Gulf Island Fabrication Inc (GIFI) 2021 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Gulf Island's conference call to discuss first quarter 2021 results. (Operator Instructions) This call is being recorded.

At this time, I would like to turn the floor over to Ms. Cindi Cook for opening remarks and introductions. Cindi, Please go ahead.

Thank you, and good afternoon. I would like to welcome everyone to our first quarter 2021 teleconference. Our results were released this afternoon, and a copy of the press release is available on our website at gulfisland.com. A replay of today's call will be available on our website after 7:00 p.m. this evening.

Please keep in mind that the press release and certain comments on this call include forward-looking statements, and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our 2020 Form 10-K and subsequent SEC filings. Please also note that management may reference adjusted net income, EBITDA, adjusted EBITDA, new project awards and backlog on this call, which are financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release.

Today we have Mr. Richard Heo, President and CEO; and Mr. Wes Stockton, Executive Vice President and CFO. Mr. Heo?

Thank you, Cindi. Good afternoon, everyone, and welcome to our first quarter discussion of our results, business trends and outlook. I'm happy to be here with you this afternoon, and I hope that each of you and your families are continuing to stay healthy and safe. I'll provide an update of the execution of our strategic priorities, including some of our key areas of focus for 2021, the status of our key projects and the current business environment and end market opportunities. Wes will then discuss the financial impact of the shipyard transaction which closed in April and discuss our quarter results in greater detail, including our backlog and liquidity position. We will then open up the call for questions and conclude with some closing remarks.

During 2020 we focused on key strategic priorities to improve our financial strength and establish a stronger foundation for future profitability and growth. As a reminder, these strategic initiatives included: one, improving our risk profile. With the shipyard transaction, we were able to divest our high-risk long-term construction contracts that represented 90% of our backlog, which was generally breakeven or in a loss position; two, strengthening our liquidity by implementing cost reduction efforts and through the sale of our underutilized assets. The shipyard transaction further improved our financial position by reducing bonding and letters of credit requirements; three, improving our resource utilization and project execution through the rationalization and integration of our facilities and putting our best people in one location with improved processes, which has resulted in improved project execution for Fabrication & Services; and four, reducing our reliance on the offshore oil and gas market. We are focused on becoming a more stable, higher growth business and are actively pursuing opportunities in LNG and renewable end markets. We have also fortified our business development efforts to increase our services footprint to drive stability and revenue and earnings.

I'm very proud of the accomplishments made so far and feel that we have come a long way during a very challenging time. With the significant progress we have made on these initiatives, we are now shifting our focus to the next phase of our strategic plan, which is generating profitable growth and continuing to reduce risk. Our growth strategy will also focus on taking advantage of improving trends in our legacy markets, while at the same time expanding our focus to take advantage of opportunities in adjacent verticals such as LNG and renewable energy. We believe we are well-positioned to take advantage of these opportunities, given our skilled labor force and history of successfully delivering high-quality solutions to our customers. Given the shortage of labor in our markets, we expect our talented craft professionals will be a key differentiator. As project activity picks up and utilization rates improve, we should be positioned to see an acceleration in profitable growth.

Moving on to a discussion of our projects and their impact on the quarter results, please note that in light of the shipyard transaction and the sale of our OSU and Navy contracts, I will focus my discussion on the shipyard contracts that we retained and our Fabrication & Services contracts.

Our 70-vehical ferry project was impacted during the quarter by an extension of schedule due to engineering-related delays on the project. This resulted in a forecasted liquidated damages and increased duration-related cost, including project supervision and subcontracted services. We are working with the customer to potentially receive commercial consideration for the impact of these delays. The ferry is currently on track to be completed in the first quarter of 2022. Our teams continue to make progress on our 2 40-vehical ferry projects. The second ferry is in the water going through the commissioning process and we expect to deliver her in June. We have commenced the rebuild of the first ferry hull and continue to work with the customer on the challenges in construction from the deficiencies in their design. Accordingly, we have submitted a claim to our customer to recover the cost and extension of schedule, specifically with any design-related impacts. We currently expect the first vessel to be completed in the second quarter of 2022.

Our first quarter results for the Fabrication & Services Division demonstrated continued momentum driven by progress made by our key strategic initiatives of improving resource utilization and project execution. The division reported positive adjusted EBITDA for a third quarter in a row, delivering an adjusted EBITDA of $2 million. These strong results were due in part to our offshore facilities module project, which was completed and delivered in April. The project contributed to a gross profit improvement in the quarter resulting from reduced forecast costs, primarily associated with reduced craft labor and subcontracted services costs and reduced contingency associated with the favorable resolution of schedule-related liquidated damages.

Our teams did a remarkable job, safely delivering a quality project of 3 modules for a sulfur recovery unit on schedule during a very challenging period. We were able to use the breadth of our facility and people to accelerate our schedule to meet the customers' needs. For example, we were able to bring the modules under cover, so that we could take weather out of the equation and accelerate schedule with evening shifts. The customer paid us one of the strongest compliments saying that he has had experience with many international fabricators, and has not seen the high standards of quality and "get it done" attitude delivered on this project.

While the Fabrication & Services team continues to deliver solid project performance, our challenge remains the lower volume levels, which we are actively addressing by expanding our Services product line and growing in new end markets outside of offshore oil and gas. While bidding activity is picking up, the larger prospects are unlikely to be awarded until the back end of the year. And as such, we'll continue to face challenges of lower volume for the remainder of 2021. In the meantime, we are actively managing our costs to ensure that we have the right mix of talent to complete the projects on hand and are ready to execute the new project awards in the future.

In the near term, expanding our services product line will provide additional revenue stability and a strong foundation on which to build our business. To this end, we have strengthened our services' selling efforts by hiring a dedicated business development professional who will supplement our current staff and be tasked to grow our services offering. One initiative to expand our services offering is working with OEMs of specialty equipment to become their preferred service provider. The value of these service offerings are often regional in nature, and I believe that we will be able to target specific equipment to customers within 100 miles of our geographic reach. An expanded services offering will further improve our financial profile by providing a more stable revenue source and will also allow us to recruit, train, develop and retain our talented craft professionals who make our success possible.

We're also focused on growing revenue by expanding our business development efforts into adjacent markets outside of offshore oil and gas, which includes the large capital projects along the Gulf Coast associated with LNG facilities. There can potentially be multiple opportunities for new awards on each of these projects. Depending on the facility and project, we're often bidding on numerous scopes to different contractors for the entire complex. For example, looking at an LNG project being developed in Louisiana, we are bidding structural steel for a marine contractor responsible for building out the docking station, the prime contractor for various modules for the balance of plant and a technology provider for various process modules. This depth of scale of opportunities will allow us flexibility and multiple opportunities for award on the larger capital projects.

Additionally, as outlined on our last call, we will look to form partnerships to help drive growth. These collaborative partnerships should enable us to deliver integrated product and service offerings that are more differentiated in the marketplace. They will deliver our customers a sole source solution that reduces project risk and improves efficiency, increasing the likelihood for delivering a value-added solution and lowering the overall cost of operation for the customers. This should result in stickier customer relationships, expanded market opportunities and improved profitability. Some examples of such strategic relationships include: one, engineering companies that need a partner to help deliver a fabricated solution. By partnering at the start of a project, we'll be able to deliver a more integrated solution that reduces risk and lowers the total cost of execution as we are more involved in the design stage of a project, which should result in fewer change orders and project delays. Two, construction companies that need a fabrication partner to reduce field risks. Our skilled labor force can be utilized to drive improved project efficiency and labor productivity, resulting in a more value-added solution for customers. And three, other fabricators that can utilize the strength of our assets and resources to improve their overall project delivery by permitting our partners access to our strategic location, large laydown areas and easy waterway access to project locations, we can generate value in projects we might otherwise not be involved in.

While the COVID-19 pandemic and crude oil volatility have created headwinds in our business, our strategy and focus remain clear. We'll continue to manage the variables that are within our control, including preserving our liquidity, maintaining discipline in the pursuit of new project opportunities that are complemented by strong customer value propositions, and rigorously executing our projects by enhancing our processes and procedures and hiring and developing our employees.

I'll now turn the call over to Wes to discuss our quarterly results in greater detail.

Thanks, Richard, and good afternoon, everyone. I will discuss our consolidated results and then provide some additional details regarding our segment results, putting in context the factors mentioned by Richard and their impact on the quarter. I will then conclude with a discussion of our backlog and liquidity. However, prior to getting into the details of our quarterly results, I would like to discuss the impacts on the quarter of the shipyard transaction that closed in April. During the first quarter, we recorded a charge of $23.4 million attributable to the impairment of our shipyard asset and transaction costs incurred through the end of the first quarter. We anticipate incurring an additional charge of approximately $2 million in the second quarter related to additional transaction and other costs associated with the shipyard transaction. The current quarter charge is classified within impairments and gain/loss on assets held for sale on our statement of operations. Throughout my discussion, I will reference adjusted net income and adjusted EBITDA, which reflect the removal of the impairment and transaction costs for the quarter. Adjusted net income and adjusted EBITDA for comparative periods similarly reflect the removal of previous impairments, gains and losses on assets held for sale and certain other nonrecurring items.

So with that backdrop, I will discuss our results for the quarter in more detail. Consolidated revenue for the first quarter 2021 was $59 million, a 2% sequential increase compared to the fourth quarter 2020 due to higher revenue for our Shipyard Division, offset partially by lower revenue for our Fabrication & Services Division. First quarter revenue was down 25% year-over-year due to lower revenue for both our divisions. Consolidated net loss for the first quarter 2021 was $18.6 million compared to a net loss of $15.4 million for the fourth quarter 2020 and net income of $5.9 million for the first quarter 2020. Adjusted net income was $4.8 million for the current quarter compared to an adjusted net loss of $11.3 million for the trailing quarter and adjusted net income of $5.9 million for the prior year quarter.

Our adjusted net income for the current quarter included project improvements of $7.7 million for our Shipyard Division and approximately $600,000 for our Fabrication & Services Division and reflected strong project gross margins for our remaining fabrication services backlog. These positive impacts were partially offset by low volume levels for our Fabrication & Services Division and the overall underutilization of our facilities and resources.

Now let me provide some additional details regarding our quarterly results by operating segment. For our Fabrication & Services Division, revenue was $19.1 million for the first quarter, a 10% sequential decline compared to the fourth quarter 2020 due to lower revenue from our marine docking structures project and lower offshore services activity, offset partially by higher small-scale and subsea fabrication activity. First quarter revenue declined 43% year-over-year due to lower revenue for our materials supply project and less small-scale fabrication and onshore services activity as well as the lack of contribution from our paddlewheel riverboat and jacket and deck projects that were completed in 2020. The year-over-year decrease was partially offset by revenue for our marine docking structures project, offshore modules project and a subsea structures project, all of which were awarded subsequent to the first quarter of 2020.

Operating income for the first quarter 2021 was $1 million compared to an operating loss of $1.8 million for the fourth quarter 2020 and operating income of $10.2 million for the first quarter 2020. Adjusted EBITDA was $2 million for the current quarter compared to adjusted EBITDA of $1.9 million for the trailing quarter and $11.5 million for the prior year quarter. Our adjusted EBITDA for the current quarter included project improvements of approximately $600,000 for our offshore modules project and strong project gross margins. We continue to see improving trends in our project performance as a result of the consolidation activities and process for improvements put in place. However, these benefits are currently being partially offset by low volume levels and the underutilization of the division's facilities and resources due to low backlog levels.

I would like to note that prior year periods also experienced individual project impacts, and absent such impacts for all periods, our project mix for the current quarter was comparable to the fourth quarter 2020 and improved relative to the year ago quarter, primarily due to our higher-margin offshore services work representing a greater percentage of our total revenue and low gross margins on our jacket and deck projects in the prior year quarter. Looking at the division's utilization, the first quarter 2021 was lower sequentially due to a 15% reduction in work hours associated primarily with lower offshore services activity. And our utilization for the first quarter 2021 was 35% lower than the prior year quarter due to lower work hours for completed projects. However, it is important to note that as a result of our cost reduction initiatives and consolidation efforts, we were able to largely mitigate the impact of the lower year-over-year utilization rates, allowing us to generate year-over-year margin improvement despite lower revenue volume. Our bottom line for the first quarter 2021 also benefited from a continued focus on managing our general and administrative expense, which was comparable to the fourth quarter 2020 and reflected a decrease of approximately 20% from the year ago quarter as a result of the consolidation of our former Fabrication & Services Divisions and cost reduction initiatives.

Now turning to our Shipyard Division, revenue was $40.3 million for the first quarter, up 8% sequentially compared to the fourth quarter 2020 due to increased construction activities for our 70-vehicle ferry and towing, salvage and rescue ship projects. Offset partially by lower revenue for our final harbor tug that was substantially completed in the fourth quarter of 2020. First quarter revenue declined 12% year-over-year due to lower revenue for our harbor tug research vessel and 40-vehicle ferry projects. This decrease was partially offset by higher revenue for our 70-vehicle ferry and towing salvage and rescue ship projects.

Operating loss for the first quarter 2021 was $17.5 million compared to an operating loss of $11.5 million for the fourth quarter 2020 and an operating loss of $1.9 million for the first quarter 2020. The adjusted EBITDA was $6.8 million for the current quarter compared to an adjusted EBITDA loss of $9 million for the trailing quarter and $1.1 million for the prior year quarter. Our adjusted EBITDA for the current quarter included net project improvements of $7.7 million, due primarily to an $8.4 million improvement for our towing, salvage and rescue ship projects associated with a technology transfer change order entered into during the quarter, partially offset by a $700,000 impact on our 70-vehicle ferry project attributable to an extension of schedule due to engineering delays and an associated increase in duration-related costs including liquidated damages, supervision and subcontracted services. Absent these net project benefits, the loss for the quarter was due to a backlog that is generally breakeven or in a loss position and the underutilization of the division's facilities and resources due to the previously discussed construction delays for our research vessel projects.

I would like to note that prior year periods also experienced individual project impacts, and absent such impacts for all periods, our project mix for the current quarter was comparable to the fourth quarter 2020 and lower than the first quarter of 2020. Looking at the division's utilization, first quarter 2021 was improved relative to both the sequential period and prior year quarter due to increased construction activities. However, this improved utilization was offset partially by costs associated with investments and additional functional expertise and other efforts to improve project execution. We also maintained our focus on the division's general and administrative expense. While the first quarter 2021 reflected a 4% increase from the fourth quarter 2020, the increase in absolute terms was not significant and was just due to the timing of certain costs. Further, first quarter expense reflected a decrease of approximately 18% from the year ago quarter, benefiting from our cost reduction initiatives.

For our Corporate Division, operating loss for the first quarter 2021 was $2 million compared to an operating loss of $2.2 million for the fourth quarter 2020 and an operating loss of $2.3 million for the first quarter of 2020. With the decrease relative to the trailing period due primarily to lower legal fees and incentive plan costs and the decrease relative to the year ago quarter due primarily to lower legal fees and cost reductions, offset partially by higher incentive plan and insurance costs.

Next, I'll provide a few comments regarding our quarter end backlog and liquidity situation. Our quarter end backlog totaled $340 million, of which $310 million was attributable to our Navy and OSU projects which were sold in connection with the shipyard transaction. Accordingly, our backlog, excluding the Navy and OSU projects, was $31 million at quarter end. Approximately $5 million to $10 million of backlog associated with both the Navy and OSU projects will be recognized as revenue for the period subsequent to quarter end through the closing date of the shipyard transaction.

With respect to our liquidity, operating cash flow for the quarter was approximately $400,000, and our capital expenditures and other cash flow uses were approximately $600,000, resulting in a quarter end cash and investment balance of $51 million, which includes approximately $10 million of restricted cash associated with security for outstanding letters of credit. $7 million of this cash restriction will be lifted upon expiration of the related letters of credit in July 2021. At quarter end, we also had total debt of $10 million attributable to our PPP loan. As previously disclosed, our application requesting loan forgiveness of $8.9 million was approved by our lender and forwarded to the SBA in December. However, as of today, we have not received an approval or denial of our application from the SBA. At quarter end, we have reflected the loan as debt, but the debt classification based on the terms and conditions of our loan and the timing of required repayments, absent any loan forgiveness.

Working capital totaled approximately $52 million at quarter end, including $8.2 million of assets held for sale, which includes 3 crawler cranes within our Fabrication & Services Division and 2 dry docks within our Shipyard Division that were included in the shipyard transaction in April. Our working capital, excluding cash and investments, assets held for sale and the current portion of our PPP loan was approximately $900,000 at quarter end. This compares to negative working capital on the same basis at December 2020 of $4.9 million or an increase of approximately $6 million. $3 million of this increase relates to changes in working capital for our Fabrication & Services Division and the contracts excluded from the shipyard transaction. The remaining $3 million increase is attributable to the contracts included in the shipyard transaction and is recoverable through our closing and post-closing working capital true-up mechanism.

As a reminder, at closing, we received $8 million for potential working capital changes for the divested projects from year-end 2020 through the closing date. To the extent our actual working capital for these projects is less than the $8 million, such difference will be remitted back to Bollinger. To the extent our actual working capital changes for these projects is greater than the $8 million, such incremental difference will be paid to us by Bollinger. Also as a reminder, we previously communicated that in connection with the shipyard transaction, we anticipated net proceeds of approximately $15 million after satisfaction of retained liabilities associated with the divested contract, of which $2 million is anticipated to be received in the back half of 2021 upon Bollinger's collection of certain milestone payments associated with the divested contracts.

As we also previously communicated, the net proceeds will largely be used to fund working capital liabilities associated with the shipyard contracts that were not sold and to fund the wind-down of the shipyard operations by mid-2022. Accordingly, the transaction itself was expected to ultimately be about cash neutral, after the completion of the retained contracts and wind-down of the shipyard operations. However, due to cash flow activity experienced in the first quarter while we still owned the assets, I want to update our estimate of the cash flow impacts of the transaction relative to our quarter end cash balance. Specifically, as previously mentioned, during the first quarter, we funded $3 million of working capital requirements on the divested contracts that will be recouped subsequent to March 31 through the working capital true-up mechanism. Further, during the first quarter, we funded certain retained liabilities associated with both the divested contract and shipyard contracts that were not sold. Accordingly, as a result of the obligations funded in the first quarter, we expect our cash balance to ultimately improve by approximately $6 million to $8 million relative to our quarter end cash balance due to the shipyard transaction and shipyard operations.

Now while this approximates the ultimate cash impact of the shipyard transaction relative to quarter end, we will experience temporary increases in our cash balance that are greater than this amount on an interim basis until all retained liabilities of this shipyard operation are satisfied. To that end, we expect our cash balance at the end of the second quarter 2021 to benefit by approximately $12 million to $15 million attributable to the shipyard transaction and shipyard operations, excluding any impact from the remaining core business.

Moving on to capital needs for the year, we expect our capital requirements for the remainder of 2021 to be approximately $1 million to $2 million. And finally, with respect to expectations regarding EBITDA for 2021, given COVID-19, crude oil price volatility and related market uncertainty, and specifically, uncertainty regarding the timing of future new project awards, we will not be providing guidance at this time.

This concludes our prepared remarks. Operator, you may now open the line for questions.

(Operator Instructions) And we did get a question and that will come from Jeff Geygan of Global Value Investment Corp.

Hey, can you talk a little bit about the expanded service in your Fab division, possibly touching on the economics: the average job size, the duration and any other color around that?

We're, Jeff, at the primary stages. But we're organically looking at growing incrementally the services business. These contracts are going to be relatively small. And in terms of margin expectation, we're looking at low double-digits kind of range.

And just to give you a frame of reference, Jeff, for the quarter, our services business which of course is within the Fab & Services segment, was right at $6 million of revenue. A quarter ago, that was right at $9 million. So just as the business exists today, it can range anywhere between $30 million and $40 million of revenue annually, and that's the business Richard's referring to that we're looking to grow. And those gross margins are at the low double-digits.

I appreciate it. You also have alluded to the collaborative partnerships. I'm wondering if you can give us an update in terms of have any of those literally been established. If not, what's the pipeline look like? And again, talk around the size, the economics, the duration.

Yes, similarly, those are also at the primary stages. We have a couple of arrangements that we are trying to formalize. But again, those contract sizes and really the magnitude I guess of the opportunity is still relatively small.

I see. All right. And lastly throughout your prepared comments, you talked about higher growth opportunities. Presumably that will improve your margin profile. Is that the correct way to read through that?

Yes, that's absolutely correct. Yes.

All right, great. I know you guys have been through a pretty challenging period here. We look forward to seeing more positive news in the future.

This concludes today's question-and-answer session. At this time, I would like to turn the conference back over to management for additional comments.

Thank you, Cathy. We're excited about the possibilities for our future. We've made significant progress and I'm confident that as the market picks up, we'll win our fair share. Recently, the performance in the Fabrication & Services business gives me the assurance that our process improvements and consolidation activities are making a positive impact on the bottom line. But while the past year has been difficult, we're focusing our efforts on sales and growing our pipeline with opportunities where we can continue to demonstrate our commitment to our customers and deliver quality products with a "get it done" attitude. For those on the call, thanks again for your interest, and I look forward to speaking with you on our second quarter results conference call and updating you on our progress. Be safe and take care. Thank you.

And again, everyone, this does conclude today's call. We'd like to thank for again for your participation. You may now disconnect.