Gulf Island Fabrication Inc (GIFI) 2005 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen to the Gulf Island Fabrication Inc. second-quarter earnings release conference call. All participants will be in a listen-only mode for the duration of today's presentation. This call is being recorded. At this time I would like to turn the conference over to Ms. Deborah Kern-Knoblock for opening remarks and introductions. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2005 second-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 4, 2005.

The 10-K was included as part of the Company's 2004 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. I was going to do a quick review of the press release. Te first paragraph indicates some income statement information which we're going to go over in more detail on the second page. The second paragraph indicates a revenue backlog of 86.6 million, which includes about 1.1 million man hours. Just a side note, that is about 30% of that backlog is for foreign destination and about 51% is for deep water destination.

Cash and short-term investments of about 45.6 million. Debt remains at zero. Shareholders equity at 134.3 million. That works out to a current ratio of 5.0-to-1 and a working capital of $83.2 million. The paragraph below that indicates the digital rebroadcast information and then the bottom paragraph is just a brief description of Gulf Island.

Going to page two is the quarterly and six-month information. I'm going to first review the three-month information. For 2005 second quarter we worked 640,000 man hours; generated a revenue of 55.4 million compared to last year's 41.4 million. That is about a 34% increase in revenue. Gross profit was at 8.4 million at 15.2% of revenue, compared to last year's quarter of 6.5 million at 15.7% of revenue.

G&A expense was at 1.5 million or 2.7% of revenue, compared to last year's 1.3 million or 3% of revenue. Income taxes for this quarter we used a 36.7% effective rate. That was actually to get our year-to-date up to 36%. Last year was using a 35% effective rate, which brings us down to a net income of 4.6 million or 8.2% of revenues compared to last year's 3.5 million of net income equal to 8.5% of revenues. It gives us a diluted earnings per share of $0.37 compared to last year's $0.29. We used an adjusted weighted average shares of 12.3 million shares compared to last year's 12.2 million.

And as a side note, depreciation was 1.6 million for this quarter, compared to last year's 1.5 million and dividends we paid $0.075 of this quarter and last year it was $0.05.

Moving over to the six-month information, direct labor hours year-to-date for 2005 was 1.2 million hours compared to last year's 1.1 million hours. It generated a revenue of $110 million year-to-date compared to last year's $92 million, which is about a 19% increase in revenues.

Gross profits year-to-date right at $15 million had a 13.6% margin compared to last year's $13.8 million was at a 15% margin. G&A expense of 2.9 million or 2.6% of revenue compared to last year's 2.6 million equal to 2.8% of revenues. The effective tax rate for 2005 the six months is like I said, 36%. Last year it was 35%. It gives us a diluted income per share of $0.65 for this year compared to last year's $0.62 a share. That is based on adjusted weighted average shares of 12.3 million for 2005 and 12.1 million for 2004.

Depreciation year-to-date is 3.1 million, compared to last year's 3 million and the breakdown of revenue this year was 30% for foreign destination and 20% for deep water destination. We paid dividends of $0.15 year-to-date 2005 compared to last year's $0.10 a share.

With that review complete, we will open up the calls to questions from the analysts.

(OPERATOR INSTRUCTIONS) Joe Agular, Johnson Rice & Company

Very nice quarter. I was just wondering in your backlog, it went up sequentially if there were any what you would consider to be big projects included in there? Was it still smaller type jobs?

Joe, there were some larger projects in there. This is Kerry. There were definitely some larger projects but it was a combination of both but predominantly some larger projects.

Okay, obviously we're seeing a lot of tightening up in the rig market and other kind of good leading indicators for your business. What are you hearing I guess now from the engineering companies? Is it any signs out there that you are going to see a meaningful change in your business this year or is it more you -- an '06, '07 type event at this point?

Joe, I think we're looking more towards '06 and '07. I think the engineering companies right now are beginning to do evaluations, feasibility and feed studies on projects for the future. There is not a great deal of shallow water activity out in the marketplace. We think it will be deep water but it is looking like it will be sometime in '06 most of it will come about or even '07. There will be some shallow water activity but mainly in the foreign areas such as Mexico and West Africa and those particular areas. But right now the engineering firms are just getting geared up to start some new projects.

Does it seem like more of a typical cycle to you where you are -- you are doing a great job right now putting very nice earnings on the line in the face of I guess what a lot of people in the construction industry in the Gulf of Mexico area at least -- there's not a tremendous amount of work but --.

You're right about that. It has been very competitive and it continues to be competitive. Some of our competitors don't have as much work as we have been fortunate to have this year. And as a result, some of the pricing is really depressed right now. But hopefully as some of these larger projects come out I'd say towards the end of the year and into next year, we hope to see the pricing improve.

Okay, well listen, great quarter. Thank you very much.

Darren Horowitz, Raymond James.

Along the lines of Joe's question, if we could just spend a minute talking about the bidding activity. I remember last time we spoke that you had commented the expectation for a pickup in deep water into the latter portion of this year. When you're looking at both deep water projects coming online both domestic and international, can we assume that most of this could potentially materialize into '06?

We would anticipate most of it would go into '06. That is correct. There are still a couple of projects in the '05 remain to be bid or be let, but predominantly most of it will go into '06.

Okay. Just switching gears for a minute addressing the steel issue, I remembered that you had ordered about $1 million in January and correct me if I'm wrong, you had another million of inventory. Are you going to continue to maintain about 2 million in the yard of steel?

We think so. We think it is very beneficial because there's a lot of smaller projects that are coming about that need the high strength steel that is very difficult to get. And if we have it on the ground we can enhance the delivery schedules and possibly get a little better pricing. Also even on the larger jobs even though we do have to order steel from the mills, invariably they don't deliver as they claim they are going to deliver and as a result we draw from our inventory and then replace that inventory with other steel that comes in at a later date. So it has been very beneficial for us to do that and we plan to continue that in the future.

Okay and just two quick housekeeping questions. The first on the tax rate, as Duke mentioned, up a little bit sequentially. What should we assume for '06, 35 to 36% tax rate still applicable?

I would think so, Darren. Of course that is something we look at every quarter, but we try to keep that at a level that we anticipate for at least a year out. So yes, it should remain in that range.

Okay, and finally just on the SG&A, I noticed that it ticked up a little bit this quarter up about 10% sequentially and a little over 20% versus the same quarter last year. Is it fair to assume that you are going to continue at this rate for the latter portion of '05?

A big piece of our G&A of course is our legal fees. And our legal fees have gone up during the past quarter and that is what the biggest part of it was as well as you know our bonus system for the executives are based on the pretax earnings of the Company. So a certain percent of pre-tax earnings go to paying bonus or is accrued to pay bonuses to the top executives. So therefore, SG&A will fluctuate up as the earnings go up.

Maybe in the range of, say, 1.3 to 1.5 then, or 1.6 per quarter?

That is correct, probably in that range.

Thanks, great quarter.

Sergiu Lisnic, Spelman Financial.

Congratulations on a great quarter both in terms of (technical difficulty) gross margin and now you have returned to the level of '04 and '03 and what was the reason? Because sequentially you had approximately the same level of revenues.

Basically we had of course more work in our facility. We worked more man hours. The second half of last year was pretty tough for us. We actually were not working nearly the man hours that we had gotten back up to. So our employment levels are running right now about 1150 employees, which I think in last year at this time we were down to about 1050. So we are up 100 production workers, which has increased our revenues and the amount of man hours that we're working. (multiple speakers) Does that answer your question, Sergiu, because you were kind of breaking up. I didn't know if you were asking about margins or --?

Yes, my question is about margins. What was the main factor behind the improvement in margin, specifically (ph) the recovering margins?

The main factor is when we get our man hours up a lot of your fixed cost is covered and you're going to have a higher margin because of that. Our margins will go up as our business activity increases.

Sure, sure. And in terms of revenues for the remainder of the year, do you expect to see the same level of revenues or a slight drop or a slight increase?

We don't give any forward-looking statements on that, Sergiu. We would hope we could maintain what we have, but we don't give any guidance on that. Okay?

Thanks very much and congratulations again.

(OPERATOR INSTRUCTIONS) Kenneth Townes (ph), (indiscernible) Securities.

I'm a little new to this story. You talk about lots of competition and pricing depressed and you have a pristine balance sheet. Have you thought about acquiring or starting a fabrication business in a foreign locale or an area where competition will be less intense?

Well, we're constantly looking at opportunities that may come across. We don't have any at this point in time but the Board and management is always evaluating the growth of the Company for future. And if the right situation comes about, we possibly could take advantage of it. But as of now we don't have anything specific.

Right, and how do your orders correlate with rig counts and things like that? That was kind of a simplistic question.

Historically we are actually on the end of the cycle. When drilling picks up, our business doesn't necessarily pick up immediately. Usually about a year to two years down the road is when our customers go into the development phase of these projects. Once they evaluate the amount of oil and gas they had then they will determine how they want to produce this oil and gas and what type of facilities it will require. So normally we find as drilling picks up it's normally a year, at least a year or possibly two years later in the cycle before our business really improves.

Right, thank you.

Brad Oeschlager (ph), DePrince, Race & Zollo.

Great quarter. I had one question for you. How has the strengthening dollar recently affected your ability to compete internationally?

We have been very fortunate. We are still competing. Of course the higher the dollar gets it is going to put a lot more strain on us in the future. But thus far it hasn't affected us very much. But it could in the future.

Okay, and could you run through me real quick again the backlog composition again?

Okay, that was -- let me see, I'm looking for the makeup -- it was 30% of the backlog was for foreign destination and about 51% was for deep water destination.

Okay, perfect. Thanks, great quarter.

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

Okay, we thank everybody for calling in and we will be talking to you all next quarter.

Thank you. If you would like to access the replay for today's conference, you may dial 719-457-0820 starting at 11:00 AM Central time today until 11:59 PM Central time on August 26, 2005. Please use the pass code 4872255. (OPERATOR INSTRUCTIONS) That concludes today's conference call. Thank you for joining us.