Executives
John Clerico - Chairman and Chief Executive Officer
Jeffrey Levos - Senior Vice President and Chief Financial Officer
Peter Atkinson - President
Analysts
Marshal Atkins - Principal Financial Securities
Joe Gibney - Capital One
Graham Madison - Lazard Capital Markets
Brad Hammer - Unidentified Company
Joe Augular - Unidentified Company
John Evans - Unidentified Company
Global Industries, Ltd. (GLBL) Q2 2009 Earnings Call Transcript August 6, 2009 10:00 AM ET
John Clerico
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Prior year’s level and $3.2 million lower than the last quarter. We are going to continue to actively manage this area. After some initial difficulties in the first quarter we successfully completed our EDAP project for Exon Mobil in Nigeria, and it contributed significantly to our operating earnings during the quarter.
As we have no new projects for West Africa at this in our backlog we have curtailed our staffing and physical assets in the region. We are however actively continuing to evaluate and pursue future projects in West Africa, and we will be prepared to again bring people and assets into the region as opportunities warrant.
Turning to the Middle East our project team there again executed our Berri and Qatif work in an excellent fashion during the quarter, and the project is now essentially completed.
Our backlog declined during the quarter, $215.6 million, this is the lowest level of project backlog we have had for some time and is the result of many factors, but we are working diligently to replace projects, which are nearing completion with new projects for our customers.
We are aggressively pursuing several project opportunities at the present time, which can substantially increase our backlog. We continue to see a number of project opportunities in the Gulf of Mexico, especially in the decommissioning area. Gulf projects however as typically have short lead times and contribute little to our backlog levels.
In Latin America and Asia-Pacific the pipeline construction market remains reasonably active, while the middle-east market continues to be slow.
Regardless of the level of our project backlog it remains our strategy to proactively control our cost to match our revenues. In this challenging industry environment our organization remains focused on maximizing our performance.
We intend to do this by actively marketing our services to customers, investing in our two world class new build vessels, developing cost effective solutions for our customers and executing our projects safely and effectively.
Now I will turn the call over to Jeffrey Levos for financial comments on the quarter, Jeff.
Jeffrey Levos
Thank you John and good morning again everyone. For the second quarter of 2009 consolidated revenues were $294.8 million compared to 300.5 million for the same quarter last year.
I can do it. Thank you, Torrie. This is Jeff Levos, the CFO. As in previous calls, I would like to welcome you to our earnings conference call for the first quarter of 2009, and remind you the call is being recorded and will be available on our Web site. The primary objective of this conference call is to discuss the earnings for the quarter ended March 31, 2009.
Certain of our comments and responses to questions may include forward-looking-statements. These forward-looking statements are subject to a number of uncertainties, which are discussed in detail in our Form 10-K filing with the SEC. Now I’ll turn the call over to Mr. John Clerico. Mr. Clerico?
John Clerico
Thank you, Jeff. Good morning, everyone. Welcome to our first quarter call. As in the past, I’ll provide a summary overview of the quarter. Then Jeff will provide financial comments, and Peter will provide more detailed operational comments, and at the end, we’ll conclude with Q&A.
As I said in our press release, we continue to make progress on our recovery plan, and we were able to return to profitability in the quarter. Our $0.17 of earnings would have been significantly higher, if we’d completed the certification of our diving saturation system in Brazil, in time to start our diving work on the Camarupim project.
We were unsuccessful in doing this, however, and it became necessary for us to charter a third party vessel to complete the work, and thereby incur significant extra cost. More on that in a few minutes from Peter. During the quarter, we continued to execute well on some of our other key projects, those in the Middle East, Asia Pacific, and the Gulf of Mexico.
Financially, as we’ve said before, we continue to carefully manage our cash and costs. We finished the quarter with $351 million in cash, as a result of focusing on our receivable collections and controlling our spending.
Our SG&A costs continued to decline as a result of cost reduction actions. We were down to $19.9 million in SG&A in the quarter, which was $3.2 million lower than last year, and then lower than the fourth quarter of 2008. We expect further reductions in this area.
As I also said in the press release, we are wrapping up in our current project in Nigeria, which contributed meaningfully to earnings during the quarter. Since we have no new projects for West Africa in our current backlog, we’ve decided to substantially reduce our operations there by closing our regional office and deploying the Cheyenne.
We intend to continue to evaluate future projects in West Africa, and we'll be prepared to reenter the market if we have the type of project opportunities which would justify doing so. Our backlog declined during the quarter to just under $400 million.
We’re currently seeing good project opportunities in the Gulf of Mexico, especially in the decommissioning area. However, Mexico projects typically have short lead times and contribute little to our backlog levels. Elsewhere, our visibility on future projects, which would start up in late 2009 and into 2010 is reduced as a result of project delays. We intend to remain vigilant and proactively reduce our costs should these project delays persist.
Despite the challenging industry environment, we remain focused on continuing to improve our performance. We intend to do this by effectively marketing our services to customers; continuing to invest in our two new, world class, new build vessels; developing cost effective solutions for our clients; and, executing our projects safely and effectively. That's it for my overview. Now I'll turn the call over to Jeff Levos for financial comments on the quarter. Jeff?
Jeff Levos
Thank you, John and good morning again everyone. For the second quarter of 2009, consolidated revenues were $294.8 million compared to $300.5 million for the same quarter last year. Gross profit was $65.2 million in the second quarter of 2009 compared to $7.8 million in the same quarter last year. Net income was $45.9 million or $0.40 per diluted share for the second quarter of 2009, compared to a net loss of $14.1 million or $0.12 per diluted share in the second quarter of 2008.
The 2% decline in revenues between comparable quarters was primarily due to lower activity in our Middle East, West Africa and North America sub sea segments, partially offset by increased revenue in our Latin America, and Asia Pacific/India and North America OCD segments.
We continue to make progress in the second quarter and reducing our selling general and administrative expenses. The $16.7 million spent for the second quarter of 2009 decreased by $8.3 million over the same quarter last year, due primarily to company wide cost control activities as well as the full recovery of a previously reserve customer balance of approximately $1.3 million. SG&A is also down sequentially from the 2009 first quarter total of $19.9 million and the 2008 fourth quarter total of $21.9 million.
Interest income of $60,000 for the second quarter of 2009 decreased by $2.9 million over the same quarter last year, primarily due to decreased cash balances and significantly lower interest rates.
During the second quarter of 2009, we booked a $116.4 million of new work, resulting in a backlog of $215.6 million as of June 30th, 2009. This booked work is distributed among our portable segments as follows, Asia Pacific/India, $82 million; Latin America, $49.6 million; Middle East, $27.4 million and North America, $56.6 million.
Turning to cash flows for the quarter, net cash provided by operations in the first six months of 2009 was $33.8 million, compared to a $124.4 million used in the same period last year. This increase in operating cash provide -- in cash provided, primarily reflects higher net income, lower working capital needs and reduced dry-docking costs. Investing activities provided $55 million in net cash during the six months ended June 30th, 2009 compared to a $119.1 million used in the same period of 2008.
During the first six months of 2009 a $93.4 million decrease in our restricted cash requirements related to outstanding letters of credit under our revolving credit facility provided cash along with $27.1 million from the same of assets, which was partially offset by $65.5 million of capital expenditures primarily for the construction of two new generation derrick/pipelay vessels, the Global 1200 and 1201.
Cash used in the first six months of 2008 was primarily for ongoing expenditures for construction is a global 1200 and 1201 as well partially offset by proceeds from the sale of marketable securities.
Net cash| used by financing activities was $2.2 million for the six months ended June 30th, 2009, compared to $8.4 million provided in the same period last year. Use of cash in the first six months of 2009 primarily results from payments on long term debt. Net proceeds from the sale of common stock were the primary source of cash in the six months ended June 30th, 2008.
In summary, net cash inflows were $86.7 million for the six months ended June 30th, 2009, with an ending unrestricted cash balance of $374.3 million, and total cash of $375.5 million. With that, I’ll turn the time over to Mr. Atkinson. Thank you.
Peter Atkinson
Thank you, Jeff and good morning everyone. As previously stated by John Clerico we are very satisfied with the performance of our projects during the quarter. Income before taxes in our West Africa segment increased $20.2 million in the second quarter of 2009, $15.1 million. Revenues decreased $40.7 million to $36.4 million.
During the quarter, we completed our most recent project in this region, the replacement and repair of a 24-inch pipeline in Nigeria. This project, which was executed on schedule, the DLB triumph generated higher profitability than the prior year’s work in the region.
The segment also benefited, from the relocation of the Hercules to the US Gulf of Mexico at the beginning of 2009 and gains realized on the sale of 1 DSP and 2 Cargo barges. Revenues in our Middle East segment declined $37.9 million to $29 million during the second quarter of 2009.
Income before taxes increased $13.3 million to $3.3 million. The Berri and Qatif project in Saudi Arabia progressed this plant within our revised estimate and is now substantially complete. The DLB 332 is currently demobilizing to Sharjah. Revenues in our Latin America segment increased to $73.5 million during the second quarter of 2009, compared with $55.6 million during the second quarter of 2008.
Income before taxes increased $28.8 million to $16.4 million. During the second quarter of 2009, we progressed Pemex' Ixtal and Ku-Maloob projects and completed our scope of work, the Petrobras’ [NexLR] project. [The DLB Eriquae] was demobilized to Buenos Aires and the remaining Asdon [ph] survey scope for the Camarupim project in Brazil is expected to be completed within the next two weeks.
Revenues in our Asian pacific India segment increased $39.7 million to $89.6 during the second quarter of 2009. Net income before taxes, increased $7 million to $17.6 million. During the quarter, the DLB 264 and DSP Subtec One demobilized from ONG’s MHSOP project of the West Coast of India. The DLB 264 has just completed a dry-docking in Batam Indonesia and is preparing to mobilize to Malaysia.
The Comanche completed work on TGI’s pipeline repair project offshore Indonesia and then mobilized to Thailand to commence work on Chevron’s 2009 offshore program, which is expected to continue into the full.
Revenues of our North America sub sea segment decreased $1.5 million to $34.2 million during the first quarter of 2009. Income before taxes were $3.7 million, compared to $7 million, in the second quarter of 2008.
Additional revenues due to increased activity, the two MSVs, the Olympic Challenger and Global Orion, which ended service in the second half of 2008 with more than offset by the loss of revenues generated from the Sea Lion and third party vessels in the second quarter of 2008. Also the REM Commander was relocated to the US Gulf of Mexico, from Brazil in May, where we experience no activity during the quarter.
Revenues in our North America offshore construction division segment with $43.6 million during the quarter compared to $22.6 million during the second quarter of 2008. Income before taxes was $4.3 million for the second quarter of 2009 compared to $1.4 million for the second quarter of 2008.
Revenues in the second quarter of 2008, were negatively affected by seasonal adverse weather conditions. Activity in the second quarter of 2009 consisted primarily of work performed by the Cherokee, Hercules and Sea Constructor. The Cherokee was in dry docks during the second quarter of 2008. Well, that concludes our prepared comments and we’ll now take your questions. Jacqueline.
Question-and-Answer-Session
Operator
Your first question comes from [Marshal Atkins - Principal Financial Securities].
Marshal Atkins - Principal Financial Securities
Phenomenal quarter, and obviously the only concern here is the backlog being down somewhat. So let’s kind of, you mentioned that you have some big bids that were coming up. So, I guess, that the question is tell us a little bit more about the bidding environment right now, are these awards that were kind of delayed, they were going to be push back, what’s our confidence level that we are going to be able to fill that backlog gap and finally on that same issue?
How much of these revenues that we are seeing actually come from backlog? Are we going to see a shift towards more of the callout work? So maybe backlog isn’t as relevant as it might have been before?
John Clerico
That’s a very good set of questions, and really captures the essence of where we are in our business and as a company. If I might I would maybe say a few words in background as to where our backlog is now.
As is normally the case particularly on international projects, lead times traditionally have been fairly long, 12 to 18 months. So where we are now to a certain extend is the result of some pricing and other decisions we made a year or two year and half ago and to be honest if we had couple of those to make over again we would make them differently.
Second factor, we have had a number of projects delayed or postponed, I can tick off a number of them and we can if you would like, but I pick those are fairly well known. We certainly have had a number of those. We have come out in a few cases, second best on what are called alternate competitive bids.
I notice that most specifically in Latin America, our market is always competitive, but here in the last, certainly since I have done a global and in the last six months particularly, bids are alternate competitive and there is for any piece of work a lot of people bidding, and I would say generally as a result of those things and some others, we are finding somewhat shorter lead times maybe because of project has been known about for sometime, but put off and then bids are requested on fairly short notice.
So maybe just by way of background those are some comments about how we got to where we are. I mentioned we do have some outstanding project bids that would go a long way toward restoring our backlog to a normal level. I’m really not in a position to make a forecast or commitments, but I feel good about the bids that we have outstanding and I do think we will add to our project backlog. I think the proof of that putting will demonstrate itself here fairly shortly.
So I think in the next 30 days or so you should be able to judge how we are doing with our project bids. Gulf of Mexico as I said and as you know well, those lead times are short, and they almost seem like they are getting shorter. None of that however in my mind diminishes the importance of backlog, I would be less than honest if I said it did.
We still consider backlog to be a very important measure of our future ability to bring revenue and earnings to the bottom line. So we have got some work to do, we have some opportunities to increase our backlog and we are hopeful it will happen. I will let my colleagues add whatever they would like to that.
Jeffrey Levos
As you know some of the projects in the international market particularly in Mexico and earlier this year in India, there were several out there for ONGC offshore India that got delayed, those projects are starting to come back for a tandem, but they are not going to be awarded in time for 2009, they are going to be 2010 and perhaps 2011 projects.
We are also starting to see a lot of interesting projects in the Mediterranean that are again 2010, 2011 type projects, but despite that there are still opportunities for the fourth quarter of 2009 that we are actively pursuing and we hope to hear something on in the near future.
John Clerico
I might just interject here. One additional comment Marshal, and that is we have got people going all over the world talking to lots of different potential customers for our new build vessels, the 1200 and 1201. We have not yet booked projects for that vessel, but we are receiving lots of interest, very favorable reception as to the capabilities of 1200, particularly since it’s coming out next year, and we expect that over the course of the next quarter or two to help us add to backlog, so that’s it. Thank you.
Marshal Atkins - Principal Financial Securities
Perfect. I am assuming here then given those comments that next couple of quarters would be prudent to model revenues directionally down from this past quarter, which obviously was pretty stout.
John Clerico
I would say that’s a reasonable prospect. I would be less than honest if I said otherwise.
Marshal Atkins - Principal Financial Securities
Last question from me, I will turn it over to someone else. Margins, you just absolutely crushed it here across, Peter can you give me some color on and you hit on some of the issues, I think, but just rehash, give some color on why margin is so good and again I would presume going forward those are going to be harder to repeat or amount of space there.
John Clerico
This is John. Let me just say one thing and then I will let Peter give you some more comments. The first thing I would say to you is this company is well positioned with operating leverage. We have taken our cost down, so revenue contributes more materially to the bottom line before.
And secondly in the quarter, you saw the impact of good project execution. We earned our target margins on projects. We have done a lot of work to try to improve our project execution, and our team has done a very good job. So I don’t know that I would agree that our margins are necessarily ahead itself. They might as a result of potentially some lower revenues, but as we just talked but the company has leveraged and is executing well.
Peter Atkinson
I will reemphasize that as well Marshal. The benefit in the quarter was our performance and our execution of the projects, and the delivery of the projects as we originally have planned them. The Gulf for Mexico is getting very competitive and it’s a still lot more hidden right now that is a very competitive market. So, but the international market when we execute we can make big margins.
Marshal Atkins
Sounds like you guys have done a phenomenal job turnaround, good job. Thanks.
Operator
Your next question comes from Joe Gibney - Capital One
Joe Gibney - Capital One
Congratulations on the quarter as well. Just some specific questions Peter, specifically on the status of the Siam [ph] now, is it remaining in West Africa, perhaps in Ghana and kind of where are we going with this vessel.
If you could comment on the multipurpose vessel outlook in the Gulf of Mexico, you said the commander is back in, but no activity to date as we think about the challenger and the arrive and the commander and these vessels here. Little bit of over capacity in this market, just could you comment directionally how that’s heading and how the bidding prospects are for those vessels in the Gulf?
Peter Atkinson
The Siam is warm stacked in [Tema Ghana], we demobilized it from Nigeria on completion of the [Edo] project and would warm stacked it in Tema. In the Gulf of Mexico, yes, there is some over capacity for those specials.
The reason the commander didn’t have any activity is that it wasn’t the absence of interest in the vessel, it was that the saturation system is still not being certified to go do work, and that prevented us putting it to work. That will be resolved this month and we are pursuing opportunities and we expect it to be put to work very shortly.
The challenger is also currently working in the Gulf of Mexico, and we are getting lots of inquiries for those types of vessels in both Brazil, West Africa and even now into Malaysia that they – the pricing is getting extremely competitive. We are finding there a lot of availability of those vessels.
Joe Gibney - Capital One
Then regionally in Asia Pacific Peter, obviously the comments are rolling on the CVX Thailand job, you mentioned the DLB 264 heading to Malaysia. Are we dropping off a little bit in working in India, obviously you see roll-off in jobs in ONGC, and picking up more in the Malaysian Indonesia regions as the general outlook regionally there and last one border dry-dock outlook back half of year. That will be it from me, I appreciate it.
John Clerico
The first part on India, this is the slow season in India. You don’t work to in the monsoon season offshore. The East Coast of India IECs work around 15th of May, and you don’t resume until the 1 of October.
So, it’s normal for us to demobilize those vessels into the Asia Pacific region or into the the Arabian Gulf. As I mentioned earlier, there were a couple of tenders that are impacted by three tenders that ONGC delayed earlier this year that we had originally expected what commenced in the fourth quarter of 2009, but got delayed.
Those are now moved into 2010 and probably will not commence offshore until October 2010 after post monsoon. So, yes, there’s been a shifting projects there, but it is normal for us to demobilize out of India during these months. We are also seen definite increase in activity in Malaysia. Petronas has come out with several packages, construction that will start in 2010 and they are getting pretty active there.
As far of the dry-docking goes, the 264 has just completed the dry-docking in Batam [ph] the 332 completed a dry-docking in the second quarter in the Middle East and we only have one of the potential dry-docking schedule for later this year and our cost on dry-docking that comes suitable at lower than they were in the previous year.
Joe Gibney - Capital One
That TD will be for direct pipeline or within the MPSV fleet.
John Clerico
That’s correct.
Operator
Your next question comes from [Graham Madison - Lazard Capital Markets].
Graham Madison - Lazard Capital Markets
A question on your outlook for rewards in the middle-east going forward, I know that you are wrapping up projects and you did book 27 million this quarter, but just your outlook for the second half of this year and into 2010.
John Katok
Let me start off we first of all the outlook is slow as we said and clearly the Saudis are taking a leadership role and production cutbacks in order to manage OPEC production and price their target price level.
So we have seen some projects postpone there particularly one that we had targeted following on from Berri and Qatif, the Safaniya project, but we are at the moment evaluating some other potential Middle East work which we can wrap it up, will contribute in the near term. I am not aware of any large projects coming out of Saudi or the middle east early in 2010, but the outlook I know improves as we get into the back part of 2010 but all that peter add to that.
Peter Jessup
Yes just, a little bit of additional color on that. Aramco awarded a significant demand of work in Saudi earlier this year. That work is ongoing, unfortunately went to some of our competition when we talk about opportunities for us, there was a project that we were targeting, that we expected for 2009 that Aramco did effectively canceled when they cut back their CapEx budget. So it is not that the Middle East is particularly slow, but we don’t have opportunities there in the short term forum.
Graham Madison - Lazard Capital Markets
Then, just turning to West Africa where margin was very impressive clarification, did you see the vessel sales were included in that margin or is that separated from that 44% or 41% margin in the quarter?
John Katok
Vessel sales would be included in the margin.
Graham Madison - Lazard Capital Markets
One last question, I know you guys have done a very impressive job in controlling SG&A costs as part of the overall impressive turn around. Is this sort of run rate that we could expect going forward or how should we think about that is the appropriate amount of SG&A, now that you’ve made changes in your fleet and just given the new outlook?
Jeffrey Levos
Gram, this is Jeffrey, we will also take that one. Great question, as you can see, I think we’ve done a considerable amount of work over the last three quarters on sizing the SG&A footprint for the businesses that exist today. There is a -- as everybody would agree, there is a logical limit to where the returns from that just on off the scale of that we’ve experience so far, and I would tell you, we’re starting to approach that as Mr. Clerico said, at the onset of the call, we are going to continue to actively work that and you should see some additional benefits from that, but the scale is going to be small.
Operator
Your next question comes from Brad Hammer – Unidentified Company.
Brad Hammer – Unidentified Company
I had to tune in just a little late, so apologies if I missed some of your discussion of this, but you all seem to have made some interesting arrangement with fluor. Could you please share a little bit of that and what that might be then by the way of opportunities for you?
John Clerico
Why don’t I start if I could Brad. We as an organization are first of all quite excited about our alliance with looking forward. You don’t need to me to tell you that they have world class capabilities and a world call reputation.
They fit with us extremely well in a couple of areas, they have extremely good engineering capability and regardless of what we might do together on future projects, we expect to capitalize on their engineering talent, experience, and expertise.
Second thing that leads us to think that this is potentially attractive venture is that we find more and more of our transportation and installation projects being awarded as part of larger usually epic type transactions and it’s becoming increasingly difficult to compete just pursuing your own segment or niche and fluor obviously brings a lot of engineering, design, procurement capability to enable us to compete more effectively in that area. Our cultures are I think a good fit.
So we are excited about it, optimistic about it. The proof of the pudding will be in how we work together in winning and then subsequently executing business, but we are going to pursue it first in Middle East, North Africa, Mediterranean area and hope to migrate it to other parts of the world.
Peter Atkinson
I can only endorse what John says, that we are extremely excited about that arrangement. Fluor has a wealth of experience and they bring to us the engineering procurement, project management expertise. They have been in the offshore industry for probably 35 years and more.
They operate in regions that we haven’t operated in the past and they definitely open up a lot more market opportunities to us than we had previously in the form of contracting opportunities and new geographical regions, and we are excited about the venture going forward.
Brad Hammer – Unidentified Company
That makes sense and you certainly see the enthusiasm. Have you worked as a sub-contractor for fluor in the past and a lot in the past, would you say the relationship was already established again?
Peter Atkinson
We had worked with the ICA fluor Daniel venture in Mexico. They have a fabrication facility in Mexico. We have installed the Nitrogen pipeline as part of a joint venture with ICA fluor Daniel in Mexico and that was very successful.
Brad Hammer – Unidentified Company
That’s helpful. Does their, your comments about the Mediterranean then, it sounds like it may be linked to the relationship with fluor specifically. Like, can I tie the two pieces of this call together that way?
Peter Atkinson
The arrangement is for the Middle East and the Mediterranean.
Brad Hammer – Unidentified Company
Right, okay.
Peter Atkinson
And we will entertain projects on a case by case basis outside of that region.
Brad Hammer – Unidentified Company
That was the following question, was there a, can we think implicitly that of a team or is it more project by project decision?
John Clerico
Small project by project, we will have, we will have a high level venture management team but each one of the projects will stand on its own and will have its own execution organization.
Brad Hammer – Unidentified Company
Okay. Just an unrelated follow up question. You mentioned with the challenger that there are opportunities in West Africa, and then I guess , well I guess the question is simply, last quarter you talked sort about sort of exiting west Africa . Is there some sort of change in strategy with respect to that region?
John Clerico
Let me just talk about that little bit. We may not have used the precisely correct words. What we are about as an organization as we’ve said many times is to make sure that we have a cost structure that matches our revenue opportunity and when we have spoken about west Africa we had from time to time good project opportunities and at other times not so good project opportunities.
They are expensive to execute in that part of the world. There are number of special concerns like security for example so we are not willing as an organization to have a large vessel and infrastructure cost, sitting around waiting for the next project.
So when we are idle there between opportunities, we are going to cut back and we did that. At the same time we continue to actively look at project opportunities in the area and I think our first and second quarter performance demonstrated to us at least that we do know how to make money there.
When we execute well, we can be successful there. So we are not withdrawing from West Africa, we are simply trying to manage our cost structure such that when we don’t have revenue we don’t have a large penalty cost if you will sit in there in West Africa.
Operator
(Operator instructions) Your next question comes from Joe Augular – Unidentified Company.
Joe Augular – Unidentified Company
Since you were just discussing the Fluor relationship, I thought I would ask you if you all have any bids outstanding at present with fluor. Is it too early for that?
John Clerico
We have been bidding on a couple of projects, not in well, outside of the Middle East region, we have already bid a couple of projects and prepare to bid [inaudible].
Joe Augular – Unidentified Company
Would these be sizable jobs? I mean, this is obviously something that helps you all get in a bigger scope projects, is there any way you could give us any indication of size?
John Clerico
I would rather not do that at the moment Joe.
Joe Augular – Unidentified Company
The other question I wanted to ask focuses on, I think, some of the comments that you all have made earlier in the call regarding kind of the adjusting your cost structure to your revenues and I am just trying to may be get you to give us a little bit more color on how you do that in this business.
It has always been SG&A costs are one thing, but obviously utilization plays a big role in your revenues each quarter and there are some fixed costs. I am just trying to get an idea. You are all trying to target any particular marginal level, is sort of a minimum or is there may be just if you could explain a little bit how you plan on managing these costs, your revenue level over the next couple of quarters, I would appreciate that.
John Clerico
Sure I will take a cut at that.. First I think a couple of key things we are trying to do. The first thing I would mention is to be pro-active. This is something we need to get ahead of and not behind and be reactive.
So as we forecast the future of our business, we try and be realistic, if we are going to have future revenues that better be from projects that we can put a name to that sees us in our back log or that we feel we have a high probability of winning and we need to make sure that if we win those projects that we achieve a reasonable margin.
I am not going to give you a target margin because it varies somewhat from one part of the world to the other. Peter mentioned a very competitive Gulf of Mexico market, a bigger opportunity, and it needs to be a bigger margin opportunity in places like Nigeria because of the extra cost.
But we want to have at least a double digit margin if you take our global business and balance. So we are always going to be trying to look ahead and say to ourselves with this project revenue load and this perspective amount of revenue, what do we need to do to manage our cost to make sure that we achieve our profitability.
The other element of it is and a key part of that is vessel cost, probably the most important part of it is vessel cost, to keep vessels crewed and idle when they are not being utilized is extremely expensive. So were trying to stay ahead of that one as well.
And then lastly, particularly with SG&A, I would just say we are constantly looking at that to try to figure out ways to be more efficient. One example, here in the last two quarters we have realigned our organization a little bit, simplified it a little bit, tried to do away with as much of the metrics part of it as we can primarily to make sure that there are clear accountabilities for execution all through the company. That has permitted us to take a look at some overlapping functions and make some reductions. So it’s a kind of a multi-front endeavor, but one we are looking at constantly.
Joe Augular – Unidentified Company
If I also could ask you, I mean, I think you just touched on this, but one of the issues I remember that I think you found when you took over in the CEO role was that the bidding and maybe project execution teams weren’t always too closely tied together, and it sounds like that has been addressed, I mean, would you care to give any comment on that?
John Clerico
Yes, definitely, and you are exactly right. That was one of our challenges. In our organizational realignment, we have as I said very, very clear lines of accountability. You can only have that if you give people control over their own destiny, their cost structure, the people they bring in, the bids they submit, and the project people who get assigned to work.
So, when we are bidding on something, we have project managers, other execution people fully involved in putting those bits together because if we win them, then those are the people who are going to have to execute it. So, we’ve very definitely addressed that issue.
Joe Augular – Unidentified Company
Okay. One last quick question, tax rate. Could you give us any help on that going forward? Thank you very much.
John Clerico
Hi Jeff, the tax rate as you see, as you observe globally is volatile for us. That’s essentially driven by the mix of projects in a particular year and a particular quarter, and this particular quarter for us as you will see in our 10-Q, which we will file today or tomorrow. The driver for the reduction in the effective rate was the favorable performance in West Africa. Because of the deemed profit regime in Nigeria that meaning that that income taxes are based on revenue.
When we perform well against our bids and our budgets, we are going to drive the effective tax rate down, and when we don’t perform against those bids and budgets it’s going to go up. Also there was some benefits for a previously un-utilizable operating loss that on a project that we were able to capture as a result of good work in Indonesia this year.
So at this point you are looking at an effective reduced tax rate for 2009 compared to 2008, but as I said that’s all predicated upon performance against estimates in individual business units in the regions.
Operator
Your final question comes from John Evans – Unidentified Company.
John Evans – Unidentified Company
Can you talk a little bit about the releasing of the cash that you had in the quarter and kind of help me understand that better and kind of what does that mean and we have to potentially put that up again for other projects?
Jeffrey Levos
Sure, John. This is Jeff again. As a result of our operating performance through the third quarter of last year we did in fact violate the covenants of our amended revolver, at that time, we negotiated with the bank group that is behind the revolver and preserved our ability to keep the revolver whilst having the cash collateralize our letters of credit.
In the ensuing three quarters our operating performance put us in a position where subject to those negotiated requirements, we were able to come back to our existing revolver, essentially our revolver and thereby release the cash collateralization requirements of those letters of credit. So we are in a position where that cash is effectively available to us again, and we are in a normal letter of credit position with our revolving credit agreement.
John Evans – Unidentified Company
So how do you look at the cashes potentially to increase your holder value? Do you just leave it on the balance sheet because you should have decent cash flow the rest of the year, shouldn’t you, and I mean maybe you don’t buy stock back, what do you do to increase the value of the EBA of the company and the enterprise value?
Jeffrey Levos
Well, the first thing I would say to you is we have had significant expenditures on our two new built vessels. We continue to have significant expenditures on those vessels all through next year and even a little into 2011.
Those are investments that we think, I don’t want to put too many adjectives on it, but it’s strategically important to us that we complete the purchase of those vessels and we think those are quite value added assets to go into our mix, as I mentioned, we are getting good worldwide reception from customers.
We think those vessels will improve our flexibility performance and profitability. I would say right now until we get ourselves to a point where the industry environment is a little bit more robust. You will see us hold that cash in reserve, but later on we are open to other things.
John Evans – Unidentified Company
Got it, and just the last thing, I am sorry, and I probably should know this, but when you get delivery of those vessels what to do with at the time of delivery?
Jeffrey Levos
Sure John, and then I mean, let me make a statement to you if that answers the question. I think you are asking, these are the construction of global 1200 and 1201. Our pay as you go. So as we receive delivery for the vessels we are going to be essentially in a paid up position when we take delivery of those vessels.
Operator
(Operator instructions) I am showing no further questions at this time.
John Clerico
If there are no further question this morning, that concludes today’s call and I thank you all for joining us in and your interest in Global Industries. Thank you all.
Operator
I am seeing no further questions at this time. That concludes today’s conference. You may disconnect at this time.
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