Gulf Island Fabrication Inc (GIFI) 2006 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication Incorporated first 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 would like to turn the conference over to your host, Ms. Deborah Kern-Knoblock. Please go ahead, ma’am.

I would like to welcome everyone to Gulf Island Fabrication's 2006 first-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 the 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 15, 2006.

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 obligations to update these forward-looking statements.

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

Good morning everyone. We're going to review the press release quickly. First three paragraphs are income statement information, which I’ll review in more detail shortly. The fourth paragraph is the backlog information, which indicates the revenue backlog of $230 million, 2.7 million man-hours remaining to work.

We expect to complete 83% of this backlog during 2006. 79% of this backlog is made up of projects for deepwater destinations and 5% for foreign destinations.

Selected balance sheet information. Cash and short-term investments at March 31st was about $5.5 million. Debt was at $19 million. Working capital $65.8 million. Gives us a current ratio of 3.6 to 1.

Right below that is the conference call and webcast information. And then a brief description of Gulf Island.

Moving on to the income statement information for the first quarter of 2006 compared to the first quarter of 2005. Gulf Island worked 686,000 man hours in the first quarter of 2006. 98,000 of those man hours were performed by Gulf Marine Fabricators, the company that we acquired on January 31st. So all this information is about 2 months of operations for Gulf Marine.

Revenues totaled $57.4 million, compared to last year’s $54.2 million. 9.6% of the revenue in the first quarter of 2006 was Gulf Marine Fabricators.

Gross profit of $4.4 million consolidated, compared to last year’s $6.5 million. Gulf Marine had a $217,000 loss at the gross profit level for their 2 months of operations.

G&A expense of $2.2 million, compared to last year’s $1.4 million. Included in the current quarter’s G&A was $658,000 of G&A expense from Gulf Marine.

Moving down to other income, that $983,000 was the sale of Gulf Island’s interest in MinDOC. That resulted in that $983,000 gain on that sale.

Income taxes for the current quarter, our effective income tax rate is 32%, compared to last year’s 35% effective rate. That gives us a net income of $2.2 million for the first quarter of 2006, compared to $3.5 million first quarter of 2005.

Included in that consolidated net income of 2006 was about $650,000 of loss from the Gulf Marine operations.

That brings us down to a diluted income per share of $0.16, compared to last year’s $0.28. Based on an adjusted weighted average shares of 13.5 million, compared to last year’s 12.3 million.

Depreciation and amortization was $2.9 million for this year’s quarter, compared to last year’s $1.6 million. Included in that was $1.3 million of depreciation from Gulf Marine.

And then for that quarter of 2006, about 30% of the work was for deepwater projects and 16% was for foreign projects.

One other thing to point out is that in 2006, we’ve started expensing stock options expense, and that was $163,000 that was included in G&A for the 2006 quarter, but of course was not included in the 2005 quarter.

That concludes the review of the press release. We will now open the call up questions from the analysts.

[OPERATOR INSTRUCTIONS] Colin Jerry from Raymond James.

Last quarter you mentioned that you were having problems with the Houma Canal getting some of your shipments in. I was wondering if you could give us an update on the status of that?

About 3 days ago, the Corp accepted bids for the Houma Nav, the Upland Reach. The Lower Reach has already been dredged, but the Upland Reach has not been dredged. They received bids. The [Mo] bid is almost $4 million. The Corp has issued a notice to proceed to that particular contractor and should be on location within 5 days. So either today or tomorrow they should be on location, commencing the dredging, which should take, we estimate, until about the end of August. At that point in time, the entire canal should be sufficient, if we don’t get any additional storms.

Okay. And when we’re looking at backlog of $230 million, could you give us the breakdown of what Gulf Marine’s contribution to that was?

Yes, sir, I can give it to you. I’ve got it here. It was about $80 million of that number and it’s all for deepwater projects.

[OPERATOR INSTRUCTIONS] Brad Evans from Heartland Advisors.

I was curious if you could just give us a brief overview of what you’re seeing in terms of current RFP and bid environment at this point?

The bid environment is pretty good right now, not excellent. But we do have some bids in the house. We’re starting to see more deepwater bids coming around the second and third quarter of this year. There are several projects destined for the Gulf of Mexico and West Africa that we will be looking at. But by and large, we’re starting to see even some of the projects from the storm damage, a few of them, in the shallow water.

So the bid activity is there right now. I think it will improve probably towards the third quarter. But it’s pretty good level right now.

I’m sorry, so the current backlog does not reflect much in the way of work that has been booked associated with the Katrina/Rita--?

A very small percentage of that would be storm damage.

Could you characterize the pricing environment? Are you starting to see some improved, maybe, rationality with respect to pricing at this point?

Pricing is still somewhat depressed. We haven’t seen an increase in it, because some of our competitors still have some capacity to fill up. So we haven’t seen a significant increasing in the pricing yet. But we anticipate, of course, as costs go up – needless to say, labor cost is going to go up. Our production supplies cost has gone up, as well as our steel. We should see some increases in prices. But there may be some squeeze in margins on that, but we sincerely hope that we can maintain some reasonable margins as we go into the second and third quarter.

Could you just talk about your ability to meet your labor requirements at this point? I know that had been an issue with respect to the draw in labor from FEMA and others and after the hurricanes.

Well, needless to say, that’s continuing to be a real problem for everyone, especially in Louisiana. In Texas we’ve been a lot more aggressive in hiring people in south Texas. We’ve actually built our workforce in south Texas to close to 500 people. Whereas in Houma and Louisiana, we’re about 1,100 personnel.

We’re trying to build that up, but it’s been very difficult to do at this point in time. But we hope, as some of this storm damage and refinery work tapers off in the near future, we should be able to pick some other people up. But until then, we will rely on possibly bringing in contract labor, probably from overseas to assist in some of our projects that we have under contract.

Michael Marino from Johnson Rice.

Actually, it’s Michael Marino filling in. My question was, as it relates to the Gulf Marine yard, now that it’s been closed and you all go in there and kind of get a better look around, is everything kind of as expected that y’all are finding? I guess especially too with the Tahiti project in there.

Yes, Michael. Everything is just about like we expected. We haven’t had any real hiccups. In fact, they’re doing better than we anticipated, right now. The attitude and the morale down at Gulf Marine is very good. The employees are really motivated. Our hiring is increasing down in that area. We are picking up some additional work at Gulf Marine, and we hope to get their labor up to around 700 employees some time in the third quarter.

I’m sorry, I meant to say the acquisition was closed, not that the yard was closed. My other question relates to MinDOC. I’m assuming that’s something you all felt the need to sell following the acquisition of the deepwater yard, so you didn’t necessarily need that? Is that the right way to think about that?

No, Michael, basically, we have not aggressively marketed MinDOC. We haven’t spent the $5 to $10 million to really market that particular concept. And as a result, our partner felt that he could market it better if he owned 100% of the technology. So our decision was to sell him the technology, at which time we would get an opportunity, if he had a contract to build one, we would get an opportunity to bid on the actual fabrication of that particular structure. And that’s what we wanted anyway, was to have the ability to fabricate it. And he can actually market it to some of our competitors who have a total epic contracting philosophy. So we needed to free him up to go out and pursue that particular method of marketing his product.

Okay. And what was the sale price on that?

It was right at $1 million.

Brad Evans from Heartland.

Just to be clear then, the Gulf Island backlog would have been about $150 million versus about $115 million at the fourth quarter, is that correct?

At the fourth quarter or the end of March? Let me correct something that was misstated. We had $112 million backlog in Gulf Marine, not $80 million, at the end of March. Gulf Marine’s backlog was $112 million.

Okay. That would still imply that the Gulf Island backlog would have been up about $4 or $5 million sequentially?

That’s correct.

Okay. And could you give us a sense of where backlog is today?

Well, we only give it at the end of the quarter. We give it at the end of the quarter and any subsequent work that we have picked up, until, actually yesterday, is included in our backlog. So it is current.

Needless to say, you would expect backlog to continue to build from this level?

Well, we’re not going to buy a backlog just to have backlog. We’re going to try and get our pricing and our margins up. So it may dip some and we’re not concerned about that. But when it makes sense, we will increase our backlog.

Any thoughts on capital spending for 2006 at this point? And what was CapEx in the first quarter, if you don’t mind?

CapEx was $5 million in the first quarter. The budgeted CapEx for this year is $36 million. We’ve already spent about $3 million of that.

Okay. And do you have a forecast for where you might see the debt structure at the end of the year, at this point, what type of target level of that you might see?

We expect it, over the period of – of course, the primary cost to the debt was the purchase of Gulf Marine. We incurred $12 million of debt for that acquisition. We expect as Gulf Marine comes on operations, fully operational and becomes profitable during the third and fourth quarter, that we will be paying down on that debt. So expect it to come down substantially from that $19 million.

Let me correct something on capital. We expect to spend about $22.2 million, is what our projection is. If work permits and increases substantially, we have an option to increase that CapEx to $36 million.

And roughly, where is that capital being spent, in terms of what are the primary uses of that capital?

Well, we’re spending $12 million on 3 large cranes that we’re purchasing for Gulf Marine. The rest of it is pretty much normal capital that we spend replacing equipment, upgrades, things of that nature. So the rest would be more normal. But $12 million of it is pretty much dedicated to these cranes.

So just to be clear then, it sounds like you’re forecasting, despite the higher CapEx budget, that you’d still be generating some amount of free cash flow, which you’d be utilizing to pay down debt, is that correct?

Yes, sir.

[OPERATOR INSTRUCTIONS] Brad Evans from Heartland.

I appreciate your taking the questions. With respect to the bidding on the deepwater work, do you find the pricing pressures or the absence of what you’d consider appropriate pricing to be a little bit better in that market? That’s a poor way to ask the question, I guess. Are the pricing pressures diminished in the deepwater work that you’re bidding on, I guess is the question?

Well, it always has been a better margin in the deepwater projects. That’s why we have brought our Company more into that arena. When you get in the real shallow water, you have a lot more competitors and small type operations that really suppress the pricing in the real shallow water areas.

So our focus over the last 6 or 7 years has been to be more of a player in the deepwater arena, where you have larger projects and hopefully better margins.

And what can you tell me about what you’re seeing from international bid opportunities at this point?

There are some coming up. We’re not actively engaged in a real onslaught of them right now, but we do project some international bids coming out in the second and third quarter this year.

Herb Buchbinder from Wachovia Securities.

Kerry, can you tell us, were there any larger jobs booked in this first quarter and can you give us the status of McDermott’s yard, if they’ve actually started to book some business? Which would certainly help eat up some of that capacity that’s out there.

We haven’t had any abnormally large jobs. It’s all jobs that have been [ward] in the normal course of business. Usually we use a break-off of $20 million and we’ll do a press release. So needless to say, everything was under that dollar value. So it’s really just ongoing business, smaller type projects that we’ve been booking.

As far as McDermott, I really can’t speak about too much. I hate to get into our competitors. The only thing I do understand that they are actively bidding in our marketplace and can use some work. I don’t know their employment levels at this point in time, but I know it is fairly low.

The West Africa job is for Gulf Marine, is that correct?

Well, it’s a possibility it could be for both of our companies.

And the timing of some of these larger jobs that are out there, is it third quarter?

Yes, third quarter is when we’ll probably see them and possibly a ward either late at the end of the third quarter or the beginning of the fourth quarter.

If you look at the chances of much of an increase in the backlog in the second quarter, we probably shouldn’t look for too much, would that be a fair statement?

Well, I really don’t know about that right now. I can’t really make a statement of that sort. The only thing I can say is that we’re not going to price jobs just to increase our backlog. We’re going to really be focused on trying to get our margins and keep our margins up.

Joe Aguilar from Johnson Rice.

This is actually Joe this time. I had a question I wanted to ask you and it may be hard to sort of frame it. But, I’m kind of curious to find out if any of your customers or any other oil companies out there, even some that you may not have done work for in the past, have started thinking far enough ahead to be concerned with yard availability?

Obviously, the whole industry, kind of at the drill bit and the drilling rig level is stretched to capacity and beyond and you’re adding offshore rigs, I guess 70 of them or so. I know fabrication yards in the Middle East and Southeast Asia are starting to book up almost to being full. It just seems inevitable almost, that eventually there is going to be so much fabrication work with all this drilling, that oil companies, just as they got squeezed on drilling rigs, have to be concerned that they might get squeezed on yard capacity.

And I was just wondering if there has been anybody, any customers out there at all that may have come to you to try to lockup yard space farther out into the future, you know, whether it’s a year from now or 2 years from now? They don’t know exactly what they’re going to be doing, but they know they’re going to have some projects that they need to start on.

Joe, that’s a great theory. I wish that was happening. But we haven’t seen it, except in some rare instances where – of course, we’re getting a lot of questionnaires as to our booking of our yards in the future. So we are getting a lot of inquiries on that, but we haven’t had anybody come forward and actually take that initiative and try and book yard space.

We have gotten phone calls that, look, if you’re looking at booking a big job, give us a call, we want to talk to you. But there’s nothing serious at this point in time.

It seems like maybe they wouldn’t necessarily be moving on that at this time, but it has to be something that they’re at least – if they’re thinking far enough ahead, would realize might be an issue.

I agree with you, but it hadn’t happened yet. But we sure hope it’s coming.

And also, from your standpoint, obviously, you have to sort of figure out what the strategy is going to be too. If you think that you’re going to have a substantial amount of work at some point, how and when you book your yard anyway. So, you know they may want to do it and it may not be something that you guys want to do.

Well, that’s correct. And we’ve always had the theory of not letting any customer having any more than about 40% of our capacity, so we don’t tie ourselves in just with one client and lose the rest of our customer base.

If that situation happens, we’re going to be analyzing it in depth to make sure we do it properly.

Now that y’all have the Gulf Marine yard under management, have you all figured out if there is any meaningful way to change the capacity of that yard, either from finding some efficiencies or the layout or whatever, beyond what you might have thought going into the deal?

Yes. We have redirected Gulf Marine into doing things that they weren’t accustomed to doing in the past. One for instance is taking on smaller projects at that facility, which they haven’t been bidding or very competitive on smaller projects, to try and stabilize the labor force.

We’re also incorporating a lot of ongoing contracts and agreements that Gulf Island had with vendors, to reduce the cost on certain items. One for instance is welding supplies. We decreased their welding supply costs by somewhere in the neighborhood of about 40 or 50%. So we’re looking at that. We’re doing a lot of things different than what they were doing and we’re getting our procedures implemented. And like I said before, we probably should see the effects of that probably around midyear.

Brad Evans.

I missed what percentage of the current backlog should be run off in the next 12 months or by the end of the year?

It was 83%, Brad.

I know that pricing and utilization are kind of moving targets at this point, but relative to where we are in the cycle for your business, do you feel that you have an opportunity to either meet or exceed the peak operating margin you achieved back in 1998 as the cycle unfolds?

Well, 1998 was a very unusual year for us. I mean, people were throwing work at us and price was not a consideration. I don’t know if our customers are going to go through that mode again.

Again, there will be a lot of pressures on the cost-side of our business, because of fuel costs going up, steel pricing, including welding supplies, production supplies, and labor costs going up, because of the demand for labor.

So we would certainly try to get to those levels, but there are a lot of obstacles in our way. If we can get to those levels, we’re sure going to give it a heck of a try.

It appears we have no further questions at this time, but I would like to give everybody another opportunity. [OPERATOR INSTRUCTIONS]

Okay, if there are no other questions, I guess we’ll close the conference call.

Thank you all.

Thank you. This concludes today’s conference. If you would like to access the replay for today’s conference, you may dial 719-457-0820 or 888-203-1112, beginning at 12:00 noon Central Time today, until May 25th. Please use pass code 6455288 to access the replay.