Gulf Island Fabrication Inc (GIFI) 2006 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication Inc. 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 would like to turn the conference over to Ms. Deborah Knoblock for opening remarks and introductions. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2006 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 Statement 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 2005 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'm going to review the press release quickly. Net income of -- the first paragraph, in the case of net income, revenues and earnings per share, which we're going to cover in more detail on the third page.

Second paragraph indicates the backlog of $429.1 million, which includes 4 million man-hours remaining to work. That's made up of 96% for deepwater projects and 38% of foreign projects -- of projects for foreign destinations. The completion year of this backlog would be 78% in the 2007 calendar year and the remaining 22% will be completed in 2008.

The next paragraph explains why we had to postpone the earnings release about two weeks ago. During the year-end close process, we discovered an error in the estimated revenue on the Tahiti contract. If you'll remember, that was the contract we assumed when we acquired the Gulf Marine Fabricators facility, which was effective January 31, 2006.

We realized we had overstated the revenue when we recorded it into our percentage of completion at January 31, '06. Of course, as this label was applied to the contract, the percentage of completion released portions of this overstated revenue into the income statement each quarter. After researching and advice from our CPAs and attorneys, it was determined that the best method was to restate these prior quarters in our quarterly results footnote in the 10-K.

Just to briefly review the September 30 quarter, we had released $761,000 too much revenue into that quarter. We, of course, had to reduce that through the cost of revenue. The G&A reduced it somewhat, to have a net effect of $436,000 to net income, which, of course, reduced that quarter by $0.03, from what we had originally recorded of $0.75 down to $0.72.

We next have our selected balance sheet information -- cash and cash equivalents of $10.3 million. Debt remains at zero. The current ratio works out to 2.4 to 1, and a working capital, $54.6 million.

Next paragraph describes the information on the conference call webcast or digital rebroadcast of this conference call. And then we have the profile of Gulf Island Fabrication.

Moving on to the income statement information, we have the third quarter of 2006 compared to the third quarter of 2005 -- I mean, fourth quarter, sorry, of those years. The hours worked during the fourth quarter of 2006 was 831,000 compared to 2005, it was 515,000 hours.

Revenue of $75.9 million compared to $41.4 million -- that's an 83% increase in revenue. Gross profit of right at $7 million of gross profit or 9.2% of revenues compared to last year's $4.5 million or 10.7% of revenue. G&A expense remains right at the 3.1% of revenue. Tax rate for the fourth quarter of 2006, effective rate of 24.2% compared to last year's 13.5%, gives us a net income of $3.7 million for this quarter compared to last year's $2.7 million for the quarter.

We earned a diluted earnings per share of $0.26 per share compared to last year's $0.22. Adjusted weighted average shares of -- or based on adjusted weighted average of 14.2 million shares compared to last year's 12.4 million, and we paid a dividend of $0.075 for both those quarters.

Gulf Island management reviews all of its percentage of completion contracts on a monthly basis. During the fourth-quarter review, it became evident that the cost estimate on two of our large contracts awarded shortly before the Katrina and Rita hurricanes would require us to increase our estimated costs, especially in the labor and contract labor areas. After I finish the review of the year-to-date financials, our President and CEO, Kerry Chauvin, is going to review that in more detail.

Going to the 12-month information, direct labor hours of 3.3 million for this year compared to last year's 2.3 million hours. Revenue of $312 million this year compared to $188 million last year, a 65% increase in revenues. Gross profit of $38.4 million or 12.3% of revenue compared to last year's $24 million or 12.7% of revenue. G&A expense, both years right at 3% of revenue. Income tax rate for the year 2006 effective at 29.9% compared to last year's 32.3%.

That gives us diluted income per share of $1.53 for 2006 compared to last year's $1.05 per share. That's based on adjusted weighted average shares of right at 14 million shares for 2006 compared to about 12.4 million shares in 2005.

We paid a cash dividend of $0.30 per share during both of those years. And the makeup of the revenue for 2006 was 57% was for deepwater projects, 7% was for foreign projects, compared to last year's 18% for deepwater and 30% for foreign.

Now I'm going to hand it over to Kerry Chauvin to review the fourth quarter.

This is Kerry Chauvin. The fourth quarter was down from what we expected for several reasons. As Duke stated, we did have problems with two jobs that were affected by the hurricane factors, mainly the increase in labor costs and increase in some material costs that was not protected by escalation clauses. We are attempting to go back to those particular customers and get some change orders to give us relief, but there's no guarantee, so we haven't included any of that into our financials.

During the fourth quarter, we also saw high use of contract labor because of the shortage of skilled piping labor in our area, for two reasons. First of all, the hurricane has caused a major strain on all labor, including piping, but the chemical plants and refineries are also demanding a tremendous amount of labor in this area. Therefore, it is very difficult to get, and we have had to rely on contract labor to help perform some of those services so that we can meet our contracted scheduled deliveries.

We did have some material escalations in areas that were not covered by the escalation clause in our contract. Most major steel is covered by escalation clauses. However, small orders of steel such as copper, nickel and fittings for piping and things such as that nature are not covered. And because of the hurricanes, this material has gone up considerably in price.

Also in the fourth quarter and continuing into the first quarter, the weather conditions in Houma and Texas have been rather poor. And I know that it's hard to quantify, but in January, just to give you some idea, we had nine days of total shutdown because of rain, fog or cold temperatures where we couldn't work. Again, there were several other days, partial days, where we couldn't work also. So this did affect our productivity late in the fourth quarter and early into the first quarter.

The major projects that we did and have been awarded after the hurricane basically have not started yet or we are just getting started on the [Tamboul Andana] project and the MinDOC projects has just started about two or three weeks ago. So we should see a ramp-up in these new projects, which should help our financials going forward.

Okay, with that, we will open the floor up to questions from the analysts.

(OPERATOR INSTRUCTIONS). Collin Gerry, Raymond James.

Just a quick question. Monitoring some of the market potential you all are seeing, could you walk us through what the bid potential is kind of in the deepwater? I remember last quarter you said that there was more Topside projects out there that you all are currently bidding on. Could you kind of walk us through the dynamic there?

Well, we have been awarded one of those, which, of course, is the Topside that goes with the MinDOC project. So that's been awarded. The other ones have not been awarded yet, and I think there may be some delays in that. But basically we have been awarded one of them. (multiple speakers) Topsides, but there are several deepwater projects that should be coming out sometime this year. I don't know exactly when. Needless to say, there have been some delays in several projects lately and we don't necessarily know the reasons why, but some of the projects have been delayed.

Okay. And kind of looking at the competitive landscapes, one of your bigger competitors, I think in January, announced construction of a new yard down in Mexico. Do you see that affecting your business or your ability to bid anything in the region, or how that affects the overall competitive landscape?

Okay. In Mexico, we have built a couple of jackets, about all we've done in Mexico. We think the Mexican market may be even delayed some more, but there will be some projects coming out of Mexico. We should participate in the bid cycle in -- well, on certain projects in Mexico. We don't want to necessarily take the total risk of being in Mexico or the PEMEX risk that is associated with those particular projects. We will bid as a subcontractor to other larger engineering construction companies that may want to take that risk, but as of now, we don't want to take that risk.

As far as the Gulf of Mexico and building in Mexico, this may be a reality for some people, but we don't know the impact of that at this point in time. But we can be competitive with fab yards in Mexico.

Okay. That helps. And just a last question. I think you kind of mentioned some of the weather there in January. If you look at what's gone on so far in the first quarter, can we expect continued seasonal cost issues coming up in the first quarter as well, just looking at some of the weather impact?

Well, of course I can't give you too much going forward, but I can tell you in January we did have a lot of weather that slowed us down both in Texas and Louisiana. So I guess you can surmise whatever you want from that.

Herb Buchbinder, Wachovia Securities.

Kerry, can you tell me if there's any effect in the fourth quarter from this Tahiti contract or is it completely adjusted to the first nine months?

First nine months.

So is the contract completed or have you made the adjustments and -- when will the contract be completed?

The contract is expected to be completed in the second quarter this year, possibly in the third, but should be the second quarter of this year we should complete the Tahiti project.

What kind of effect does that contract have on the fourth quarter?

Well, really, it didn't have that much of an effect except when we had to restate these earnings that -- we didn't have the revenues, but other than that, it didn't have any effect or very little effect. I can't give you the dollars right now. I would have to go back and look at percent complete.

Yes, just to describe what happened, we realized the error was in the amount of revenue we anticipated receiving on the job. When we discovered the error, it was determined that we had to go back and take or remove from those previous three quarters what those overstate revenues were. But in the fourth quarter, since the error was recognized, we just adjusted the estimated revenue, and of course the estimated cost remained the same going forward.

So it had no effect on the fourth quarter and it won't have an effect going forward other than the fact that it reduced the total estimated revenue or -- I'm sorry, the profits on that contract.

I assume it has lower margins and so it's going to reduce the gross margin somewhat until it's completed. Is that correct?

That's correct.

Okay. The other thing is when you release your backlog, you go through February 13. Does that mean that you take the orders that you booked less the estimated revenues for February 13 to come up with the backlog?

Okay, what we do is there's work remaining at 12/31 -- in other words, jobs that have been booked less the amount that we have invoiced on them or recognized as revenue on them. Then any job that's awarded through -- typically through the date that we make our earnings announcement is also included in the backlog. That way, the reader of the financials and such can see what we're going to be working on going forward.

In other words, if we are awarded a job on January 10, we're going to be working on that job in 2007 and possibly 2008. So it's more informative to know at this point in time what we're going to be working on over the next future periods.

Is there a way that you could tell us what the backlog was at the end of the year so we can see what kind of adjustments were made in that six-, eight-week period?

No, we do not.

Lastly, do you expect to continue hiring all this contract labor during the first half of the new year? Or are you going to get back to hiring enough people to take care of your business?

Well, we're trying to hire enough people to take care of our business. Unfortunately, there's a tremendous demand on the skill sets that we need, but we're making all the efforts to try and do that. We've increased our labor rates that we are paying. We have had several recruiting trips and all kinds of things to try and recruit people, and it's very difficult to get.

We've managed to increase our labor, our total workforce to about 1800, and we have about 275 contract laborers on the yard, and we're making every effort possible to get these laborers off the yard. However, when weather conditions such as we've had in January come around and to meet our scheduled deliveries, we have to put some other labor on the yard, whether it's contract labor or our own labor. And we haven't been able to ramp up as fast as we need to with our own labor to be able to meet our delivery schedule. So therefore, we had to rely on subcontract labor.

Hopefully, and I've made an effort with our subsidiary Presidents, I have given them a challenge to try and get the contract labor off the yard as soon as possible. We also have challenged our personnel department to try and increase our level of employment to such levels where we won't need contract labor.

The two problem jobs that you had, what kind of effect -- how long will they linger into the new year?

Those two jobs are both in spring and summer, or second quarter of this year. One will probably be the beginning of second quarter. The other one will be towards the end of the second quarter. But they should be coming to an end fairly shortly. And we should be ramping up on these other jobs towards the end of the first quarter and into the second quarter.

Can you give us an idea of what kind of gross margin we might expect on your business in 2007?

No, we can't at this time, but we're going to make every effort to get our gross margins back to where they used to be or even higher, if we can.

Is that somewhere around the 20%-plus level? Is that where they used to be?

No, our gross margins typically run around anywhere from 12% to 14%, 15%.

Joe Agular, Johnson Rice & Company.

Just on that last point, I think that may have been -- your gross margins, I think, are higher than that, Kerry.

Well, it depends on when you look. We have gotten as high as 18% and 19% in some years, but that's not typical. Our typical margins, I think, are running somewhat lower than that.

Let me ask, the two jobs that you referenced being an issue in the quarter, will those still turn out to be profitable jobs for you?

Yes.

It's just that you're not going to make as much money as you thought.

That's correct.

Okay. And the last two quarters, the third quarter of '06 and the second quarter of '06, third quarter particularly, you guys really surprised us big-time to the upside. And even after the Tahiti issue, you still made $0.72. The backlog that you booked in 2006, I know you guys were aware of the shortage of workers in the region. Did you all, in those bids, do you feel comfortable with the margins in those bids, and knowing the situation that you knew at the time, that there's -- when you start to work these things in 2007, that the kind of results that we saw in the second and third quarters of '06 are -- we could get back to those levels?

Well, we hope to get back to those levels, Joe. We had very good confidence in those bids at that point in time, realizing that a lot of our contract labor comes towards the end of a project when you're trying to get the painting done and you're trying to meet schedule and you're doing the piping. And those things are when we really ramp up on contract labor. And that causes some problems.

The piping, we actually lost about one-third of our piping crews in Houma, and of course, we didn't have any at Gulf Marine, and they have always relied on contract labor. So the piping comes towards the end of the job, and that's when you run into some difficulties. And I think that's what happened at -- I know it's what happened at this point in time. But on the future jobs, we think we have everything covered, and our future bids, we think we're in pretty good shape right now, based on bidding them after the hurricane and based on the shortages of labor in the area.

I guess it's a long way of asking you, pricing and margins in work have gone up over the last year.

Well, we think they have, yes. And so we are bidding to get our margins up, Joe, as much as we can. Of course, the customer has some restraints on us in that they won't let us just get obscene in those margins, and when we're negotiating, some of it is very difficult to get the margins very high.

On previous conference calls, you all had discussed the tremendous amount of work out there that was anticipated to come from refinery upgrades and expansions. Could you update us on where some of that work stands?

That work is delayed a little. There will be some work -- not for us, but the work is starting. You may have seen the press releases on the Marathon upgrade, and that's starting, but most of that will be done in plant. But there are some other projects and we're in discussions with people on these other projects. It looks like most of them will start later on this year or early into 2008 and would last for probably about two years.

Okay. And the size again, could you just refresh us on?

Each one of those projects runs about 30,000 tons of steel, and right now, we know of seven, and there may be an eighth one coming out between now and the beginning of 2008. But we are looking at about 30,000 tons of steel each, and these are some modules that will be built anywhere up to probably 1500-ton modules each. But it will be many modules that they will ship into the refineries and chemical plants and they'll actually do the integration in the plant, bolt them together and start operations.

Is there any way for you to bid those jobs on time and materials or kind of a cost-plus basis?

Well, we're in the process of trying to do that right now, Joe. You're a little ahead of us, and that's what we're trying to get done, all right? I don't think we would deal on a fixed price on that type of work.

(OPERATOR INSTRUCTIONS). Jason Podraza, Howard Weil.

Is there any way to quantify in the fourth quarter the impact of the specific two jobs where we revised kind of our cost estimates on the job?

No, Jason, we're not doing that. It's part of our percent complete. We do not speak about specific jobs, and it just flowed through the percent complete at the new estimates, but we do not quantify those amounts.

Okay. You guys mentioned kind of post-hurricanes feeling a little bit better about maybe the bidding process and working in some of the increased labor costs, but as it relates to going back to your customers here, looking for some type of change order relief on either the materials or the higher labor front, how you handicap your efforts there? When would timing be on knowing something there? And in the past, how often has that been something you have been able to push through?

Okay. It's something we're attempting to do right now. When it would happen, I really can't tell you. Needless to say, it would have to happen before these jobs left. But we have factored in zero dollars as far as collecting anything on that in our financials. If we do, that will just be a fallout, but again, the probability of getting that is relatively slim, but we're going to give it a try.

Okay, thanks, guys. And then, just a housekeeping item. Duke, any thoughts on tax rate for next year? Looks like 30% in '06. Is that a similar level in '07?

Jason, between the 30% and 31% is what we would anticipate looking at the total tax picture.

Herb Buchbinder, Wachovia Securities.

A couple of quick follow-ups. You mentioned there were nine bad weather days in January. Can you give us roughly what it was in the fourth quarter versus the year-ago quarter and what it was in the first quarter last year so we can see how we are comparing against, at least on weather so far this year?

Well, I don't have that with me right now, but it was -- all I can tell you right now is it was substantially higher this year than it was last year.

In December, it was higher than the previous December?

I don't have that with me right now, but I can get you that information later.

But you are sure in January that it was higher than a year ago?

Definitely.

Can you answer one other question? When you -- on some of these deepwater projects, do you use any carbon fiber in your construction? It's supposed to substantially improve the strength, particularly of these umbilical and tethering systems that are involved in some of these production platforms. Is that something that you are doing or not?

No, we don't use that. We don't get involved in that. Basically, what we use is carbon steel, just plain carbon steel, some stainless-steel and some copper nickel, but basically we don't use any fiber.

(OPERATOR INSTRUCTIONS). There are no further questions in the queue, so that 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 remarks.

Okay. We appreciate you all calling in, and we will talk to you next quarter. Thank you.

If you would like to access the replay for today's conference, you may dial 719-457-0820 or 888-203-1112 beginning at 12PM Central Time today until 1159 Central Time on March 16. Please use the passcode 3493118 to access the replay. This conclude today's conference call. Thank you for your participation and you may disconnect at any time. Thank you. Have a great day.