Gulf Island Fabrication Inc (GIFI) 2017 Q2 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Q2 2017 Gulf Island Fabrication Inc. Earnings Conference Call. (Operator Instructions) This call is being recorded. At this time, I would like to turn the conference over to Ms. Cindi Cook, for opening remarks and introduction. Cindi, please go ahead.

Thank you, Melanie. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2017 Second 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 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 2, 2017. The 10-K was included as a part of the company's 2016 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, CEO and Director; Mr. David Schorlemer, our Executive Vice President and Chief Financial Officer; and Mr. Todd Ladd, our Executive Vice President and Chief Operating Officer. Mr. Meche?

Thank you, Cindi, good morning to all of our listeners. After my opening remarks, we will follow our standard format with David providing a breakdown of the financials, followed by Todd, as he provides an update on existing projects. I will have closing comments before we open it up to the analysts for questions.

Yesterday afternoon, we announced our second quarter results for 2017. As stated in our press release, 2017 continues and will continue to be a challenging year for our company, and this quarter's results reflect these difficult time. A significant adjustment to one of our complex projects within our shipyard division, along with the underutilization within our divisions put our financial results in a loss position for the quarter. While we continue to receive the awards for our shipyard group, construction on these projects will not start until later this year and into 2018. Our task will be to complete our current projects with the quality and reliability Gulf Island has become known for. While we have not received any bidding offers on the sale of our South Texas facilities, much interest has been expressed by several companies and we will continue to work with these potential buyers through our sales agent. Let me now turn the call over to David, who will provide our earnings and segmented breakdown. David?

Thanks, Kirk, and good morning to everyone. Yesterday, we reported a net loss of $2.9 million on revenue of $45.9 million for the second quarter ended June 30, 2017, compared to net income of $5.5 million on a revenue of $81.5 million for the second quarter ended June 30, 2016. The decrease in revenue and corresponding gross loss for the period is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. At quarter end, the company posted a revenue backlog of $251 million and a labor backlog of approximately 1.7 million hours, which is the highest backlog we've reported in over 3 years. This compares to a revenue backlog of $113 million and labor backlog of approximately 1.1 million hours in our prior quarter of this year, which represents 122% increase sequentially quarter-over-quarter.

Backlog from formal commitments received through July 26, 2017. Our backlog by segment at June 30, 2017, includes fabrication which represented $42.3 million, shipyards representing $196.4 million and services representing $13.3 million. Our corresponding book-to-bill ratio, which is simply our incremental quarterly backlog of $138 million divided by our revenues for the quarter of $45.9 million is 3.0.

Now let me break down the segments of our company. For our fabrication division, revenue was $14 million for the second quarter ended June 30, 2017, and $24.3 million for the same quarter of 2016, down 42.4% on a comparable basis. Gross profit was $1.9 million for the quarter versus $3.9 million for the comparable quarter in 2016. Operating income was $1.1 million compared to $2.7 million for the comparable quarter in 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards, as a result of the depletion of our backlog in this division and the winding down of our South Texas facilities in preparations for their disposition. We incurred holding cost of $1.2 million during the quarter related to our South Texas facilities, which are for sale. Year-to-date holding costs in South Texas were $2.5 million plus another $1.9 million in depreciation, which was incurred during the first quarter.

We expect ongoing quarterly holding cost of approximately $1 million per quarter related to these operations. For our shipyards division, revenue was $18.3 million for the quarter and $29.4 million for the same quarter of last year. A decrease of 37.7% on a comparable basis. Gross loss for the profit was $13.9 million versus a positive gross profit of $5.4 million for the comparable quarter in 2016.

Operating loss was $14.8 million for the quarter, with operating income of $4 million for the quarter ended June 30, 2016. Our shipyards division has continued to experience cost overruns on contracts that were signed to us in our shipyards acquisition of 2016. In particular, we are working on 2 offshore vessels in which we incurred losses during the quarter related to rework and revised estimates to complete the construction projects. We have also incurred holding cost related to a completed vessel that was delivered on February 6, 2017, however, the vessel was refused by our customer citing certain technical deficiencies. This customer was experiencing significant debt challenges and subsequently entered into a formal restructuring process. As of June 30, 2017, approximately $4.6 million remains due and outstanding from our customer under this contract. The balance due to us for a second vessel upon completion will be approximately $4.9 million, which will be invoiced upon reaching our delivery milestone once we recommence construction.

We have retained legal counsel to protect our claims of approximately $9.5 million under the contracts and are commencing arbitration for both vessels. Because these vessels have been completed, or are substantially complete, we believe they have significant fair value and that we would be able to fully recover any amounts due us. Based on our evaluation today, we do not believe that any loss on this contract is probable or estimatable at this time, although the arbitration process could take several months.

For our services division, revenue was $15.4 million for the quarter and $28.7 million for the same quarter last year, for a decrease of 46% on a comparable basis. Gross profit was $400,000 for the quarter versus gross profit of $4.9 million last year. Operating loss was $300,000 during the quarter compared to operating income of $4.1 million for the same quarter last year. Gross profit and results of operations decreased over the comparable quarter due to completion of a large offshore campaign ongoing during the first half of 2016, along with weak industry conditions continuing during the first half of this year.

For the company as a whole, noncash depreciation and amortization expense for the quarter was $2.8 million compared to $6.3 million for the second quarter of '16. The decrease is primarily attributable to management classifying our South Texas assets as assets held for sale and suspending ongoing depreciation expense on February 23, 2017.

Capital expenditures for the quarter were $1.4 million, primarily for continuing work performed in connection with the expansion of one of our existing dry docks for the shipyard and machinery and equipment for our fabrication division. Asset dispositions of $2.1 million related to some order and smaller dry docks acquired in our shipyard acquisition, offset capital expenditures to result in $700,000 of cash contributed during the quarter from investment activities.

We expect capital expenditures for the remainder of this year to be within a range of $2 million to $5 million, primarily related to improvements at our facilities. As of June 30, 2017, we have $22.3 million in cash and remain debt-free with $4.6 million in letters of credit issued. These LCs were temporarily cash collateralized as we transitioned banks during the quarter, which left availability under our new revolver at $40 million. Our cash decreased during the quarter by approximately $12.4 million, primarily related to the following: operating losses for the quarter of $16.3 million, progress and liabilities from assumed contracts in our shipyard acquisition, we have significantly progressed these contracts which in turn has resulted in utilization of the working capital and settlement payments received during this year.

The suspension of 2 vessel projects following our customer's refusal to accept delivery of the first vessel in February of this year and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts, and buildup of cost for contracts in progress related to a customer in our shipyard division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of this year through the first half of next, partially offset by proceeds from the sale of 2 dry docks for $2.1 million.

As noted in our earnings release, during the quarter, on June 9, we successfully executed a new $40 million credit agreement with Whitney Bank with improved flexibility to support our business. The new revolver may be used for issuing letters of credit and/or general corporate and working capital purposes, providing the company with enhanced working capital flexibility to manage our business and respond to market opportunities as we continue to execute our business plan this year and in the coming year.

As I mentioned on the prior quarter's call, any anticipation of the proceeds to be received from the sale of our South Texas assets, any connection with our overall corporate strategic planning, we engaged advisers to assist in the development of our capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options, including investing in our operating liquidity in order to facilitate, anticipate the future projects, selected capital improvements to enhance and/or expand our existing facilities, marked positions to expand our product and service capabilities, and other options to return surplus resources to shareholders either through stock buybacks and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities, we believe will enhance the long-term value of the company and we are consistent with our strategy.

I will now turn the call over to Todd, who will provide an update on our operations and major projects. Todd?

Thanks, David, and good morning to everyone. I'll begin with our fabrication division. At our South Texas facilities, we continue more [falling] activities for this location along with evaluation of existing assets. Our Louisiana fabrication facilities continue with module assembly for the actual (inaudible) project, where continued delayed deliveries on our first furnished items, is creating challenges for us in terms of steady utilization of labor within the facility.

Opportunities remain active for additional petrochemical and midstream module fabrication projects and other plant upgrades as well as offshore wind power projects on the East Coast, and structures for Gulf of Mexico and overseas locations. We continue to see these markets maturing in late 2017 and early 2018, due to the increased amount of bidding opportunities being presented. With our services division, we continue to feel the effects of challenges within the oil and gas offshore upstream sector, and overall project activity and pricing are down significantly from last year. However, relative to the first quarter, capital and maintenance spending by our core customers has increased with their traditional summertime construction campaigns. Moving into the winter months later this year, we do expect the typical seasonal slowdown to occur and we continue to look for opportunities within onshore plant expansions and maintenance programs to offset the seasonal declines. Our shipyard division continues with fabrication of 2 MPSVs scheduled for delivery on 2018. Additionally, the last 2 of 6 [escort tugs] fabrication orders will deliver in August of 2017. We have placed orders for steel on the 8 harbor tug commitments, we were recently awarded last month. This work will take place at our Jennings, Louisiana shipyard and work should begin at the end of the third quarter or possibly the beginning of the fourth. Engineering for the research vessel for Oregon State University will commence shortly while primary fabrication work is not scheduled to start until the second quarter of 2018. I'll now turn the call back over to Kirk for closing comments. Kirk?

Thank you, Todd. We remain focused on managing our balance sheet and rebuilding backlog. During the second quarter, we were able to secure 2 important projects for our shipyards group. The first is a regional class research vessel for Oregon State University and the second is the award of the 8 harbor tugs Todd spoke of. These awards, along with other smaller awards, provide us with a revenue backlog that is the highest the company has reported in over 3 years. Given the recent awards, we expect SG&A to increase in the coming quarters as we engage in hiring additional project management personnel in anticipation of starting these new contracts, along with additional support required for other significant project opportunities with which we are currently bidding. Emphasis will continue to be placed on opportunities outside traditional oil and gas upstream sector and into petrochemical planned construction and expansion, as well as alternate energy solutions for our fabrication and service divisions, and vessel construction project for the river cruise and government and military sectors for our shipyard division.

We look forward to converting many of these bidding opportunities into additional backlog in the coming quarters. Melanie, you may now open the line for questions from analysts.

(Operator Instructions) we'll take our first question from James Geygan with Milwaukee Institutional Asset Management.

You had a couple of big contract wins since your last call, congratulations on those, namely the tugs and the OSU regional class research vessel. Can you walk us through the accounting for those in your backlog, please?

Yes, the accounting really is just reported in a backlog report, it doesn't go into our balance sheet. We added approximately a little over $80 million on the harbor tug order, and additional $70 million on the research vessel and we have another, I believe, $15 million to $20 million that was related to some other projects -- smaller projects. That actually doesn't go on the balance sheet or the P&L, but it will show up in the coming quarters as we make progress on those contracts.

In terms on the LEEVAC contracts, it consistently produced cost overruns, how much do we have left to work through on those contracts?

We have approximately -- we've got another $55 million or -- $60 million is remaining on those projects.

You discussed your sales pipeline a little bit, you said that there were increased bidding opportunities and interestingly, you mentioned some offshore wind projects, can you elaborate a little bit on your pipeline in general and discuss the bidding environment?

Yes, JP, this is Kirk. So and when we look at our backlog -- excuse me, we look at our bidding opportunities that we have [frozen], we're seeing a large amount of opportunities as we talk about petrochemical side of the business. There's a tremendous amount of plant expansions that are happening primarily in the Louisiana but all over the U.S. We're looking into those backlog numbers, we have history associated with that type of projects and so when we look at our backlog -- excuse me, our bidding opportunities, we see that, that market represents nearly 50% of the remaining outstanding bids that we have within our sector right now. And then again, on top of that, we talk about other markets, which include government type backlog -- bidding opportunities, which represents probably about 25% of what we're looking at. And then again, we talk about renewables, renewables section is probably a little bit close to 12% of what we're looking at in terms of bidding opportunities.

It seems like it's been a while since we heard about fabrication in the offshore oil and gas jacket. Is there an opportunity for pickup in that area?

I think there may be some, although it might be slight, I think when we look at what's happening within oil and gas sector, and we read the reports from some of the majors, looks like they concentrating more their efforts onshore as opposed to offshore. And there is some talk about to shelf a little bit in terms of a few opportunities that may exist and if it's shelf type related work, it may be coming from overseas markets but certainly, not much in terms of traditional upstream Oil and Gas and again when we look at a total bidding opportunities we have, that sector represents less than about 5% of the total we have for outstanding bids.

Okay. One final question and this would pertain to your South Texas facility for sale. We've recently observed some activity in that area pertaining to real estate, notably in the past few weeks, the sale of another property on the Intercoastal Waterway that what we thought was a somewhat distressed price. Have there been any sales or any other indications that would cause you to reevaluate the approximately $105 million that you have held for sale?

No. Actually, when you look at that property, I guess, you got to look at in terms of geographic location. It was on Intercoastal Waterway system, ours is located at the corner, at an intersection in a coastal waterway system, and the Corpus Christi ship channel. So we have deepwater where the other property didn't, and you're right it probably was more of a distress sale than what we've got. So all indicators from what we are gathering, including the amount of interest that we have on the property, would not suggest that we would have to look at -- trying to reduce what we think the property is worth, so, no, not at this time.

(Operator Instructions) We'll go next to Martin Malloy with Johnson Rice.

This is [Henry Shortes] I am Martins' associate. I am filling in for him this morning.

I am sorry what was your name, please?

[Henry Shortes] yes, just filling in for him this morning, I'll will be brief here. I think my questions is kind of got touched on with the first caller. First question I had was, how much left on the vessel that increased cost in the second quarter, can we get some comfort that this will be the last of the increase cost to complete?

So again, I think David had -- you're right, David answered part of that question, I think, he said there was about $50 million to $60 million left remaining to work on a project, and yes, we certainly hope that this is the last of the adjustments we need on the project. We do have the luxury of having the first vessel deliver about 6 months prior to the second vessel. So we're applying learning curves to the second vessel that we experienced in the first vessel but again, there is no guarantee, this is a very large complex vessel that we're trying to complete. And, again, so management has taken their best shot in terms of what we think is going to take to complete these vessels, given the time frame we have remaining.

Yes, and then Henry just to add a little bit. We've got about $40 million of additional cost and $55 million of balance-to-bill.

Okay. That's helpful color. Next, just a question on, I guess, venturing into non-oil and gas markets for projects. Just kind of how important that will be for you guys going forward? And what opportunities you'll see out there that are nontraditional I suppose?

Well, again, when we look at our matrix of high [chore] if you want to call it that in terms of bidding opportunities, the biggest sector of that is, obviously, the petrochemical side of the business and again it represents greater than 50% of the bidding opportunities we have. And the number is pretty large. Not that we're going to get all these projects but it's larger than we've ever seen within traditional oil and gas sectors for opportunities that this [shows] and again, we talked about 3 competitive markets that we're looking at -- actually 4, the first, the petrochemical, the second is the government and military options that -- or opportunities that are out there for us, the third, is renewables, which deals with offshore wind and/or alternative energy solutions and of course, the fourth is the shipyards sector again, when we talk about opportunities that may exist for river cruise vessels and whatnot.

A quick follow up on that one, is there any update on the offshore wind project?

Well, I don't think there's much of an update. There are 2 companies that have been granted their permits to go and install these units. We are all working with both of those customers. Again, it's 3 different locations, we do think that there's some merit to one location, in particular, that may happen probably within a year or so. Certainly, the other ones are a couple of years away. But there is -- a lot of interest is being generated in terms of what the foundations look like, what are the opportunities to create jobs, not only in Louisiana but also in the states in which are benefiting from the power that's being generated by these windmills. And so as we kind of continue to look forward into what's out there for us, there are other opportunities that do come in to play with the possibility of building Jones Act compliant vessels to install and service these units, and so part of our shipyard opportunities, in terms of bidding, is coming from that sector as well as it relates to the vessels to install.

We'll go next to Tom Spiro with Spiro capital.

If you had a cash balance at the end of the quarter of $22 million, do you expect that cash balance to grow or shrink over the next quarter or 2?

I think that we could have some moderate pressure on our cash balances over the next couple of quarters but as I mentioned, we did have a number of things that have impaired our cash balance year-to-date, particularly related to the 2 vessels that are in arbitration, that's roughly $10 million that we would have had in our cash balance today. In addition to that, we had some cost related to 2016 that were paid out in the first quarter, so I think that given where we are today and where we are with our projects. We feel like we are in good shape, it was very important for us to put in place the credit agreement that would provide working capital support for us and so, I think we're going to be using that and the contracts that we put in place and are being awarded, we have some front-loaded receipts that help support some of that work as we kick it off. So hopefully that answers your question.

Just a follow up on the arbitration point, the $9.5 million, you mentioned that the other party to the arbitration is undergoing a financial restructuring, if we won the arbitration, is it likely we get the cash?

Well, what you do when you go through the restructuring is contracts are evaluated and they are either assumed or rejected. In our case, the contracts are assumed and the entirety of the contract survives. So in our contract, we have very good provisions around arbitration and that arbitration process will have to proceed, we have legal counsel that is working with us, we've identified an arbitrator on our side. We're waiting for them to continue. And so that's going to take some time but...

So, Tom, this is Kirk. Yes, we do anticipate that upon decisions from arbitrator, if we're successful, that the cash will be available for us to collect.

We have a lien on the vessels, so that's another key aspect to note.

I think we have a lawsuit underway with respect to one of our clients who hasn't paid, I have got that right, could you give us an update on that please?

So, yes. That contract also has been -- the court date has been set January of next year, we are in discovery process. We have retained expert witnesses in that respect as well. So there's no change in that respect, we're still aiming for our court date latter part of January 2018.

I see. And on the South Texas properties that are for sale, if it should turn out that the sales process is longer than we anticipate, is the property now [postured] so that we can hold it indefinitely at cash cost, the cash cost at about $1 million per quarter?

Yes, yes it is Tom.

And do we feel an urgency to show that or are we prepared to take our time, and if it costs us $1 million a quarter for some period of time, until we get what we think is a fair price for the property so be it?

I think it's we're prepared to wait this thing out. Again, we think that we got the corner locked, and that there is tremendous value within the facilities and especially with that area as we manage to push on with petrochemical development and so we don't see any signs of that market decreasing that we spoke about our bidding opportunities and how much opportunities we have especially with that sector.

So we're prepared if we're going to hold out. But there has been quite a bit of interest in the facilities and again we're going to continue working that through our sales agent and hopefully at some point in time, we get to a point where we get a decent offer on the facilities.

We'll go next to (inaudible) with [Rene Group].

I just have a quick follow up on the backlog in the shipyard division, so the Oregon State vessel is for $70 million in the press release at least -- it was $70 million for one vessel with the option of 1 or 2 more I think Oregon State stated there were 2 more. So can you just give us maybe a more color there on what are the contingency and what's the time line for additional vessel? I didn't clarify the $70 million just it's for the first one? And then, just real quick, if you can just give us a little more color on the $80 million under backlog that you talked about in the shipyards division, the new contract, can you define what timeline, any contingency there for additional work? Just a little more color on that?

In regards to the Oregon State Vessels. Yes, it is a contract for one with an option for 2 more, that option spreads over a period of 5 years. Right now, it's an item for the second vessel, that is contingent upon congressional approval, so that's an item that will go through that. Not anything at this time where we know any further of its movement or where it's gone but again it will be up over the next 5 years, and potentially, the way it's set, it could be at any given time they could physically award 2 or just one, or at any point in those 5 years they have an option on how they want to do it. But again, it is all contingent upon going through congressional approval type process. And -- Okay, and on the tugs, So GNH tugs is the other project that's out there for the $80 million so that is 8 individual harbor tugs that we are building and those are being done in our Louisiana facility.

Will go next to Michael Melby with Gate City Capital Management.

My understanding was you had some additional heavy equipment at the Texas facility. Could you update us on the potential sales process of that equipment and perhaps the potential proceeds you see coming from that?

Yes, Mike. The equipment that we have in the yard itself, majority of it is made up by some of our large cranes. These were items that were fairly new, they have been purchased in the last 5 years for some of the bigger projects that we've completed in that facilities. And again, they are all up for sale. So the 2 big cranes, roughly are about $17 million or $18 million, I think the $21 million total that we show right now in the overall assets for sale, so that's majority of it. We do have brokers that are out there trying to sell them, it's on a worldwide market. A lot of it is just kind of a wait-and-see as to where the market is for those potential opportunities to sell the cranes. Again, those are not items that we are in any hurry to sell. We do have a potential use where they could be put back in service for other projects that would come up. We don't have those projects in hand yet, but again time will tell what the use of those vessels and those piece of equipments will be...

And now we'll conclude our question-and-answer session for today. I'd like to turn the conference back over to management for any additional and closing remarks.

This will conclude our second quarter 2017 conference call. Again, thank you for joining us and we invite you to join us for our third quarter 2017 call in October of this year.

Once again that does conclude today's call. We thank you for your participation. You may now disconnect.