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Gulf Island Fabrication, Inc. (NASDAQ:GIFI)

Q2 2014 Earnings Call

July 25, 2014 10:00 am ET

Executives

Cindy Cook - Accounting Manager

Kirk Meche - President & CEO

Jeffrey Favret - VP - Finance, CFO

Todd Ladd - COO

Analysts

Will Gabrielski - Stephens

Martin Malloy - Johnson Rice

Operator

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication, Inc. Q2 2014 Earnings Conference Call. All participants will be in a listen-only for the duration of the presentation. After the presentation, we will conduct a question and answer session. Instructions will be given at that time. Today's call is being recorded.

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

Cindy Cook

Thank you, Anna. I would like to welcome everyone to Gulf Island Fabrication's 2014 second 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 7, 2014. The 10-K was included as part of the company's 2013 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 and CEO; and Mr. Jeffrey Favret, our Chief Financial Officer; and Mr. Todd Ladd, our Chief Operating Officer. Mr. Meche?

Kirk Meche

Thank you, Cindy, and good morning to all of our listeners. I will provide updates on existing projects, a general overview of the market and opportunities that exist for our company. I will also touch briefly on a cooperative agreement we signed yesterday with Bechtel Oil, Gas, and Chemicals. I will then turn the call over to Mr. Jeff Favret, our Vice President, Finance, and Chief Financial Officer for a breakdown of the financial information for the second quarter of 2014. At the conclusion of the Mr. Favret's report, we will open the lines for questions.

I will begin with an update on the projects currently under contract. At our Texas facilities, we continue to fabricate a 1,200-foot jacket, the associated piles and topsides for the Gulf of Mexico destination. Deliveries for these units are scheduled for late summer of 2015. We also continue to fabricate two tank barges with deliver set for the third quarter of 2014. We also are in the process of receiving material for our pile job in which the award was received this quarter.

At our Louisiana facilities, work continues on several jackets and topsides for shallow water projects which include domestic and foreign locations. Efforts for a major offshore hookup and integration project for a large deepwater platform in Gulf of Mexico continues with work anticipated to complete in latter part of this. We continue to work on several vessels, including the large lift boats scheduled for deliver in the latter part of the third quarter of this year, as well as two offshore supply vessels scheduled for delivery this summer in the latter part of this year, respectively.

As recently announced, we are preparing for the construction of two river towboats scheduled for delivering the second quarter of 2015. Our drydock remains active with opportunities for work going forward.

Now onto the market conditions. We expect bids for deepwater projects to be available in later part of 2014 or early 2015. We had seen these projects continue to push to the right over the last several months and believe this trend to continue. Bidding activities for shallow water projects, non-traditional Gulf of Mexico marine related projects, wind projects and support work associated with deepwater structures are expected to increase from current levels over the next two quarters.

In prior quarters, we spoke about strategic plans to acquire the opportunity to obtain additional work, which included but was not limited to teaming, partnering or joint venturing with several companies for opportunities that exist. Yesterday, we issued a press release announcing the cooperative agreement we signed with Bechtel Oil, Gas, and Chemicals. We will combine the talents and expertise of each of our respective companies to pursue EPC and EPCI contracts. This will give us greater opportunities to markets in the Gulf of Mexico, as well as oversees. We are extremely excited by the possibilities that exist for this type of arrangement and what we collectively offer to our clients.

Before I conclude, I would like to say a few words about our Founder and Director Emeritus Mr. Alden J. (Doc) Laborde. Doc passed away during the second quarter of this year. He was a pioneer in the oil and gas industry with many contributions to this industry, including the formation of Gulf Island Fabrication in 1985. We are honored to have known and work with this gentleman. He will be sadly missed but never forgotten.

I would now like to turn the call over to Mr. Favret who will discuss our financial performance for second quarter 2014. Jeff?

Mr. Jeff Favret

Thank you, Kirk, and good morning everyone. I'll discuss highlights from the quarter, provide specifics for our financial performance and then, we'll open the call to your questions.

We had another solid quarter with net income of $4.3 million or $0.30 per share, compared to net income of $4.3 million or $0.30 per share for the second quarter 2013. Revenue for the three months ended June 30, 2014 was $129.2 million, compared to a $154.6 million for the prior year quarter.

Gross profit was $10.3 million for the second quarter 2014, representing an 8% profit margin, compared to $9.7 million or 6.3% profit margin for the second quarter 2013, an $8.8 million or 6.5% for the sequential quarter.

The decrease in revenue was 16.4% for the second quarter 2014 compared to the prior year quarter was primarily due to substantial revenue for the three large deepwater projects recognized during the second quarter 2013.

Consistent with increases in gross profit for the first quarter 2014, the increase in gross profit for the second quarter 2014 compared to the prior year quarter is primarily due to improved margins associated with the fabrication and installation of offshore skid and other short duration projects during the second quarter 2014, and suppressed margins in the prior year quarter due to losses experienced in connection with the large deepwater contract.

The following represents selected balance sheet information for June 30, 2014 compared to December 31, 2013.

Cash and cash equivalents were $31.4 million compared to $36.6 million. Working capital was $84.6 million versus $89.7 million.

Net property, plant and equipment was $231.9 million compared to $223.6 million and total assets were $379.8 million and $426.2 million respectively.

CapEx for the second quarter 2014 was $10.7 million, primarily for the purchases of a 660 ton capacity crawler lift crane and other equipment. Approximately $10.2 million of capital expenditures are planned for the remainder of 2014, including approximately $4.1 million of maintenance capital expenditures at our Texas and Louisiana facilities, $1.1 million for yard improvements at our Texas facility, and another $2.1 million for a plate roller at our Texas facility.

We declared and paid cash dividends of $0.10 per share during each of the quarters ended June 30, 2014 and 2013.

I'll now turn to our backlog information. Revenue backlog was $223.8 million with a labor backlog of 2.1 million hours remaining to work at June 30, 2014, compared to a revenue backlog of $271.4 million and labor backlog of 2.5 million hours remaining to work at March 31, 2014.

Revenue backlog for deepwater projects was $129.8 million or 58.1% compared to $171.1 million or 63.1% for the sequential quarter. Of the backlog at June 30, 2014, we expect to recognize revenue of approximately $164.1 million or 72.8% during the remaining six months 2014 and $58.6 million or 26.7% during the calendar year 2015, not including change orders, scope growth or new contracts that may be awarded.

We had approximately 1,900 employees and 200 contract employees at June 30, 2014, compared to approximately 2,000 employees and 250 contract employees as of March 31, 2014. Labor hours worked during the quarter were 978,000 compared to 953,000 hours for the sequential quarter.

Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Will Gabrielski with Stephens.

Will Gabrielski - Stephens

So I guess first on the Bechtel agreement, it sounds like you have may be limited ability to talk too much about it. But can you talk about how it came together and what -- you mentioned EPCI, where the "I" would come from?

Kirk Meche

Well yes, sure, and you are right. We have been working on this for probably close to about a year now trying to get Bechtel and Gulf Island aligned. As we identified within the markets, we knew that we were limited on what we could bid and could not bid. As these owners continue to push risk down, I guess to the right, to the fabricators, we saw the need for more of an EPC and EPCI type contract. And certainly, with Bechtel they offer the engineering aspect that we were missing. And they also offer -- they are strong procurement, they do worldwide, as well as project management, their contacts.

And basically, what will happen in this arrangement, we'll identify projects as we go forward and we will determine who would take the lead in the projects. And again, it will depend on the scope of work, which may also include installation portion of it that Bechtel has been accustomed to in the past.

Will Gabrielski - Stephens

Okay. Very helpful. It sounds like -- so if we look at the margins this quarter 8% gross and you're talking about it, it sounds like better margins on your book and burn work. Are the large projects or the remaining backlog you have left on your large project, is that still a headwind to that gross margin and does that wind it down? Does the market continue to pickup all else being equal?

Kirk Meche

I think as we wind down in a big project for sure, again, assume that we are going to have no issues as the project winds down, which is you got to be careful with these big projects going forward. We anticipate the margins to be close to where they are now. I don't see any real major swing in the margin itself from the large deep-water project we have got out here. I think we have got it well managed. It's under control. Things are going well with the project. And I don't anticipate any major swing in that margin on the project.

Will Gabrielski - Stephens

Okay. And are you starting to see opportunities to move pricing a little bit higher on small work, given maybe its tightening labor conditions on the Gulf Coast?

Kirk Meche

No. We really haven't. There is still -- as -- there is not whole lot of big projects out there. And as the big projects come down sometimes it appears to be more competition from the aspect of not only a lot of the smaller players in the market but also the big player. So I think the margins -- it's not given us opportunity just yet to go and really increase those margins. Downstream and upstream have not come together yet. The projects continue to push to right. And we would hope that once the downstream segment catches up with the upstream then you may see some improvement in margins.

Operator

(Operator Instructions) We'll now move to Martin Malloy with Johnson Rice.

Martin Malloy - Johnson Rice

Congratulation on the 2Q results and the Bechtel agreement. Could you talk about maybe -- with the Bechtel agreement, are there specific projects that you all have identified? And maybe is there any help you can give us in terms of the timing of when we might actually see something booked or announced under this agreement?

Kirk Meche

Sure, Martin. Currently, because we just signed the agreement yesterday, we're working on lot of details, there are a few projects that we have tentatively identified but nothing that we have come together to identify to say this is the project we're going to go after. Again, we've got a few of them on a radar screen and we're going to start visiting with our customer base to help them understand the relationship we have with two companies and I think that will help open up some bidding opportunities.

Now, again, I think Bechtel may have some opportunities overseas that we are not aware at this point in time. So I don't anticipate having any immediate effect on this. But I would say that within a quarter or so that we will probably start seeing some opportunities for both companies to have the opportunities bid on these projects, including deep-water projects that may not be destined for the Gulf of Mexico.

Martin Malloy - Johnson Rice

Okay. In terms of Bechtel's track record, in terms of engineering for offshore projects, have they had a large presence both in the Gulf of Mexico and in internationally?

Kirk Meche

Marty, I don't want to speak on behalf of Bechtel. But Bechtel has had a large presence overseas and they realize that they want to get little more involved in the Gulf of Mexico and enhance the relationship with Gulf Island. Now, they've got some folks on board that certainly have been through the industry that have participated in the Gulf of Mexico on a lot of the sales force. Some of these gentlemen have come from Technip and what not. So they have the expertise in terms of engineering these large projects for Gulf of Mexico. But again, I would say that predominantly they had been overseas more so than they had been here in the Gulf of Mexico.

Look, it won't be just limited to projects in the -- for the Gulf of Mexico. Again, it may be some projects that may have some flavor in terms of modular type constructional work. Now, we don't look at all different projects and make sure that it works best for both companies and see what we can do going forward.

So again, we are very excited about this, to have this announcement with Bechtel. We think it opens up a lot of opportunities for both companies, with the strength we have. And again, we're pretty excited going forward. So I think within the next quarter, we will probably make some additional announcements on how this is really structured and going forward. But again, we are pleased to have them on board with us.

Martin Malloy - Johnson Rice

Okay. And then, in terms of some of the shallow water fabrication opportunities both for topsides and jackets, can you talk about what you are saying both not only in the Gulf of Mexico but may be some international opportunities? And then, what you are expecting in terms of timing of those awards and you’ve both historically done a few projects in West Africa --

Kirk Meche

Yes.

Martin Malloy - Johnson Rice

Maybe talk about that, any projects in Latin America region and potential timing of awards, when we get start to see the backlog in flat.

Kirk Meche

Sure, Marty. Again, when we identified projects, we currently are tracking some 40 projects that have shallow water components as well as other type of components and there's some mix between domestic and foreign. There are several projects that we have bids outstanding currently not only for the domestic market but also for foreign markets that we’re hoping that these owners will make some award within the next couple of weeks quite honestly. But again everyone's subject to last minute these projects have a tendency to be pushed a little bit to the right. We would have expected some of these projects to have been awarded by now and for whatever reason delays of permitting and what not, they're being pushed back for about a month. So we are hoping to see a little uptick in the market in the next couple of weeks to next month. And again so that activity remains very strong for us going forward.

Again there is a strong presence and strong need for the shallow water opportunities and again as well as other opportunities as well. I know wind is out there as well, we are looking at opportunities for these windmills that’s going to go up the eastern coast of the U.S. and we’re trying to position ourselves to be competitive in that market as well.

Martin Malloy - Johnson Rice

And in the shallow water bids that you have out saying would these awards be at the sizes that might lead to a press release?

Kirk Meche

I think there may be a few of them might lead, that lend itself to an announcement. It’s as we spoke about in the past. A lot of these platforms don’t fit the criteria for an announcement and, hence, I think that’s why you see the backlog while it is dwindling its not dwindling at an alarming pace. It’s a slow dwindle with a backlog. And again that’s associated with couple components, one is the offshore campaign that we don’t book as revenue or backlog and the second part of course is we're burning off our man-hours but we're picking up small projects that we don’t announce it. So you see a small trickle effect in terms of a dwindling in the backlog but we’re hoping to get those numbers out.

Operator

(Operator Instructions). We’ll now take a follow-up from Will Gabrielski with Stephens.

Will Gabrielski - Stephens

Can you talk about the risk sharing component of Bechtel relationship and how do you think you guys will be able to manage sitting down together and figuring out who’s responsible for what and who’s willing to take what risks and make -- a JV structure I think it’s always been -- or an agreement structure like this has always been a challenging in the industry from that standpoint?

Kirk Meche

Will, we just touch on a little bit. I think and truly really identify the projects themselves I don’t know that we can sit here and telling you how we are going to break down that risk going forward. I will tell you this. Our primary goal will be to go after the bigger projects where we anticipate Bechtel will take the lead on the projects. And we will provide the labor and facilities and Bechtel will provide the management of the projects going forward. But again this could be our project by project specific basis and each project will have its own unique component as to risk that we are going to share amongst the companies.

Will Gabrielski - Stephens

Okay, when you look into planning for 2015 obviously you get a lot of work to do to get backlog up to a level that would we supportive of continue and keep revenue kind of in and around where its been exclusive of the deepwater projects that’s lining down. So I guess what you guys planning, as you go through the planning activities, how do you thinking about fixed costs and your flexibility around certain different cost variables when you look at what might be a down revenue year again?

Kirk Meche

Gosh, Will, again we look at all the components we have in terms of tracking our projects and trying to see what’s out there in terms of the big projects and making sure that we are not overstaff in terms of having the ability to be comparative on a small stuff. We are working on different components. We look at our company, we are not just a one off type company in terms of we only fabricate one type of component. There are other opportunities that are out there, that were talking to customers about nothing that we can say that we actually bidding just yet, but again there are other components in the industry that may not lend itself to quite oil and gas type structures. But again I really don’t want to get too far ahead of myself in terms of telling you what we can foresee as a five-year plan going forward, but just know that we are out there, we are trying to make sure we got ourselves well-positioned for the markets that we see immediately as well as the markets we see in the long term.

Will Gabrielski - Stephens

Okay. And then on the balance sheet how you guys thinking about continuing to use the balance sheet, I guess to create value beyond the dividend? Has anymore thought gone into taking a look at that cash balance and possibly utilizing it to return some to shareholders?

Jeffrey Favret

Yes, Will, this is Jeffrey Favret. We are always looking at all of the capital allocation strategies. And so one of them could be the increased dividends, one could be a buyback program; we're certainly looking at that. We are looking at other activities, quite honestly, other uses for our cash. And so we would say, I think we said this in prior quarters that nothing is off the table, we are going to look at all of these capital allocation strategies including the couple that you were referencing.

Operator

This does conclude today’s question-and-answer session. At this time, I'd like to turn the conference over to Mr. Meche for any additional comments.

Kirk Meche

Okay, well, we certainly would like to thank everyone for listening today. And we look forward to speaking with everyone next quarter. Thank you.

Operator

Thank you, sir. A replay will be available for today’s presentation starting today July 25th at 12:00 pm Central time and August 1st at 12:00 pm Central time. To listen to the replay you may dial 1 (888) 203-1112 and enter pass code 1108351. Again the dialing phone number is 1 (888) 203-1112 with a pass code of 1108351. And that does conclude today’s conference. We thank you all for your participation.

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