Gulf Island Fabrication Inc (GIFI) 2006 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication Incorporated second 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 Ms. Deborah Kern-Knoblock, for opening remarks and introductions. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2006 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 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. This is Duke Gallagher. We're going to review the press release quickly. The Company had a revenue backlog of $172 million, which equaled about 2.1 million man-hours at June 30th. We expect 72% of this backlog to be completed during the year 2006. This backlog was composed of 82% for Deepwater projects and 100% for the Gulf of Mexico.

Selected balance sheet information. Cash and short-term investments of 13.3 million. Debt at June 30th, was 17.2 million. The paragraph below the balance sheet information is information on the digital rebroadcast of this conference call. And then below that is a paragraph describing Gulf Island's operations.

It works out to a working capital of $70 million at the end of June and a current ratio of 3.0 to 1.

Moving on to the income statement information for the second quarter of 2006, we worked 885,000 man-hours, compared to second quarter of 2005, where we worked 641,000 man-hours.

Revenue for the 2006 quarter was right at $90 million, compared to last year's $55.4 million. We produced a gross profit of $11 million, or 12.2% of revenue, compared to last year's $8.4 million, which was 15.2% of revenue.

G&A expense of $2 million, equal to 2.3% of revenue for 2006 second quarter, compared to last year’s $1.5 million, or 2.7% of revenue.

The income tax rates for the second quarter of 2007 equals 32.7% of income before taxes. Last year that was 36.7%. We produced a diluted earnings per share of $0.43 a share compared to last year's $0.37 a share. And that's computed using an adjusted weighted average shares of 14 million shares for this quarter, compared to 12.3 million shares of last quarter.

We also have other financial information of depreciation and amortization and both quarters this year and last year, we paid dividends of $0.075 per share.

Moving on to the six-month data. For 2006, we worked 1.6 million man-hours for the six months, compared to last year's 1.2 million man-hours. Produced a revenue of $147.3 million for this year, compared to last year's $110 million.

Gross profit, produced 15.3 million of gross profit, equal to 10.4% of revenue, compared to last year's 15 million of gross profit, equal to 13.6% of revenue.

G&A expense for the six months, 4.2 million for 2006, or 2.8% of revenue, compared to last year's $2.9 million of G&A expense, equal to 2.6% of revenue.

Income tax rates for 2006, the effective rate was 32.4% for the six months of 2006, compared to last year's 36% rate.

That brings us down to a net income of $8.1 million, or 5.5% of revenue, compared to last year's 8.1 million, equal to 7.4% of revenue. It gives us a diluted income per share of $0.59 for 2006, compared to last year's $0.65, using an adjusted weighted average shares of 13.8 million shares for 2006, compared to last year's 12.3 million shares.

We also provide the other financial information. Cash dividends for both six-month periods was equal to $0.15 a share. The work performed during this six-month period was 33% for Deepwater projects and 19% for deliveries outside of the Gulf of Mexico.

That concludes the review of the earnings release. We're now going to open up the lines for questions from the analysts.

[OPERATOR INSTRUCTIONS] Joe Aguilar with Johnson Rice.

Very nice quarter. I was wondering if I could ask you a quick question on Gulf Marine? Duke, you gave the hours worked in the quarter, I was wondering if you would want to at least give how much of the hours worked came from Gulf Marine and/or a general kind of comment on how you all did financially with Gulf Marine in the quarter, was it a drag, was it a help, you know, overall?

Joe, there's going to be a lot more information coming out in the 10-Q, which should be filed tomorrow morning. But just in general, Gulf Marine did make a profit in the second quarter. It was not a drag on the Company. It was not normally the profits we would see, but they did have a profit and the details will be filed in the 10-Q in the morning.

But Gulf Marine has turned into a profitable mode in the second quarter. You want the number of employees? I can give you that.

That would be fine.

All right, number of employees total Company-wide at the end of the quarter was 1,678 and of that, 559 was attributable to Gulf Marine Fabricators.

But Kerry, having Gulf Marine contribute in the second quarter, it seems like it may be a little ahead of the schedule that you had planned. It seems like you're doing a little bit quicker integration, if you will, of the acquisition than you may be thought at the time it occurred.

That's correct. We thought we wouldn't turn a profit in Gulf Marine until after the turn of the midyear, probably until the third quarter. We were hoping to break even. But it looks like we did have a turnaround. The morale at the Company is excellent. They are in a profit mode. They want to make money. We just have to keep the man-hours up and keep the work coming in and keep the volume high enough to allow them to make money.

And there were a few projects we picked up in the second quarter that really were profitable and did help that company turn around, relatively smaller projects, but it did help on the profitability side.

Okay. If I could ask one other question, then I'll let some others jump on here. But I noticed in your commentary with regard to the backlog that it was 100% Gulf of Mexico and I think 82% Deepwater. I seem to remember you all doing some international work or at least having international work as a component of your backlog in previous quarters. Is this just sort of a transition period here and you expect that international work to show up again at some point?

Joe, yes, we worked through our international work and our deliveries to West Africa and, of course, to Mexico. So that has been completed. There are some bids outstanding for additional work in West Africa and we perceive around the 1st of the year that Mexico ought to gear-up again and have another round of projects coming out, now that the Presidential election is over. So I would assume that we could see some additional backlog--at least we hope we're going to see some, coming from other areas of the world.

And in terms of Deepwater, they are right now earmarked. We have for the Gulf of Mexico, a possibility in the next six months that it could be as many as 8 topsides bid for Deepwater. So we're looking at that. That's mainly Gulf of Mexico. So there seems to be some good projects coming out sometime in the next six to eight months.

What is your thought at least in terms of 8 topsides bid in the Gulf of Mexico market, what that would do to capacity, not only for you, but for the industry?

Well, with only 3 major players in the Deepwater and larger type projects, it seems like, you know, we hope Gulf Island would get its share of that work and that's kind of what we're looking at. And we're not necessarily looking to be the first one to take the first projects coming out, because we know the margins would probably be relatively slim at that point in time. So we hope our competitors would book up with the cheaper work and we could come in the backside and maybe get a little better margins.

Sure, but--I don't know the tonnage or anything in total, but is that--the jobs that you're describing, would that be substantial enough to maybe put most of the yards in the Gulf of Mexico working at 75% of utilization or some number like that?

Well, we're not exactly sure of the number, but I would say you're probably pretty close to it.

Anders Hove with Jefferies & Company.

Great quarter. I just wanted to ask a question about the backlog and what Management's philosophy was about the backlog? It looks like it came down a little bit. Have you guys worked through some of the projects, maybe particularly internationally? What's the outlook there?

Well, we just talked about that, but yes, we are waiting, hopefully for some other projects to come out for bid. We don't want to jump out and take the lower margin work in the beginning of an up-cycle and we think there might be a little up-cycle coming, especially in the Deepwater.

Also, normally our bidding activity is higher in the third quarter than what you would normally see in the first and second quarter. So we perceive in the third and even into the fourth quarter, the bidding activity could pick up. And that's when we would increase our backlog.

We still have a very strong backlog in terms of labor hours left to work, so we're not very concerned about the backlog at this point in time. It's pretty substantial and sufficient for us for our next two quarters.

[OPERATOR INSTRUCTIONS] Collin Gary with Raymond James.

Nice quarter. I think you all beat our estimates pretty much across the board here.

I'm sorry about that, but--.

That's all right, we'll take it. I wanted so get some clarification on your margins this quarter. It was a pretty big jump between last quarter and this quarter and kind of get a feel for what that's going to look like going forward. You know, what happened here? Was this a product of Gulf Marine turning a profit or the market outside of that being all the more robust or a combination of the two?

Well, in the first quarter we did have some losses at Gulf Marine that contributed to low margins, which we predicted. And in the second quarter, Gulf Marine, like we said, did turn a profit. There will be more information coming in the 10-Q that will be filed tomorrow morning that you can take a look at. But it was predominantly Gulf Marine, instead of the losses we had anticipated for the second quarter, actually turned a profit. And I think you'll see those numbers when the 10-Q comes out.

We still think Gulf Marine is not where they need to be. The margins aren't as large as they could be, so our margins may be a little down from what you normally see in the third and fourth quarter. But we're going to do our best to try and get them back up.

Okay. And looking at the backlog, could you quantify what percentage of that total backlog is kind of inherited Gulf Marine work that you had from the acquisition?

Probably about 25% of that, Colin.

That about does it for me. Again, a great quarter.

Herb Buchbinder with Wachovia Securities.

Can you give us an idea of what the capacity situation looks like out there, particularly with your major competitor and if it's beginning to show up in a little bit better pricing or are you still seeing the same type of pricing on the deals that you did book in the last quarter?

Herb, we're still seeing a lot of pressure on pricing, because most people have not booked up in work. So the pressure continues on the pricing. Hopefully towards the end of the year we ought to see a little relief on the pricing, but it's continuing to be very competitive. Because our competitors are not booked up with work at this point in time.

Okay, that's what I was getting at. Thank you very much.

[OPERATOR INSTRUCTIONS] Brad Evans with Heartland Funds.

It sounds like you saw a fair amount of revenue that didn't flow through backlog in the quarter. Do you see that trend continuing in the second half?

Well, that's kind of a forward-looking statement. I don't know what's going to happen, but we would sure hope we would. That's what we need to do to keep the Company going and keep the revenues and the profits up.

Okay, is there anything in, say, the month of July that would help either collaborate that or maybe make that comment not true?

Well, I really can't answer that right now. We would hope that we would pick up some more work in the near future that would keep the backlog at a relatively reasonable level to keep our labor force busy during the next, let's say, six to 12 months.

Okay. And I guess just secondarily, are you seeing any of the post-recovery hurricane activity in the Gulf of Mexico at this point, either in the bid environment or any of that activity at this point?

Well, that really doesn't affect Gulf Island's major business, because we're in new construction. There is a small amount of repair work and smaller new builds out there that we're getting our share of, but it's a relatively minor part of our business. The offshore contractors that have derrick barges and pipe lay barges are really reaping the benefits of the destruction in the Gulf of Mexico.

It really hurt our business somewhat in that the new projects coming out for new finds have been delayed, because a lot of our customers' resources have been put on the repairs and not concentrating quite as heavily on the new construction type work, which is predominantly what Gulf Island Fabrication does.

And then just lastly in terms of--it's probably hard to quantify, but in terms of dollar value of work you're bidding, could you compare the magnitude of work you're bidding internationally, versus, say, the Gulf of Mexico over the next six months?

That's difficult. I would think the Gulf of Mexico probably will be a greater amount of work that we would be bidding, specifically the Deepwater Gulf of Mexico. But you never know, some West Africa work could come up in the near future. But basically, I'd say the bulk of it will be Gulf of Mexico in Deepwater.

Colin Gary with Raymond James.

Quick follow-up. I remember coming out of the hurricanes last year, you had some problems the Houma Canal or the navigational Canal with some silt buildup and that might have affected some shipments coming in and out. Can we get a status update on that? I think last time we spoke you said that that was set to get fixed in August of this year. And is that going to have any kind of ongoing effects or has it so far in the third quarter, to your numbers?

The navigation Canal dredging is in progress on the Upper Reach. The Lower Reach, needless to say, was dredged right after the storm, but the Upper Reach to get these ships in is still not complete. In talking to the Corp of Engineers, the completion should be around mid September, after which we should be able to get those two particular vessels in to complete the integration of the decks we built onto those two vessels.

So I would think those vessels would come in around the fourth quarter, we should see them coming in. However, the dredging or lack of dredging has not affected any other project that we have had.

Joe Aguilar with Johnson Rice.

Kerry and Duke, the tough thing, as you know, that we struggle with is trying to figure out exactly how to model the Company.

I could imagine. Well, we have a tough time too.

I hear you. I guess my question is, was there anything in the quarter--I mean, did you have some job closeouts in the quarter that turned out better than you expected or anything that we should think of when we're trying to figure out maybe the third and fourth quarters of this year, what to expect?

Well, there were some projects, some short-term projects that did have better results than we anticipated with one of them having a bonus associated with it. Now whether we have that going forward, we don't know. It depends on these short-term projects, whether they materialize. If they don't, then yes, we might not have as good as what we've had in this quarter.

But you could, Kerry, right? I mean--.

There's always a possibility, but we don't have anything in hand right now.

I understand. The other moving part here I guess is Gulf Marine and would you expect the results of Gulf Marine to improve in Q3 and Q4, as you all kind of further integrate it and put your systems and incentive programs in place and so forth?

Well, we're always hoping that will happen. That's predominantly why we bought Gulf Marine, was to get them profitable first of all and then to get their margins more in the neighborhood that Gulf Island is normally accustomed to. So, that's what they pay us to do is to go out and accomplish that and hopefully we can do that in the next six months.

Okay. So, I think I hear you saying that you would expect, you know, all things being equal, that just the effect of Gulf Marine on the margin should be positive in the next couple of quarters, regardless--and then if you book more work and everything, so much the better. But the margin improvement should still show up in Q3 and Q4 from your Management team getting in place there?

Yes, we would hope so. Let me explain one thing. On work we book up in the Deepwater, probably will not hit our books or our revenues until next year, 2007, just because of the delivery schedule in the steel. What you'll see is maybe some smaller shallow water type projects would hit our books in the second half of this year. So predominantly any larger work we would pick up in the next two quarters, there would be very little revenue recognition between now and year-end.

One of the things, if I understand the situation correctly, I know at the Houma yard you all traditionally have done a great job of filling in with kind of the smaller work, some shallow water work, if you will, from time to time. Whereas my understanding was that the Gulf Marine yard did not really focus on that market segment very much and that you all may be doing that over there now?

That's correct, Joe. We are doing that. We have brought in some shallow water type projects into Gulf Marine for fill in and we'll continue to do that at Gulf Marine to try and stabilize or level-off their labor sales. So whether than have big spikes up and down, we want to get more of a level labor curve into Gulf Marine. And we are accomplishing that to some degree.

Now understanding the Tahiti project is going on, which is a pretty substantial project and that has kind of stabilized our labor force. But any additional smaller projects really enhance their ability to move projects along and get better margins.

Brad Evans with Heartland Funds.

I guess I should let a sleeping dog lie here, but I just went back to my notes from the third quarter of last year and there was--I'm paraphrasing what was said in the conference call, but there was commentary of opportunity available for work due to the hurricane destruction. You said--I think you had indicated bids were active and considerable in number and that you were seeing a lot of quick-turn work with higher margin opportunities. Did we see any of that revenue or is that just totally gone away?

You've seen some of it, but it's been very minor compared to the rest of our work.

So, is it a timing issue? Does that work eventually--?

Some evaluations on these locations in the Gulf of Mexico have changed and they are actually going to plug and abandon some of those locations, rather than build new structures and put on them.

And also, what they're looking at is maybe putting a freestanding case on up and bringing the production to another operator's platform and letting them produce for a fee. So it's substantially less than what we thought might materialize.

Okay, I appreciate that. Can you just bring us up to speed as to what you're seeing on the labor front?

Labor is a difficult front, needless to say. But we've managed to, like I said, our employment level at the end of the quarter was 1,678 employees. We're able to get labor, not freely, but a little better in South Texas than we are in Louisiana. We anticipate Louisiana might improve as FEMA starts cutting off some of these payments they've been giving some of these past employees in that area.

But also, one of our major competitors that was down substantially, is starting a hiring process, so there will be still a lot of pressure on labor. It's going to be very difficult in South Louisiana on the labor side. And there is a lot of pressure to increase the wage levels of that labor and we're starting to see that. Even though we have in most of our contracts some escalation built into it, we would hope we'd be covered on that in the next six to eight months.

I appreciate that. And then my last question I guess, I don't know if you can share this with us, but you wouldn't happen to have a dollar value of outstanding bids handy, would you?

No, we sure don't. That would be really difficult to quantify, because some bids we have are not really bids, there's budget estimates and some may or not be real projects. So it's very difficult for us to come up with that number. I think it would be somewhat misleading.

Do you think there's a chance in the next six to eight months that there would be a psychological shift in the marketplace that would, I guess favor you in that there might be a perception of scarcity of shipyard capacity?

Well, I don't think at this point in time that's happening, but it is always a possibility that it could happen and someone may want to negotiate on it. We've seen that in the past, but we haven't had any indications of that at this point in time.

There are no further questions standing by at this time. And this does conclude 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 appreciate you all calling in and we'll talk to you next quarter. Thank you.

Thank you. If you would like to access the replay for today's conference, you may dial 719-457-0820 or 888-203-1112. This will begin at 12:00 p.m. Central Time today and will end at midnight Central Time on May 25th. Please use pass code 2416235 to access the replay. That does conclude today's conference call. Thank you for your participation.