Gulf Island Fabrication Inc (GIFI) 2010 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Incorporated 2010 first quarter 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'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 2010 first 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 Information and elsewhere in the Company's 10-K filed March 8, 2010. The 10-K was included as part of the Company's 2009 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, 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 for the first quarter of 2010. The press release consists of two pages -- page 1 is text and page 2 is the income statement. I'd like to review page 2, which is the income statement, first.

The following are the results of operations for March 31, 2010 compared to March 31, 2009. Revenue was $69.3 million compared to $85.0 million. The cost of revenue was $61.8 million compared to $73.2 million. Gross margin was $7.4 million or 10.7% of revenue compared to $11.8 million or 13.8% of revenue.

The largest contributing factor causing a reduction in margins was the decrease in billable man-hours, due to the temporary reduction in the work volume at our Texas facility. The current low volume -- production volume man-hours is not allowing us to cover certain fixed costs at our Texas facility. Although we have taken steps to reduce costs at the facility, while waiting for the award of some larger oil and gas fabrication projects, certain fixed costs cannot be eliminated.

General and administrative expenses were $2.1 million or 3% of revenue compared to $2.2 million or 2.6% of revenue. Operating income was $5.3 million, compared to $9.5 million. We had net interest income of $953,000 for the three months ended March 31, 2010 compared to interest income of $3,000 for the three months ended March 31, 2009. The increase in net interest income is primarily related to the accretion of the discount associated with the financing arrangement with Bluewater ATP on the fabrication of the MinDOC 1 hole.

Other income expense was $746,000 as a gain, resulting from the settlement of claims related to damages incurred in connection with the hurricanes, which hit the Gulf Coast in 2008.

Income before taxes was $7.0 million compared to $9.5 million. Income tax expense was $2.5 million compared to $3.3 million. Income tax rates were 36.0% compared to 35.0%. Currently, we expect our tax rates to be 35% to 36% for the remainder of the year. Net income was $4.5 million compared to $6.2 million.

Basic and diluted earnings per share were $0.31 compared to basic and diluted earnings per share of $0.43. Weighted average and adjusted weighted average shares outstanding were 14.3 million shares for both periods.

Depreciation expense was $4.8 million compared to depreciation expense of $4.5 million. We declared and paid cash dividends of $0.01 per share for the period ended March 31, 2010 compared to $0.10 per share for the period ended March 31, 2009.

Please refer back to page one of the press release. We had a revenue backlog of $144.6 million with a labor backlog of 1.5 million man-hours remaining to work. The following represents selected balance sheet information as of March 31, 2010 compared to December 31, 2009.

Cash and short-term investments were $13.2 million compared to $8.8 million. Total current assets were $137.0 million compared to $114.1 million. Property plant and equipment net of depreciation was $198.5 million compared to $200.5 million.

Total assets were $347.5 million compared to $333.4 million. Total current liabilities were $43.2 million compared to $33.6 million. Long-term debt was $0 for both periods. Shareholders equity was $278.3 million compared to $273.8 million. Total liabilities and shareholders equity was $347.5 million compared to $333.4 million.

Other financial information for March 31, 2010 compared to March 31, 2009 consists of -- pass-through cost was 37.2% of revenue compared to 35.7% of revenue; man-hours worked was 663,000 compared to 857,000; deepwater revenue represented 16% of revenue compared to 72% of revenue; foreign revenue was less than 1% of revenue compared to 26% of revenue.

Other financial information for March 31, 2010 compared to December 31, 2009 consists of -- revenue backlog was $144.6 million compared to $136.8 million; remaining man-hours to work was 1.5 million compared to 1.5 million; revenue backlog for deepwater was $2.2 million or 1.6% compared to $7.7 million or 5.6%. Revenue backlog for foreign locations was $37.1 million or 25.7% compared to none at December 31, 2010.

Of the backlog at March 31, 2010, we expect to recognize revenue of approximately $98.3 million, not including any change orders, scope growth or new contracts that may be awarded during the remainder of 2010; and approximately $46.3 million of backlog is expected to be recognized as revenue in 2011 and thereafter.

We had approximately 1,385 employees and 15 contract employees. That compares to 1,395 employees and 50 contract employees.

Capex for the first quarter of 2010 was $2.8 million. Capex for the remainder of 2010 is approximately $16.1 million, which includes $4.5 million on a gate for our grading dock located at our Gulf marine facility in South Texas. Also included is $7.0 million for a fabrication shop and a warehouse in the [West shore] of our Gulf Island facilities, to further expand our marine construction and repair activity. We believe this enhancement to our Gulf Island marine subsidiary will allow us to operate more efficiently by being more centralized.

Michelle, I would like to open the call now just to the analysts. Michelle?

(Operator Instructions). Blake Hutchinson, Howard Weil.

Just trying to get a sense of the changing nature of your business here. If we look at your backlog at quarter end, how much of that would you say is kind of the traditional offshore fixture business versus some of your newer, more diversified boats, vessels, et cetera? Go ahead --

Well, Blake, we think it's probably around 20% of oil and gas compared to -- the rest would be more on the marine side of our business.

Okay. Does this -- does that disposition change the way you think about your business at all, in terms of predictability of margin or seasonality, or -- how does that change the way you look at kind of the near quarters in years here?

Blake, basically, there's no change in how we perceive our business. The margins should be similar to what we've seen in the past and maybe slightly below; but typically, we're handling these marine jobs just as we do our oil and gas business. So typically, I think you won't see that much of a difference going forward.

Okay. Switching to the Iraq tender or award that you received this quarter, you had mentioned that there's some work behind it, possibly some units behind it. Are you able to give us an idea of -- not necessarily what gift you would be awarded, but the magnitude of new units? And does this put you for kind of the first time on any sort of list with the government that qualifies you for other projects that may add new avenues of diversification?

Blake, of course, it puts our name on the radar for other projects. We don't have, at this point in time, earmarked any follow-on objects for these two vessels -- after these two vessels. But clearly, this puts us in the government contracting mode as a subcontractor primarily to prime contractors that deal with the US government and other government entities.

We have done other government work in the past, but this -- we hope this will lead to more projects; but we're just not that sure at this point in time.

Is there any change -- I mean, is this work any different in terms of, is it cost-plus? Or does it change your margin profile at all in and of itself?

Well, it is not cost-plus. It's basically a fixed price bid; but as of anything, you can expect maybe some change orders or something of that nature going forward. But at this point in time, we have actually a fixed price on these vessels.

Okay. And just a final question, and I'll get out of the way here and let some other folks ask some questions. Can I get -- just can you just give us an update on your 2010 Capex outlook? And kind of more specifically, what the larger portions of it may be and what you hope to achieve through the expenditure?

All right. Basically, what we're spending on, like Robin mentioned, was about $4.5 million -- about $5.5 million, actually in total for the gate, for our graving dock, to where we can do quicker turnarounds in the graving dock and have more maybe dry dockings, we call it, or repair work at that facility in Texas.

Secondly, we're looking at expanding our fabrication shop and warehouse in a new office building for our marine sector to be able to do more fabrication under roof, and coupled with our panel line, we've already put into operations; and, of course, centralize their operation more into one area, rather than having that fabrications scattered or both type fabrications scattered all over our facilities.

So this will give them a leg up on moving forward on centralization as well as becoming more efficient in their operations.

Other than that, the rest of our expenditures are basically maintenance-type expenditures -- replacing welding machines, upgrading maybe some computer systems for our cutting equipment and things of that nature. So -- but those are the major projects that we'll be spending Capex on.

Great. Appreciate the insight. Thanks a lot, guys.

Jim Rollyson, Raymond James.

Another nice quarter, I guess, absent a whole lot of backlog from what you guys would like to see. I guess first, Kerry, on that topic -- margins were down a little bit, but still maybe better than what your outlook last quarter might have been, just because backlog is down and all.

Kind of curious to get your thought on, given that your backlog has picked up a little bit and it seems like you continue to get the marine-type work, do you think we hold margins kind of in this range where they are, assuming there's no weather issues to speak of until you start picking up more backlog than the oil and gas side?

Well, Jim, we are bidding margins on these projects similar to what we've done in the past. One of the issues we have, of course, is our fixed costs. We can't come down quite as far as we'd like totally on fixed costs. As a result, our margins are somewhat depressed because of the volume situation that we bump into, like you mentioned.

We think the second quarter is going to probably be a little tougher quarter for us. We thought the first quarter would be a little tougher than what really was, but there was a couple of projects that came through at the last minute that had a little better margins on it -- not significant projects, but projects that we could work on and turn around on a quick nature.

And also, we cleaned up some change orders on a couple of other projects, which have really helped us. And there was a little expansion on some projects that we had under contract already. So we had some good things happen to us in the first quarter as well as some good weather. We had some reasonable weather in the first quarter for a wintertime situation.

Second quarter, we don't have those type of situations; we don't hope to get them, but we haven't seen them yet. So we think the second quarter will probably be a little more difficult than the first quarter. And then, hopefully, by the third and fourth quarter, we'll see oil and gas projects come back into the mix.

We have bid two significant topsides for deepwater at this point in time, and we have another one in-house that's due towards the end of May. However, we don't perceive that these projects will be awarded -- of course, if awarded to us, or whoever, until probably sometimes in the third quarter, with fabrication starting in the fourth quarter.

That's great color on that. As far as your graving dock expenditure, can you talk about when that's supposed to come into the market or be completed? And have you guys started trying to bid some work for that?

Right now we're expecting probably in May, June, latest timeframe to be complete on that. We've actually used some of our production workers on some customer-paying projects rather than put it on our Capex. But we've delayed it. We were hoping to have it in operation in April, but I think it will be delayed to the May/June timeframe.

We are seeking clients to do dry dockings. We are in discussion with some customers at this point in time on bringing some ships and semisubmersibles in. Nothing definitive at this time, but it's ongoing conversations. And we will be promoting that quite heavily in the next couple of months.

There's a big one out there that's in need of a lot of repair. (multiple speakers)

Last question for me, just on the shipyard side, it's obviously picking up a lot of the slack kind of today. When you think about this going forward over the next two, three, five years, assuming you get back to a more normalized oil and gas side of the business, how do you see your shipyard business? Does it take a backseat to oil and gas business? Or is that something you just want to continue to pursue and keep as a reasonably strong mix? And do you actually, at some point, add people to keep building up that side of the business? Or just kind of how you see that playing out.

Well, I think the second part of the question answers it pretty well. We look at that as another company, another subsidiary, and we plan to aggressively increase that subsidiary as the market allows us to, even when the oil and gas business comes back.

So we're looking at that as a strong subsidiary going forward. And that's why we're spending the money right now on trying to develop their own facilities and allowing them to hire employees and grow at a rate that we can control, but a rather fast pace.

And you still have enough yard space that's kind of idle or open to develop if and when that happens?

That's correct. In Louisiana, on our Westshore, we have 437 acres. We only have about 120 acres developed. So we have substantial acreage that we can go ahead and develop to do that type of work. And eventually, we'll -- we have one dry dock, but we have leveraged that by using our transporters to move vessels on and off the dock onto land, and do repair work. So we haven't had a tremendous need to have more than one dry dock; but in the future, we'll be looking at things of that nature to expand our capabilities even more.

Excellent. Thank you, guys.

Will Gabrielski, Broadpoint.

Just a couple of questions. Most are asked and answered. But you mentioned a few bids for some topsides. Does that all go for Mexico?

Yes.

Okay. The shallow water work you had talked about last quarter, some shallow water jacket work in the Gulf of Mexico, how is that progressing? And what does that look like today versus when you guys had your call a month and a half ago?

Well, we're still seeing a couple of projects. It's nothing real significant, but there are a couple of projects out there. Some of it has been delayed. You're seeing a little M&A activity right now in the Gulf of Mexico on the shelf, but there are some projects being talked about quite heavily, and we hope to have some bids on a couple of them in the next 60 days.

Okay. In your general discussions with some of the bigger clients in the Gulf of Mexico, are you getting -- are you still confident in terms of their commitments to some of these bigger projects right now, as oil prices have held up -- is that having an impact positively or anything changed?

Well, they've given us some positive responses, nothing negative where they're going to cancel these projects. There may be a slight delay in them, but it looks like they're going forward and it's been pretty positive on their end, to move forward on some of these larger projects.

Okay. Then lastly on -- obviously, ATP has been out in the news; they started up production. You guys are -- maybe just run through the dollars you're owed again and how we'll see that play out from a cash standpoint over the next year.

Well, actually, the cash payment portion of the agreement we had with Bluewater ATP has been satisfied. So what they always write down is the $48 million production payment. And based on the information we have, it appears that we're on schedule for -- what our anticipated payments were, based on what we disclosed in our 10-K.

Okay, great. Thank you a lot. Nice quarter.

Brian Uhlmer, Pritchard Capital.

I have a couple of easy ones for you. First, as we look at the makeup of backlog now, just trying to figure out how we can roll that over, because traditionally, it would take a little bit longer to turn into revs with the oil and gas longer-term business. So how should we look at your backlog rolling off into revenues?

Well, Brian, a large portion of our backlog right now is basically our marine business. Now, you have two big components of what's in the backlog on the marine side. We have this 355-foot lift boat and then we have the two Iraqi (multiple speakers) --

335.

-- 335 -- the lift boat is 335. And then we have these two Iraqi boats. Now, those are not going to start contributing revenue until probably third, even maybe fourth quarter. So the boats that we have in progress now, the tow boats that we have in progress now, certainly, the repair work; and then the two dry docks that we're building. But those things are going to be starting to be delivered -- the boats will be delivered in one boat a quarter.

Perfect. Thank you. And on an unrelated follow-up, when we're looking at capital expenditures and equipment that's out there, you guys are aware, obviously, of these bankruptcy auctions that are going on now. Do you think that there's items available that you want to get ahold of? I'm looking at a couple of crawler cranes and some of the stuff out of one of your competitors at Mobile and what's -- do you think that there's a market to get a lot of equipment this year in bankruptcy or at a discount?

Well, we always look at that and we go to these auctions. However, sometimes the auctions go for higher prices than what you can possibly buy new, which is kind of strange. But some people go to auctions and they get caught up in that fever, and they buy some equipment that's used that may not be as well-maintained as you would like, because a lot of companies when they go bankrupt, they don't really maintain their equipment prior to filing.

So we look at it pretty hard. If we can get a real bargain at it, we'll look at it. Other than that, we'll go in the market and see what we can find. And, of course, first, in the used market, to see what's available that has -- that's really been maintained and good condition. And secondly, we'll look at going new, where your maintenance costs is reduced for the first period of time in using that particular equipment.

Okay. Good answer. Thank you. I'll turn it back.

(Operator Instructions). Martin Malloy, Johnson Rice.

Could you talk a little bit about the capacity along the Gulf Coast for fabricating these large deepwater topsides? And beyond the three bids that you spoke about, are there additional ones out there that could impact 2011?

Well, Marty, of course you have the three larger fabricators -- ourselves, Kiewit, and J. Ray McDermott, that all probably need work at this point in time. So you have a significant amount of fabrication capacity available on these projects.

And as far as future projects, we are talking to individuals; we don't have any definitive bids, but of course, you're constantly talking on future projects. And I don't know exactly how many of them right now will actually come forward to bid, but we are talking on other projects at this point in time, including one topsides for the North Sea and possibly a bid on a couple -- another structure for the North Sea. We haven't been successful on all of the North Sea work yet, but we are still looking and still participating in that market.

Okay. And as far as -- if you look at the Gulf Coast fabrication yards, do you have an estimate as far as how many deepwater topsides they could be working on at the same time? What the maximum capacity is?

Marty, that's a tough question. I can't really evaluate the other yards. But we can actually work in our facilities probably on three of them without any problems at one -- at a point in time.

Okay.

Depending -- it depends on the delivery schedules and everything else that goes along with these projects. But we feel real comfortable with three.

Okay. Thank you.

And at this time, we would like to open the call up to any questions whether you're an analyst or not. (Operator Instructions). Joe Gibney, Capital One Southcoast.

You hit most of the high points here. Robin, just curious -- a little bit -- some granularity on the -- I've been thinking about this overriding royalty interest from Bluewater; just circling back on Will's question earlier.

I know in your 10-K, you've referenced $7 million to be recognized as interest income in '10 and another $3 million in 2011. Just curious how we should be thinking about that flowing through the P&L the rest of the year here, 2Q through 4Q?

We've recognized about -- well, it was right under $1 million in the first quarter. And the remainder of 2010, we will recognize approximately $6 million, and kind of look at it as a bell curve between now and, say, May -- April/May of 2011.

Okay. And you're still on the trajectory of $3 million in '11, correct?

That's correct.

Okay. All right, that's helpful. And just a little clarity, relative to Brian's question, is the timeframe on a few of the projects in backlog and transitioning into revenue. You referenced the lift boats and the USVs probably not coming on burn rate until third quarter or fourth quarter this year.

What are the estimated times to complete for those? Are you going to run through all these -- this one 335 in the course of a year? Is it going to take a bit longer? And same for the LSVs. Just curious how long it will take to burn through those.

The bulk of it will be in 2011 (multiple speakers) -- schedule.

Okay. All right, that's helpful. And last one, just on the repair capability side, you guys -- the $7 million on the fab shop and the warehouse certainly adds to the panel line and all your gate work here from a repair standpoint, particularly when we get past kind of the fixed cost absorption issues in this slack period.

Is it reasonable to think about sort of a higher margin repair mix to your business? This is back to Jim's question on the shipyard and how this folds in bigger picture. But this is typically higher margin work; do you think you can execute a little bit more, a little more favorable repair-oriented mix maybe, when we get past this kind of slack period on the deepwater side?

Well, the repair business has been a little higher margin work than what we're accustomed to. But understand -- and maybe our margins might be a little slightly lower on the new construction on the marine side. So it's kind of a balancing act, so -- but as we expand into the repair side in the future, then maybe our margins would increase. But we anticipate our margins to be similar to what we've seen in the past.

Yes, that's right, Joe, what Kerry said -- the margins are a little higher, but the percentage of the repair business at this point is not large enough to have a large impact or a semi-large impact. I mean --

No, understood. Understood. And last one for me, just curious, you referenced still hustling up some work in the North Sea. Just curious, what's the biggest impediment there to get some traction? Is it just local competition? Are they a lot more aggressive on price? Or is it just a longer courtship process? Just curious there.

Well, I think some of it is that the European sector is somewhat slow too, and the political climate has been recently to keep a lot of that work in the European fabrication yards. I mean, we're going to still compete and try and get it, but I think the European fabrication markets would have to get a little more filled up before we can get some significant projects outside of that area.

Okay, good deal. I appreciate it, guys. I'll turn it back.

And with no more questions in the queue, I'd like to give the presenters an opportunity for any additional or closing remarks.

No, we just want to thank everybody for participating, and we'll be back next quarter for our next meeting. Thank you all.

And this will conclude today's call. If you'd like to hear a replay of the conference, please dial 1-888-203-1112 and enter the passcode, 1200664. The replay will begin today at 12 p.m. Central time and will end on May 6 at 12 p.m. Central time. Thank you for your participation in today's conference.