Gulf Island Fabrication Inc (GIFI) 2008 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Gulf Island Fabrication, Inc. 2008 third quarter earnings release conference call. All participants will be in a listen-only mode for the duration of the presentation and we will have a question-and-answer session. This call is being recorded.

At this time, I'd 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 2008 third quarter teleconference.

Please keep in mind that any statements made in this conference that are not statements of historical facts are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ- materially from the results presented in the forward-looking statements. These statements include the timing and extent of changes and 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 3, 2008.

The 10-K was included as part of the Company's 2007 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. Robin Seibert, our CFO. Robin.

Thank you, Deborah.

I'd like to review Gulf Island's press release issued for the third quarter of 2008. The press release consists of two pages, page one is text and page two is the income statement. I'd like to review page two, which is the income statement, first. The following are the results of operations for the three months ended September 30, 2008, compared to the three months ended September 30, 2007.

Revenue was $92.7 million compared to $124.9 million. The cost of revenue was $86.3 million compared to $106.9 million. Gross margin was $6.3 million or 6.8% of revenue compared to $18.0 million or 14.4% of revenue.

As mentioned in previous quarters, certain projects include costs for additional -- additions or improvements for our infrastructure that are necessary to fabricate and complete the project. Since additions or improvements provide future benefit to us, the cost to build these projects is capitalized. Thus, costs removed from project costs in subsequently capitalized directly increases the estimated profit on the project.

Amounts included in project revenue that were capitalized are $207 million compared to -- I'm sorry -- $207,000 compared to $1.9 million, thus, more benefit was received by the quarter ended September 30, 2007, opposed to 2008. The amounts included in project revenue mentioned above will capitalize net of depreciation expense.

General and administrative expenses were $2.1 million or 2.2% of revenue compared to $2.8 million or 2.2% of revenue. Operating income was $4.2 million compared to $15.2 million. Net interest income was $24,000 compared to $49,000. Other income expense was a loss of $42,000 and a loss of $5000, respectively. For both periods, the losses were related to sales of miscellaneous equipment.

Income before taxes was $4.2 million compared to $15.3 million. Income tax expense was $1.4 million compared to $5.3 million. The income tax rates were 32.8% compared to 34.2%. Net income was $2.8 million compared to $10.0 million. Basic earnings per share were $0.20 compared to $0.71. Diluted earnings per share were $0.20 compared to $0.70.

Weighted average shares outstanding were 14.3 million shares compared to 14.2 million shares. Adjusted weighted average shares outstanding were 14.3 million shares compared to 14.3 million shares. Depreciation expense was $4.6 million compared to depreciation and amortization expense of $3.5 million. We declared and paid cash dividends of $0.10 for both quarters ended September 30, 2008 and 2007.

The following are the results of operations for the nine months ended September 30, 2008 compared to September 30 of 2007. Revenue was $334.3 million compared to $371.8 million. The cost of revenue was $284.7 million compared to $331.2 million. Gross margin was $49.6 million, or 14.8% of revenue, compared to $40.6 million, or 10.9% of revenue. Capitalized costs net of depreciation included in project revenue was $5.3 million compared to $4.8 million, given the larger benefit for the nine months ended September 30, 2008. General and administrative expenses were $7.3 million, or 2.2% of revenue, compared to $7.9 million, or 2.1% of revenue. Operating income was $42.2 million compared to $32.8 million. Net interest income was $156,000 compared to $310,000. Interest rates were considerably, lower accompanied with lower cash balances available for investing.

Other income expenses were losses of $97,000 and $10,000 respectively, again, those losses for both periods were related to the sales of miscellaneous equipment. Income before taxes was $42.3 million compared to $33.1 million. Income tax expense was $14.1 million compared to $10.7 million. The income tax rates were 33.4% compared to 32.5%. We currently expect tax rates to be 33% to 34% for the remainder of the year.

Net income was $28.1 million compared to $22.3 million. Basic earnings per share were $1.98 compared to $1.58. Diluted earnings per share were $1.97 compared to $1.56. Weighted average shares outstanding were 14.2 million compared to 14.2 million. Adjusted weighted average shares for both periods were 14.3 million. Depreciation expense was $13 million compared to depreciation and amortization expense of $10.5 million. We declared and paid cash dividends of $0.30 per share for the periods -- nine month periods ended September 30, 2008 and 2007. Please refer back to page one of the press release for review.

We had a revenue backlog of $422.4 million with a labor backlog of 4.6 million man-hours remaining to work. The following represents selected balance sheet information for September 30, 2008, as it compares to December 31, 2007.

Cash and short-term investments were $5.6 million compared to $24.6 million. Total current assets were $127.0 million compared to $135.7 million. Property plant equipment was $204.2 million compared to $188.8 million. Total assets were $331.7 million compared to $325.2 million. Total current liabilities were $57.2 million compared to $78.4 million. Long-term debt was zero for both periods.

Shareholders' equity was $254.8 million compared to $228.9 million. Total liabilities in shareholders' equity was $331.7 million compared to $325.2 million.

All the financial information for the three months ended September 30, 2008, compared to September 30, 2007 consist of, pass-through costs was 42.8% of revenue compared to 51.0% of revenue. Man-hours worked were 931,000 compared to 887,000. Deep water revenue represented 80% of revenue compared to 74% of revenue. Foreign revenue represented 24% of revenue compared to 23% of revenue.

Other financial information for the nine months ended September 30, 2008 compared to September 30, 2007 consist of, pass-through costs was 40.4% of revenue compared to 55.9% of revenue. Man-hours worked was 2.9 million compared to 2.7 million. Deep water revenue represented 66% of revenue compared to 78% of revenue. Foreign revenue represented 20% of revenue compared to 24% of revenue.

Other financial information for September 30, 2008 compared to December 31, 2007 are, revenue backlog was $422.4 million compared to $330.4 million. Remaining man-hours to work was 4.6 million compared to 3.7 million. Revenue backlog for deep water was $243.2 million, or 57.6%, compared to $185.4 million, or 56.1%. Revenue for foreign locations was $12.1 million, or 2.9%, compared to $62.6 million, or 18.9%. Of the backlog at September, we expect to recognize revenues of approximately $83 million during the remaining of 2008, approximately $339.4 million in 2009 and thereafter.

We had approximately 1,985 employees and 194 contract employees. This compared to 1,820 employees and 550 contract employees. CapEx for the first nine months of 2008 was $28.5 million. Committed CapEx for the remainder of 2008 is approximately $2 million. We had an additional $18.6 million of committed capital expenditure costs at September 30th that won't be incurred until 2009.

Of those costs, approximately $1.9 million is for the completion of phase two of the Graving Dock, to be expected to be incurred in the first quarter of 2009. $2.4million is the remaining balance for the purchase of two cranes, that we anticipate being incurred in the second quarter of 2009. And we have $14.3 million for the construction of a dry dock, to be located in Houma. Those costs are going to be incurred based on progress payments all throughout the quarters of 2009 in the expectation of that dry dock to be completed in the fourth quarter of 2009.

I would like to now open up the line for questions of the analysts. Dana?

Thank you, sir.

Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

And we'll go first to Jim Rollyson with Raymond James.

Good morning, guys.

Good morning, Jim.

Good morning, Jim.

Could you spend -- obviously hurricane interference seemed to be a big part of -- I presume you didn't talk about it much this morning, but based on your press releases, and obviously what's been going on, can you maybe spend a couple of minutes just detailing, you know, kind of how much of the margin dip and revenue dip this quarter was tied into hurricanes, how things kind of stand today and just kind of walk through that logic a little bit?

Okay. Jim, this is Kerry.

The hurricanes really shut us down for almost a month down in Houma. As soon as we packed up and left for the first hurricane, we came back, got everything running again, which was considerable expense, the second hurricane came, so we lost production. We also -- our crews offshore were not able to work during that time frame because of the destruction offshore.

So, it was a very significant event for us, even more so than other hurricanes, Katrina and Rita, because the parish and the officials make us shut down somewhat earlier than we did in the past, and they won't allow people back in the parish until a later date than what we have seen in the past. And also our power, or electricity, was down in the Houma area for a considerable amount of time before we could get geared back up.

Also, in Texas we lost five business days in Texas because of the same situation, there was a mandatory evacuation. Needless to say, the Hurricane Ike did not come to Texas as predicted, but with mandatory evacuations, everyone had to leave the area and were not allowed back in until about five or six days.

So, it did hurt us, yes, and we also shut down for Dolly too, which was another hurricane down in south Texas. So, we had quite a bit of effect in south Texas.

But hurricanes aren't the only reasons our margins are down. There are several other reasons. We expended more man-hours, and I think when you get out 10-Q you'll see it, we expended more man hours in loading out the Tombua Landana project, somewhat related to the hurricanes, in that once we got back, there was a schedule we had to maintain.

We are trying to get some relief from our client, but we haven't been able to negotiate some change orders with our client based on the additional cost, and (inaudible) associated with the hurricanes on loading out a significant project, and we are in the process of doing that. The cost is already in our financials, but we don't have the revenue to help offset that cost.

So, there were several reasons, other than the hurricanes, but I think our productivity was not also as good as we would have liked to have seen in the third quarter compared to the third quarter last year and other quarters.

And as it sits today, everything is back up and running to pretty much normal?

Pretty much so.

We have a few electric motors we still are drying out and installing, but by and large everything is up to normal. We should also have our cranes that were in an accident back in the early spring. They should be back in operations in December.

So you expect -- it sounds like things should kind of -- margins should drift back towards normal, all else being equal, and from what I'm gathering, you might get some coverage from your customer on the one project. So, would that show up in the fourth quarter if they kind of help cover that?

It would be the fourth or early first quarter.

Okay. Can you talk about just maybe bidding activity, Kerry, kind of what you're seeing? Maybe spend a minute, as well, on kind of how this credit situation going on reflects into your customers. You tend to work some international, national oil companies, certainly some of the bigger guys and maybe just kind of spend a minute how that looks.

Okay. Bidding activity seems to be picking up, to be honest with you, on a deep water.

There are some deep water projects that we are looking at now, and I think we will see two -- at least two projects, and possibly three being bid either -- well, probably fourth quarter and early first quarter. So -- but as far as the shallow water, we still don't see very much shallow water type activity, and I'm speaking mainly from the Gulf of Mexico, and that's going to be our primary market here in the near future.

There are some international projects we are tracing, but I don't think we will see those come out for bids until first, second quarter of 2009. But I think considering the credit market, I think the larger international-type oil and gas companies are going to be where the bidding activities are going to come from for the next couple of quarters, because I think these clients still have cash, and they have projects that need to go and need to get done, because they are going to lose their lease if they don't go ahead and develop these particular projects. So I think we'll still see the deep water projects continue.

The credit crunch, we are keeping a close eye on it right now with our clients, and we haven't had any negative impacts as of now, because most of these projects were long-term projects and designed to be completed in the long run, and not just the short run, let's get it done, and start producing.

So, you know, we still could have a lot of fallout from the credit crunch, but we haven't had that indication yet. But it may welcome.

Last question. Are you giving any pickup in work in the shallow water just related to some of the hurricane damage?

Our little subsidiary, Dolphin, has picked up some hurricane damage work by going offshore, actually, and doing some of the cleanup offshore.

We think that this storm is somewhat different than what we saw with Rita. Ike and Gustav did more damage to what I call platforms that were not designated to be removed, ultimately, and employed and abandoned. So, we think there will be some platforms that should be replaced out of the 40 something that were damaged. There will be some that will be plugged and abandoned, however, it will generate some shallow water business, probably more -- we'll see the bids more in the first quarter and second quarter of 2009.

How many come about, you know, they are still trying to evaluate the damage and what they are going to do. Needless to say, if they can move the production to another platform, they will probably do that, but there are some shallow water hubs that probably will have to be replaced, and we are looking for that probably towards the second quarter of 2009.

Great. Thank you, guys.

Okay. Jim.

(OPERATOR INSTRUCTIONS). And we'll go next to Joe Agular with Johnson Rice.

Good morning, Joe.

Hey. Good morning, Kerry and Robin.

I was just, you know, wondering, if you look at the hours that you worked in the quarter, actually they were okay, it seemed like. 931,000?

Well, Joe, a lot of that was inefficiencies that, on the projects, that we didn't get our full value or we couldn't get revenue for. So we actually overran the man-hours in trying to get, specifically one project, loaded out, and the 10-Q that's coming out later on, you will see that we also were not able to work as much as we'd like to have done on the MinDOC project for that -- for the third quarter. So, we were not able to take a lot of the revenues on the MinDOC project.

So, in the 10-Q, which we hope comes out later on this afternoon, there will be more specifics on it.

Okay. Maybe I -- this may not be a fair question, but is there a way to quantify the man-hours that you lost in the quarter? Or when you have these interruptions, do you pay people and keep them on the payroll and count their hours?

Well, we did both. But even for the storms, our employees, basically, didn't have a very good paychecks for three weeks, so for one of the weeks we actually made sure everybody was paid for 40 hours of payroll. So, we made everybody whole for that one particular week.

Plus, the other two weeks we did pay payroll for shutting down and also getting back in operation. So, there was a tremendous amount of lost motion in that, and I don't have that quantified at this point in time.

Okay.

Joe, this is Robin.

It would be very difficult for us to quantify that, because we know we lost man-hours because we had people that didn't work, but under, say, more perfect conditions, we would have had additional man-hours, but dependent upon what they would have done with projects they would have worked on, it just makes it tough to quantify that in numbers as well as dollars.

And then, again, dependent upon if they were working on projects that were, you know, like MinDOC we didn't work that much on, we didn't have much progress during the quarter. Tombua Landana we were trying to load out, so we were doing things to get that done. A lot of things that happened during the load-out, you actually go ahead and do what you can do to get the job load-out to satisfy your customer, and then you negotiate after the fact on what you think was done outside of scope, which hasn't been done yet.

Right. You know, this time, I guess, if you could give us an update on your outside contract workers, and I know in the past that was an issue, but it seems like y'all have been steadily decreasing that outside percentage.

That's correct, Joe. We hope to get most of the contractors off the payroll in the fourth quarter.

Okay.

But we have reduced it to where, now, it's basically our employees, and we had 194 contract employees at the end of the quarter. That is down to about 150 contract workers at this point in time. And within the next month or two, we hope to get that down to zero. And that way only work our employees.

Okay. And one last thing.

Kerry, your comment earlier with respect to Jim's question on the bidding activity, I think you said deep water was picking up. Did you mean deep water Gulf primarily, or --

Yes, deep water Gulf. There's a few projects in deep water Gulf that are circulating right now, and a couple of them, they are preliminary, I guess, bid questionnaires that have been circulating.

And any sense on timing?

Hopefully they will be bid no later than the first quarter of 2009.

Okay. Thanks very much.

Okay, Joe.

And we'll take our next question from David Wish now with Capital One.

Good morning, guys, this is Joe Gibney. How are you?

Hey, Joe.

Hey, Joe.

I just wanted to follow up, relative to the scenario where if we do have a little bit of a push to the right on deep water, curious Kerry, on your mind-set relative to incremental tow boat awards, incremental modular work? Are you more inclined to try to book some of this work as you get toward the end of this year into 2009, given the credit crisis and kind of where we are against the broader back drop of ordering?

Well, we are going after the modules. We are continuing to do that, and we think there will be some modules coming out probably early 2009. We have booked some modules, modular work for, actually -- it's under $40 million, so we didn't release a press release on it, but we do have modules we are working on right now for a refinery up in, I think it's Illinois, and we also are doing some modules that are going up to Alaska that should be leaving our facility in the spring.

But, we will continue to seek out that type of work when it becomes available. I think, though, we may see a slowdown in that work probably sometime in 2009, because I think right now the economic conditions, the refineries have excess capacity at this point in time, and they may tend to delay spending on future expansions.

But on the tow boat side, are you still materially positive for the amount of works that's possible for you guys there?

That's correct. We could sign several more boats if we wanted to, but we are actually evaluating our performance at this point in time, and it looks like our performance on those vessels are pretty much well within what we have predicted. So, we probably will seek some other contracts in the near future.

Okay. And just following up on the status of backlog.

Any concerns of incremental projects that are in backlog now relative to MinDOC two, any update there? Any status from ATPG, given that they have cut some of their CapEx? I know you guys have been working on some of the steelwork down in Aransas on it already, but where do we stand on MinDOC two, or what do you hear on that front?

On MinDOC two, we don't have any formal delays or anything at this point in time, but we constantly evaluate that with our client to see what his schedule is, and we are working with them as best we can, and at this point in time we just don't have any changes in the direction we are going.

Okay. And last one, Robin, if you could just in terms of what is comprising your backlog here at the end of the quarter, now that Tombua is out the door we are sitting on the tow boat side, and remaining portions on MinDOC 1 and MinDOC two, if you could just give an update on backlog at the end of the quarter, big ticket items that are there now.

The big ticket items are going to be the second MinDOC hull and the second MinDOC top sides.

Yep.

We do have a substantial amount of tow boat work left in there, probably still in the $80 million range.

Okay.

Because those -- you know, we have three boats in progress. The first boat is probably about 70% to 75% complete, but the delivery schedule on those is spread out over, probably about six quarters.

Okay.

They have some modules that we are working on that's going to Alaska, and that probably represents a decent portion, but besides that, the rest of it's just a big collage of, basically, fill-in type work, just normal, routine things that we do at Gulf Island.

Okay. And we're still January, February time frame for MinDOC one getting out the door; is that right?

That's correct.

Okay. Thanks, guys. I'll turn it back.

Sure.

Okay.

And we'll take our next question from Herb Buchbinder of Wachovia Securities.

Kerry, just a quick question.

In looking at your backlog, what quarters do you think have the most, or least visibility at this point through '09?

Well, that's hard to say, whatever we have going forward, I think we told you about what our revenues would be for 2009.

We probably have some holes in our schedule that we need to fill, but we feel that we will get some work and fill some of those holes. Right now, first/second quarter is pretty much booked up, and we will be looking for more work around the third quarter.

Okay. Okay. That's all I want to know. Thanks a lot.

Okay, Herb.

(OPERATOR INSTRUCTIONS). The lines are now open for all questions from anyone on the call.

We will go next to Robert Kosowski of OFI institutional.

Good morning, guys.

Good morning.

Good morning.

Hi. I just had a question about the margin profile for the different types of work you guys do. So, if you look at maybe a $4 million man-hour year, could we have materially different earnings depending on the mix of products going through there? What are the types of work that have the most sensitivity?

We try and maintain our margins the same on all types of projects, so we don't bid, let's say, tow boats less than deep water-type structures. So, we try and maintain margins as best we can across the board and keep it fairly consistent.

Okay. So you guys have a really good 1 million man-hour quarter, then that's kind of representative of what you guys could do in an optimal environment?

Pretty much so, yes.

Okay. Then quickly, the two to three contracts that are in bid for Q1 or Q4, or Q1 '09, are those somewhat big ticket items?

Yes, deep water projects are normally big ticket items.

Okay. And then finally, the decrease in contractors that you guys are using right now, just because of, I guess, less of a labor shortage in the Gulf region, or is it something that you guys have done, kind of concerted effort by Gulf Island?

It's a concerted effort by Gulf Island.

When we had some very large projects that needed additional labor to meet the delivery schedules, we had to add contract labor. We are trying to get the contract labor off the payroll at this time. And that's by design, not because it's not contract labor.

Okay. And is there a labor shortage right now in the Gulf region still?

It's about the same as it always was, and it hasn't changed very much. We can always use additional labor. We'd like to hire some additional people ourselves and we are constantly looking at that situation. But it's still a tough labor market, but we are managing to wade our way through it.

Thanks a lot, and good luck.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS).

And, gentlemen, it appears we have no further questions. I'll turn the call back to you for any additional or closing remarks.

We don't have any. If there's no more -- just that, Dana.

Thank you, sir.

That will conclude today's conference call. A replay will be available starting at 12:00 central time, today through November 7th, at 12:00 central time. To access the replay, please dial 888-203-1112, and enter the confirmation code of 947-3494.

Thank you for your participation and you may disconnect at this time.

Thank you, Dana.

Thank you, sir.

Bye-bye.

Bye.