Editor’s note: This article is a distillation of Berger’s remarks to the Deutsche Bank group on June 16 grouping his comments on the topics rather than reporting them in the order he made them.
Jon Berger ceo and director of Great Lakes Dredge & Dock LLC described the company’s activities and goals to the 2011 Deutsche Bank Global Industrials and Basic Materials Conference on June 16.
GLDD has had a three-year annual compound annual growth rate (CAGR) of 21.4 percent with EBITDA (earnings before interest taxes depreciation and amortization) growth from $45.1 million in 2005 $103 million in 2010 and $24.6 million in the first quarter of 2011.
“In the last three years the marketplace has been very good to us” said Berger. “We have a lot of cash ($100 million) and are looking to put it to good use” he said.
He explained that when the company went public four years ago they realized that “as a public company we would have to grow.”
Last year GLDD changed their management team adding Jon Berger who has a strong financial management background as chief executive officer and director; and Bruce Biemeck who was chief financial officer of GLDD from 1991 to 1999 as president cfo and director.
In April 2010 David Simonelli who has been with the company since 1978 was promoted to president of dredging operations. Simonelli joined the company as project engineer and has served in various roles since that time most recently was senior vice president from February 2009 to April 2010.
Looking at the company’s management experience extensive fleet of dredging equipment and strong balance sheet Berger described the basic revenue-producing activities and growth opportunities presented by the dredging marketplace at home and internationally.
Capital Dredging (Channel Deepening)
U.S. port deepening is necessary in preparation for post-Panamax vessels after the Panama Canal deepening is complete in 2014. No East Coast port can handle these ships fully loaded said Berger and deepening projects are necessary.
Capital dredging is the hardest most complex dredging often involving digging and breaking rock and “we are the clear leader in this” he said. This is the highest margin part of GLDD’s business and the managers are looking to bidding on major deepenings in New York Baltimore Philadelphia Charleston Savannah Jacksonville and Miami where contracts can run $100 to $200 million.
Last year GLDD received 65 percent of domestic capital dredging projects said Berger “the highest margin of dredging we do.”
Berger described the importance of beaches where a majority of Americans live. Storm activity and natural erosion require that they be restored and re-sanded an activity funded by local states and communities. In the past three years GLDD garnered over 50 percent of this market share and expect a robust market over the next 12 months said Berger.
The Corps of Engineers’ goal is to have 95 percent of ports operating at capacity but they are nowhere near that said Berger. “We get about a third of the market or 25 percent” he said. It is a good market and will grow with the HMTF. Maintenance material is not heavy material but deposited on the yearly basis and is good ongoing work” he said.
The Harbor Maintenance Trust Fund (HMTF) consists of tax revenues from port users intended to be used solely for harbor maintenance. Ninety percent of imports and exports are through the ports and the tax can pull in $1.4 billion a year but at present only $500 million to $700 million is spent on port maintenance.
Bills in both houses of Congress will ensure the money is spent only on maintenance.
“We expect that the legislation will be passed this year or next year” said Berger. “There is hardly anyone who doesn’t believe it is the right thing to do” he said referring to the bi-partisan support of the legislation (S. 412 and H.R. 104) now before Congress.
Gulf Coast Restoration
“Twenty-five years ago when they moved the Mississippi River around New Orleans it caused tremendous issues in infrastructure and environment and marshland is disappearing by the hour” said Berger. “Katrina is an example of what happens when we lose the marshland. It wouldn’t have been as bad if we had all those acres (of marshland) back” he said.
Two Gulf Coast restoration projects are coming up for bid in the next 30 days (mid July) said Berger including Pelican Island and West Belle Pass. Another project will be bid this fall in Mississippi. These are between $25 million and $60 million dollars each.
As a result of the Deepwater Horizon oil spill last year BP will pay penalties of $10 to $15 billion and the federal government has said that 60 percent to 80 percent of this will go toward Gulf Coast restoration. BP has advanced $1 billion toward early restoration projects in the Gulf of Mexico to address injuries to natural resources caused by the spill.
The money will be used to fund projects such as the rebuilding of coastal marshes replenishment of damaged beaches conservation of sensitive areas for ocean habitat for injured wildlife and restoration of barrier islands and wetlands that provide natural protection from storms.
This is one of the most under-invested areas of the U.S. infrastructure said Berger. We have seen flooding and a tremendous amount of silt coming down the Mississippi River. Levee repair and improvement is a tremendous opportunity for our acquisition L.W. Matteson he said.
Environmental Service and Dredging
GLDD has been looking at the large environmental cleanup projects now in progress specifically the cleanup of PCBs on the Hudson River the Fox River cleanup in Wisconsin and the ash pond breach in Tennessee. Projects like this are in the realm of the expertise and equipment owned by L.W. Matteson.
The company is entering this market with the new Rivers and Lakes Division which consists of the new acquisition – L.W. Matteson a major inland dredging and marine construction contractor. Matteson will serve as a platform for GLDD to expand into inland levee and construction inland maintenance dredging environmental and habitat restoration and inland lake dredging. The purchase was on December 31 2010 and year-to-date revenues from this division are $4 million (as of March 31 2011.)
Dredging is a Jones Act-protected business and any companies doing dredging in the U.S. must be three-quarters U.S. owned and equipment maintained to U.S. standards so any big international competitors do not compete. It is a consistent market with a certain amount that has to get done every year for commerce and security.
This part of the company has had a tough year and a half said Berger. It is a free standing part of our business and we are in the process of integrating it with our marine business. A good example is the project the company has to take down the I-10 bridge over Lake Pontchartrain in Louisiana. This is a $27 million project that allows us to utilize our project management skill and knowledge of how to work over water said Berger.
The demolition sector in New England is starting to pick up said Berger. There was a problem moving into New York where we underestimated tenacity of competition in New York. We switched management in early part of year are cleaning up some projects and are looking to grow in that area said Berger. “It is an $80 million business for us” he said. “We are comfortable with our capital structure right now and in the next few years will be good.”
The International Market
Great Lakes Dredge & Dock is the only U.S. dredging contractor with an international presence and “we have been able to deploy our equipment overseas when the U.S. market is slow” said Berger. “There are four major international competitors but in markets where we can compete” said Berger. These are mainly in the Middle East specifically in Qatar Bahrain and Iraq where activity is starting to pick up again.
In the last three years the company has averaged $130 million in international projects and this market is expected to provide good opportunities in the future said Berger.
“The upgrade of the electric hydraulic dredge Ohio completed at the end of 2010 will allow us to meet future demand anticipated in the Middle East” he said.
In September GLDD began a deepening project in Brazil using the hopper dredge Reem Island.
The Foreign Corrupt Practices Act makes it difficult to compete in Brazil but this deepening project will allow us to get our license and see nice bidding activities coming up in Brazil the near term said Berger.
“We are seeing a significant uptick in opportunity in the Middle East” he said.
In Bahrain the government has been dealing with civil unrest and has now allocated money to reclaim land to build houses for Sunni Muslims. In Qatar they are building a major new airport and in Iraq the ability to rebuild will be based on their ability to promote oil and gas.
The U.S. Navy and Corps of Engineers are negotiating a sole source contract to build a lighthouse funded by the Kuwaiti government and another sole source contract will be to remove 150 sunken vessels from the shipping channel in Umm Qasr Iraq.
Berger described the company’s dredging fleet which consists of:
• 20 hydraulic dredges 19 U.S. flagged – 16 in the U.S. and four in the Middle East. The hydraulic fleet includes the two largest electric hydraulic dredges in the country which will be useful for projects in Los Angeles and other areas where low diesel emissions are required;
• 10 hopper dredges – four in the U.S. five in the Middle East (four U.S. flagged) and one in Brazil;
• five mechanical dredges including one of two electric clamshell dredges in the U.S.
The fleet is very flexible and often works in unison with each type of dredge having different skill sets needed for different projects said Berger.
“It would take $1.5 billion to replace the fleet” he said but the value is not just the equipment.
“We could never replace our fleet with its appraised value” he said. Showing a photo of a dredge operator he said “he is looking at four computer screens and working through technology. There is a lot of human capital and intellectual property. It’s not as if you can just walk out and dredge” said Berger.
GLDD will probably build a hopper dredge for the U.S. market in the near term said Berger especially if there is some certainty in the marketplace that the HMTF legislation was going to be enacted. As for replacing other dredges that are approaching their useful life by maintaining the equipment and replacing worn equipment such as ladders “we can run the equipment almost indefinitely” he said.