Gulf Island Fabrication Inc (GIFI) 2018 Q1 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Q1 2018 Gulf Island Fabrication, Inc. Earnings Conference Call. (Operator Instructions) This call is being recorded.

At this time, I'd like to turn the conference over to Ms. Cindi Cook for opening remarks and introductions. Cindi, please go ahead.

Thank you, Lauren. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2018 First Quarter Teleconference.

A copy of the press release of our financial results for the quarter is available on our website at gulfisland.com. A replay of today's call will be available on our website later today.

Please keep in mind that the press release and certain comments on this call includes forward-looking statements, and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our Form 10-K and subsequent SEC filings.

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. I want to hit a few highlights of the quarter before David reports on financial results for the quarter.

On April 20, 2018, we completed the sale of our Texas South Yard located in Ingleside for $55 million to a subsidiary of Buckeye Partners. This is only one step in our strategic planning to improve our liquidity as we transition into diverse areas within our business sectors. Our North Yard in Texas remains for sale, and we have several interested parties visit this location within last several months but currently do not have any buying offers.

During the first quarter this year, we received a contract from the Navy for its T-ATS vessel program, which is subject to a bid process. The award is for 1 vessel, and the contract has options for 7 additional vessels.

Also during this first quarter of the year, we were awarded a MET tower for the U.S. offshore wind industry. While this is not substantial as it relates to revenue, it does show Gulf Island's continued efforts to diversify by being selected as -- for a second U.S. offshore wind project.

In addition, as previously stated in our last quarter's conference call, we have a nonbinding Letter of Intent with EEW as it relates to its Letter of Intent with their customer for structures off the coast of Maryland. Along with this LOI, we have executed a team agreement with EEW for future U.S. offshore wind projects.

Now on to matters as it relates to our Shipyard sector and the construction delivery of 2 MPSVs for a particular customer. As previously reported, we receive a purported termination letter from our customer, which we dispute. Pending resolution of the dispute, all work has been stopped, and the vessels and associated equipment and material are in our care and custody at our shipyard home in Houma, Louisiana.

I will now turn the call over to David, who'll provide details on our earnings and segment breakdowns. David?

Thanks, Kirk, and good morning to everyone. Prior to my comments, please make sure you are referencing our corrected earnings release, which can be found on our website at gulfisland.com. The initial version was corrected shortly after the filing did not change earnings but included corrected revenue and cost of revenue numbers.

With that, we'll discuss operating results for the quarter. We reported a net loss of $5.3 million on revenue of $57.3 million for the first quarter ended March 31, 2018, compared to a net loss of $6.5 million on revenue of $38 million for the first quarter ended last year.

Compared to the fourth quarter of 2017, which was negatively impacted by losses incurred at our shipyard, revenue increased 54%, and gross profit improved to positive $0.7 million as compared to negative $24.3 million in the fourth quarter of 2017. The improvement was primarily related to positive results in the Services division from increased demand for our offshore services and reduced losses on construction contracts in the Shipyard and Fabrication divisions.

Gross margin, excluding depreciation, was a positive $3.4 million, up from negative $23.2 million in the fourth quarter of 2017. The improvement was primarily attributable to positive or breakeven margins at our primary operating divisions, with particularly strong margin contribution from the Services division. Our revenue backlog of $262 million and a labor backlog of approximately 1.5 million hours at March 31, 2018, remains comparable to our year-end backlog of $223 million, with a labor backlog of 1.5 million hours reported as of year-end. Our backlog includes recent awards primarily from our Shipyard division and remains the highest backlog we've reported in over 3 years. Backlog includes formal commitments received through April 25, 2018. Our backlog by segment at March 31, 2018, includes Fabrication, which represented $6.7 million; Shipyard, representing $243.6 million; and Services, representing $11.9 million. Our revenue backlog includes approximately $94 million related to 2 projects for which work has been temporarily suspended. One of these projects relates to 2 MPSV vessel contracts under dispute with our customer, and the other project is a recently awarded defense contract under a bid protest.

The revenue backlog excludes options on contracts of approximately $600 million, which include deliveries through 2025 should all options be exercised. During the quarter, the company was successful in adding backlog for not only existing customers but also new government customers.

Now let me break down the segments of our company. For our Fabrication division, revenue was $17.3 million for the first quarter ended March 31, 2018, and $10.2 million for the same quarter 2017, up 69% on a comparable basis. Gross loss was $200,000 for the quarter versus a gross loss of $3 million for the comparable quarter in 2017. Operating loss was $1.6 million compared to a loss of $3.8 million for the comparable quarter in 2017. The improvement in gross loss is attributable to increased revenue within this -- the Fabrication division, driven by our CB&I project; approximately $1.1 million in rental revenues and scrap sales at our Texas South Yard that was recently sold, partially offsetting holding cost of $1.6 million; no depreciation being recorded for our South Texas assets for the 3 months ended March 31, 2018, as these assets are classified as assets held for sale; and continued cost minimization efforts implemented by management for the period. Offsetting these items is a noncash impairment charge of $750,000 related to our South Texas assets.

For our South Texas assets, we expect ongoing quarterly holding cost of approximately $1 million per quarter related to these operations dropping in the second half of the year given the sale of our South Yard.

For our Shipyard division, revenue was $18.6 million for the quarter and $18.4 million for the same quarter in 2017. Gross loss for the quarter was $1 million versus a gross loss of $1.7 million for the comparable quarter of 2017. Operating loss was $1.8 million for the quarter, with operating loss of $3.1 million for the quarter ended last year March 31. Included in the first quarter 2017 operating loss is an impairment charge of $389,000, and that's in the first quarter of last year.

Our shipyard division produced near breakeven gross margin, the first time since Q3 of 2016, which is the result of improving utilization of the Jennings yard doing tug construction projects and higher-quality project work beginning in our Houma yard, along with no material project losses incurred during the quarter. While backlog for the Shipyard includes new projects added during the last year, much of the new work will not commence in earnest until later this year due to vessel construction engineering and design analysis prior to final customer approval to commence production. So while these steps do delay start-up, we believe these steps will mitigate construction risks for the new projects.

For our services division, revenue was $21.9 million for the quarter versus $10.7 million for the same quarter in 2017, for an increase of 104% on a comparable basis. Gross profit was $2.6 million for the quarter versus breakeven gross profit for the comparable quarter in 2017. Operating income was $1.9 million during the quarter compared to operating loss of $0.6 million for the same quarter of '17. Gross profit and operating income increased over the comparable quarter due to increased demand from offshore oil and gas related services due to improving industry conditions.

For our EPC division, revenue was negligible, with gross loss for the quarter of $308,000 and operating loss of $725,000. However, subsequent to the quarter, the EPC group did obtain from our customer a limited purchase order approval for approximately $1 million for ongoing early works support services over the next 3 to 4 months, which will offset some expenses during the period.

For the company as a whole, noncash depreciation and amortization expense for the quarter was $2.7 million compared to $4.7 million for the first quarter of 2017 and $2.7 million in the prior quarter -- fourth quarter of 2017. The decrease compared to the first quarter of 2017 is primarily attributable to management classifying our South Texas assets as assets held for sale and suspending ongoing depreciation expense in February of last year.

No benefit for Federal income taxes was recognized due to GAAP limitations on recognizing deferred tax assets related to our net operating losses. Due to our cumulative NOLs, we do not anticipate paying Federal income taxes for the next several quarters.

Capital expenditures for the quarter were $71,000, and we do not anticipate significant CapEx for the remainder of 2018.

As of quarter-end, March 31, 2018, we had $6.5 million in cash, $10 million drawn on our line of credit and $2.5 million in letters of credit issued, leaving us with availability of $27.5 million. Subsequent to quarter-end, we reissued an LC for $3 million due to outstanding contractual obligations, which we expect to remain outstanding until July of this year.

Our cash decreased during the quarter by approximately $2.5 million, primarily related to the following: buildup of cost for contracts and progress of $9.1 million; buildup of retainage projects of $1.5 million; operating losses in excess of noncash depreciation, amortization and impairment and stock compensation expense of approximately $3.8 million; payment of year-end property taxes of approximately $2 million. And these uses of cash were offset by $10 million advance on our revolver and another $2.2 million in insurance proceeds received related to our South Texas property claim from Hurricane Harvey. We have a remaining outstanding claim request for Hurricane Harvey-related damages, which we hope to resolve during the second quarter of this year.

After the sale of our Texas South Yard and as of April 25, 2018, our cash balance was $55 million; and amounts outstanding on our revolving line of credit was $10 million, with the remaining availability under our credit agreement of approximately $25 million, for a total liquidity of $80 million.

I'll 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 GMF location are in its final stages as we're moving the last of our equipment out of the South Yard in preparation for a timely transition given the recent sale of the facility. The North Yard will retain maintenance personnel for preservation of equipment and facilities until a sale is secured.

Our Louisiana fabrication facilities has completed delivery of the Axiall-Lotte project. During this quarter, we delivered the last of 4 modules for this ethylene plant in Lake Charles. This fourth and final module sailed from our facility last weekend. We thank CB&I for the opportunity and look forward to assisting them with future endeavors.

Our Services division had another strong quarter. Work associated with offshore tiebacks, upgrades and maintenance projects remain strong. We will continue to pursue opportunities within the offshore and onshore plan expansion and maintenance programs as well as supporting the continued growth of developing shale infrastructure in West Texas.

In our Shipyard division, work continues on the 8-ship docking tug project in our Jennings location as well as servicing vessel repair needs in our Lake Charles facility. In our Houma location, work continues on the second tidewater vessel, with delivery scheduled for the second quarter of this year. It should be noted that our customers for the docking tugs, along with Tidewater, are extremely pleased with our performance and in Tidewater's case performance of the vessel which was delivered in the first quarter this year.

We also have 5 vessels for Tidewater that have recently been drystacked in our facilities. Engineering of the St. Lawrence Seaway Icebreaker Class Tug is in progress, with fabrication scheduled to commence late in the second quarter of 2018. Design engineering verification for the research vessel for Oregon State continues, with fabrication not scheduled to commence until early third quarter 2018. Our EPC division have received an early works purchase order from SeaOne. We continue to work with SeaOne on finalizing initial engineering design and project pricing.

I will now turn the call over to Kirk for final comments.

All right, thank you, Todd. We remain focused on preserving our balance sheet as we continue to direct our efforts on various opportunities. We remain committed to cutting cost within the company, which starts at the board level, with our Board of Directors taking a pay adjustment along with executive management. We will continue these efforts along all divisional lines while remaining focused on the needs for future growth of our company and the resources needs to obtain our goals.

Lauren, you may now open the lines to questions from analysts.

(Operator Instructions) Our first question comes from Martin Malloy with the Johnson Rice.

Congratulations on closing the sales of one of the yards in Texas. First question, just in terms of the bidding outlook, maybe if you could comment on what you're seeing out there in terms of additional modules, the SeaOne Project, additional vessels, including tugs. And maybe if you could outline for us the timing of how this bid protest will be figured out for the Navy vessel, then the potential timing of option being exercised?

Marty, this is Todd. Real quick, yes. So where we stand right now in regards to outlook and seeing other proposals that are out there, there is a lot of work that's going to be happening all throughout the petrochemical industry for the Gulf Coast and other areas that we're seeing within the U.S. infrastructure. We're definitely pursuing a lot of that work. It's one of those items where some of this though might not be items that start for another 2 years because of the engineering cycles and things that's out there. But again, we are pursuing it, and we are have -- I mean we do have people that are out there looking to see everything that's a possibility that works into our typical steel fabrication facilities that we have that's already in place. In regards to the items on the Shipyard side and what we're seeing, again, as far as the offshore industry, that's extremely limited to any opportunities there. But when you start looking at things around like the service work that's with the small docking tugs, there's still a lot of that that's going on, and we see that continuing. We also see more items around brown water-type work and also potential around maybe some LNG support-type things with ATBs and all that may be coming up. And on the wind industry, that's one of the big items that we're really focusing on and seeing the opportunity there. A lot of leases have been obtained. A lot of people are getting their funding in place and things that are starting to come to play. Some of it, we may not see on our end as far as kind of moving into contractual statuses later this year and into next year and projects that will be coming. But again, this is something where we're going to see some continued growth, and it's going to go well on for a few years that we're going to see this continuing to mature and become an industry that we're going to be participating in.

And Marty, this is Kirk, so getting back to the Navy project. The latest is that mid-July will be the latest date in which they have to make the ruling as it relates to the protest that was lodged. And timing, as the remaining backlog. The backlog itself for the 7 remaining vessels takes us all the way out through 2025.

And in terms of when those options might be exercised, is it 1 a year? Or is it would they exercise a group of them up closer to the front?

So what it is, they are staggered, and so we'll see as they come, but it's basically 8 of them over an 8-year period is what we're going to see. And so with that, they have an option on how they can move some things up or possibly move a little bit back. But in general, yes, it's roughly 9 months to a year in between each one that gets released.

Okay. And then on the MPSV situation, where you stopped work on the 2, can you outline for us maybe how this might get resolved and potential time line?

Marty, I think at this point in time I think it's best just to say that we are having conversations with the customer as well as the bonding company. And so I don't anticipate anything moving very quickly. I think at this point in time, I guess, that's the latest update and status of it. The work has stopped. The vessels are in the facilities. And again, we try and to push to try and get some resolution for this, but currently, there's discussion going on I think is the best way to just leave it there.

(Operator Instructions) We'll take our next question from John Deysher with Pinnacle.

I was just curious, Kirk, on the MPSVs how much of that is in the backlog right now? You said the total was $94 million regarding the 2 projects. I think the Navy vessel was around $64 million. So does that imply backlog of $30 million or so for the MPSVs in the backlog?

Marty, this is David. You're typically pretty good with numbers, but I think we would prefer not to say at this point given the ongoing dispute resolution that we have with that particular customer. John, I'm sorry. I'm sorry, John.

No worry. How much of nonrecurring cost were embedded in the first quarter results because of that dispute for legal, for whatever you want to include there?

Well, I think it's got a multiple numbers on it. There are legal costs associated with it, but there were also some costs associated with performing the work up until the stop-work order was issued. So John, I apologize, I don't have that number right in front of me.

Okay, no worries. I'll circle back with you. And I guess finally, with the delivery of the second Tidewater vessel in the second quarter, will we get any money once we deliver that? And if so, how much?

Yes. So again, it's milestone-driven payments on Tidewater, as it is most shipyard contracts. And I believe it's roughly another $2 million or so.

You said $2 million?

$2 million. Yes, John, $2 million.

$2 million, okay.

And we'll take a follow-up question from Martin Malloy with Johnson Rice.

I just want to follow up on SeaOne Project and maybe any events that we should we be looking for there that would help us get more comfortable with the time line for this project moving forward. Should we be looking out for announcements from the customer there as far as financing and offtake agreements being signed? I think you mentioned before that there's a -- you were likely to -- that there is the potential for the contract to be signed this year for the EPC.

So Marty, I think if you track the website for SeaOne as well as the Biloxi, the Port of Biloxi, as we understand it, SeaOne is waiting to take, I guess, ownership of the ports facility in terms of the leasing. There were some site work that had to be completed prior to SeaOne taking over that. They would have some weather delays in that respect. So I think once you see that they've completed that and SeaOne has taken the lease of the facilities, I think that probably would be a good trigger as to the next chain of events that's going to happen within SeaOne. So I think if you log onto their website, you'll be able to see some of those data they post.

Okay. That's on port website?

Well, either the port website and/or I believe SeaOne has website as well.

Our next question comes from Jeff Geygan with Global Value Corporation.

Backing up a little bit, it's been a fairly challenging environment over the last 2, 3 years. Congratulations, you weathered it, although it's been a little bit challenging. I'm curious about your view and the board's view of the company and the opportunities that exist in both oil and gas and energy, generally, onshore and offshore and how we as shareholders should think about the evolution of the company as we go into the next cycle?

Okay. So Jeff, this is Kirk. You're absolutely right. But I think you've seen Gulf Island as we call it the pivot. As we continue to diversify our sectors, our segments, our divisions, we've created an EPC division to actually go after the markets not really traditionally associated with oil and gas. When you look at the EPC group we've formed, that EPC group primarily is focused currently on onshore module fabrication as well as East Coast development with the wind industry. We're not in the business to go and compete for the huge projects with deepwater as it relates to some of our competitors. So I think that would give you an indication of where we as management and the board feel that the company is heading as we continue to go through these marketplaces. I hope that answers the question. And again -- well, and Shipyard sectors as well. So we're trying to get our Shipyard sectors where it needs to be, as Todd has said earlier in the call. There's not much opportunity as it relates to supply boats or OSUs or anything else associated with the oil and gas industry, but there's a tremendous amount of interest coming up as it relates to the offshore wind projects because of Jones Act protection of the vessels. And so we are heavily, I won't say engaged, but we have a lot of conversation with our customers -- potential customers as they try and figure out ways to make sure that the Jones Act compliance is met as well as the opportunities for new construction or modifications to existing vessels. Now on our services group, as David has said in the call, the services group had another strong performance this quarter, and we forecast that to continue on through the year. But we plan on expanding that division into other sectors, which include onshore and which may include other sectors. Again, I don't want to get too far ahead of myself in terms of wind opportunities and whatnot. But certainly, in the distant future, someone needs to maintain those structures offshore as well. So we think we've got a good model as it relates to the future for diversification within the companies, but again not losing sight of the core business that we enjoy for all these years has been pretty dormant over the last 3 years. And I think with our location in Louisiana, we're geared and ready to get back in action should that market improve. But currently, we don't see much improvement, especially through 2018.

That's helpful. I appreciate it. And specifically to the SeaOne contract, what can you tell us about the financing on their part and what that implies in terms of the outlook for us? How are we gearing up, anticipating they do have that financing? And in the event that, that doesn't materialize, what impact will that have in our EPC division?

Well, as it relates to their financing, I don't have anything definitive, but I can tell you where they stand with their financing other than I think what we've reported on other conference call in terms of some of the large investors they've told us. So we have to assume that they're continuing on with their investment portfolio. Again, as Todd has said earlier, we did get an early works commitment from those guys for about $1 million. Again, that'll cover the cost associated with our EPC group for several months to come. In the event that SeaOne would delay or not happen at all, again, when we look at the EPC group we have that group is easily rolled into other sectors of the business in terms of our future models, which includes offshore wind. So it's not a huge staff we have here in Houston. We've limited the hiring process until we get firm commitments from SeaOne. But certainly, those folks that we have hired to put into this group are multitalented and have the ability to cross lines not only as SeaOne but into different markets. So look, I look at it as a positive. If SeaOne would not happen, for whatever reason, again, it's much needed horsepower we need within this company. So I think as shareholders and management I think we really will be -- will benefit from these guys being part of our staff going forward.

We'll go next to a follow-up question from John Deysher with Pinnacle.

Just a quick follow-up on the proceeds from the South Yard. Congratulations again on getting that over the finish line. But what are the thoughts in terms of how that's going to be deployed going forward? Obviously, you've got some short-term issues and some funding requirements. But what else are you thinking about with respect to those proceeds?

Well, John, this is David. I think that we're going to be very protective of our liquidity, and we want to maintain a very strong position as we bring on some of these contracts that we've been able to add to our backlog over the last year and also as we continue to invest in our EPC division. So I think what you'll see is we'll be very protective of that liquidity position over the next several quarters. If we identify some potential growth opportunities, those will be done in conjunction with greater visibility to earnings and just making sure that we have a very strong balance sheet going forward into the next year.

It appears there are no further questions at this time. This concludes today's question-and-answer session. At this time, I'd like to turn the conference back to management for any additional comments.

This will conclude our first quarter 2018 conference call. Again, thank you for joining us, and we invite you to join us for our second quarter 2018 call in August. Have a nice day.

This concludes today's conference. Thank you for your participation. You may now disconnect.