Ladies and gentlemen, thank you for standing by, and welcome to the Great Lakes Second Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers presentation, there will be a question-and-answer session. . I would now like to hand the conference over to your speaker today, Tina Baginskis. Please go ahead..

Thank you. Good morning and welcome to our quarterly conference call. Joining me on the call this morning is our President and Chief Executive Officer, Lasse Petterson; and our Chief Financial Officer, Mark Marinko. Lasse will provide an update on the events of the quarter, then Mark will continue with an update on our financial results of 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..

Thank you, Tina. In the first half of 2021, our operations saw a substantial impact as a result of the COVID-19 pandemic. As the third wave of the pandemic spread through our population, we started to see significant additional direct cost and operational interruptions in the first quarter of 2021.

Several of our vessel crews were infected despite extensive testing and isolation protocols.

In order to mitigate continued outbreaks, in the second quarter, we initiated an extensive vaccination effort of our crews and staff as vaccines became available and set an ambitious target to have a majority of our employees vaccinated by the end of the quarter.

Thus far, we have been successful, and our company-wide vaccination currently stands at 71% of our staff being fully vaccinated or partially vaccinated.

We are now implementing new protocols, including requiring all new projects to have 100% vaccination prior to startup and all vessels coming back into operations from drydocks to have 100% vaccinated crews. Additionally, we require proof of vaccination to access any of our main offices.

Unfortunately, vaccines were not readily available until later in Q2. Hence, we continue to incur COVID related costs and experienced increased operational challenges on several projects during the second quarter of this year.

The direct COVID costs of at home and on site testing, disinfecting of vessels and the cost of quarantine infective crew and bringing replacement crews were $4.3 million in the first quarter with an additional $3 million incurred in the second quarter.

Direct costs can be easily tracked, but the impact on projects and operational performance-related to COVID were not as easily quantified, but could be seen in lower than expected margins on several jobs.

The majority of the projects worst affected are now been completed, which included an international project, two Coastal Beach projects in the Southeast, One Beach project in the Northeast and one capital project in the Gulf of Mexico.

We expect to see positive effects of our vaccination initiative, which reduced -- with reduced corporate impacts on our operation in the remainder of the year. We ended the quarter with adjusted EBITDA of $20.2 million and net income of $2.1 million.

Our first half of 2021 results did not meet expectations due to the COVID impacts and related project performance mentioned..

Great. Thank you, Lasse. I will start with the quarterly results and then discuss some specifics related to our dredging business. For the second quarter of 2021, revenues were $169.9 million, net income was $2.1 million and adjusted EBITDA was $20.2 million.

Total company revenues for the second quarter of 2021 represented a $2 million or 1.2% increase compared to the second quarter of 2021. The increase was caused by higher domestic capital and Rivers and Lakes revenue, offset partially by lower maintenance, coastal protection and foreign revenue.

Gross profit was $22.9 million compared to $33 million in the second quarter of 2020. Gross profit margin was 13.5% compared to 19.7% in the prior year quarter. Direct COVID-19 costs had an unfavorable impact of $3 million on gross profit during the second quarter and related productivity impacts and delays affected several projects.

As stated previously, the majority of those projects effective have now completed. During the second quarter of 2021, we had the New York, Alaska, Texas, Liberty and Terrapin in drydock. All vessels, except the Terrapin, are returning to work in the third quarter.

Total company operating income was $8.8 million, which is a decrease of $9.5 million over the prior year quarter. The decrease is a direct result of lower gross margin. General and administrative expenses were slightly lower than the prior year by $0.6 million.

Net income for the second quarter of 2021 was $2.1 million compared to $9 million in the prior year quarter. The current quarter income includes net interest expense of $6.7 million and income tax expense of $0.8 million. Income for the second quarter of 2020 included $6.7 million in net interest expense and $3.1 million income tax expense.

Approximately $1 million of extinguishment of sub debt is included in the interest expense for the current quarter, which is related to the refinancing of our senior notes. Adjusted EBITDA for the second quarter of 2021 was $20.2 million compared to adjusted EBITDA of $28.1 million in the second quarter of 2020.

Next, we turn to our balance sheet, where at June 30, 2021, we had $180.8 million in cash. During the second quarter of 2021, we continue to maintain a 0 cash balance on revolver.

Our capital expenditure for the second quarter of 2021 were $27.5 million, which included $8.1 million related to the construction of the new midsize hopper dredge and $5.4 million for the build of the new multi cap vessels and $0.6 million related to the design of the rock installation vessel..

Thank you, Mark. As we and our country are still facing the continued challenges and impacts of COVID-19, the dredging industry deemed as an essential service has continued to execute critical and needed infrastructure projects. The U.S.

Army Corps of Engineers has continued to follow their bid schedule and prioritize all types of dredging, including port deepenings, port maintenance and expansion and coastal protection and restoration projects.

In 2020, the domestic market reached EUR1.8 billion in project bid, and we are confident that the 2021 domestic market will remain as strong as 2020, driven by work that will include large-scale port deepening projects along the East and the Gulf Coasts.

We expect that 2021 will see bids for multi project phases for port deepening projects in Corpus Christi, Norfolk, Freeport and Houston in the Houston ship channel that will continue for the next several years.

In addition, our nation's coast are subject to climate change, increasing severe weather events and sea level rise, which results in an increase in Beach erosion and other damage that add to the recurring nature of our business and the need for more frequent coastal protection and port maintenance projects.

In the second quarter, Great Lakes announced awards of $112.8 million of new work that adds to our 2021 backlog, resulting in a 34.5% market share for the first half of 2021. Backlog at June 30, 2021, was $454.4 million versus $423.4 million in June of last year.

After the second quarter end, we were awarded the Cape May Beach Renourishment Project for $12.1 million, and we were low bidder on the Thimble Shoal deepening and renourishment projects for $39.5 million.

On July 30, Great Lakes were the successful low bidder on the Corpus Christi Phase III Deepening Project at $152 million, which will commence in late Q4 of this year. Our confidence in the market is reinforced by the support that we have seen for the dredging industry in the U.S.

Army Corps of Engineers 2021 budget that was approved at another record high level. In July of this year, the house of representatives approved the course 2022 proposed broad budget that is slated to be $8.66 million, which is an 11% increase over this year's levels..

. Your first question comes from the line of Adam Thalhimer with Thompson Davis..

Can you give us any sense for -- I'm new.

So sorry, if you don't want to kind of directly answer this question, but any kind of sense for when you say Q3 and Q4 up year-over-year? Any kind of sense for magnitude?.

Yes, sure. So as we look going forward, first of all, when we file the Q later this week or this week, first of all, you'll see that for our backlog about -- if we look at the revenue first, about 93% of our backlog at June will be recognized as revenue for the rest of this year. So that's over $400 million of revenue.

We expect the gross profit margin percentage for Q3 and Q4 to be similar to what full year 2020 was. And the reason for that is well, as Lasse earlier mentioned, many -- a lot fewer vessels are in drydock in Q3 and Q4 versus Q1 and Q2.

We do expect G&A to be a little higher in the second half, due to more activity in the back half of the year plus as Lasse just mentioned some money related to BCG. When I specifically talking about the drydock days, we expect Q3's drydock days to be less than half of what we had in Q2 and then almost down to 0 in Q4.

So we expect Q4 to be a little stronger than Q3..

Okay. That's great color, actually. And then the 4 boats that you have returning in the back half, can you give us a sense of where -- just because I'm trying to get to that -- to the revenue segments.

Can you give us a sense of what kind of projects those boats are returning to?.

That one, I'll have to -- that's a little bit more detail than I have in front of me here. So -- but we do have a number -- we do have our port deepenings continuing to go on. It's really across the board. It's going to be nothing on the international side, obviously, but on the domestic side, continued port deepenings, beach jobs in Q3.

So it's really cross-border and maintenance..

Adam Thalhimer:.

So the core bidding at this point, we expect it to be close to where it has been in the last couple of years with the exception of, I would add, with this infrastructure bill that could increase it from this kind of $1.8 billion that we've seen for the last 3 or 4 years. So that would be the piece that could increase.

But we -- it's too early to tell when those types of infrastructure build projects for our industry, the timing of those, it's too early..

Your next question comes from the line of Jonathan Tanwanteng with CJS Securities..

I was wondering if you could give us any insight as to how much lingering COVID impacting expense there might be in Q3, if you're seeing that extending into July, especially with these rates going up across the country?.

Yes. In terms of what we expected, kind of, I'd say, slightly before this delta variant, we were expecting -- we had $4 million in the first quarter, $3 million in the second quarter, we're expecting about $2 million in the third quarter. We'll kind of see how this rare -- new delta variant impacts us. It's moving up a little bit.

But right now, our expectation is $2 million. Obviously, we're in the mix to mix of this one, so we'll kind of see how it goes..

Got it.

And were there any delays or stoppages or interruptions as a result in the last month?.

In the last month, we haven't had any vessels stopped or taken in because of this variant..

Got it. Okay. Great news. I was just wondering, as you looked at the first half your win rate on the bid market, I recognize it was smaller than usual, both from the total the market perspective? And also just 35% versus your normal 40% win rate.

I'm just thinking -- I'm wondering what your thoughts are for the rest of the year in terms of your rating the visitor out there and kind of the projects that you're best suited for..

Yes, sure, John. That's a great question we looked at. So the good news is post June 30, as Lasse was mentioning, we're low bid around Thimble Shoals. We were just -- were low bidder on Corpus, which just happened on July 30. That was a big $152 million.

And we were low bidder on Freeport deepening, which is about $72 million, but we're over the government estimate. So we'll see how that kind of shakes out. But those 3 bids are $264 million that would be added to our backlog, if awarded to us. So that's a big number. We talked about the back of half of the year.

But with $700 million bidding, in the first half of the year, we expect about $1.1 billion to bid in the second half of the year to get us to this kind of one -- another $1.8 billion market.

So we do have to win a little bit higher than, I would say, let's say, around 45% to get the backlog to where it would be at the end of this year as similar to the end of 2020. But we're off to a great start with these 3 bids. And the projects that have come up during -- that are coming up here are well suited for us.

So it's been a great start to this back half of the year right out of the gate..

Got it. And then just any update on the LNG projects that you've been awarded but aren't in backlog yet.

Are they moving forward? How should we think of those in terms of impact of this year or next year? And if there's been any progress?.

Yes. The one -- the smaller of the two that we did expect at the beginning of this year to possibly start this year, isn't going to start this year, but that is still moving along. They have purchased some land to relocate roads to where that -- so that they can work on the land there.

They -- and I just heard yesterday that they are beginning to sign some revenue contracts. So that looks like that could be a notice to proceed in 2022. But there's still a few more final hurdles to get to, but there's some positive movement there. The larger one is still further out.

Still there, but the smaller one that we signed earlier is hopefully getting closer..

Yes. I'd like to add, Mark. The client is now saying that they have sold the -- got optic contracts for the two first trains on that LNG facility, which means that they can then get Bechtel to start construction early next year. That's what the clients are estimating..

Got it. And just quickly on the BCG engagement that you were talking about.

What's the additional cost from that, number one? And kind of what really is the opportunities for expanding the business beyond the 1 or 2, I guess, foundation vessels you're thinking about?.

Yes. I'll start off with that, and Mark can fill in. We looked at the offshore wind market now for the last 2 years. And as the opportunities in that market are being crystallized and we stop bidding work, we wanted to have an independent and joint with us, review of the opportunities in the offshore wind market and what that represents to us.

So we have gone through an extensive analysis of the opportunity that is there for the rock placement for the foundations and also other related activities that are close to our competencies and ability to perform.

As you know, we had BCG engaged some 4 years ago to do the restructuring that we did, and they helped us out very successfully, and we decided to reengage with them to do this analysis. And I must say that I'm very optimistic about the opportunities that this, let's say, industry is presenting to us going forward.

Mark?.

Yes. So just on the specifics related to the cost, it's less than $2 million. As I mentioned earlier, that's going to push our G&A up in the second half a little bit versus the first half.

But yes, very excited about as they confirm what we're looking at in offshore wind is also kind of reaffirming and relooking at our other investments we're making in the dredging business as we look forward on a longer-term basis..

Your next question comes from the line of DeForest Hinman with Wal Halston & Company..

Just clarity further on the outlook for offshore wind is -- are we looking at other vessels, cranes, service vessels or this is more along the lines of just confirming thoughts around potentially doing another rock vessel?.

Well, I think we can say that on the crane side, we're not going to get into the installation vessel business. But there are a lot of opportunities for rock installation.

The -- we made our investment decision for the first vessel or the decision to go ahead with a design and pursue that business on the basis of 10 gigawatts installed power generating capacity by 2030. Last year, and now the bid administrations has tripled that target.

There will be supply chain issues, which is impacting how we reach that target, but there is definitely good opportunities for more than 1 offshore rock installation vessel. So we're looking at that.

In addition, there are additional services, which is performed under and under and on the water, which is close to our competencies in the company that we are -- that presents an opportunity for us to further invest into this new market segment.

But I just want to repeat that to build an offshore lifting installation vessel is a very large investment, which we are not considering..

Okay.

And then can you give us an update -- a lot of discussion on the Army Corp bid market, but are there any private market bids on projects that we're working on that we should be aware of?.

Well, the private market bids that we do have in the low bid, not awarded category as for LNG developments. So those projects are significant. And based upon the final investment decisions by the clients, these projects could come to fruition in 2022 and 2023. Mark, I don't think we have other projects that are currently slated in that category..

That's correct. It's really just those two on the private side, yes, those two are in low bid pending award at this point, not in our backlog. That's correct..

Okay. Very helpful. And I've been asking this forever. I can't talk about it anymore, but you've got the debt refinanced. Can you just give us a refresh in terms of capital allocation priorities, and we're spending a lot of money on new vessels and potentially more money on new vessels.

Can you give us a rundown there? Where does that pay down fall in from a priority perspective, dividends and potentially stock repurchases?.

Yes. I'll take that one, Lasse. Yes, nothing's changed too much. So let me just refresh it at this point. So we're in the middle of building our -- the hopper dredge, the midsized hopper dredge. So that's $35 million this year. It will be $45 million next year and then another, I think, $5 million in the last year in 2023.

We're building these 2 multi cats, the smaller vessels to help with our -- working on our pipelines more efficiently and safely. That's a total of about $26 million, it will be $18 million this year. The -- obviously, the priority then after that since those are already in-flight being constructed now is this offshore wind vessel.

That vessel, we still don't have final confirmed pricing yet. But that's going to be somewhere between $175 million to $200 million. So a large vessel as big as the Ellis island. And on the -- so those are kind of the things we've talked about that haven't changed kind of confirmed.

But as we look forward longer term, these are some of the things we're talking about with BCG, for example, on the dredging side, we have that option for the carbon copy of the hopper dredges, but do we look at that versus a cutter dredge. So we'll look at that moving forward, too early to tell the outcome of that.

We've got another year, We have to wait and make a decision on that second half until next summer. And then we'll look at the other -- whether the offshore wind market, do we want to invest more there in a second offshore wind vessel or something else. So I don't have an update yet on that. Those are in the middle where we are analyzing currently.

In terms of the share repurchase, just as -- like last year, Lasse and the Ford are very supportive of if we believe the stock to be undervalued, we would put in a share repurchase program like we did last year. So that's still out there to do so. We'll keep an eye on that and be ready to do that if the opportunity presents itself..

And the last part of the question was the dividend?.

Yes. So I would say of all those priorities dividend are probably the last of those priorities related to what we do have to do to obviously focus on growing the business and then the share repurchase was fairly effective last year. And so I would say it's of the priorities.

It's definitely something we consider just in the priority, let's say probably tell you it's at the latter of all those other priorities..

Okay. Very helpful.

And just clarity on the option on the hopper dredge, does -- if we exercise that option, is it a fixed price option? Or does that price reflect the current environment as it relates to steel, which has gone up quite a bit?.

Yes. So that did -- so when we do these options, you get a lower price, it was about $4 million lower than the current one we're building. But right, there is a range of steel prices. So if steel prices are higher than the range that's in that contract, and it could be a little bit more. But at this point, steel prices have kind of leveled off.

So just have to see how the market is, let's say, next summer, if -- and how that impact is. But I don't see it to be enormously material to us based on where we are today..

Okay. Perfect. And then last question. Just help us understand the decision on the rock dumping vessel as it relates to this financing that's out there.

You did reference it in your press release, but just being very specific on this, would we be willing to make an investment decision on the rock vessel without potential favorable financing through the DOE? Or is it possible that, that financing could come into play after we make an investment decision, kind of a weird question, but can you just help us understand that?.

So we have the ability, looking at capital allocation, looking at the cash flow that we've been able to generate that we can do these items I've talked about, including the offshore wind vessel, off our current balance sheet, I don't necessarily need to take on new debt. If we did add additional items then I would or could.

So at this point, I don't have to, if we stuck to kind of what we're committed to. I don't take any more debt. But yes, we have, like I said earlier in the last call, we've had conversations with the Department of Energy. And that's attractive financing, and it looks like it could be, we would take advantage of that..

Do we have any understanding of what -- that you can share in terms of what potentially that cost that, that would be?.

The cost of the vessel?.

The debt..

Yes. So it's a floating -- it's a floating rate. It's based on your credit rating, it's essentially LIBOR plus a number and based on your credit rating, but it would be in the -- kind of in the 3% range today..

Your next question comes from the line of Poe Fratt with Noble Capital Markets..

First thing is, Mark, you had mentioned the Freeport, it sounds like you're a little bit pending award on Freeport, but you're above the core's estimate.

Can you give some color on that? I think you said it might be $50 million if you look at sort of the awards that you included in the press release?.

Freeport was about $73 million, actually. But again, we're above the government estimate. So we're presently working with them to see if we can make that awardable..

How much above the estimate were you?.

I'm going to say about, I want to say $15 million, but that number, I don't recall of that, something like that..

Okay. Like 25% above their estimate, roughly..

Yes..

And then typically, you give the low bit pending award number you referred to it a couple of times, but I didn't hear an actual number..

Oh, sure, it's 400 -- low bid pending award at 6/30 was $447 million..

Okay. And then just to confirm, it sounds like you're not seeing any indication that the U.S. Army Corp. engineers is point forward any projects based on increased funding..

I'm sorry, can you repeat that? Poe, sorry..

Are you seeing any indication that with the core's budget potentially going up that they're preparing to pull forward any projects? And put them out to bid sooner than what you have anticipated?.

No. I wouldn't say there's anything earlier yet. We're coming into the really busy season of bidding, obviously, for Q3 and Q4 here, and those bids have been kind of set for a while, right? So nothing yet. That would be something we'd have to see probably more impact earlier 2020, too.

But yes, at this point, this kind of bid market is now set for fiscal year. Remember, their fiscal year ends into September. So that's all kind of fixed for this year. It would push -- that would happen later, but I haven't seen that yet..

Yes. I mean, I guess my point would be, I mean, my view has always been that the core's budget has not been the issue. It win more of the pipeline and their ability to handle schedule in few projects.

And so it maybe extends the fairway a lot longer, but it doesn't really impact the bid market year-to-year in that materially?.

Yes. I mean, we haven't seen the Army Corp. Bids really slowed down. It's all been pretty much on a -- pretty much where we expected. And so -- but I hear you that -- yes, I think it's all a positive for us, obviously. It's just a little too early to tell. The bills got to get passed and completed.

But would that potentially, I think what you're asking is, would it potentially overload the Army Corp. a little bit. I don't think so. I mean, they've been able to handle everything up until now, and those are important projects that they want to get done, So I think it's a positive..

Yes. And Houston has been out on the horizon as far as a pretty significant project.

Can you give us an update on any timing that you're seeing from the standpoint of the Houston project, the ship channel?.

Yes. I can take that last..

Okay..

So we have the first level. First, bidding of that's coming up in August, potentially in the range of $100 million..

Okay. Great. And then, Mark, you highlighted that $175 million to $200 million for the cost of the rock dumping charge.

Would that be mainly 2022 and 2023 CapEx? Or would you see as you hit that investment decision more in '21?.

Yes. There is a potential that we could, looking at the market and when we'll kind of tie to time it with the market, right? When do we think these projects will commence? And when will that vessel have to be ready? So there is a potential that we could have the first payment this year.

If we make the decision to do the investment that be kind of near the end of this year based on being ready in 2024. So that just have to continue to gauge the market of when they're going to need that ready to do the construction..

Yes..

But it is pretty....

It probably will. Yes. Mark, the projects that we are bidding today are having offshore construction season starting in 2024. And in order to meet those deliveries, we will have to make our investment decision as early as Q3 this year..

Okay. And maybe I should have asked, could you give us a 2021 full year CapEx number, hopper dredges, the first hopper boards is $35 million, the multicats $18 million.

Can you round out the CapEx numbers for '21?.

Yes, sure, sure. So exactly $35 million on the new hopper $18 million on the multicats, $2 million on the design of the offshore wind vessel, about $35 million in regular CapEx, what keeps our fleet going. And we did separately from a -- we've done a couple of lease buyouts that falling the capital expenditures.

When you look at the cash flow statement, you will see the cues. And those are -- for the -- right now through the first half this year, about $16 million. So that total there is in the neighbor of $100 million, and that does not include what Lasse just mentioned, if we made the call to do the -- to start the construction on the offshore wind vessel..

And would it reach the estimate be at 10% of the project cost as far as the deposit moving forward? Or is it -- would it be higher than that?.

Now, I don't think it would be higher than that. It could be -- if you think about -- as we looked at the kind of the one where -- like the hopper dredge we're building, it was about 10%. So yes, it could be -- I don't think it will be higher. I think it would be around 10% or maybe a little less..

Okay. Great. And then just a couple -- last one, just from a standpoint of -- I heard you line clear as far as the stock buyback hasn't been revisited yet.

But maybe there you could illuminate where the last stock buyback matrix was as far as where you thought the stock was undervalued? Or maybe sort of give us a little color on where you're thinking potentially stock buyback might kick in? I'm not sure, any color would be helpful..

Yes. I mean, it was a different -- we're in a little different situation back in September of last year, where the stock was, I believe, at $8.63 when we made the call with the Board at that point in time. So we're not anywhere near that number.

But yes, it's a little -- I don't have a preliminary number, but at this point in time, it would be a higher -- obviously, higher, but we'll -- yes, I can't give you a number yet on where that would be, but I just want to be clear that we -- the Board has been very supportive, Lasse very supportive of doing reinstating a new one if we needed to based on just being undervalued.

So -- and that will be based on what's our forward looking -- what we think the forward-looking market is and our performance and where the stock price sits..

Great.

And Lasse, if you could address the play agreement that was completed in June and just sort of how you went through that exercise of assessing the risk as a government contractor versus clean agreeing to that play agreement?.

Yes. As you know, this is a very old case. Some 6 years ago, we had an incident where a subcontractor punched a hole in a pipeline that caused a spill. And we have been through a lot of discussions here with the client and also with the authorities on who's responsible and so forth.

We believe that we were not responsible for directly responsible for this bill, it was caused by a subcontractor. However, this case was being drawing out. We spent a lot of resources and management time on pursuing and discussing this case.

So this -- this year, we decided that it was probably better for us as a company to plea to a miner, which -- and then get on with our business. So we agreed to pay a fine in the amount of $1 million that came with guilty plea.

And then we have set aside $2 million, which is determined then by the conclusion of the civil trial that we are involved in on this matter. And if we are successful in our claims of not being responsible for this spill, at that time, the $2 million would not be an expense for us..

Great.

And then, Mark, if any of that's been recognized, was the fine recognized in the second quarter? And I guess, this simple question will be recognized in first and second quarter?.

Yes. We've already -- we actually recognized that in the first quarter. So there wasn't a P&L impact. The $2 million that's essentially set aside, it's called restricted cash. That has not hit the P&L at this point in time. And we also believe that or expect insurance to cover that, it that was restitution was awarded to the plaintiffs..

There are no further questions. I would now like to hand the call over to 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..

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect at this time..