year in particular next year and onwards. And we price our risks - as we see the projects accordingly. And that's the only thing - I can say about that. We are bidding the market as we see it.

And I guess, Jon, the only thing I would add is we're there right now at Houston, we understand the risks and the conditions of the material there. And we priced all of that in. We're very comfortable with what we bid even after doing the post-mortem and frankly, even trying to go back and re-figure out how to get where the winning bidder did to stick with the risk that we know are there and the margins we couldn't get there. So while we would have liked to have it, it's in our backyard, we're very comfortable with how we price that project. And as Lasse said, we feel very strong about the 2023 and 2024 market. So if it's not this one, we'll move on to the next one and stay disciplined.

Understood, thank you and good luck.

Adam Thalhimer with Thompson Davis. Your line is now open.

Oh, thanks for getting me back in. Just one question as you guys look out to 2023, is there any reason to think the margin profile of the business has changed at all?

Margin profile, we are looking at margin as we have in the past. The business is solid. And as we have said, our EBITDA expectations, has not changed. We are looking at getting a new dredge out there next year, which will be a nice addition to our fleet with a new modern hopper dredge. And that's why we also decided to go for the option. We do see a very optimistic both in - upon this market as we go forward.

And then, Scott, you mentioned the tens and tens of millions of cost reclamation out there. Does that flow straight to EBITDA when that comes in?

Yes, I mean when we settle one of these, if the project is already complete, that will go straight to revenue. If we're able to resolve while project is in progress, then yes, it will still through the end of the project flow through down to EBITDA.

Okay. And you think on these three jobs and previously outstanding items, more likely to get payback sometime in 2023 or are you hoping for this year?

Yes I mean, some could happen this year. I mean, again, it takes quarters and as I mentioned, of the large amounts that I've mentioned, most of those have happened prior to Q2. So there is absolutely a chance that we get resolution. Now the amounts that I say, that is the claim the way that we see it right now. That does not necessarily mean that we're going to settle at $100 on the dollar. Our success rate has been historically very, very high, but not necessarily at every penny that we believe is coming to us.

Okay. But you haven't put any of that into the H2 outlook that you gave?

In the outlook, we haven't put, we also haven't talked about any potential claims that may pop up that goes the other way in the second half. These do ebb and flow.

Fair enough okay. Thanks guys.

Yes.

Please standby for our next question. Our next question comes from Poe Fratt with Alliance. Your line is now open.

Hi, good morning, Lasse, and good morning, Scott.

Hi Poe.

Hi just - Scott, I didn't catch the adjustment one-time adjustments to the second quarter G&A that looks like it will hit the third quarter too. Can you just give us a little more color on the amount and sort of the nature of that adjustment?

Yes, so it will not hit the third quarter. It was strictly isolated to the second quarter. But when I'm talking about a bridge between the second quarter to third quarter the third quarter won't have the benefit of the adjustment that lowered G&A in Q2. And it has to do with the lower incentive pay that I talked about in the quarter. It was also an adjustment related to that.

Okay. And would that be the full difference between the first quarter G&A and the second quarter G&A? Is that sort of the way to frame it?

That's a big part of it. That's not all of it. We have - I think I mentioned in one of the earlier calls, we are really taking a hard look at costs and we have rolled out a number of cost reduction initiatives, and we're also starting to see those payoffs as well. So I would say it's a combination of both of those, partially offset as we build up the wind team.

Great. And then on the unresolved claims, the three larger projects, reading between the lines, I'm coming to the conclusion that Houston is one of those jobs where the site conditions changed. Is that possible given how that project only started a short time ago or can you just give us a little more flavor on the three projects? And then also when you expect to complete the three projects, not necessarily when you expect to resolve the claims?

Yes we - look we are not going to discuss individual projects. But the projects in question, these projects that we executed in Q2 and Q3, and we expect the projects to be done by third quarter, and the discussions with the clients will also take some time before it gets resolved.

Just to clarify, Lasse, so all these three projects will be completed in the third quarter of 2022?

That is the way the schedule looks today, yes.

Okay great. And then can you talk about the new build program and inflation has been an issue on the operating level. But can you talk about your new build costs in the context of the inflation that you're seeing on the operating level? Is there a potential impact on the new build costs?

Well, we have seen some supply chain issues on the new builds with delay of equipment coming to the yard. And there are some inflationary pressures. However lately, we've seen steel prices moderating and even coming down. So when we entered into the contract to build the first hopper vessel, we negotiated the price of the option. And that's - really what we can say about that. We have an agreement with the yard where we are doing some adjustments on steel pricing up and down. So we do not see any continued major impact of the inflation on the new build projects. Scott, do you want to...

Yes and Poe, just to add a little color. So on the Galveston Island, which we're about to take delivery of - as Lasse mentioned, the fixed price contract it would be exception of steel. We signed this contract a couple of years ago when steel was lower and obviously, it's increased. The impact of the change orders because of the - increase in price of steel was a couple of million dollars, and that was a pretty drastic increase in steel. So that was a nominal impact. And now when we signed the new one, and we've already given the price in the low 100 that was negotiated at a much higher steel price. So our expectation is that we don't see an increase and - it does go up or down, so we potentially see a clawback.

Great, thanks for your time.

At this time, this concludes the Q&A. I would now like to turn the conference back 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.