Gulf Island Fabrication Inc (GIFI) 2008 Q4 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication 2008 fourth quarter release earnings conference call. (Operator Instructions)

At this time, I would like to turn the conference to Ms. Deborah Knoblock for opening remarks and introductions. Deborah, please go ahead m'am.

I would like to welcome everyone to Gulf Island Fabrication's 2008 fourth quarter teleconference. Please keep in mind 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 Information, and elsewhere in the Company's 10K filed March 3rd, 2008. The 10K 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 updates these forward-looking statements. Today we have Mr. Kerry Chauvin, Chairman and CEO, Mr. Kirk Meche, President and COO, and Mr. Robin Seibert, our CFO. Robin.

Thank you, Deborah. I'd like to review Gulf Island's press release issued for the fourth quarter of 2008. The press release consists of two pages. Page one is tax, and page two is an 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 December 31st, 2008 compared to the three months ended December 31st, 2007. Revenue was $86.2 million compared to $100.9 million. The cost of revenue was $83.5 million compared to $84.7 million. Gross margin was $2.7 million, or 3.1% of revenue, compared to $16.2 million, or 16.0% of revenue. As mentioned in previous quarters, certain projects include cost for additions or improvements to our infrastructure that are necessary to fabricate or complete a project. Since these additions or improvements provide future benefit to us, the cost to build these projects is capitalized. Thus, costs removed from project costs, and subsequently capitalized, directly increases the estimated profit on the project. Amounts included in project revenue that were capitalized are $63,000 compared to $3.5 million. Thus, more beneficial to the quarter-ended December 31st, 2007. The amounts included in project revenue mentioned above were capitalized net of depreciation expense.

General and administrative expenses were $2.1 million, or 2.4% of revenue, compared to $2.5 million, or 2.5% of revenue. Operating income was $621,000 compared to $13.7 million. Net interest income was $16,000 compared to $74,000. Income before taxes was $637,000 compared to $13.8 million. Income tax benefit was $237,000 compared to an expense of $4.9 million. The income tax rates were 37.2% benefit compared to 35.8% expense. In the fourth quarter, adjustment for the tax rate was related to the extension and retroactive application of the federal work opportunity tax credits.

Basic earnings per share were $0.06 compared to $0.62, diluted earnings per share were $0.06 compared to $0.62. 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 $4.4 million compared to depreciation expense of $3.7 million. We declared and paid cash dividends of $0.10 per share for both quarters ended December 31, 2008 and 2007.

The following are the results of operations for the 12 months ended December 31st 2008 compared to December 31, 2007. Revenue was $420.5 million compared to $472.7 million. The cost of revenue was $368.2 million compared to $415.9 million. Gross margin was $52.3 million, or 12.4% of revenue, compared to $56.8 million, or 12.0% of revenue. Capitalized costs noted depreciation included in product revenue was $5.3 million compared to $8.3 million, again providing a larger benefit for the 12 months ended December 31, 2007. General administrative expenses were at $9.5 million, or 2.2% of revenue, compared to $10.4 million, or 2.2% of revenue. Operating income was $42.8 million compared to $46.5 million. Net interest income was $172,000 compared to $384,000. Interest rates were considerably lower, accompanied with lower cash balances available for investing. Other income expense were losses of $97,000 and $10,000, respectively. Losses for both periods were for the sale of miscellaneous equipment.

Income before taxes was $42.9 million compared to $46.9 million. Income tax expense was $13.9 million compared to $15.7 million. The income tax rates were 32.4% compared to 33.5%. Net income was $29.0 million compared to $31.2 million. Basic earnings per share were $2.04 compared to $2.20. Diluted earnings per share were $2.03 compared to $2.18. 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 $17.5 million compared to depreciation and amortization expense of $14.1 million. We declared and paid cash dividends of $0.40 per share for the 12 months ended December 31, 2008 and 2007.

Please refer to page one of the press release for review. We had a backlog of $360.2 million, and a label backlog of 3.9 million man-hours remaining of work. Included in our backlog is approximately $150.4 million and 1.6 million man-hours remaining on the MinDOC Two project, in which our customer has announced will be postponed and be utilized at another of their locations, sometime in the future.

The following represents selected balance sheet information for December 31, 2008 compared to December 31, 2007. Cash and short-term investments were $13.8 million compared to $24.6 million. Total current assets were $136.4 million compared to $135.7 million. Property, plant and equipment was $204.7 million compared to $188.8 million. Total assets were $350.9 million compared to $325.2 million. Total current liabilities were $74.9 million compared to $78.4 million. Long-term debt was zero for both periods. Shareholders equity was $254.2 million compared to $228.9 million. Total liabilities and shareholder's equity was $350.9 million compared to $325.2 million.

Other financial information for the three months ended December 31, 2008 compared to December 31, 2007 consists of past due cost was 44.1% of revenue compared to 38.7% of revenue. Man-hours worked were 903,000 compared to 896,000. Deepwater revenue represented 67% of revenue compared to 79% of revenue. Foreign revenue represented 18% of revenue compared to 25% of revenue.

Other financial information for the 12 months ended December 31, 2008 compared to December 31, 2007, consist of past through cost was 41.2% of revenue compared to 52.3% of revenue. Man-hours worked 3.8 million compared to 3.6 million. Deepwater revenue represented 67% of revenue compared to 78% of revenue, and foreign revenue represented 20% of revenue compared to 24% of revenue.

Other financial information for December 31, 2008 compared to December 31, 2007 consists of, again, a revenue backlog was $360.2 million compared to $330.4 million. Remaining man-hours to work was 3.9 million compared to 3.7 million. Revenue backlog for deep water was $200.8 million, or 55.8%, compared to $185.4 million, or 56.1%. Revenue for foreign locations was $1.5 million, or less than 1%, compared to $62.6 million, or 18.9%.

Other backlog at December 31, 2008, we expect to recognize revenues of approximately $153.9 million during 2009, and approximately $206.3 million in 2010 thereafter. Out of the $150.4 million associated with MinDOC Two, we projected at the time, 77% would be related to 2010, and the remaining would be in 2011. We had approximately 1,835 employees and 145 contract employees, compared to 1,830 employees and 530 contract employees. CapEx for 2009 is estimated to be $22.5 million, which includes the purchase of equipment and additional yard and facility infrastructure improvements. Included in the 2009 capital budget, is $10.1 million for the remaining cost to complete the dry dock and to be incurred as progress payments due in all quarters of 2009. We expect the completion of the dry dock in the fourth quarter of 2009. Also included is $1.3 million to complete the purchase and installation of equipment for a panel line system which is expected to be completed in the second quarter of 2009. I would now like to open the call to our analysts.

Thank you, sir. (Operator Instructions) We'll take our first question from Jim Rollyson, Raymond James.

Good morning, guys.

Good morning, Jim.

Covered a lot of stuff, very efficiently, this morning. Questions for me would be, number one, you talked about kind of where everything stands in backlog and man-hours and that kind of stuff. Maybe talk about what happened in the fourth quarter, because it's unusual to see you guys with margins down here. Is this kind of a function still falling on with the hurricane related stuff, or just bad project, or what's going on?

Jim, this is Robin. In the fourth quarter, we had a couple of things that probably caused the most strain on our margins. We loaded out the Tambua-Landana project and we had some cost that was incurred, that we're currently discussing with our customer. We're negotiating. Trying to get reimbursement for that. We don't want to really give out any numbers on that because we're still negotiating with them. The other thing is that the MinDOC project, the first MinDOC project, it's the prototype for all, so we're constantly having changes to it. During the fourth quarter, because we were concentrating a lot of our efforts on getting that Tambua-Landana project loaded out at our Texas facility, we really didn't make a lot of progress on the first MinDOC project. We just kind of were moving along to get things done, to put us in a position where once we loaded out the other job, then we could refocus all our labor back on the first MinDOC project. That really affected our margins.

So I guess as we go forward into this quarter, now that the Tambua-Landana project is gone, plus or minus what you might be able to recoup in costs there, you think you're going to end up being more productive on the MinDOC One and start seeing margins get back, improve a lot or what?

Jim, this is Kerry. We hope so. We're working full boar on our first MinDOC so our man-hour levels are higher. We should be able to pick up some ground on there and get some significant increase in our percent complete.

And then, as far as the MinDoc Two getting pushed off, which I guess makes sense given the current environment, from your standpoint, that was something you guys planned on working on this year, I suppose. What's your situation now? You've got $153 million or $154 million, I think, of the backlog right now that runs off in 2009, which is about two quarters, maybe, worth of business. What's your prospects, Kerry, for work, and how do you fill that in to replace the MinDOC Two, and where do you stand?

Okay, Jim, what we're doing is moving up some of the ground water vessels, actually enhancing the schedule on those particular vessels, and we're dealing with our clients on that to move them up. Instead of delivering in 2010 and possibly 2011, we're moving some of the hulls up to fill in some of those gaps we may have because of the MinDOC Two. Granted, we probably will not be able to fill in all those gaps, but we are bidding additional marine type work or ship yard work, which seems to be a little more readily available than the fabrication work. So, I think that we will fill some of the gaps with that. I think you'll see more of a strain towards the third and fourth quarter, than the first and second quarter. And we're constantly looking, also, at our cost structure based on work levels as they may come down. We hope they don't come down significantly, but that's always the possibility, and we are looking at our overhead cost structure to make sure it matches whatever work levels that we have coming in the future.

And if I recall, Kerry, your original take on some of the marine work was that you might start off initially with a little lower margins, but as of last quarter, if I remember, you had yet to get through that to really feel out where those margins are. Have you made any progress on understanding how that's going to work out?

Yes, we delivered our first boat this week, and it's actually working, today, hauling some barges around, even though the christening will be formally sometime at the end of March or April, and the margins were right in line with what we anticipated. Our panel line, which we spent about $6 million on, is operational now, and should be producing panels for us on these future boats which should help our productivity and help our profitability on these jobs. It also has given us the opportunity to bid other marine work or panels that'll be used in other shipyards that don't have panel lines, where we could sub-fabricate for them, as well as help on our bidding on future work as far as the marine segment of our business. We think that's going to be a real plus for us and help us replace some of the production that may be lost on MinDOC Two. Now, MinDOC Two, the second MinDOC, we don't have a lot of information from ATP other than as their cash flow allows, we may be able to continue to work on it. It's not a definite, so we basically have written it out, more or less, for 2009, and considering it in 2010 and 11.

Last question. Remind us how the margins on the marine ground water boats compare to your normal fabrication?

We'll, we're bidding them in the same light as our normal fabrication, however the first vessel, we were probably about 75% of what we would normally get as a margin. But that was by design in the bid of that particular project.

Okay.

Rest of them were bid in accordance with our normal margins.

Great, thank you.

Okay, Jim

Next is Herb Buchbinder with Wachovia.

Hello?

You there?

Yes.

Kerry, you answered a number of my questions already, but what percent of the backlog is actually in the boats, right now, that you've got?

Herb, the number's about $75 million in dollars.

Okay, $75 million in the boats, okay, and the idea is to get most of that shipped this year if you can, but as of this moment, the schedule for that $75 million would be what?

Well it will go into next year as per our contracts, but we have asked some of our clients to move some of the vessels up to fill some holes we may have in our production.

So, if you can't get them to do that, all that $75 million is 2010 revenue?

No, that's not correct. We're going to deliver three boats this year. We actually have four under construction right now.

Okay, so, if you can't get them to accelerate the deliveries, roughly what kind of revenue from the boats will you have in 2009?

That's very difficult to say because we'll have to see what holes we have in our production schedule.

Okay. I'm not sure what you're including MinDOC Two in your backlog when you have very little feeling for when you're going to get the business, or even if you're going to get the contract. From a prudent standpoint, shouldn't you take that out of your backlog completely?

Well, if you noticed in our press release, we have segregated it, so if the contract is actually dissolved, which it hasn't been at this point in time, then yes, we've given you that indication of what it might be. To this point in time, we still have a contract for that second MinDOC. It has been suspended at this point in time waiting on our ultimate client's activity to dictate when we start up again. It's not been cancelled at all.

You said that the second half of the year is the, I guess, the most risk for the year. The question is, do you have enough business to stay profitable? If you don't, you may not even cover the dividend in 2009. Is that a fair assumption?

If you noticed, we did declare a dividend yesterday, however, we also stated in our press release that we would not, at this point in time at least, we expect to suspend the quarterly dividend for the remainder of this year.

Okay, I didn't see that. The dividend has been suspended.

We're going to pay this dividend. After this, it's going to be suspended. That's mainly a precautionary measure.

I can understand that.

We feel that we should have enough cash flow to support it, but not knowing what the market's doing, not knowing what our federal government's going to do at this point in time, and our clients, as far as their future spending, we thought it was prudent to save cash and try and stay out of debt. That's been our goal all along. It's been pretty successful about staying out of debt until now, and we hope to continue that.

So, you don't see yourself needing any, even short-term, financing during the course of 2009?

We're shooting for that, but we never know. There may be short-term needs, but we would hope we wouldn't. Our goal is never to draw down on our revolver unless we absolutely need it.

Okay, thanks a lot.

(Operator Instructions) We'll go next to Joe Aqular with Johnson Rice.

Good morning, Joe.

Good morning, Kerry and Robin. The question is, could you go over the oil and gas side of your bidding activity? You mentioned, obviously, the ship building stuff, but is there any business out there to bid on right now?

Joe, there's some business. Very small amounts. We're bidding other projects, smaller projects, needless to say. Most of the deepwater projects have been pushed to the right, waiting to see what's going to happen, with the economy, the world and everything else. None of our larger projects have been cancelled. Most of them are going to be delayed to probably sometime in the summer or possibly into 2010. I think the bulk of them will be delayed until the beginning of 2010, however, there may be some that we'll be looking at towards the end of the second quarter.

Okay, those, those are deepwater projects?

That's correct.

Okay, and magnitude of the work? Is there any?

Well, when you bid a deepwater, you don't know if you're going to get the hull, the topsides or what. It's hard to pick out, but could be substantial projects for us, especially the topsides. Topsides probably have the most credibility going forward. Large topsides could run you anywhere from $50 million upwards of $100 million. We really don't know the magnitude of them at this point in time because we're not privy to the drawings.

Just out of curiosity, has the decline in steel prices forced, or how are the oil companies interacting with engineering companies, and then you, in terms of bidding projects with the change in steel projects? Are you going back and rebidding older projects, and what impact might that have on their decision to go forward with some stuff this year while commodity prices are lower? Steel commodity, that is.

I think there's a lot of pressure to go ahead and bid some of these projects and the, what I call the middle to upper level management of these companies. However, the upper management of most of these companies are not going forward on it. The pressure from the middle management, telling their bosses that the steel prices are down, costs are low, very competitive, and they'd like to go ahead with the projects, however, there's still a hold on most of them that's above and beyond their control.

Just out of curiosity, you may or may not know this, what kind of oil price threshold do you think they're looking at for their decision. Also, just to clarify, when you mentioned the second quarter, are those award dates or the start of the work?

Those are award dates.

Okay.

And we really don't know on the first part of your question. We really don't know what their thresholds are right now. I'm not sure they know.

Okay. If I could go back to what was mentioned earlier with regard to the fourth quarter, you mentioned you were loading out the Tambua-Landana work and incurred some costs in the fourth quarter. I understand you don't want to give an amount there, but could you maybe tell us what some of the incurred costs were related to?

Well the incurred costs were related to the load out, the finalization of the project, and where we were spending a lot of overtime and additional hours getting these structures ready to load out, as well as actual load out costs. So, we are presenting these claims to our clients to see if we can negotiate something.

Would you characterize any of these as change orders?

Well, there's, different categories of change orders, okay? It could be a possible change order in the near future.

Okay. Another question. You know, given the environment today, and some of the outlook that you've mentioned in terms of businesses out there and your backlog and so forth, just kind of remind us. I mean, you all have been through this several times, in terms of dealing with down cycles, and you've always managed your way through them, really well. Do you feel that the Company today, has the same sort of management information systems and the control over the cost that you've had previous down cycles to work through this and stay profitable, should this be an extended downturn?

We think so. Our management's pretty much the same. We've had some change in one of our subsidiaries, but however, it's the same philosophy we had in the past. Conserve cash, bid projects that we think we can make money on, control our costs. And we've been, like you said, successful since 1987, and being able to do that and have not had a losing quarter. We've been very fortunate. I think our employees are all in line with whatever we need to do to keep costs down and keep the Company profitable, as well as conserving cash. We don't want to give our cash away. We've cut our CapEx, we haven't given pay increases for this year. We don't anticipate any pay decreases, but we stand ready to do that if necessary. We're doing everything possible to try and keep our Company in a profitable mode.

And, you touched on being the last question, did you all give a CapEx number? I missed it, if you did.

$22.5 million.

Thanks.

$10 million is associated with the drydock that's in process, that's going to be used in our Houma facility, part of our marine operation.

Okay, great, thank you.

(Operator Instruction) We'll go next to Katherine Schmidt with Cecil Mercurier.

Hey, Katherine.

How are you all doing? A couple quick questions for you this morning. Do you first anticipate having to do any layoffs or staff reductions, either on salaried workers or contract workers?

Needless to say, all contract labor is down, if you listened to the first part of the call.

I think I missed that one.

We are considerably down in contract labor, and our goal is always never to use contract labor unless we absolutely have to. As we've always said, contract labor is not as productive as your own labor force. Plus, you have a middle man who's making the profit on the contract labor. Our goal is not to have contract labor. So yes, we plan to get rid of contract labor wherever we can.

Katherine, the other thing too is the numbers we give on contract labor applies to all of our facilities, both Louisiana and Texas.

Would you mind reading that number again?

We had 145 contract laborers currently, and that compares to about 530 that we had at the same time last year.

Okay.

There are no definite plans to lay off any of our employees at this point in time. With some of the large contracts, you do have additional employment a lot on the contract side, and you would come down from that as these very large projects are loaded up and delivered.

In the fourth quarter, how much of that would you say is due to the load out expenses versus just the downturn in the overall economy and the fall in the price of oil?

Repeat your question.

In terms of the drop-off that you folks saw in the fourth quarter, how much of that do you feel was the economy, and how much of it was the one-time cost you talked about earlier, associated with those two different projects?

With work in our backlog, probably very negligent amount was because of the downturn in the economy. Most of it was because of the additional costs in the load out, a very large project.

Okay, that's all for me.

Okay, Katherine.

It appears we have no additional questions at this time.

Okay, we'd like to thank everybody for participating and we'll close the conference now.

And there'll be a replay available for this conference, starting today at 12:00 p.m. central time, running until March 20th, 2009 at 12:00 p.m. central time. To access the replay, dial 888-203-1112 or 719-457-0820, and use confirmation code 5342961. We appreciate everyone's participation today. Have a great day.