Gulf Island Fabrication Inc (GIFI) 2017 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Q3 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 introductions. Please go ahead.

Thank you, Moneth. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2017 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 2, 2017.

The 10-K was included as 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, and good morning to all of our listeners. After my opening remarks, we will follow our standard format, with David providing the breakdown of the financials, followed by Todd as he provides an update on existing projects. I will have closing comments before we open the lines to analysts for questions.

Yesterday afternoon, we announced our third quarter results for 2017. 2017 continues and will continue to be a challenging year for our company, and this quarter's results reflect these difficult times. Underutilization within our divisions along with an adjustment to one of our complex projects within our shipyards division put our financial results in a loss position for the quarter.

However, we are pleased to report significant improvements in results sequentially compared to last quarter. Additionally, the backlog numbers continue to improve with awards within our services division and our shipyards division. It should be noted that these projects will not start until later this year and in some cases, mid-2018.

I'm also very pleased to announce that earlier this week, we received notification from SeaOne Holdings, LLC that we had been selected as the prime contractor for the engineering, procurement, construction installation, commissioning and startup, also known as EPCICS, for its Caribbean fuel supply project.

While SeaOne's selection of our company is nonbinding and commencement of the project remains subject to a number of conditions, including agreement on terms of engagement, we are working to strengthen our internal project management capabilities through the hiring of additional personnel to service this potential project.

We look forward to providing additional information in the coming quarters as we continue to work with SeaOne to enter into definitive agreements. We recognize this as a significant project and look forward to working with SeaOne.

To continue with other news during this quarter, we experienced one of the most devastating hurricanes in U.S. history to hit the Texas Gulf Coast. Hurricane Harvey made landfall to the northeast of our Gulf marine facilities in South Texas. With this, we experienced winds in excess of 135 miles per hour but no flooding. Damage was suffered by most, if not to all of our buildings and some of our cranes. Insurance claims have been filed, and we are waiting final estimates on the total amount of damage experienced. We expect the dollar amount of damage to exceed $14 million and could be as high as $22 million. We fully expect to recoup this amount.

Hurricane Harvey then stalled and dumped more than 51 inches of rain on the Houston area, flooding most of Houston and the surrounding areas. Our corporate office did not have any issues, but several of our employees' homes were affected by these flooded waters.

We have executed a letter of interest with a proposed buyer for the sale of our South Yard in Ingleside, Texas. While this LOI is nonbinding, the proposed buyers will be conducting several surveys on the property during the next few months as part of their due diligence.

I also want to provide some color on ongoing disputes with 2 of our customers. First is the nonacceptance of the 2 offshore supply vessels that were completed and ready for delivery but our customer cited design deficiencies. As per the contract, this has been submitted to the National Arbitration Society, and 3 arbitrators have been selected, and we are in the process of discovery. In recent weeks, the customer in question has named a new interim CEO. The interim CEO has made contact with me, and we will be meeting to discuss possible ways to resolve these issues.

Second is the nonpayment of change orders associated with a large jacket built by our fabrication division. Trial dates have been set for January 2018 and discovery has begun.

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 $3.1 million on revenue of $49.9 million for the third quarter ended September 30, 2017, compared to net income of $0.5 million on revenue of $65.4 million for the third quarter ended September 30, 2016.

Compared to the prior quarter, revenues increased 8.8%, and gross profit improved to nearly breakeven at negative $0.5 million as compared to negative $11.6 million in the second quarter of this year. The improvement was primarily related to positive results in the fabrication and services division and reduced losses on construction contracts in the shipyards division.

Gross margins, excluding depreciation, were positive $2.2 million, up from negative $8.8 million in the prior quarter. The improvement in results is primarily attributable to reduced losses on construction contracts in our shipyards division as compared to the prior quarter.

Our revenue backlog of $251.7 million and a labor backlog of approximately $1.6 million at September 30, 2017, remains comparable to our second quarter backlog of $251 million at June 30, 2017. Our backlog at September 30, 2017, includes recent awards from our services and shipyards divisions and remains the highest backlog we've reported in over 3 years.

Backlog includes formal commitments received through October 20, 2017. Our backlog by segment at September 30, 2017, includes fabrication, which represented $29.6 million; shipyards, representing $200.9 million and services, representing $21.9 million.

Now let me break down the segments of our company. For our fabrication division, revenue was $18.3 million for the third quarter ended September 30, 2017, and $22.3 million for the same quarter 2016, down 17.9% on a comparable basis.

Gross profit was $1.3 million for the quarter versus $0.6 million for the comparable quarter in 2016. Operating income was $0.5 million compared to an operating loss of $0.3 million for the comparable quarter in 2016. The increase in gross profit is attributable to gains on scrap sales of approximately $700,000 in our South Texas facility; decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards; no depreciation being recorded for our South Texas assets for the 3 months ended September 30, 2017, as these assets are classified as assets held for sale; and continued cost minimization efforts implemented by management for the period.

We incurred holding costs of $1.1 million during the quarter related to our South Texas facilities which are for sale. Year-to-date holding costs in South Texas were $3.6 million plus another $1.9 million in depreciation, which was incurred during the first quarter. We expect ongoing quarterly holding costs of approximately $1 million per quarter related to these operations.

For our shipyards division, revenue was $15.1 million for the quarter and $23.1 million for the same quarter in 2016 for a decrease of 34.6% on a comparable basis. Gross loss for the quarter was $3.5 million versus a positive gross profit of $1.9 million for the comparable quarter of 2016. Operating loss was $4.4 million for the quarter with operating income of $0.5 million for the quarter ended September 30, 2016. Our shipyards division has continued to experience cost overruns on contracts that were signed to us in our shipyards acquisition last year.

In particular, we are working on 2 offshore vessels in which we incurred $2.1 million in losses during the current quarter related to rework and revised estimates to complete these construction projects.

We have also incurred holding costs 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 September 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 recommenced construction.

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 to us. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimatable at this time. As Kirk mentioned earlier, we've had conversations in recent days with the new management and are working to resolve our dispute in a constructive manner.

For our services division, revenue was $17.7 million for the quarter and $20.9 million for the same quarter in 2016 or a decrease of 15.7% on a comparable basis. Gross profit was $1.9 million for the quarter versus gross profit of $2.9 million for the comparable quarter in 2016.

Operating income was $1.2 million during the quarter compared to operating income of $2.0 million for the same quarter in 2016. Gross profit and operating income 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 2017.

For the company as a whole, noncash depreciation and amortization expense for the quarter was $2.7 million compared to $6.4 million for the third quarter of 2016 and $2.8 million for the prior quarter of this year. 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 of 2017.

Capital expenditures for the quarter were $2.7 million, primarily for continuing work performed in connection with the expansion of one of our existing dry docks for our shipyards division and machinery and equipment for our fabrication division. We do not anticipate significant capital expenditures for the remainder of this year.

As of September 30, 2017, we have $17.8 million in cash and remain debt-free with $4.6 million in letters of credit issued. Our cash decreased during the quarter by approximately $4.5 million, primarily related to the following: operating losses exclusive of depreciation and amortization for the quarter of $2.2 million; CapEx of $2.7 million; buildup of costs for contracts in progress related to a customer in our shipyards division, with significant milestone payments occurring in the later stages of the projects, which are expected to occur later in 2017 to the first half of 2018; and partially offset by insurance proceeds received of $1.5 million.

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, everyone. I'll begin with our fabrication division. Mothballing activities for our South Texas locations, including the evaluation of existing assets, have slowed as we had to secure the location following the impact of Hurricane Harvey. Our Louisiana fabrication facilities continues to perform work on the actual [Latte] module fabrication project. The project's first module is scheduled for delivery in November 2017, having the subsequent modules delivering in early 2018.

With our services division, we have secured some offshore platform facility expansion work, which entails the onshore fabrication of structural and production components as well as the offshore installation and hookup scopes of work. We have also been successful in securing of opportunities within the onshore plant expansion and maintenance programs.

Our shipyards division continues with fabrication of 2 MPSVs scheduled for delivery in 2018, where we successfully launched the second vessel at our Jennings location and have subsequently moved this vessel to our Houma location for final outfitting. Our Jennings facility has now commenced with the fabrication of 8 harbor tugs due for staggered deliveries through the end of 2019.

Engineering for the Oregon State University Research Vessel continues, where the fabrication of this vessel will commence in the second quarter of 2018. Last, our backlog of work continues to grow with the recent award of an Ice-Class Z-drive tug for St. Lawrence Seaway Development Corp. set for delivery in the second quarter of 2019.

I will now turn the call back to Kirk for closing comments. Kirk?

Thank you, Todd. We remain focused on managing our balance sheet and rebuilding backlog. We are working to position the company return to growth in 2018 and beyond. As we evaluate our organization capital structure and operational capacities, we will be making changes to ensure our ability to execute on our existing and anticipated projects going forward. Remainder of 2017 and early 2018 will remain challenging given our current backlog and histograms.

Moneth, you may now open the line for questions from analysts.

(Operator Instructions) We'll take your first caller from Martin Malloy with Johnson Rice.

It sounds like an exciting opportunity here with the SeaOne project. Anything else you can tell us about the project regarding the timing of it potentially moving forward, what steps that we should look for from the project owner's side to indicate that it's moving forward? And then the potential scope here, it looks like a fairly large project, and I don't know if there's any help you can give us on the potential scope award for Gulf Island.

Sure, Marty. So this is Kirk. Well, first of all, when you want to get, I guess, the best information on the project, the thing to do is go onto SeaOne's website, and they post updates and status of where they are with the project. That's probably the best indicator as to what the project is doing. Second of all, you're absolutely correct, this could be one of the largest projects that Gulf Island could sign in the history of our company. And as we develop scope with SeaOne on exactly what phases we end up doing with these guys, right now, we're looking at Phase 1, 2 and 3. But again, there are a lot of things that need to happen. I would hope that some type of formal letter of intent would be issued, hopefully in the coming months. And as SeaOne continues to push forward to make sure that they've got everything lined up with their investors and whatnot, I would anticipate that sometimes in the mid- to latter part 2018 might be a good time frame for Gulf Island to begin work. But certainly if anything materializes beyond this selection as the fabricator, we certainly will keep the investors posted.

Okay. Great. And then next question, just on the sales process for the Texas facilities and the damage from Harvey. How extensive was the damage from Harvey? And maybe if you could just update in terms of expected timing for how long the sales process is going to last.

Yes, Marty, this is Todd. In regards to the damage that incurred, pretty much every building on both locations that we have in South Texas had incurred some damage. Some was just superficial, where we may have just had some exterior skin of the building that might have gotten peeled back and needs replacement, and other were pretty significant damage to the main structural components of the buildings themselves. Unfortunately, the 2 office buildings did incur roof damage, so we did get a lot of water intrusion. And things, where we're going through and just making assessment, so again, whether it's a complete loss or we can do some rebuilding of those particular buildings. It's still in process. We have secured everything. So we have everything to where it needs to be, where it's safe for anyone to be within any of the facilities. And then now it's just a process of going through insurance assessments, things of that nature. I'll just say, so in regards to the sales item and what we're looking at there, again, we're going through a period right now that we have with the potential buyer, and there's an exclusive period that we're working with these individuals. It's something that probably timing we're looking at is going to be early 2018 in regards to formalizing our sales agreement and defining the exact time of closing.

Okay. Great. And then switching over to shipyard division, it was encouraging to see the losses on the 2 vessels going down this quarter. Could you maybe give us an update on approximately how percentage -- what percentage you are in terms of completion of these projects, these 2 vessels?

Yes. So where we're at right now -- and rather than just giving you numbers just to look at it. So of the first vessel itself, again, structurally, we are right about 90% complete overall. And it's -- in its completion phase where we're in, they're actually doing some final painting in certain sections. But a lot of it is, right now, to where we have turned it over to the subcontractors, where we're doing a lot of internal completion of architectural work as well as electric components and things of that nature. So it's well along its way. It's at least 70% complete overall in construction. The second vessel, as I noted, we had just launched it about a month ago and brought it to Houma so we can go into its outfitting stage. But we still have some structural components of the superstructure or the main control section that you would see on a vessel that's above the hull that we're installing right now, getting those complete, and then we'll be moving on to the other phases, where we're actually doing the outfitting, again, bringing in the subcontractors, who do all the architectural and the electrical works and things of that nature.

Okay. Great. And then just with the issues that have gone on in the shipyard division over the last year or so related to these vessels, could you maybe talk about what you've learned from these vessels and maybe how you're applying it to the bidding that you're doing now? And maybe just giving us some comfort with the awards that you've announced recently that the risks have been appropriately evaluated.

Yes. So with those vessels -- and one of the things that we're seeing -- and this is a pivot that has changed in roughly the last 5 to 6 years within the industry. And the vessels themselves are getting just very complex on the way the equipment that's put in and the electronics and things of that nature. So a lot of the way previous business was done around OSVs, and they were pretty straightforward, and simple vessels have now taken themselves to being very complex-type units with a lot of electronics and things on it that get a little bit above and beyond typical what we would have seen for just meeting regulation. And so some of that's causing some challenges to just what needs to be done for the vessels themselves and getting them to kind of meet the operational needs of the operators. With that and what we're doing around new bidding and things going forward, these vessels we're seeing now are taking on kind of a new life, where the engineering aspects upfront and the amount of modeling and computer-generated -- somewhat building the vessel in a computer first and having everything 100% engineered prior to start of a vessel is where we're seeing -- and again, segregating what is typical, standard, small construction to what complex vessels are. And these complex vessels we're identifying upfront, and then bidding process, what we've done is we've actually segregated a section of our staff to where we're going to have a technical group of guys who are part of our bidding process, and they do evaluation of the contracts, understanding what needs to be done in the bid and also the engineering aspects that must be done on these vessels before we can begin construction.

Marty, this is Kirk. And Todd is absolutely right. And one thing to add to that is that we have opened an office in Metairie, Louisiana, where we've drawn upon the talent, mostly from UNO with the naval architectural program they have. And so we have opened official engineering office in Metairie, and currently, I think, we have about 10 folks in that facility. And as Todd said, their primary mission is to evaluate the bids when they come in and then -- but more importantly than that, is to provide engineering services to the respective shipyard divisions prior to start of construction of the vessels.

(Operator Instructions) We'll move next to JP Geygan from Global Value Investment Corp.

It sounds like things are generally starting to improve, which is an encouraging sign. First, I have a few questions on your properties, and this is really a 3-parted question. Part one, you indicated that a letter of intent had been signed for the Ingleside property. Does that also apply to the Aransas Pass property? Is that still held for sale? Part two, as you previously indicated that you'd hired some advisers to get some suggestions on deploying the proceeds of those sales, do you have an update on that? And then part three would be you'd leased the Prospect yard, and it was my impression that one of the Tidewater vessels is parked there and that would terminate on December 31, 2017, at the latest. Could you provide an update on that, please?

Sure, Jeff. So this is Kirk. I'll give you an update on questions one and three, and I'll let David get number two. So number one, again, just to make sure we're clear, it's a letter of interest on the yard. It's not a letter of intent. And as far as that goes, it is the South Yard only. So this party's interest is in the South Yard, and so consequently, the property in the North Yard remains -- both properties remain on the marketplace. But the North Yard and, particularly, the 30 acres adjacent to the North Yard, at this time, would not be part of that transaction. The second part of the -- second question you had was Prospect. You were correct. What we had with the previous owner or who has the facilities, we made an agreement with them to reduce the rent that we had an obligation to pay through -- it was May of this year. So we reduced that rent money, and our obligation ends at December 31 with the facilities. We still had some and still have some assets still remaining in the facilities. We had a dry dock there, which we moved to our Houma location, and there's still some small machinery that we have in the facilities. So that obligation will end December 31. And David, if you want to address the update on advisers.

Sure. Yes, Jeff, we received some recommendations that were really developed by the management team as well in consultation with the advisers. We presented that to our Board of Directors, and they received that. And I think, at this point, that's certainly something that we're incorporating into our future strategy. But in the meantime, we're going to be maintaining very conservative capital structure. We've got a lot of large project opportunities that we're evaluating, and we want to make sure that we have the financial position to help support those going forward. Kirk mentioned some investment being made on the human capital side. So that's going to be our first priority is just to maintain a very conservative capital structure.

Okay. Second question, and I know you spoke on the 2 multipurpose offshore vessels at length, but I did want to revisit the financing on those. I believe on last quarter's call, you indicated that you had $55 million left to bill on those 2 vessels and $40 million in costs, suggesting that there might be an opportunity for some recuperation of losses previously recognized. Can you provide an update on the outlook?

Yes. We've incurred greater losses than we had anticipated since the last quarter, but those losses are in the past. And so based on our current estimates in cost to complete, we believe that the cost to complete the vessels will be a little over $30 million, and we still have milestone payments in excess of $50 million. And so from this point forward, we still have positive residual cash flow opportunities. So we're going to be continuing to move forward to make that a reality to the extent we can.

Excellent. Final question would be on offshore wind, and it's something that we identified as pretty significant opportunity going forward after you worked on the Block Island wind farm. Can you talk about any strategic relationships that you have developed or continued to develop with developers of offshore wind farms? And then if you have any sort of update on any specific projects.

Sure, Jeff. This is Kirk. First of all, when we talk about our partnering ability for future projects, we are still maintaining a relationship with the partners that we had on Block Island, which included EEW, which is a German firm. And so that relationship continues. And collectively, we are pursuing 2 projects, in particular; one for deepwater wind and another project that is currently being bid by the majors, which includes DONG Energy and others, for a project off the coast of Rhode Island. And so we are in the process of, as I said, of providing updated estimates to these 2 projects. These projects still a little ways off in terms of being awarded, I still think about a year out. But nonetheless, Gulf Island, I think, is well positioned for these projects, including trying to establish local content within the regions that these units are going in. And so consequently, we've been focusing a little bit of effort along the East Coast looking for different facilities as well as fabricators to assist us in these projects.

We'll move next to John Deysher from Pinnacle.

Quick question, Kirk, on the insurance recovery from the hurricanes. How much was that again? What are your claims in terms of dollars for that?

What we're looking at right now, John, is it's a range. Like I said, we have not gotten finalization with the adjusters, but we believe it could be anywhere from a low number of $12 million to a high number somewheres around $22 million. Some of that is being driven by damage that we experienced to our cranes. And so, again, that's the process with the cranes. The buildings were a little bit easier to make the assessments and whatnot. The cranes are a little more complex, as you can imagine, because as much electronics in those cranes to make sure that there wasn't any damage to the structural part of the crane. The last thing you want to do is use a crane and hurt someone. So there's an ongoing inspection on the cranes to determine the exact -- or the amount of damage that was done to them. So that's really the open part of our claim as we sit now. And one thing to remind you, John, we did receive insurance proceeds during this quarter of about $1.5 million in advance. Just to let you know, since then, we've collected a total of about $3.3 million in insurance claims, and we have a request for additional $2.7 million just as an additional cash outlay from the insurance companies, which they have agreed to. So about $3.3 million to-date has been received on that claim.

Okay, good. So I'm sorry, the $12 million to $22 million, that works for buildings only? That was excluding cranes?

No. That was building and cranes.

And cranes, okay. So I guess the question is, if you get $20 million or $22 million, you don't necessarily have to spend that, do you? You don't have to necessarily replace damaged equipment and damaged property. Is that fair?

That is correct. And of course, we've got to make sure that anyone who has any potential interest in the facilities that we have to see the needs that they have in terms of what they need the facilities for. And certainly, we believe at this point in time that we were not going to spend that [full] money to get facilities back up and running. But again, I'd like to be a little cautious in that respect. As we get our final numbers, then we'll make our final determination. Certainly, we'll share that with the marketplace.

(Operator Instructions) And at this time, there are no additional callers in the queue. I would like to turn the conference back over to Kirk Meche for any additional comments.

This will conclude our third quarter 2017 conference call. Again, thank you for joining us, and we invite you to join us for our fourth quarter 2017 call in February.

That does conclude today's teleconference. We thank you all for your participation.