Gulf Island Fabrication, Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Good morning and welcome ladies and gentlemen to the Second Quarter 2018 Gulf Island Fabrication, Inc. Earnings Conference Call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded. At this time, I’d like to turn the conference over to Ms. Cindi Cook for opening remarks and introductions. Cindi, please go ahead.

[Cindi Cook:]

Thank you, Nicole. Good morning. I would like to welcome everyone to Gulf Island Fabrication’s 2018 second 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 include 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?

[Kirk Meche:]

Thank you, Cindi. And good morning to all of our listeners. We posted positive results for the quarter, which was largely attributable to a gain we recognized on the sale of our Texas South Yard, along with strong performance by our Services Division, which Dave will provide further details during his report. During the quarter, we received additional awards as it relates to an existing contract for docking tugs. Two additional tugs were awarded resulting in active orders for 10 vessels with two remained options. Also during this quarter, an option to construct a second vessel for Oregon State University’s newbuild project was exercised. The exercise of these options by our customers highlight the confidence and satisfaction they have in our ability to build quality state-of-the-art vessels. Now on to matters as it relates to our shipyard and construction and delivery of two MPSVs. Nothing new to report this quarter as we continued to work with a bonding company and our customer towards resolution. The vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana and activity remains suspended until further resolution. Our North Yard in Texas remains for sale and we are currently negotiating with potential buyer and in discussions with numerous other parties. We hope to have a contract for the sale of this property soon. As a final note, before turning the call over to David, we delivered the second and last OSV to Tidewater last week and our customer cannot be any happier with the quality of the vessel, which is a testament to our management team and the many craftsmen providing our ability to deliver complex and highly sophisticated vessels. I will now turn the call over to David who will provide details on our financial results and segment breakdowns. David?

[David Schorlemer:]

Thanks, Kirk. And good morning to everyone. We delivered second quarter revenues of $54 million which increased nearly 18% as compared to revenues of $45.9 million for the second quarter ended 2017. Net income was positive $549,000 or $0.04 per share as compared to a net loss of $10.9 million, or a net loss of $0.73 per share during the second quarter of last year. The improvement year-over-year 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. Our revenue backlog increased to $348 million and represents our largest backlog reported since 2013. This quarter's $348 million is a 38.5% increase over last year's second quarter backlog of $251 million and a 19% increase sequentially over our first quarter 2018 backlog of $292 million. Our backlog includes recent awards primarily in our Shipyard division. Backlog includes formal commitments received through August 9, 2018. Our revenue backlog by segment includes

[Todd Ladd:]

Thanks, David. And good morning to everyone. I'll begin with our Fabrication Division. During the quarter, we completed some remaining salvage and cleanup activities at our Texas facility South Yard which was sold in April. Mothballing activities for our Texas North Yard continued along with the evaluation of existing assets for disposition. Our Louisiana fabrication operations delivered the fourth and last petrochemical module for an ethylene plant in Lake Charles. We thank CB&I for the opportunity and look forward to future endeavors to work together. Our Services Division had another strong quarter of work associated with offshore tiebacks and expansions of top sized production capacities. Offshore opportunities continue to remain strong. The construction of a medium heater module and a produced water model are in final stages, with delivery scheduled for late third quarter of 2018. As we complete ongoing projects and progress, we will continue to look for opportunities in the offshore and onshore plant expansions and maintenance programs. In our Shipyard Division work continues on the [now 10] docking escort tug project in our Jennings location. In our Houma location, as Kirk stated, we delivered the second Tidewater vessel, so a very satisfied customer. We also have eight vessels for Tidewater that have been dry stacked in our facilities. Fabrication of the St. Lawrence icebreaker tug has commenced with cutting of steel for a retractable pilothouse towboat used for delivery in the second quarter of 2019. Detailed engineering efforts for the marine research vessel for Oregon State University continues with fabrication not scheduled to begin until fourth quarter of 2018. Additionally, as David mentioned earlier, fabrication commencement has been delayed due to preconstruction design verification work which has led to some changes in the length and in general arrangement of the vessel where this has resulted in reduced man-hour utilization in the short-term. We believe these steps will lead to improved construction efficiency once we do get underway later this year. As it relates to the Navy's T-ATS award, after the unsuccessful process by a bidder, we were given the go ahead with execution of the contract. However, we were recently notified that this processor has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering. We await a ruling by the DOJ. The award is for one vessel currently and the contract has options for seven additional vessels. Our EPC division continues to work with SeaOne on finalizing initial engineering design and project pricing along with efforts of expanding our presence in the future development of the offshore wind energy sector. I will now turn the call back to Kirk for final comments.

[Kirk Meche:]

Thanks, Todd. We remain focused on preserving our balance sheet and we continue to direct our efforts on various opportunities within the petrochemical and alternative energy sectors. We remain committed to cutting costs within the company, and we will continue these efforts along all division lines while remaining focused on the needs for future growth of our company and the resources needed to obtain our goals. With wind, petrochemical, ship repair and general offshore opportunities, we hope to capitalize on these markets in the coming quarters. Nicole, you may now open the lines for questions from analysts.

[Operator:]

[Operator Instructions]. And will take our first question from Martin Malloy with Johnson Rice.

[Martin Malloy:]

I guess my first question, I wanted to maybe see if I could get -- if you provide us with some additional commentary on how you see the Oregon research vessels -- Oregon University research vessels ramping up in terms of activity levels for you all? I know you said it would start later this year. Is that with all the design and engineering done? Is that going to ramp-up pretty quickly? And then also on the Navy side, assuming a positive ruling from the DOJ, when do you see that ramping up?

[Todd Ladd:]

Alright. Martin, this is Todd. So just giving you a quick one. On OSU Oregon State we anticipate again having this vessel to where it is 100% engineered and everything will be finalized. So that actually gives us to start a lot of things very quickly compared to projects that are kind of under design while you're starting construction. So this is a better opportunity for us to have everything completely planned out ready to go. So when we start we will be putting a lot of people to work pretty quick. I'm figuring that roughly once we get going -- by the first of the year we are going to be in full swing with this project ramping up very fast.

[Martin Malloy:]

Okay, and then on Navy side.

[Kirk Meche:]

Yes, so -- and this is Kirk. So as Todd said right we have a partial stay, which means we will continue or will start the engineering process, planning, scheduling and project management as well as ordering the material. But we can't start construction until we have a ruling from the Department of Justice. And we're hopeful that, that ruling will be favorable for us and it will be a very quick decision and shortly after I would anticipate construction on that probably wouldn't start until the second quarter of next year.

[Martin Malloy:]

And then there's been some early signs of activity picking up in the Gulf of Mexico. Could you maybe talk about your customer conversations there both with respect to the Services segment as well as shipyard repair?

[Kirk Meche:]

Sure, Martin. So as it relates to Services Group, you're right, there seems to be a lot of activity in the Gulf in terms of -- I should say potential activity in the Gulf. We are seeing some opportunities for tiebacks and whatnot. But I don’t see very many opportunities for big structures. We know that there is four big structures identified for the coming years, but primarily it looks like those may be overseas opportunities as opposed to here in the US. But what we are seeing is a host of companies that are trying to do tiebacks to existing platforms and those platforms maybe coming down in terms of capacity that they have the throughput through. But I think for us the nice thing about that is not only does it give our Services Division an opportunity to perform work as we are doing now, but I think it may also lend itself some possible fabrication work as we start talking about booster platforms and whatnot, I won’t get too far into the reason on that but there are some opportunities we think in the next year or so that may put Gulf Island in a position to provide some of these structures to boost the production. And as it relates to -- I think you asked about the shipyard repair side of it, again there is some activity that seems to be happening. But again, we haven't seen a lot of it just yet. And we have an arrangement with Tidewater. We have I think now total eight or nine vessels that we have drystored in our facilities. We have gotten no indication from those guys in terms of possible going back to work. But we are positioned ourselves with our drydocks some upgrades we are doing and whatnot and some additional marketing we are doing to position ourselves for that type of work going forward.

[Operator:]

And we will take our next question from Jeff Geygan from Global Value Investment Corp.

[Jeff Geygan:]

A couple of questions. Can you provide a little more detail on the SeaOne opportunity as well as offshore wind?

[Kirk Meche:]

Sure, Jeff. So this is Kirk. Let me start with SeaOne. Nothing really major to announce during this quarter. We continue to perform our initial engineering analysis with those guys. We've had several meetings with them. So we've focused on Gulfport bundle at the moment. SeaOne did take a possession of the lease with the facilities down in Gulfport. We constantly then have put a trailer in place, marking I guess their territory there. So that's positive sign for us and we also know that they had a filing with -- this -- with the SEC in terms of trying to raise some capital. We're not too familiar on the details of that but we did see that they came across our desk and they were trying to raise about $165 million in capital. As it relates to wind, certainly there are -- there is a lot of opportunities in the wind sector. We still believe that we are a front runner in terms of providing opportunities to these owners or solutions. The bids have been tendered on two of the bigger projects for deepwater wind and then there’s another project out there that -- it's for Maryland that we're looking at as well. But we were on the East Coast this past week. Our guys are up there. We are having discussions with the owners and our partners. And so, we're going to start looking at what opportunities are out there for us in terms of joint venture and with other guys to provide these solutions to the customers in the future. So again nothing immediate on that but conversations are going well, a lot of buzz in the marketplace. Again we think we are pretty well positioned for our future work as it relates to offshore wind.

[Jeff Geygan:]

And I would agree I think you've got -- you've developed a nice expertise with the offshore wind. With respect to onshore petrochemical opportunities, what does the horizon look like?

[Kirk Meche:]

Well the immediate future is not quite as bright as what we see for the later part of '19 and the ‘20 and we have quite a bit of outstanding bids currently that we are waiting on. But those projects, as I said, won’t start until latter part of ‘19 and then ‘20. And certainly based on what we have seen from a bidding opportunity standpoint, there is a tremendous amount of work that could be had in that sector potion. We need a little help from the government in terms of maybe some possible taxes as it relates to import goods and I think we maybe moving in that direction. So hopefully there is some positive news there. But again there is quite a bit of opportunities out there. And again we've got a very strong relationship on the delivery of the modules for CB&I who will now with McDermott. We’ve had conversations with that organization as well going forward. So again I think we got some pretty good position as it comes along, the only disadvantage of that is it might be a little bit into the future.

[Jeff Geygan:]

Understood. How are you finding the competitive environment with regard to maintaining profit in your bids?

[Kirk Meche:]

Well, that's -- it’s certainly a challenge Jeff. But again with not a lot of work in the segment or the industry, not only from our standpoint but from my competitors’ standpoint as well, markets do get challenged -- sorry, margins do get challenged. But again we're not going after -- we're trying to stay away from the low margin work just to have work in the facilities but there's fine line between having worked in the facilities and really trying to get these high margins on these jobs. I don't think the margins on the jobs that we are seeing from a fabrication standpoint may not be there until it really gets ramped up in petrochemical side of the business. I'm sure our offshore wind guys are listening to this call but hopefully there's some margin there associated with those projects as we move forward.

[Jeff Geygan:]

Understood, last question, I’ll jump in the queue. This is for Dave regarding the absorption with the Shipyard Division. Can you just -- would you provide a little more color in terms of when that tilts favorably versus what we might be able to do -- you might be able to do in the short to medium range to affect your cost structure there?

[David Schorlemer:]

Sure, I guess first I would say that we don't give guidance and so I want to be careful about my comments. I think that as Todd had mentioned we are in a situation where we've got some very high quality backlog we believe and projects that we can make some money on certainly on the subsequent vessels where we’ve established our learning curve and lessons learned and stepped up appropriately. I think that still over the next couple of quarters going to be tough, although we will be increasing our work in the shipyard in preparation for those projects in seeing OSU begin to kick off. And then hopefully we get to go ahead -- the full go ahead on the Navy T-ATS program. But I think that in the first quarter based on those -- just those two projects, we should see some strong flow-through there and be able to get back into a breakeven or better position. And from that point forward, once we have established a base level of utilization in the two primary shipyard facilities, then we can start looking at dropping in incremental projects, repair work, jobs that are priced at the current market rate as opposed to what we would consider more trough pricing levels last year and earlier part of this year, and hopefully, be able to convert that into some higher profitability later next year.

[Operator:]

[Operator Instructions]. And we have a question from John Deysher with Pinnacle.

[John Deysher:]

Quick couple of questions. One, the North Yard I think you’ve said in the release that you expect to have a contract for sale in the near future. Could you elaborate on that in terms of timing and possible amount?

[Kirk Meche:]

Timing I can give you timing, I don’t know that I want to disclose at this point in time till we get final contract in hand on the amounts. But I will tell you this, so John, just to give you indication, as we said we are in negotiations one potential buyer and we are in discussions with several other interested parties. Pending we get a resolution on this one potential buyer that we are speaking to and we’d hope to have something in place very shortly and I am hoping in a couple of weeks or so. As far as the pricing on it, we’re trying to keep the pricing up on the facilities. Again, there seems to be -- there are some of facilities. There continues to be articles we are reading about the expansion and whatnot has happened in the Corpus Christi area. And so even with that, over the last week we’ve had more interested parties, contractors want to go and see the facility. So again we're very hopeful that we can get something done fairly quickly on this thing. I'm optimistic that it might be before year end, but again there is no guarantee in that respect.

[John Deysher:]

So if I understand you are correctly, once you get resolution with this first buyer, if it falls through, then you’re free to negotiate with these other interested parties?

[Kirk Meche:]

We are free to negotiate with whomever at this point in time right now. We are under no exclusivity.

[John Deysher:]

And in terms of the Tidewater delivery, did we collect any money with delivery and if so how much?

[Kirk Meche:]

Yes, John. So the final delivery was completed as we said we were very proud of our guys. Tidewater is extremely happy with the vessels and I think final billing on it was around $2 million to $2.2 million that we received. That was after the quarter ended obviously. But I think it was included in number that David gave you for our total cash on hand which [particularly] I think was roughly 8 million.

[John Deysher:]

And we haven't talking about the [Walker] trial for a while or dispute. I'm just curious where we are with that because if I remember correctly that was a pretty significant amount so I'm curious as to where we are with at?

[Kirk Meche:]

So yes it is a very significant amount. I think we’ve published that as 34 plus million dollars. Depositions have been positions started and depositions have been taken on our side for sure. Experts have rendered their final reports. Trial date is currently scheduled I believe for around mid-October, however counsel on their side has indicated to us that there is some type of a medical situation with one of their counsels so they are requesting that it would be pushed back some but we have no rendering on that, so as it stands right now trial date is set for mid-October.

[John Deysher:]

And then on the MPSV dispute I think the release says your backlog includes 30.2 million for that contract. What can you share with us in terms of where we are with that in terms of collecting that and how much leverage do we have in terms of keeping those vessels in the yard until we get some kind of payment?

[Kirk Meche:]

John I think at this point in time I think the proper thing for us to do is not comment on that and just let you guys know that we are trying to work some type of resolution. We are talking to the surety company as well as our customer is talking to them as well. Again I'm hopeful that we can get to some resolution. But again there is a lot of moving products here, so I would prefer not to get too far into the details on that.

[Operator:]

[Operator Instructions]. Okay. And this concludes today's question-and-answer session. At this time, I’d like to turn the conference back over to Kirk Meche for any additional comments.

[Kirk Meche:]

This will conclude our second quarter 2018 conference call. Again, thank you for joining us this morning, and we invite you to join us for our third quarter call in November. Have a good day.

[Operator:]

And once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.