Gulf Island Fabrication Inc (GIFI) 2004 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication, Incorporated Fourth Quarter Earnings Release Conference Call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded.

At this time, I'd like to turn the conference over to Miss Deborah Kern-Knoblock for opening remarks and introductions. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2004 Fourth Quarter Teleconference. Please keep in mind that any statements made in this conference that are not statements of historical fact are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements. These factors include the timing and extent of 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 Statements Concerning Forward-Looking Information and elsewhere in the Company's 10-K filed March 12, 2004. The 10-K was included as part of the Company's 2003 Annual Report filed with the Securities and 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. Just going to do a quick review of the press release.

First paragraph gives the net income, the revenue, and the earnings per share, which we're going to go over in more detail shortly.

Second paragraph gives our revenue backlog at $88.2m and 1.1m manhours, and this is based on work that was awarded through December 31 and through this press release date.

Selected balance sheet information -- cash and cash equivalents of 40.4m; debt remains at 0; shareholders' equity of 127m. This works out to a working capital of 75m and a current ratio of 5.7 to 1.

Going to the next page, first of all, comparing the fourth quarter of 2004 to the fourth quarter of 2003, direct labor hours worked during the quarter was 510,000 hours for 2004 quarter and 593,000 hours for the 2003 quarter.

Revenue was 45.9m, compared to 56.2m last year.

Gross profit was 5.1m for the 2004 quarter, or 11.2 percent of revenue, compared to 11.0m, or 19.6 percent of revenue.

G&A expenses was right at 1.1m, or 2.3 percent of revenue for 2004 quarter, compared to 1.6m, or 2.8 percent of revenue, for last year's quarter.

Income taxes for the 2004 quarter worked out to 31.7 percent. This was due to adjusting some of our reserves of income taxes, and last year, it was 34.3 percent of income before taxes.

Net income worked out to 2.9m for this year, equal to 6.2 percent of revenue, compared to last year at $6.2m, or 11.1 percent of revenue.

Diluted earnings per share of 23 cents for this year -- or this quarter, compared to 52 cents last year's quarter. We used adjusted weighted averaged shares of 12.3m for this quarter and 11.9m for last year's quarter.

Depreciation of 1.5m this year, compared to 1.4m last year's quarter.

Moving over to the 12-month results, direct labor hours during 2004, we worked 2,075,000 hours, and last year, that was 2,337,000 hours.

Revenue for this year, 174m, compared to 203m last year. That was about a 14-percent decrease in revenues.

Gross profit this year was 22.7m, or 13 percent of revenue, compared to last year's 28.9m at 14.2 percent of revenue.

G&A expense was -- we had reduced that down to 4.8m, equal to 2.8 percent of revenue, compared to last year's 5.2m, or 2.5 percent of revenue.

Income taxes for the annual period, both years were at 34 percent of income before taxes, bringing us down to income for 2004 of 12m, or 6.9 percent of revenue, compared to last year's 16m, or 7.8 percent of revenue; equals diluted income per share of 99 cents for this year, compared to last year's $1.33 per share. And we used adjusted weighted average shares of 12.2m shares for this year, compared to 11.9m shares for last year.

Depreciation worked out to $6,041,000 for this year, compared to $5.3m last year.

With that review being complete, we're now able to open up the lines to the analysts' questions.

Thank you, Mr. Gallagher. [Caller instructions.]

[Darren Horowitz][ph], Raymond James.

Let's first start off with backlog. I noticed at the end of Q3, when we last spoke, that you guys had hoped to work off approximately 36m in backlog, and net of any additions this quarter, it looks like you worked off right around 30m. Can you give us kind of a sense of what the expectation is for what's expected to be worked off in Q1? And, more importantly, in terms of project timing, any large projects to be worked off in the upcoming quarter?

Well, it's tough to say what's going to happen during the quarter in terms of revenues, but basically, we were down because of 2 things.

First of all, December was a very slow month for us. Our ability to get materials in on a timely manner was somewhat hampered by the mills. So some of our revenues we could've expected in the fourth quarter will probably be delayed until after the first of the year.

And some of the major projects we have in, most of the materials will be coming in towards the end of the first quarter and definitely in by the beginning of the second quarter. But this delay in materials is what really prevented us from increasing our revenues in the fourth quarter, as well as, again, not weather conditions as much as just lack of material. We slowed down our working hours to 40 hours a week rather than the normal 50- to 65-hour-a-week range.

Okay, so now I'm assuming with the delay in materials that that's not just directly related to steel, because if memory serves, you had a little bit less than $1m' worth of steel still sitting in the yard, correct?

That's correct, but some of the work we have gotten, we've had to go to the mills. I mean $1m of steel will help us on the smallest, shorter turnaround-type projects but not on the larger projects similar to, let's say, the PEMEX job that we announced we had, and of course, we have some other jobs. As you can see, our backlog went up a little. And so this material had to be ordered from the mills.

Okay, with that said, that's actually a great segue into my second question. In terms of the bidding activity and what you're hearing from PEMEX and also from areas in the Gulf of Mexico, how does that landscape look right now? I remember that the last time we had spoke, you were anticipating to get an increased amount of work from international areas and also a larger percentage from deepwater-type products -- or projects, excuse me. But with, you know, PEMEX potentially pushing things back a bit or scaling back their budget, how does that -- how has that affected the bidding climate?

Well, the bidding climate, we think, is going to improve this year because the engineering firms are now getting busy. There's some talk about several deepwater projects that should be coming about probably in the second or third quarter of this year, and we hope to participate in that.

Right now, our backlog -- as far as deepwater, it's 27 percent of our backlog, and we consider foreign projects actually 40 percent of our backlog, so we've actually increased our foreign backlog with PEMEX and some other work that we have gotten. So it looks like the foreign work is more prevalent in the marketplace, at least at this point in time. However, we do see some shelf projects and some deepwater projects from Mexico coming out for bid around the second quarter timeframe.

As it relates to Dolphin, what early indications have you gotten in terms of hurricane-related work to be coming around, you know, the tail-end of Q1 here and into Q2?

Well, we don't see that. Most of our hurricane-related work, we sent crews offshore to do that work in the third and into the fourth quarter. There's still some work to be done but not nearly as much as you might think. Most of the work now is really for the diving and pipeline companies.

As far as replacing platforms, entire platforms, we don't see that at this point in time. We're not relying on hurricane damage, and we think whatever's out there is going to be a minimal part of our future work.

Okay, great. Thanks, guys.

Okay.

Thank you, Darren.

[Caller instructions.]

[Sergio Lisnick][ph], [Stone][ph] Research.

Just a short question about the margins this quarter. It seems that you're at historic -- almost historic lows, taking out the last quarter. Do you think it's going to improve going forward? And what are the reasons for?

Well, we don't know if it's going to improve. We're bidding to have higher margins, and we sure hope they improve to higher levels than what we saw in the fourth quarter, but there's no guarantee on that. But, yeah, we'd like to get our margins higher than what they were in the fourth quarter. To do that, we have to increase our workloads and our manhours to be able to do that, and hopefully, we can possibly do that later towards the second quarter and third quarter this year, when historically we have better weather conditions to work more manhours.

Okay, so there is no -- no specific reasons, like raw materials or something else? Because like, for example, in the first and second quarter, the workload was approximately the same, but you managed to do the best in terms of margins?

Well, you have to understand, our manhours are normally down in the fourth and first quarter of the year. Sometimes, it's the bonuses that play into our -- our margins, which happened in the first quarter of 2003 that we didn't have in the fourth quarter -- I mean 2004 - didn't happen in the fourth quarter of 2004. So sometimes there's bonuses that may go for early delivery or delivering on time, and other incentives our customers will give us for particular jobs. And you normally would realize those incentives at -- right at the end of the project to make sure you met delivery. So sometimes you'll see that play into and it'll actually raise margins. I think that's what you saw in the first quarter of 2004.

Yeah, that's probably -- thank you. Thank you very much.

Okay, Sergio.

Darren Horowitz, Raymond James.

Just a follow-up question I thought I'd jump on. If we could for a minute, Duke and Kerry, let's circle back to the steel issue. If memory serves correctly, I recall that steel prices were up about 40 percent from the November '03-type timeframe. Just to kind of get a little bit more clarity in terms of the raw material that you're buying out at the mills, how much more steel was needed, and is it more of like the lower-grade-type steel? I guess what I'm trying to get a sense for is how much actual steel in terms of volume, and obviously, the related lag times, are you needing to go out to purchase in the open market?

And more importantly, I'm just trying to kind of get a sense for how available it is and if that's going to stretch out the duration of the project.

Well, we have purchase orders out for the -- in the neighborhood, and I will give you some ballpark figures. But, basically, on our larger projects, about 50 percent of those projects are -- involve the steel purchase. So if you look at some of our larger projects right now, we have about $20m' worth of steel on order with the steel mills. And these orders will be filled in the first and partly into the second quarter of 2005. So these orders should be filled rather quickly from now on, so we should be able to start increasing our manhours, is what we're hoping to do. And by the way, these orders are protected on price. We don't have any price risk on these particular orders. Most of it is high-strength steel with some mild steel mixed in, but predominantly, it's a lot of high-strength steel.

Okay, great. That actually reminds me of another question. It's more of a housekeeping issue. What were the direct labor hours worked in the quarter?

In the fourth quarter --

Yes.

-- of 2004, it was 510,000.

Okay.

And last year's, Darren, just for a reference, it's 593,000.

Okay. And just another quick housekeeping question. I noticed that SG&A was down this quarter. As a matter of fact, to the lowest point that it's been for the full year 2004. What's the appropriate type of number to run with? Is it something just over 1m, or maybe 1.2m?

Darren, in that range is where it's going to fall. I mean, you know, where -- operations at the level we're at.

Darren, consider, also, that in SG&A are the executive bonuses, and that's directly a relationship to the profitability.

Sure.

Okay, so that will fluctuate on your SG&A more than anything.

Sure, sure. I can understand that. I was going to say it's a great thing that the SG&A is down a bit, but didn't want to mention that because that might be a sore subject. Thanks, guys.

Okay.

Thank you, Darren.

[Inaudible - multiple speakers], Darren.

Joe Agular, Johnson Rice.

Quick question, I guess, on the -- going back to the fourth quarter comment on the steel delivery issue. Was that something that would've affected the bottom line at all, or were those deliveries just kind of projects that were in the early stages where you aren't booking any profit yet?

Well, we're not booking any profits, but you need that steel in to be able to put manhours in. You know, you can't work manhours without the steel. So as a result, our hours were actually down for the fourth quarter because we didn't have enough material in-house to be able to work our people a normal 50-, 55-hour work week. So that -- you know, the inability to work manhours and realize earnings on the manhours -- you remember, our percent complete? We only recognize profits as we add value or manhours to it.

Right.

So we have to get the steel in and start doing some value-added work before we can recognize any earnings. So without having the steel in-house, number one, your manhours are down; therefore, your fixed costs are still there, so your profitability is not as high as you'd like to see.

Any guess as to how many manhours you -- were, you know, affected?

That's hard to say, really. I couldn't speculate on that right now, but if you look at last year versus this year, you're looking at about, you know, 80,000 manhours' difference on what we worked last year when we had material in-house versus this year when we were struggling to get material in on a timely basis.

Do you -- a broader question, I guess. You know, your manhours overall for '04 versus '03 were coming down. Would you expect '05, you know, for the full year to be flat, up, down?

Well, that depends on what work we pick up.

Well, that's an indirect way of asking you that!

Yeah, we always hope it would be up.

Yeah.

I mean that's your goal is to try and get more, but again, we don't take work if we can't get reasonable margins. We're not going to go ahead and buy work, you know. So we trade off whether you're buying work or -- you know, we'd rather let our competitors take some of the cheaper work, and we wait and take a little higher-priced work a little later on in the year. So, you know, whatever happens in the bidding cycle's going to determine what that is.

What's the best area right now in terms of bidding activity for you all? Is it international or domestic?

Well, it has been on international, but I think we'll probably see a shift to more domestic, we hope, you know, in the next 2 quarters.

So you're optimistic that Gulf is going to return?

Well, if you look at CapEx spending on most of the oil and gas producers, most of them have increased their CapEx spending not only overseas but also in the Gulf of Mexico, so we would hope that that would relate to other projects. And in talking with the engineering firms, there are projects on the drawing board for the Gulf of Mexico, and they just -- you know, we have to wait and see if they actually materialize.

I know it's obviously way down the road, but you have to be encouraged with some of these deepwater rigs going back to work, both in the Gulf and around -- you know, around the world, too, but --

Yeah, that seems pretty exciting. You know, some people are really excited about that right now, and I guess we're hopeful ourselves that that will relate into some deepwater projects that would have like very large, you know, top sides that we've been building over the last, you know, 4 or 5 years. So that would add to our backlog if you could see some of those come out or at least get our competitors busy to where we could pick up some other projects with higher margins.

Right. And one -- just one last question. The constitution, Jack, could you give us an update on how that's progressing?

Quite well.

Okay.

Going quite well. We're running ahead of schedule, and so it's moving along quite well.

Great. Thank you very much, Kerry, Duke. Appreciate it.

Yeah.

[Neal Macketty][ph], [Red Rock Partners][ph].

Well, listen, I apologize. I jumped on a few minutes late. What -- the backlog is, you know, 82m and 1.1m manhours. It's not quite records, but, you know, a pretty decent backlog going into next year. Now, that number includes everything you got since December 31, as well?

That's correct. That's what we always reported. Backlog at December 31 and any additional work we have picked up since then.

Okay. And what is the general bidding -- you know, level of bidding activity, say, now versus where it was in February of '04?

Well, the bidding activity is a little stronger now than what we saw in '04; '04 was somewhat of an election year, and notoriously in an election year, there's not much happening as far as development in -- especially in U.S. areas. But we're seeing some uptick. The engineering firms are busy, and we are busier right now bidding some projects for delivery later in the year, especially for the Gulf of Mexico, as well as some international projects.

Has the dollar helped you guys maybe get more opportunities international than in the past?

Well, we think so, and, Neal, you might not have been on, but our foreign backlog is -- right now, it's at about 40m, and our deep -- I mean 40 percent of our backlog, not 40m. Forty percent (40%) of our backlog is foreign, and 27.4 percent of our backlog is deepwater. So you can see there's been a shift more towards the foreign activity, but normally we're running -- maybe 20-something-percent of our backlog work is foreign.

And is the majority of that PEMEX?

Well, that's one of them. There's actually some more in there, but that's one of the projects. And, of course, I can't give you the numbers because we normally don’t do that.

Right. And then, last, just on the [indiscernible], I mean there's been a lot of thought that maybe the [A&P][ph] companies were so busy trying to get their production back on that some of the major repairs would be pushed out or some of the big decisions would be pushed out. I mean is that maybe wishful thinking and it's just going to help Dolphin a little bit and there's probably a little bit more work to be done, or do you really see maybe some major -- you know, major issues in some of the contracts for bid and focus on repair, or are they focused on new projects?

Well, I think when you're talking in terms of Dolphin, you know, the repairs -- a lot of the repairs have been done.

Okay.

We're seeing offshore right now as more modifications to increased production, and that's what we're seeing on some of these projects in terms of what Dolphin's seeing. And, you know, hopefully, we'll see some more of that where maybe one platform is getting production from a sub-[seed][ph] well or another line, and they're having to increase the production equipment or have a shut-in to do some more tie-ins. And that's what we're seeing more so than hurricane damage.

Okay, great. Thanks, guys. Good job.

Okay, thank you, Neal.

Thank you now.

[Caller instructions.]

[Blake Hutchinson][ph], [Howard Wheel][ph].

You know, just a quick question, you know, more theoretically in terms of how you look at your business right now. It appears that trends are set to improve certainly year over year and have improved a little bit as of late. Is there -- when you look at your business right now, we've bumped against 1.3m manhours and about 100m of backlog late in '03, and you know, you're starting to approach that at this point. Is there a point, you know, in your purview where you -- you know, that you don’t want to go above in terms of backlog right now because you fear losing a little bit of efficiency and you either need to stretch staff? In other words, I guess I’m trying to figure out where you are utilization-wise, when you start to bump up against that, and when you need to start to see, you know, those margins really expand on the project before you decide to make that kind of incremental add to backlog.

Yeah, well, you know, increase in backlog, we're very cautious to do that, and as we increase backlog, we're going to look for projects that have better margins; you know, as our backlog goes down somewhat and our competitors take additional work. I don't think there's a level where we're going to back off. If we see some good projects with reasonable margins, we're going to go ahead and take those projects, but you know, we have to have the margins in there to do that. And, of course, there is some labor available in our area right now, so we could actually increase our labor force without too much of a problem at this point in time. You know, that may change shortly, but there is a lot of labor on the market. We have picked up some labor in the last 3 or 4 months, and specifically the last month, to get ready, but some of this work we have it coming on board late in the first quarter and in the second and third quarter of this year. So, really, we can pick up quite a bit of work. But we've also beefed up our staff positions. We have hired 3 outstanding project managers to increase our ability to do these works, and to do this work and control our work in the future. So we are expanding our staff to be able to handle a higher workload as it comes about.

Okay, so you guys are already pretty well prepared.

That's correct.

Okay. That's all I had, thanks.

Okay.

Okay.

And that concludes today's question-and-answer session. At this time, I'd like to turn the call back over to Mr. Gallagher for closing comments.

Okay, we just want to thank you all for calling in, and we'll talk to you next quarter. Thank you.

Thank you. If you'd like to access the replay for today's conference, you may dial 719-457-0820 starting at 12 noon Central today until 11:59 PM Central on February 8, 2005. Please use the passcode 216143.

That concludes today's conference call. Thank you for your participation.