Gulf Island Fabrication Inc (GIFI) 2006 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Gulf Island Fabrication, Incorporated third quarter 2006 earnings release conference call. All participants are currently in a listen-only mode for the duration of the presentation. Just a reminder that today's conference is being recorded, and at this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Deborah Knoblock. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrications' 2006 third 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 statements and elsewhere in the company's 10-K filed March 15, 2006. The 10-K was included as part of the company's 2005 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. I want to review the press release quickly. Of course, the first paragraph describes the net income and revenues, which we're going to go over in more detail on page two. Second paragraph indicates that we have a backlog of $417.3 million going into the fourth quarter. The years of completion for that backlog is 18% throughout the remainder of this year, 61% for 2007, and 21% of that backlog will be completed in 2008.

The backlog is also composed of 95% for deepwater projects and then 40% for foreign projects, and just the overlap, all the foreign projects are for deepwater locations. And also, the backlog includes 3.8 million man-hours remaining to work.

Selected balance sheet information. Cash and short-term investments of $6.3 million, debt has been brought down to zero from the prior quarter. It gives us a working capital of $50.7 million and a current ratio of 2.4 to 1. Right below that is the information for a webcast, a digital rebroadcast, and then below that is Gulf Island's profile.

Moving on to page two, which is the income statement information. We first compare the third quarter of 2006 to the same quarter of 2005. In 2006, we worked 913,000 man-hours for the quarter, compared to last year's 535,000 man-hours. We produced $90.5 million of revenue, compared to last year's $37.5 million of revenue, and it produced a gross profit of $7.6 million, or 19.5% of revenue.

Included in that cost of revenue is lower than historical pass-through cost material, which is part of the reason for such a large increase in our gross profit margin. And then last year's gross profit was $4.6 million at 12.3% of revenue.

G&A expenses of $2.6 million for this year, or 2.9% of revenue, compared to $1.5 million, or 4% of revenue, for last year. Income tax rate for this quarter, the effective rate was 30.2% of income before taxes. Last year, that was 36% of income before taxes. It brings us down to a net income of $10.5 million, or 11.6% of revenue, compared to last year's $2.2 million, or 5.9% of revenue. It gives us a diluted earnings per share of $0.75 per share for this quarter, compared to last year's $0.18 per share. Dividends of $0.075 for both the quarters, and depreciation for this year was $3.1 million, and also an amortization of some intangibles of $233,000 for 2006's quarter, compared to last year's $1.6 million of depreciation.

Moving on to the nine month information, for the first nine months of 2006, we worked 2.5 million man-hours, compared to last year's 1.7 million man-hours. Produced a revenue of $237 million, compared to last year's $147 million. Gross profit at the -- about $33 million, or 13.9% of revenue, compared to last year's $19.5 million, or 13.3% of revenue. G&A costs of $6.8 million for the nine months of this year, compared to last year's $4.4 million. Income tax rate for this year, the effective rate is 31.2%, compared to last year's 36%. It brings us down to a net income of $18.6 million, or 7.8% of revenue, compared to last year's $10.3 million, which is 7% of revenue. Our earnings per share for this year, diluted, is $1.34 per share, compared to last year's $0.83 a share for the nine months.

This period, we used 13.9 million shares, just the weighted average shares, compared to last year's 12.4 million weighted average shares. Dividends of $0.225 for the first nine months of this year, and it was the same last year. Depreciation YTD, $8.6 million, compared to last year's $4.7 million, and the amortization is $622,000 for 2006, with no amortization last year. And another note is, for the nine-month period, 33% of our revenue was derived from deepwater projects, and 19% was derived from projects for foreign destinations.

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

Thank you, Mr. Gallagher. [Operator Instructions] We will go first to Joe Agular with Johnson Rice.

Good morning, Joe.

Hey, good morning. Congratulations on a really nice quarter there.

Well, thank you.

Thank you.

I was wondering, you mentioned that there were not a lot of pass-through revenues and that sort of made your margins look better. Was there a high amount of job completions in the quarter, or was it sort of just normal?

Yes, Joe, there was. Typically, we deliver quite a few jobs in the third quarter. The reason the earnings were so high -- several reasons, but it seems like everything went right for us in the quarter. The weather was good, there was no hurricanes, all the material was onsite, so we didn't have any delays in working some of our projects, so everything just clicked for us and worked real well, where normally that's not the case. We also had a couple of projects that had small bonuses that we received from our customers.

So with all this in mind, the percent margins were higher than what we anticipated. But in terms of dollar margins, of course, they're higher also, but with everything going right for us during the quarter, it really showed.

Did you give the number of man-hours worked in the quarter?

Yes, sir.

I'm sorry, I missed that.

Yes. Joe, for the 2006 quarter, it was 913,000 hours, and for last year it was 535,000.

Okay. And when you look at the backlog that you all gave in terms of man-hours, I guess 3.8 million, Kerry, what's a comfortable level right now that you all think you can handle company-wide with the two yards, sort of on an annual basis?

Joe, our answer is most of our presentations have been from 3.5 to 4 million man-hours on an annual basis. Of course, if things go right, we could increase that. But basically what we've told the market in most of our presentations is 3.5 to 4 million man-hours a year.

Okay. So when you look at the 3.8 million and you're saying 60% of that, roughly 61%, is for '07, that's -- you still have some room left to book work for '07. Is that right?

That's correct, Joe, and we are seeking more work. I mean, we're not totally booked. And again, we're looking to increase our employment. Right now, we have about 300 contract skilled craftsmen on the facility that we would like to replace with our own employees, so we're actually looking at increasing our employment level somewhat. We don't know exactly how much at this point in time, but we are seeking additional work, we are bidding work, we are talking to customers about potential work for 2007 and 2008. In fact, we are talking to some about a little work here in 2006, also.

Okay. That's great. And one other thing: I know there's been some discussion of sort of nontraditional - you know, the petrochemical type work making its way into some of the yards; do you have any update on that?

Well, that's still ongoing, Joe. We're still dealing with that. A lot of that work has not been put in the marketplace yet. We think it's coming in the very near future. But one thing I failed to mention, too, is we have what we call somewhat nontraditional work, which is some dockside work that really helped us in the third quarter. So that really helped us, in addition to all the other things I mentioned, to get the profit levels up.

Okay, great. Thank you very much, Kerry.

Okay, Joe.

Thank you. Moving on, we'll go next to [Colin Jerry] with Raymond James.

Good morning, Colin.

Good morning. Great quarter, guys.

Thank you.

Thank you.

Just to hone in on the margin issue a little bit further. You all talked a little bit about that, but I guess -- am I reading this right, that going forward, this isn't necessarily the best-case scenario, but it may be approaching that level, in that you shouldn't see too much growth beyond the margin that we're seeing this quarter?

Well, the margins were based on, like I said, everything going exactly right. I mean, no delays on material and everything clicking, good weather conditions. Third quarter, traditionally over the years, has been when we have worked the most man-hours during any particular period. We don't have as much seasonality and many holidays as you do during Christmas and the beginning of the year, so that normally - or , historically it's not always the case, but it usually indicates our best quarter is normally our third quarter.

Okay. And I guess I want to go back to the last quarter. You had mentioned that in the Gulf of Mexico, there are about eight topside projects that you all saw out there in the market, and looking at the big backlog we saw this quarter, are some of those been awarded? And I guess just what's the overall outlook there in the Gulf of Mexico now? What's the update?

Out of the eight, we know of four that have been awarded, so there are still four additional projects out there. We are in discussions on the possibility, but looking at them, one may be delayed. We're not necessarily sure. But we are still in discussions on some of those projects, and we do still have the capacity to do some of that work.

Okay. Sounds good. Great quarter, guys.

Thank you.

All right, thank you.

[Operator Instructions] Moving on, we'll go next to Brad Evans with Heartland.

Hey, Brad.

Good morning. My hat's off to you guys. Nice quarter. Nice execution.

Thank you. Appreciate it.

Just as a -- I guess kind of a dovetail on that last question. I guess I was just hoping for maybe a more in-depth discussion of kind of what you're seeing out there from an RFP or a bid perspective in terms of the flow of opportunity, both in the Gulf of Mexico as well as international.

Well, the Gulf of Mexico is deepwater; it's probably going to be the most active for us in the next six to eight months because of the projects coming out. We will see some international work, but not as many big projects as we're seeing basically in the Gulf of Mexico. There is one we hope to bid for the North Sea, and that should be coming out in the very near future, and there are some additional projects for West Africa. We think that Mexico probably will be somewhat dormant in the next six months as they transition to their new government, but we still foresee West Africa and possibly some of the North Sea structures coming into play. But the big source for us is going to be the Gulf of Mexico deepwater.

And I'm sorry, of the four topsides that have been awarded in the Gulf of Mexico, how many of those have you been awarded, if any?

We have been awarded one.

Okay, one of the four. Okay. Thank you very much, and congratulations.

Thank you.

You're welcome, Brad.

We'll take our next question today from [Tim Adler] with JPMorgan.

Good morning.

Hey, Tim.

I was just wondering if you could share your observations on the, I guess, fabrication marketplace in light of what appears to be a little more work that's now coming on with J. Ray McDermott.

Well, we can't speak for J. Ray McDermott too much. I don't want to get into their business. All I know is that they are in a hiring mode. I don't know exactly what work they have awarded, but it can be a problem for us on the cost side, as far as the labor costs, as they try and gear up and increase their levels of craftsmen in their facility. And that's one thing I think we'll see in the next -- starting in 2007, there's going to be tremendous pressure on the cost side of our projects, especially on the labor and the welding supplies and things of that nature, and we'll have to take a look at that pretty close. We do have escalation built into our projects for the labor and the steel costs, but there are other costs associated that could go beyond what we may be anticipating for the next year.

But to the extent that they have any work versus having had an empty yard, I guess, last time I spoke with you, shouldn't that be a positive just in terms of tightness of supply available for application capacity and be a positive for your pricing and your ability to contract additional work?

Well, we hope so, but of course, I can't speak for McDermott and how they're going to price future work. We'll just have to wait and see. We're going to keep our pricing at a level that we feel comfortable with, and we just can't say how they're going to bid their projects.

Right. Okay. Well, that's it for me. Thank you.

Okay. Thanks, Tim.

Thanks, Tim.

[Operator Instructions] We'll go next to [Dan Sulfer] with Wachovia.

Good morning.

Good morning to you. Couple of questions. One, your tax rate was better this year. Could you comment on the reasons and maybe what you expect for next year?

Well, it's going to be more in line with this going forward, and what's happened there is there's been some changes to the Louisiana Tax Code, which has helped us out, and then also there were some changes due to the federal - because of the hurricane season. So we anticipate this rate going forward.

Okay, so low 30s, 31, something like that?

Yes, sir.

Okay. All right. The other thing, you talked about replacing some contract labor with your own employees, and I know there's been a constrained labor pool in your part of the world down there. Do you think those employees are out there? Can you attract them? And if so, is it going to mean a lower labor cost for you?

Well, we sure hope we can attract them. We have taken some steps that -- to make it more attractive. We have increased our labor rates that we actually pay our skilled laborers. We have active recruiting programs going on. We're trying to bring in prior employees back into our fold, and we are being somewhat successful in that, but it's not an easy process and it takes a while. But we also have training programs going on to try and bring in younger employees into the mix basically as helpers and train them to where they will become skilled laborers in the future.

It's not an easy process; it's more of a long-term process, but we're very active in trying to attract the labor. And we're also looking at the possibility of bringing in foreign labor into the U.S. on some visas and housing them, maybe starting in the second quarter of next year, if we can't find enough employees here in the United States.

But with the labor escalation clause in your contracts, maybe you don't get as much benefit as you might otherwise? Is that the way I hear it?

Well, we're concerned about it. We do have labor escalation clauses, but it could go beyond what we've projected as what we think the labor escalation will be. And that's a little unknown, but we do have some clauses that protect us.

Okay. Well, keep up the good work.

Okay. Thank you.

We'll go back to Mr. Agular with a follow-up question.

Thanks. Kerry, I want -- I know you all are sort of right now at about a 3.6 million annual man-hour rate, given what you worked in the quarter. And I'm wondering sort of from a space capacity standpoint, how many man-hours you think you could get to if you could add the people?

Well, in an ideal situation -- I mean, the facilities we have could support 5 million man-hours easy or 6 million man-hours, but it's just the ability to get the people and to get the proper work in with the proper margins. Facility-wise, we have a lot of capacity left, but in terms of our resources and people, it's limiting us at this point in time.

And are you all doing anything to address that? I mean, is there enough potential work out there where you might have to try to do something like that?

Joe, that's an ongoing assessment. We're constantly looking at that, but a lot of people have expanded too quickly and they've lost their shirt on expanding too fast. You have to be able to control your organization and make sure you're working and supervising these people as you go forward. Something like this can get away from you rather quickly if you don't have the organization in place to make sure you have a controlled, steady growth rather than a fast increase growth.

And I know you all -- and I totally agree with the notion of not necessarily wanting to discuss the Texas versus Louisiana yard -- but is it fair to assume that the integration of that yard as gone very well in this quarter, sort of shows that you've kind of established your -- where you wanted to get to with that yard?

I think we're getting there. We're not totally there, Joe, but we're getting there, and we showed a big improvement in the second quarter from the first, and again the third quarter was a big improvement. And we're going to continually improve that facility and work them so they can be as profitable as we think they can be. And it's going quite well. I have to take my hats off to the people in South Texas. They are really excellent workers; good supervision. We have been more than pleased than what we had [thought] down there as far as facilities and especially the people. I can't say too much about those people because they are really fantastic and good workers.

That's great. It sounds like there may even be a little bit more upside left there.

As well as our workers in Louisiana. They're also producing quite well for us. So all in all, we have a very well-motivated workforce throughout all our facilities, and we're very happy with that.

Well, they obviously did a great job here this quarter for sure.

They did, Joe.

Thanks a lot.

All right. Thank you.

Okay, bye.

And we'll go back to Brad Evans.

Just a follow up on Joe's question there. I mean, with the success you've had with Gulf Marine, do you think you guys might be looking for additional acquisitions, or do you feel like your footprint right now is pretty solid?

Well, you always have to be looking. Right now, we don't have anything active. I'll tell you that right now, but you always have to be looking. We're not going out searching for acquisitions at this point in time, and I guess our strategy has always been if we see an opportunity that is priced right and we feel fits into our strategy and our organization, then we'll take a look at it. And that's kind of like what we've said all along. It took us a long time before we could get a facility like Gulf Marine. I think it's been a big challenge for our management and our organization. I think our management stepped to the plate and took care of things. But we'll just have to wait and see what happens going forward.

I know you guys haven't been historically in the business of giving guidance, but considering the breadth of the backlog at this point, going into '07, do you think you might be able to sometime in the future give us guidance on '07, or is that something you don't anticipate doing?

No, that's something we don't anticipate doing. I guess our feeling is if we give guidance -- and I see so many people changing guidance as the quarter goes, that doesn't really make sense. So rather than give you guidance, I think you all have some pretty good models, but just understand that there will be a lot of pressure on the cost side of the equation going forward, whether it's labor, welding supplies and everything else that we have. We've had a good quarter, but we have other quarters where we have seasonality and other things that play into the mix.

I'm just -- I guess just to be consistent from the last conference, and the last few, I guess, Kerry, have you seen any activity in the Gulf of Mexico that would be associated with post-Katrina and Rita reparation activity?

Most of that is complete. We didn't get a lot of work out of that, other than our little subsidiary, Dolphin, that has crews that work offshore. We're still seeing a small amount of that, but it's a relatively small amount for our operation. Almost all of what we're seeing is new construction and new projects.

Okay. And then my last question. Just paraphrasing, I guess, looking at my notes from the second quarter call, you had indicated that you had hoped to see some relief from -- I guess some improving pricing as you move toward the end of the fiscal year. Have you started to see that at this point?

Well, we hope our pricing is better. We're trying to maintain some relatively high pricing, of course, as much as our customers will allow us to do, but understand that some of the cost has gone up, which has dictated higher pricing. We're always trying to increase pricing, but that's really limited by our competitors and what pricing they're putting on these particular contracts.

Okay. I guess just if I can speak one more. I mean, with backlog where it is today, I mean, would you expect to see any growth in backlog moving forward from here?

Well, it's pretty healthy right now. I think we've got to get some of this behind us, but with the projects that are out there, there's always a chance of some increased backlog. Like I said, there are still three or four more projects that may be awarded, I mean, significant projects that will be awarded in the next three to six months, so we will be in the mix. Whether we get it or not, we'll wait and see.

And of course, our backlog decreasing has never really bothered us that much because normally we let our competitors take projects with lower margins than what we would like and then we come in on the back side when everybody's working near capacity, and that's when we benefit from the higher pricing. So whether our backlog stays constant or decreases, I don't think that that's significant to us at this point in time.

Okay. Thank you very much.

All right.

There are no further questions at this time, so this will conclude today's Q&A session. At this time, I'd like to turn the conference over to Mr. Gallagher for concluding remarks.

Okay. We appreciate everybody calling in and with good questions. We'll talk to you all next quarter. Thank you.

Thank you, Mr. Gallagher. If you would like to access the replay for today's conference, you may dial 719-457-0820 or 888-203-1112 beginning at 11:00am Central Time today until 11:59pm Central Time on November 14th. Please use the pass code 1182943 to access the replay. Once again, that does conclude today's conference. We'd like to thank everyone for their participation.