Gulf Island Fabrication Inc (GIFI) 2003 Q3 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Gulf Island Fabrication's third quarter earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I would now turn the conference over to Deborah Knoblock. Please, go ahead Ms. Knoblock.

I would like to welcome everyone to Gulf Island Fabrication's 2003 third quarter teleconference. Please keep in mind that any statements made in this conference that are not statements of historical fact or considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the results projected in the forward-looking statements. These factors include the timing and extended changes in the prices of Crude oil and Natural Gas. The timing of new projects and the company's ability to obtain them. And other details that are described under cautionary statement concerning forward-looking information and elsewhere in the company's 10-K filed March 27, 2003. The 10-K was included as part of the company's 2002 annual report filed with the Securities Exchange Commission earlier this year. The company assumes no obligation to update these forward-looking statements.

Today, we have Mr. Kerry Chauvin, President and CEO, and Mr. Duke Gallagher, our CFO.

Good morning everyone. This is Duke.

Going to do a quick review of the press release. Page one, second paragraph just indicates that at September 30, we had a revenue backlog of $75.5m and our labor backlog of approximately 900,000 hours remaining to work. Selected balance sheet information. You can see cash in short-term investments of $19.6m. Debt remains at zero. Shareholders equity of $105m gives us the current ratio of 2.8 to 1 and working capital of $51.7m.

Going to the second page of the press release is the income statement information. I would like to first review the third quarter ended September 30, 2003 compared to 2002. First of all the man hours of -- direct labor hours sold there in the third quarter of 2003 was 637,000 hours compared to 519,000 hours for last year's third quarter. Produced the revenue of $63.3m compared to $40.3m, which is 57% increase in revenues. Our gross profit generated was $7.3m overall this current third quarter on 11.5% of revenue compared to $6.8m of gross profit or 16.8% of revenue.

G&A expenses was $1.2m or 1.9% of revenue compared to last year's $1.1m of 2.7% of revenues. Income before taxes was $6.1m for the quarter or 9.6% of revenue, compared to last year's $5.8m of income before taxes, which equals 14.4% of revenue. Both periods, the tax rate was 34%. Our net income of $4m of 6.4% for this current quarter compared to last year's $3.8m, which equals 9.5% of revenues.

Diluted earnings per share this quarter was $0.34, last year was $0.32. Adjusted weighted average shares of a $11.9m this quarter compared to $11.8m last year's quarter. Depreciation was $1.4m, or 2.1% of revenue compared to $1.2m, which is 2.9% of revenue.

Then moving over to the nine months year-to-date information. Man hours sold so far in 2003 is 1,744,000 hours compared to last year's 1,384,000 hours. Produced a revenue of $147.5m compared to last year's $100.6m or 47% increase in revenue from last year's year-to-date. Gross profit of $17.9m or 12.1% of revenue for this year-to-date compared to last year's $13.1m or 13% of revenue, which is a 37% increase in gross profit.

D&A expense for this year-to-date was $3.6m or 2.4% of revenue compared to the last year's $3m or 3% of revenue. Income before taxes of $14.5m this year, which equals 9.8% of revenue compared to last year's $10.5m or 10.5% of revenue. Both periods, the tax rate was 34%. Net income before the cumulative effect of change in accounting principle for the current year was $9.6m or 6.5% of revenue, compared to last year's $6.9m or 6.9% of revenue. That's a 38% increase in net income.

Diluted income per share $0.81for this year compared to $0.59 last year. Adjusted weighted average share was $11.9m of this year-to-date compared to $11.8m for last year. Depreciation of $3.9m or 2.6% of revenue compared to last year's $3.4m or 3.4% of revenue.

With that review complete, we'll open up the lines of analysts to ask their questions.

Analysts sure sound pretty quiet.

Hey Kerry. This is Joe Agular. Sounds like I'll jump in.

Hi Joe.

My question, I guess is, if you could maybe talk a little bit about the gross margin in the quarter. Given with the high level of revenues, were there some pass through costs or materials running through there that -- maybe the margins are a little bit less than what you might have expected given such a strong quarter in revenue?

Yes. You are right on target, Joe.

Basically two things, our material, we bought a lot of material for a large job during the quarter. But primarily the percent margin was down because of the outside services. We had a tremendous amount of contract labor and other outside services like E and I contractors and people like that working in the facility. That really just started it.

Like I have always said when you go on a road, you see some quarters where revenues are high but our margins on a percent basis are not as good because of the high flow of outside services and materials. And that's exactly what happened.

Well, I mean it's obvious you all had your best operating profitability quarter in two or three years at least. Four years -- it's been a long time, which is the great news. I was wondering if you could also maybe kind of tie together the job that you worked off and that profitability in the quarter. Where there some jobs finished up in the quarter, or what was behind maybe the profitability that you all did report?

We did finish up some jobs, but I’ll give you a little insight. Two-thirds of August was pretty bad as far as rain. We are still in the quarter with the rain, and July was pretty bad for us, but overall we did deliver some jobs, Gunneson (ph) finally left our facility. And there were some other smaller jobs that left our facility. Gunneson was the big that everybody was watching. And that was delayed leaving our facility because of various reasons, mainly because of the offshore contractors, the installation contractors were delayed with all the loop currents that were going on in the Gulf of Mexico. So it stayed a lot longer than what we had anticipated, but it did leave during the quarter.

But that was mainly normal course of business, I would say in that quarter, where we do have smaller jackets index that they go, even the third quarter from our facility.

I don't want to put words in your mouth, but it wasn't anything really unusual. It's just a good solid quarter.

That's correct.

And just a real quick comment if you don't mind, I know what somebody else wants to ask a question here. On the backlog, obviously it went down from Q2 to Q3, but it is still at a pretty respectable level. Just generally, what should we look forward in terms of the fourth quarter, maybe you went into the first quarter next year for backlog. Do you think it will stay level with where we are today, what is your outlook for that?

You know I can't tell you much about that. We are getting some projects -- but, yeah, our backlog is healthy. We are happy with the backlog right now, it's a good sound backlog, and going forward. The market is a little -- I don't know if you call it squirmish, we don't know what there is to make of it. There is not a lot of bids outstanding, but we do have lot of prospects for next year coming and possibly deep water as well as the international scene. The shelf for us is still pretty dead. There are a few projects coming out and we're bidding them. We just hope we’re in that mix, keep our backlog at a reasonable level.

But, again, our philosophy has been not to buy backlog just to add backlog. We're going to wait and let out competitors normally beat each other up and try and get the low-priced for it And we may get our backlog down even more to where we can get a little better margin. We don't have the ego where we have to jump up and take everything.

Very good thanks.

Okay Jim.

Kerry, Duke -- this is Brent Rakers.

Hi Brent.

I was hoping maybe you could quantify some of these issues with the margins. I guess, on the material side -- I think you used to several years ago give kind of a sense of the mix of materials to labor base revenues and quarters. Could you maybe throw some number out there on that side?

Well, that's pretty tough to do, Brent. I can tell you right now, outside services are running over twice what they would normally run during the quarter period. And near the end of the project, you have a lot of electrical and instrumentation contractors. But this contract labor, we had about 400 contract laborers on the payroll for most of the quarter. We're actually down right now in the contract labor side to about 268 contract laborers at the end of the quarter, which we were down some. But we still have that problem with the contract laborer. We have gotten rid of more contract laborers during the month of October and we're hoping to do more.

As Dolphin is coming off of some of the jobs that they had during the summer, and some of their laborers become available, we are using more of a Dolphin labor to assist the Gulf Island fabrication side in getting some of these projects done. Needless to say, we have some pretty tight delivery schedules that we have to meet. And we have to use the contract labor or Dolphin's labor and even -- we're actually using some of Southport's labors to supplement Gulf Island in assisting and leading our schedules.

I know in the past you've obviously said that the contract labor on the base level is lower margin than your own employees. But there are also inefficiencies on top of that. I mean are you running into a difficulty managing this kind of subcontract labor force in the yard?

I don't think we can get Dolphin and Southport into the main yard, then we don’t have nearly the problem which we have outside. I can't get into too much detail, but basically a contract laborer, if he’s productive, costs about $5 an hour to have him on the yard. More so than they have own labor on a facility. And essentially that takes away all our profit for that particularly man-hour work, if he is productive. If he is not productive that actually costs us more in profits.

So it really is a negative feature for us. You think it would help you to get more revenue and more margins but it really cuts into our margins having contract labor and facility.

Kerry let me throw out of hypothetical. I am guessing either you didn't want to staff up for a couple projects. Or you were unable to get your labor hired for Gulf Island as permanent labor force. And maybe you can respond to that first but secondly, let's say you know six months ago if you are able to hire 400 more company employees. What do you feel like the margin percentage would have been under that type of scenario?

Well, it has been hanging lot better if we could have hired them but, yes, we are having a difficult time bringing additional labor into the payroll. We have increased our labor force. We are up to 1150 employees at this present time. We are still in a hiring mode. We are still trying to bring additional people into the payroll. And we do have aggressive training programs in place to try and bring the lesser scale personnel up to higher levels.

If we would now had the contract labor, needless to say, we would make at least $5 per man-hour more than what we are showing now. You are right, we weren't able to get it and we had some scheduling problems, some very large jobs that requires some pretty tight schedules. And the staffing up was not a slow staffing up like we would like to have seen. It was like a pretty drastic staff up to get this project done on time.

And I guess -- just three more quick questions and I’ll let somebody else to jump in. The first thing, did you miss any bonus payments in the current quarter?

Well, I don't know if any bonus payments for the current quarter -- you are talking about the past quarter.?

That was third quarter, yeah.

Yeah, we didn't have any real any bonus activity in that quarter. We missed the bonus as I mentioned on one big job because of all the rain we had.

That was during the second quarter really.

Right.

And with labor being as tight as it is, do you see any ability to start passing on some of these cost in the actual bid itself?

Yeah, we continued to try to do that Brent but that is a competitive bidding market and we have a lot of competitors out there that might look at their and see what they look like. And are probably somewhat bidding lower than we are in some of these project I would assume.

And then just last question again just to hit up on this sub-contract labor. You were essentially saying that is kind of a zero margin type of businesses -- would that will be similar than just like materials essentially being a pass-through item?

That is correct. Exactly right, Because we group materials and outside services which would include contract is coming to yard like electronic instrumentation, as well as contract labor in our cost of goods sold. But yes it would be.

Okay. Thanks a lot Kerry.

Good morning guys. Hello.

Hello.

Hi. It's Blake..

Hi. Blake (ph) .

How you guys doing?

Alright.

Great. Just wanted to get some commentary.

I know that there is being rumblings coming out of Pemex that they were going out for a pretty substantial number of platform awards. Probably numbering up to the thirty or forty. Trying to get your insight as to your participation with them, if you work with them in the past.

And then your going back to something, you mentioned briefly earlier, kind of some insight into to the international markets beyond Mexico and what might be going on regionally numbers-wise. And in terms of timing and what your looking at for '04? Kind of a broad question, but?

That’s all right, its pretty general about the market.

But basically in Mexico -- we have not participated yet in Mexico, I mean, we have in previous years provided some role goods and some various sub-fabrication parts for different contractors in Mexico -- of course, we required at this time that we would have a parent company guarantee from a US company to do that. We haven't been able, as of now, to secure a company who is willing to give us a guarantee in Mexico that we are going to get paid.

Now in Pemex, you have to understand that the first contract will go to Mexican contractors. I don’t know if that was a part of their constitution or what. But basically they have to fill up the Mexican yard before they will give work outside of Mexico. And that is in process now. The yard should be getting sufficient work within the next few months. I would perceive that we would, I say we -- the Gulf Course Fabricated -- would probably participate in that somewhere in the bidding cycle somewhere after the first of year, probably not until the second quarter. When we would see some actual bids coming out of Pemex that would allow these Gulf Course contractors to participate.

But it will be coming. I can't do anything in Mexico. It is kind of just now, that means whenever we get around to it. There is a lot of issues that they have to go through before they actually put of out bid and then settle on what contract is going to get the particular bid. So, it's a very difficult task to go through and somewhat unpredictable.

So, we are watching Mexican market. We would like to participate, but we are only going to participate if we are guaranteed getting paid by somebody. Whether it is Pemex direct, or some guaranteed at our US bank, or performance in payments bond, or some instrument that we have that we are sure of getting payment.

As far as other markets. We are very active in the Trinidad market at this point in time -- have been and hopefully we will continue in that market. We think that is a real good market for us. West Africa is somewhat sporadic. We are participating in some of the West African markets. I would assume that that probably we will continue in the future, at least we hope it does.

And that's pretty much the markets that we see that is going to be active in the near future that we can participate in. We can't participate in the Far East. We can't build here and ship into that area unless it’s living for us. The Gulf of Mexico is a lot slower right now than we thought it would be. We thought the Gulf of Mexico, with the natural gas prices being high and oil prices being at reasonable levels, that we'll see more activity in the -- especially in the Shelf.

Now, understand deep water takes a lot more money and a lot more risk. But we understand there are some projects that may be coming out with eep water in the relatively short, near-term, which I mean in the next six months.

Okay. And now, as for the shallow water market. Do you think it's more or less over for the year? Are we are going back to the budgetary process, and so it's not going to be until late first quarter next year before another real heavier round of bidding comes to fruition?

I think you're right. We are talking to the engineering firms and engineering firms are really our gauge of what we see coming out. And there are some engineering firms that are awfully slack right now. When they start to get bids, then we would probably see, in two or three months down the road, we would see some bidding activity. But right now they look pretty slack. So, I don't perceive we'll have a lot of bidding activity on the Shelf floor until probably right around the turn of the year.

Okay. And you talked a little bit about bidding activity being a little bit slack right now. Is that just in volume or is it pricing pressure, or is it a little bit of both?

I think it's in volume mainly. We just don't see the bids coming out right now as we would like to see. And it may be just a timing issue, hope it's just timing issue as the budgets come available for the E&P companies. We would hope that -- they like to normally get a jump start and start bidding some of this activity before year end and have it under fabrication at first of the year for installation in the summer of next year.

It is pretty slow right now. Of course, we're still early in the fourth quarter, so we would hope that we'd see some bid packages coming out in the next couple of months.

Great, Thanks guys.

Okay. Any other questions from the analysts? If not Jenine you can open up the line for the full audience.

Thank you sir. The question and answer session will begin at this time. If you are using a speakerphone please pickup the handset before pressing any numbers. Should you have a question, please press star one on your pushbutton telephone. If you wish to withdraw your question please press star two. Your questions will be taken in the order that they are received, please stand by for your first question. Ladies and gentlemen, as a reminder, should you have a question, please press star one at this time.

Our first question comes from JD [Padgit] with Founders Asset Management. Please state your question.

Yes, hi guys.

Hallo JD.

Question I guess really on gross margins. And what would an expectation based on the workload that you have slotted for Q4? And then when do you think that we could maybe return to kind of the historical types of margins in the mid-teens, low-teens, kind of range?

Well, a lot of our margins were low on a percentage basis because of, like I mentioned, a high level of contract labor and sub contract work in the facility. In addition to that we really got nailed hard this summer on rain activity that cut into our profitability and our margins. So, those two things were the real problems we had.

We hope to get our margin levels back up to where they are, and we are working on that pretty feverishly. If we have some reasonable whether I guess we can reduce some of that contract labor, we have a good chance of possibly getting to those levels that we were at once before.

Our industry has changed a little. It keeps changing and it's got a little different personality of it right now. But hopefully we can get back to those levels soon.

Is there a -- I mean as you sit here today and look at the workload for Q4, is there a way that you can see how the margin structure there should play out, if we have normal weather? And you are successful in maybe bring in some more permanent labor?

We are working in that direction. There is no guarantees on anything, but we sure are working in that direction to get, probably get some of the contract off the facility, because we will -- you know in Q4 we are going to have less hours to work in Q4 mainly because of the daylight days are going to go down. And can't work all your projects at night, somewhere we can work on a double shift, that’s all we can.

So, Q4 is normally going to be a little down for what you've seen in Q2 and Q3. And that's just a normal progression, same as the first quarter of next year. This past year we had a great January to work. Normally, January gets very low productivity because of the weather conditions and the short hours. Q4, we have more holidays, we shut down pretty much for about a weekend ahead at Christmas. And everybody takes a vacation time at that point in time.

So all things were playing into Q4, but we sure are trying hard to get its contract labor and get our margins back up to where they could be. The only thing that could affect it otherwise, like I said, is the ahead -- the mix on how much material hits our books, as well as outside services would put your percent down. But your dollar margin on your labor, we hope would be in good stead.

Is the Q4 mix of business more heavy toward some of that pass-through business?

Not as worth much as which we think.

Okay. Then given that there is kind of fewer hours to work in Q4, it seems like that would help you to kind of balance what you are doing more in the direction of temporary laborers – or permanent laborers. Which would help the margin percentage, right?

Well, we would hope that would be the case but it may not necessarily be the case of this. As you have less daylight hours to get there, you have more people working during the daylight hours to meet your schedules.

Okay. So there are some pressing schedules?

Yes, sir.

Okay, and then one last question. Just why was the revenue so big in Q3? That's great, but is this just timing of when your customers requested to have those projects delivered or?

That's correct. And like I said, it was when you are getting near the end of these very large projects which -- we have some very large projects in the facility. There is a lot of electrical and instrumentation, which goes -- which is an outside service we'll provide there and we have to contract that out. So there is a lot of that, a lot of quality control personnel, just a lot of timing on those particular projects. And at the same time, we are buying material for other projects. So it really get us pretty hard in the third quarter on that.

And like it was always done we don't take profits on our material on outside services. Even though we don't have built into our project, we normally assign all earnings or profits to our labor. And we don't take these earnings or recognize earnings until we are actually add value, or we've tied into the labor we put on the project, which is a little conservative way of doing it.

As I have said when I am going on the road and given talks that we would have these high revenue months. And our percent margin is going to be lower, because we just pass this material through in these outside services at no markup because we want to relate. We are really in business to sell productive labor and that's how we add value. And we only start to recognize our profits as we add value to the project. So may be 50% of the beginning of the project is material, so you would have a high spike in revenues we have to bill our customer and charge him for these material. But we don't take any profits on this material, but as we start to add the labor then we start recognizing the profits.

Okay. Thank you very much for the explanation.

Okay.

Thank you. Our next question comes from Warren Clifford with Clifford Capital Management. Please state your question.

Yes, given your strong balance sheet, are you giving any consideration to a dividend or the stock buyback?

Well, it's nothing in the mix now, we are always considering fullest investments in possible other companies. We are constantly looking at dividends and stock buyback. We have no plans at this point in time, but it's certainly something we are and will be looking at.

Okay.

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