Gulf Island Fabrication Inc (GIFI) 2013 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication, Inc. 2013 third-quarter earnings release conference call. All participants will be in a listen-only mode for the duration of the presentation. As a reminder, this call is also being recorded.

Now at this time, I'd like to turn the conference over to Mrs. Deborah Knoblock for opening remarks and introductions. Ma'am, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2013 third-quarter teleconference. Please keep in mind that any statements made in this conference that are not statements of historical fact are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements.

These factors include the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the Company's ability to obtain them, and other details that are described under cautionary statements concerning forward-looking information and elsewhere in the Company's 10-K filed March 13, 2013. The 10-K was included as part of the Company's 2012 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. Kirk Meche, President and CEO and Mr. Jeffrey Favret, our CFO.

Thank you, Deborah. Good morning, everyone. I'll discuss highlights from the quarter, provide specifics on our financial performance, and then we'll open up the call for your questions.

Some of you may recall that we announced in March of this year that we intended to move our corporate offices to the Houston marketplace. I'm happy to let you know that earlier in October we completed that move and we are now in our Houston Energy Corridor office.

Now I'll turn to our financial performance for the quarter. Revenue for the three months ended September 30, 2013, was $168.2 million and $141.8 million for the comparable period 2012. Gross profit was $9.1 million or 5.4% of revenue for the three-month period ended September 30, 2013, compared to a gross loss of $13.4 million for the same period 2012.

Operating income was $5.3 million for the quarter ended September 30, 2013, compared to an operating loss at $15.4 million for the comparable period 2012. And net income for the three months ended September 30, 2013 was $3.3 million or $0.23 per share compared to a net loss of $13.4 million for the three months ended September 30, 2012.

The increase in revenue of 18.6% for the third quarter 2013 compared to the third quarter 2012 was primarily due to continuation of work related to change orders received in the prior quarter related to a hull in topside projects for a large deepwater customer. The increase in gross profit for the three months ended September 13, 2013, compared to the third quarter 2012, was primarily due to a combination of revenue recognized during the third quarter 2013 for a change order related to hull and topside projects for a large deepwater customer and losses of $9.5 million recognized during the third quarter 2012 associated with a separate topside project for a different large deepwater customer.

The following represents selected balance sheet information for September 30, 2013, compared to December 31, 2012. Cash and cash equivalents were $21.8 million compared to $24.9 million. Working capital was $80.1 million versus $81.3 million. Net property plant and equipment was $223 million compared to $229.2 million and total assets were $426.2 million and $403.5 million respectively.

CapEx for the first nine months of 2013 was $12.5 million. Approximately $11 million of capital expenditures are planned for the remaining three months of 2013, including $3.6 million of maintenance CapEx, another $3.6 million for rolling equipment to replace aging rolling equipment at our Texas facility, and $1.7 million net for a replacement aircraft.

We declared and paid dividends of $0.10 per share during each of the quarters ended September 30, 2013 and 2012. Revenue backlog was $342.5 million with a labor backlog of 3.0 million hours remaining to work at September 30, 2013, compared to a revenue backlog of $537 million and labor backlog of 4.4 million hours remaining to work at December 31, 2012.

During the third quarter 2013, topside modules for a large deepwater project in accordance with the contractual terms were transported to an integration site for lifting and setting procedures. Shortly thereafter, we entered into discussions with the customer concerning a reduction in scope to the project whereby remaining completion and integration work would be performed at the current project site by another integration contractor.

As a result of those ongoing discussions, we reduced our estimate of revenue and labor backlog by $25.5 million and 271,000 labor hours respectively. Additional backlog information for September 30, 2013, compared to December 31, 2012, was as follows -- revenue backlog for deepwater projects was $222.1 million or 64.9% compared to $393.3 million or 73.2%.

Of the backlog at September 30, 2013, we expect to recognize revenue of approximately $126 million during the remaining three months of 2013, not including change orders, scope growth, or new contracts that may be awarded. Approximately $173 million of backlog is expected to be recognized as revenue in 2014 and approximately $44 million of backlog is expected be recognized thereafter.

We had 1,909 employees and 438 contract employees at September 30 compared to 2,180 employees and 344 contract employees as of December 31, 2012. For the three months ended September 30, 2013, labor hours worked were 975,000 compared to 1.2 million for the same period 2012, and pass-through costs were 59.4% of revenue compared to 58.2% of revenue for the three months ended September 30, 2013, versus 2012.

Because we continue to have significant amounts of subcontract service hours remaining for our large deepwater hull and topside projects, pass-through costs are expected to continue to remain relatively high throughout the fourth quarter 2013. We expect labor hours to decrease somewhat during the fourth quarter as we enter into the latter stages of our deepwater hull and topside projects, and based on the reduction in scope on the separate deepwater topside project discussed earlier. However, we have worked hard to mitigate the impact of the project descoping, and we were able to successfully redirect a portion of our labor force to other projects.

And lastly, I can tell you that we have begun to see increased interest in our assets held for sale associated with the Cheviot project, and continue to believe that the ultimate disposition will net at a minimum our recorded value of $13.5 million. Operator, you may now open the call for questions.

Thank you, sir. (Operator Instructions). We'll pause for just a moment to allow everyone a chance to signal. Blake Hancock, Howard Weil.

I just wanted to see regarding the deepwater project that you guys called out last quarter that contributed about $43 million of revenue, how much did that contribute to this quarter's revenue, and potentially how much is remaining in your backlog or is that the $25 million that you guys wrote down?

No, those are two separate projects, Blake. Most of the revenue was generated last quarter we spoke about was our separate deepwater project compared to the one that we completed during this quarter. Those are two separate projects.

Okay. Can you quantify the amount of revenue that it contributed this quarter then?

No, Blake, I'm sorry; we don't have that information in front of us in terms of specifically how much per each project we have for the quarter. Jeff, I don't know anything more to add on that but we typically don't break it down by projects; I'm sorry I don't have that information in front of us.

We generally don't disclose that information.

Okay, great. That's fine. Just following up, can you guys talk about what you guys are seeing for other topside jacket orders, as well as where we stand for some of these deepwater tenders that are out there?

Sure, sure. Blake, this is Kirk. Some of the large deepwater projects as we've been reporting the last couple of quarters; we always see the tendency for those projects to start moving a little bit to the right and I think this is no exception.

There are a few of them that we are tracking and, again, they appear to be moving a little bit to the right, but nothing that's alarming us in terms of it's being canceled or anything like that. There are several of them that we are chasing currently.

We talked about the shelf work last quarter as well. We were successful in picking up one of the large projects for shelf work. There's some additional shelf work out there that we are currently chasing.

Of course, you know, everyone's chasing the plant work associated with some of this work that's going to happen in Louisiana. Our shipyard operations seem to be very healthy at this time, in terms of the bid and backlog we have with those guys.

We are seeing a little bit of a slowdown in terms of I guess the number of vessels we're seeing out there. It looks like they had a mass wave of vessels that were being built. Looks like they're starting to slow down a little bit now towards more normal, I guess, bidding activities going forward with our shipyards.

You know, again, there's quite a bit of stuff out there; some unique stuff that we hadn't seen in a while, some overseas type opportunities for us, as well. But, unfortunately, looks like some of these bigger platforms maybe moving a little bit to the right, and maybe by a quarter or so, nothing more than that.

Okay. Great. And then just one more if I can, one housekeeping question. G&A was up a little bit this quarter from the norm. Is that something we should keep going forward or will that revert back to historical levels?

Blake, it should revert back to historical levels. There was a one-time item in there that related to a bad debt expense that we, for conservatism, put in there.

Okay. Great. That's it for me, guys. Thank you.

Okay. Thanks, Blake.

Rob Norfleet, BB&T Capital Markets.

I just had a quick question on margins. I know you all have called out, obviously, pass-through costs have been up the last couple of quarters, but how should we look at progression of margins over the next few quarters?

I think if you looked at the backlog where it is today versus past cycles, and past cycles you know your margins were up around 8, 9, almost north of double digits. What do we need to see to get margins back to those levels?

Is it utilization? Is it pricing? I just kind of want to understand how we should expect to see margins as we look over the next 12 months.

Okay, Rob, well, certainly we're like you. We like to see our margins increase. We've had some difficulties with some projects, some of our larger topsides, deepwater projects in the past, and I think that has helped, or has contributed, to the suppression in the margins. And certainly we are conscious of that, and we're out there, we're trying to bid these projects as competitively as we can, putting the margins in that we can.

So we were hoping, like you guys are, that our margins improve as we go forward. And, again, hopefully with some of the resolution and completion of some of these big large deepwater projects we have, we'll get back to more of our conventional type projects with the shallow water shelf-type work. And, again, we're hoping that our margins improve but, again, with no guarantee there.

Okay, and just quickly in terms of the competitive nature of the market -- obviously, as we are seeing more activity ramping up in the Gulf, are you seeing much competition coming from overseas from some of the foreign competitors?

Yes, we are. With the completion now of one of the large transportation companies that's just completed a very large vessel that will enable the overseas markets to compete with us in terms of bringing the big projects completed as one to the Gulf, where before the topsides were being built here, they were being integrated here in the states and th hulls were being built overseas. Now that we've got this big vessel out there, I think it's going to open up the market a little bit more in terms of competition from foreign markets.

Okay. That's helpful. The last question I have, and I know you've been asked this before, obviously we are getting ready to see a pretty significant buildout of chemical and petchem activity in the Gulf Coast area. Especially on the module side, what kind of opportunities do you see in terms of fabricating some of that business in your facility?

Rob, we see a lot of potential there. The nice thing about the modules that we are seeing is that traditionally these modules were stick-built modules in the plants, where for our scope of work it was more of bolted-type connections. And we cut and drill the holes and bolt it and send it on its way. In some cases, we even dismantle it.

Now, we are seeing more traditional or conventional type modules that would lend itself to fabrication work with cutting and welding and whatnot, so we see the concepts coming out. There's a lot of opportunities going forward. Again, I think they're changing their philosophy in terms of the amount of time they're shutting these plants down and the amount of time it takes to assemble them on site, realizing that the most opportune ventures they have is going to be within the fabrication yards, which gear itself right towards what we think we do.

Great. Thanks for your answers.

Okay, Rob. Thank you.

Randy Bhatia, Capital One.

Just curious if you guys could give us any more color on the scope reduction that you guys took this quarter. What kind of -- what drove that and is that something that you guys were anticipating, and could we see it again on any other projects that are currently in backlog?

Well, first of all, for any other projects in the backlog, no, we don't have any other type of projects where we have an integration portion that happens outside our facilities with lifting and whatnot, so we don't anticipate that happening anymore. In terms of the descoping of the project with the customer, there are a lot of circumstances behind it and a lot of decisions that need to be made in terms of what was best for the project and best for the owner at the time.

We are in negotiations with those guys to wrap this thing up, so I'd prefer not to elaborate too much on it but just tell you guys that we're working with the customer in that respect. And, again, we think it may have been best for the project in order to keep this thing at the integration site and not bring it back to us.

Okay. That's helpful, thank you. Just getting back to the question on the petchem opportunity, would there be any sort of retooling or any sort of upfront CapEx required at your facilities to take on some of that module work?

Randy, no, I don't think so. Again, as I said earlier, this work really lends itself to our type of construction. There may be some general maintenance CapEx that we may need in order to produce this amount of work, because it's a tremendous amount of work.

So maybe some upgrades in terms of some small CapEx within each facilities in terms of our welding machines and whatnot, but it's not a big CapEx project. What the project needs is a lot of real estate and, again, so once you get past the fitting and the cutting and then welding these modules together then it's just process at that point in time. You line these things up and put them in line. So no, it won't be a lot of CapEx associated with this type of work.

Okay, great. Thanks. And if you don't mind, if I could sneak one more in here just on the margin question, and just kind of broader petchem opportunity and deepwater bidding environment, is there any thought to whether or not the deepwater projects are as attractive to you guys as they were, say, two years ago? Is that becoming a relatively less attractive target market?

Well, no, that's a good question, Randy. And it's certainly something that we continue to monitor within our companies as to what provides the best opportunities for us going forward.

It's an evaluation period we're doing, but certainly we've got our customer base out there as well. So, in some respects, I think we've just got to make sure that we've got the proper numbers in our bids, and make sure that we man our projects where they need to be to go forward with the projects.

Again, it's an evaluation period we do. We don't bid everything that comes in the door; we certainly look at what we are dealing with in terms of our capabilities, and from that point on then we make decisions whether or not we want to bid the projects or not. So it's something we're going to keep a close eye on and look and see what generates the best opportunities for our companies going forward.

Great. Thanks very much, guys, I appreciate it.

Okay, Randy, thank you.

(Operator Instructions). Brad Evans, Heartland.

Can you call out the size of that bad debt reserve in the quarter?

Yes, it was just under $800,000.

Okay. Was there anything unusual with the tax rate in the quarter?

No, we had a -- the only thing about tax was that there was an adjustment based on a true-up of a provision to return that affected the rate somewhat, not dramatically.

Okay. So the bad debt reserve cost you about $0.04 in the quarter. Can you amplify exactly what product that was associated with? Or what customer that was attributable to?

It's associated with a vessel customer. It was work that was performed over the course of a period of time. There was a final billing due and we are pursuing collection of that final billing.

Okay. So that's about $0.04, correct?

That's about right. That's how the math works out.

Okay. What was cash flow from operations in the third quarter? Do you have that handy?

I do. It was positive at just about $13.8 million.

$13.8 million. So that brings year-to-date cash flows from operations to roughly almost $29 million?

I'm sorry, $13.8 million is for the nine months.

That's for the nine months, excuse me, I'm sorry. So you're actually a little negative in the third quarter. Do you have a view as to how you think cash flows from operations might shake out in the fourth quarter? Do you expect them to be positive?

We do. We have quite a bit of pent-up investment in contracts, if you will, that we expect to convert to cash over the course of the next quarter. So that's one element, and we think that with the kinds of work that we're seeing coming through in the fourth quarter, that the net income component of that should be strong. So we expect it to be positive.

Okay. And the timing of the Cheviot receivable or the asset disposition, is that -- how far -- what's the range of potential scenarios as to how quickly that might materialize?

We're certainly hoping that it materializes before year-end, Brad, but I think first quarter is probably safe in that respect. Again, we've got some very strong interest in it, and we're just trying to make sure that we move forward with it. And the customer has some other opportunities they are looking at in terms of the hull itself; they're pretty set on the top side. So, again, I think probably, hopefully, we'll announce something by year end, and if not then certainly first quarter.

Got it. So, did you say $16 million was reserved on the balance sheet for that?

$13.5 million.

$13.5 million, excuse me. So depending upon the timing of that, plus the stronger cash flows in the fourth quarter, cash balances should be up handsomely as you look out over the next quarter or two?

I think that's right. Clearly, we are at an early stage of interest in this project so we can't guarantee that this will monetize over the course of the next six months. But certainly we don't expect it to be next quarter. It would be thereafter.

Understood, but my point was over the next quarter or two cash balances should be up meaningfully from where they are today.

That's correct. That's our expectation. That's right.

I'm sorry, you gave some numbers for the $3.6 million, the $3.6 million, and the $1.7 million for allocations of capital. Was that what was spent, or is that what you expect to spend in the fourth quarter?

That's what we expect to spend going forward.

Over the next what period of time?

Three months.

Next three months. Okay.

And just in terms of backlog, I know we're all, everybody's focused on the headline number, but I think shareholders are probably focused on more so the quality versus the quantity of backlog with respect to embedded margins, what have you. This is probably a hard question, but when you think about the trajectory of the backlog bottoming here as you bleed off some of these less than desirable pieces of business, when do you think we start to see the backlog trend toward a more high calorie, high quality backlog?

When do we start to see that do you think? Is that the first half of next year?

Brad, I certainly hope it's a little earlier than that. Again, with this one project we're negotiating will certainly could have some impact on our margins, but assuming we get all of that resolved fairly quickly then yes, I would think first quarter, second quarter of next year at the latest.

We're hoping to see these margins improve. Again, as we talk more about our traditional type of work that we're doing with our shallow water components and whatnot, traditionally those margins have been a little bit higher than we've seen on these large deepwater projects.

I'm with you. I'm hoping that first quarter, and certainly by second quarter, we should see some return in the margins pending nothing else ever happens.

Got it. So, I mean, if the market continues to improve, the Gulf of Mexico, the deepwater, the shallow water, your traditional work, the vessel OSV market where you have a little bit of exposure, the petchem cycle starts to impact you positively, there's nothing structurally that prevents you from getting back to a 8% to 10% operating margin, is there?

No, I wouldn't. I wouldn't see why we couldn't obtain those margins.

Okay, good luck. Thank you.

Okay. Thank you, Brad.

And that's all the time we have for questions today. So I'd like to turn it back over to our speakers for any additional or closing remarks.

Well again, we'd like to thank everyone for listening in on our conference call for this quarter, and we'll talk again at the beginning part of next year. So thank you, again, and have a good day.

And that does conclude today's call. We thank everyone for their participation.