Global Industries CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 5.10 | About: Global Industries (GLBL-OLD)

Global Industries Ltd. (NASDAQ:GLBL-OLD)

Q3 2010 Earnings Call

November 05, 2010 10:00 am ET

Executives

Andy Smith - SVP & CFO

John Reed - CEO

Ashit Jain - COO

Analysts

Joe Gibney - Capital One Southcoast

Martin Malloy - Johnson Rice & Company

Graham Mattison - Lazard Capital Markets

Brad Handler - Credit Suisse

Michael Marino - Stephens Incorporated

Brad Handler - Credit Suisse

David Griffiths - Copia Capital

Operator

Welcome to the Global Industries third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded. If you have any instructions, you may disconnect at this time. On the call this morning are John Reed, Chief Executive Officer; Andy Smith, Chief Financial Officer and Ashit Jain, Chief Operations officer. I would now like to turn the meting over to Mr. Andy Smith. Sir, please begin.

Andy Smith

Thank you and good morning. I would like to welcome everyone to Global Industries third quarter 2010 earnings conference call. The call is being recorded and will be available on our website at globalind.com. Before we begin, I would like to remind everyone that certain of our comments and responses to questions reflect our current views and assumptions and are considered forward-looking statements as defined in securities, laws and regulations and may include risks and uncertainties which are more fully described in our filings with Securities and Exchange Commission. Interested parties are directed to our website for access to our SEC filings.

Now I'll turn it over to our Chief Executive Officer, Mr. John Reed. John.

John Reed

Thanks Andy and good morning and welcome to the call. Before I turn it over to Andy for the financial results and AJ to go through the operating results, I want to update you on our progress to get a strategic initiatives. As you know, we've been focused on building a top tiered management organization with deepwater experience. I am happy to report that we're essentially completing this effort. Second, we reviewed and analyzed our existing fleet and set about a plan to divest of assets which no longer meet our strategic needs. Since we start going Global, we have divested six vessels including four this quarter. Additionally, subsequent to the quarters then, we have reached agreements to sell the DOB 332 and the Cherokee. As such as we are substantially complete in our fleet rationalization effort.

Finally we recognize that our project execution needed to be flawless in order for us to be successful. I am very disappointed that our efforts in this area haven't developed sooner as poor project execution on our L59 and L58 project for PEMEX resulted in project losses for the quarter. However I am confident that number one, our team is fully engaged ensuring that this project has no further deterioration and two, the centralization of our bidding; estimating and project management functions will reduce the likelihood of future issues and result in more consistent performance. Our efforts to improve business acquisition and execution efficiencies via centralization continue and will incorporate other functions as we move forward. This effort will result in better targeting of projects and improved cost control by allowing us to focus resources on the most promising opportunities to give us the greater opportunity for success. On a positive note, our bid dollar volume in house and outstanding bids on a rolling 12 month basis has increased by approximately 30%. This is primarily driven by activity in Asia Pacific region. As expected, our backlog has continued to grow and our expectation is that they will continue to grow modestly for the remainder of the year.

Turning to our operating regions. North America OCD activity remains low in spite of the now lifted drilling moratorium. However in our North American subsea segment we delivered positive operating results thanks to high utilization of some of our MSVs on the Macondo spill side. Permitting for gulf activities remains low and we would expect a very slow return to normal levels over the next year. The recent directive to operate is regarding the acceleration of PMA and salvage activity could provide a boost in that area and we'll be ready to partake of the opportunities as they present themselves. However, our long-term strategic shift towards deepwater installation projects remains unchanged.

Finally as you may know, we christened the G1200 on September 18, and she is currently completing her final handover from the [KSM Yarn in Singapore] to us. Having successfully completed her seat trials we will shortly begin this and equipment trials. We recently announced our first project for the vessel for Dubai Petroleum establishments scheduled to begin offshore operations in April of next year. The project will utilize pipelay and structural capability as scope of work includes the design and fabrication and installation of a small big structure. The G1201 remains on schedule and on budget and will be delivered in the third quarter of 2011. We continue to actively target and bid projects for the G1200 and G1201 worldwide.

With that I'll turn it back over to Andy.

Andy Smith

Thanks John. For the third quarter of 2010, consolidated revenues were 189.5 million compared to 203.7 million for the same quarter last year. Gross profit was 9.8 million for the third quarter compared to 39.9 million for the same quarter last year. Net loss attributable to common share holders was 27.9 million or $0.24 per diluted share for the third quarter of 2010 compared to net income of 14 million or $0.12 per diluted share for the third quarter of 2009. Included in the third quarter results are several items that deserve special explanation. First as John previously noted, the quarter was negatively impacted by poor execution on the Line 59, Line 58 projects in Mexico. As these execution issues resulted in the overall expectation for the projects to produce a loss, we are required by percentage of completion accounting rules to recognize the full loss in this quarter. The total loss recognized on these projects in the third quarter is $18.2 million. As a result of the loss in Mexico and the industry downturn, we were obligated during this quarter to review our balance sheet goodwill for impairment. As a result of this reveal, we have written off all remaining goodwill on the company's books. This impairment resulted in the $37 million after-tax loss nearing the quarter.

Also during the third quarter, our fleet rationalization initiative continued with the sale of Shawnee, Cheyenne, Tornada, and Sea Constructor. Total gains on sales of vessels net of some minor asset impairments in the third quarter was $23.3 million. As we discussed previously, the company is continuing its efforts to centralize key operating functions in Houston and as such recorded $800,000 of cost in the quarter for severance and relocation expenses.

Finally during this quarter, we sold 30% of Leblon operating entity which owns the DOB 264 to our Malaysian partner as required by our three year PETRONAS service contracts. This sale resulted in no gain or loss but now requires us to show below net income and net of tax, income attributable to the non-controlling interest portion of Leblon entity. The above items and the operating results for this quarter resulted in the tax situation in which we incurred positive taxes on a pre-tax loss. This is primarily due to substantially non-deductible nature of the goodwill charge. Our tax rate is expected to be 32% for the full year 2010.

Now let me get to the income statement in a little more detail. The overall decline in revenue from the third quarter of 2009 included declines of 33.6 million in our North American offshore construction segment, 3.9 million in our North American subsea segment and 18.2 million in our Asia Pacific Middle East segment which are reflective of relative weakness in these markets as compared to 2009 levels. Offsetting these declines was an increase of $36.3 million in our Latin America segment primarily attributable to the ongoing Line 59 and Line 58 projects in Mexico.

Gross margin declined from 39.9 million in the third quarter 2009 to 9.8 million in the third quarter 2010. As a result of recognized project losses of 18.2 million in our Latin America segment and lower activity levels in all other operating segments. As a percentage of revenue, gross margin declined from 19.6% in third quarter 2009 to 5.2% in third quarter 2010. In the third quarter SG&A totaled 16.6 million, a decrease of 2. million over the same period last year reflecting lower legal fees as compared to those incurred in 2009 which were associated with our now closed SCPA investigation and a reduction of non-cash stock compensation expense associated with our long0term incentive plans.

Other income totaled 1.3 million for the quarter and primarily consisted of foreign exchange gains on forward contracts purchased to offset foreign currency needs on our significant capital expenditure items and specific foreign operations. During the quarter we booked $216.9 million of new work and at September 30, 2010 our backlog stood at $274.5 million.

The backlog is distributed among our reportable segment as follows. Asia Pacific Middle East 58.6 million, Latin America 205.8 million and the North American segment is $10.1 million combined. Bookings towards the quarter included the award of the Dubai Petroleum project, our first project in hand for the Global 1200. At September 30, our cash balance stood at $322 million up sequentially from 270 million on June 30th primarily as a result of cash received for vessel sales and good working capital management. Year-to-date, the cash from operations has provided $61 million of cash flow to the company.

During the quarter we spent 27.4 million on capital expenditures and there are many commitments on the Global 1200 and 1201 were $168 million at September 30th. Finally as a result of our performance during the quarter we were unable to meet certain of covenants contained in our revolving credit facility. Specifically we were in violation of the minimal EBITDA and fixed charge ratio covenants. Our banks have waved covenant compliance for the third quarter and are committed to working with us in the fourth quarter to structure covenants which meet our needs going forward. I will now turn it over to AJ for comment on our operations during the quarter.

Ashit Jain

Thank you Andy and good morning everyone. During the third quarter activities in our North America construction segment continued to be negatively impacted but there are delays in permits due to the oil spill. The activities in this division included several platform salvage projects for the vessel Cherokee and couple of pipelay projects for reel pipelay vessel Chickasaw. The pipeline for these services however remained at low levels impacting our margins. In our North America Subsea segment we continued were considerable small projects, the Olympic Challenger and Normand Commander were busy supporting activities for BP, responding to Macondo spill while the Pioneer, Sea Leopard and Orion continued supporting several small construction projects. The vessel utilization in our North America region was up from third quarter 2009. This higher utilization was however offset by the depressed pricing level. In the 11 America segment we continued work on three major projects during the quarter. (inaudible) DSV continued supporting installation of subsea facilities for Petrobras in Brazil, title to Hercules and Orion initiated work on the Line 59 projects for PEMEX and lastly we initiated the engineering and procurement activities on Line 58 projects for BMX. During third quarter we experienced productivity and non-compensable weather related issues on Line 59 projects. As mentioned by Andy based on our performance and Line 59 projects, we re-estimated the Line 59, Line 58 projects moving forward and booked a third quarter loss of $15.2 million on both these projects.

In Asia Pacific we continued work on two major projects as compared to three major projects in third quarter of 2009. DLP264 was involved in installation of pipelines, Petronas as part of the long-term agreement in Malaysia and (inaudible) DLB Comanche continued performing pipeline repair work for DGI and Indonesia. This lower project is activated negatively impacted our reserves in this quarter.

That completes our prepared comments and we will now take your questions. Thank you.

Question-and-Answer Session

We will now begin the question-and-answer session. (Operator Instructions). One moment please for your first question. Your first question comes from Joe Gibney from Capital One Southcoast. Your line is open.

Joe Gibney - Capital One Southcoast

Just wanted to follow up a little bit, a question in the Gulf of Mexico if you could address seasonality as we look into 4Q and 1Q. There's not a lot of visibility. You referenced some of the direct Macondo related work for the Challenger and the Commander in the quarter. Just curious how much of a boost did it provide in 3Q and what we should we look for in terms of potential drop off here seasonally in the fourth quarter?

Andy Smith

Yes, the Commander and the Challenger the boost was really the utilization of the assets. I wouldn't say that it was day rate charter working; I wouldn't say that the margins were spectacular. Both of those vessels now are off of the BP side. We've got a few things going forward in the Gulf but we do expect to see the seasonally low drop-off in Q4 and extending into Q1.

Joe Gibney - Capital One Southcoast

Okay, that's helpful. And just one question on the 1200, you guys looked to get it in the fleet and out and working early next year as planned on the Dubai project. Are your expectations as you shake this vessel out that it will be a profitable vessel for the first job? Certainly you have seen from some of your peers that have been shaking out vessels initially here on initial jobs, you can take some time to certainly understand that just kind of curious your thoughts there as profitability thoughts on the 1200 as it works its way into the fleet a little more fully on the back half of 2011.

John Reed

I think you're right. We're not expecting it to be immediately profitable on the very first job. However, we think its not going to be determinately either. We're starting with a pretty simple job. Its shallow water, it's not difficult. So, it's kind of ideal in that sense and give us a chance to work in your remaining bugs out. We're doing a mission equipment trials right now that mentioned so, we'll be in good shape to get to working, we've got time to get organized. We'd like to have something before that, but that's the first one we've got booked. So, I think it gives us a reasonable chance to start in a good way and prove from there, there and out.

Joe Gibney - Capital One Southcoast

Okay. That's helpful. Here's one last quick one from me. Andy, I'm sorry, if you could just repeat. Did you reference that the 332 and the Cherokee have now both been subsequently been sold this quarter?

Andy Smith

Yes, we have reached agreements on both of those to be sold and we're working through the paper work on those right now.

Operator

Your next question comes from Martin Malloy from Johnson Rice. Your line is open.

Martin Malloy - Johnson Rice & Company

Could you talk a little bit, now that you've come close to finishing your fleet rationalization, about thoughts for use of your cash going forward beyond the 1200 and 1201?

Andy Smith

I'll talk about it a little bit. I think that right now we don't have any immediate needs. We might as we go forward look at vessels of opportunity where we have requirements, but I don't see any needs for any immediate capital expenditure on new vessel.

John Reed

Just to add to that, I think we want to be pretty conservative on our cash management, it will be a better visibility. Obviously we'll keep our eyes open. There are a lot of vessels coming on to the markets that might be adventures but we don't have event setting specific lines.

Martin Malloy - Johnson Rice & Company

Okay. And the 30% increase in the bids outstanding that you referenced, what is the dollar amount now for the bids outstanding that you have?

John Reed

It's about 2.9 billion.

Martin Malloy - Johnson Rice & Company

And where was that, say, the end of 2009 or six months ago?

John Reed

In March, it was at 2. Total was 2.

Martin Malloy - Johnson Rice & Company

And for these bids, is this for work that would begin, say, second, third quarter of 2011?

John Reed

Primarily 11 and 12, but a lot of its 11 and some 12.

Martin Malloy - Johnson Rice & Company

Thank you.

Operator

Next one comes from Graham Mattison from Lazard Capital Markets. Your line is open.

Graham Mattison - Lazard Capital Markets

Really just talk more on your bookings outlet. If you look around the world, where do you see the best opportunities in the next 12 to 18 months?

John Reed

Well the primary area right now is Asia Pacific. That seems to be driving the growth in our dollar bid by at the moment.

Graham Mattison - Lazard Capital Markets

All right. And then is there potential for additional JVs or partnerships? I know you recently had the one with Flora that you dissolved and you still have an informal one. Are you looking at any potential other JVs or partnerships around the world?

John Reed

We're evaluating a lot of areas, what's the best strategy forward to maintain position in some markets and in our other markets. So, in general yes we're looking at other opportunities to expand our presence in various areas.

Graham Mattison - Lazard Capital Markets

Then on the 1201, you guys take possession of that later this year. When do you think you'll have the first contract? Will it be a similar type of timeline to the 1200 where it's about a six month lag between when you take delivery and when the first project starts?

John Reed

That's kind of hard to say. I will say that we've gotten an earlier start on bidding than we did for the 1200. So, its kind of hard to say when you get the first one, but our activity level in terms of bidding the 1201 into the market is higher than it was at the same time for the 1200.

Graham Mattison - Lazard Capital Markets

But in terms of the shakedown process that could potentially be compressed if a project came in sooner?

John Reed

Yes, potential that and because they are essentially sister ships. So system wise there shouldn't be as much shake down.

Operator

(Operator Instructions). Your next question comes from Brad Handler from Credit Suisse. Your line is open.

Brad Handler - Credit Suisse

How much more revenue is associated with the Line 59 and 58 work for PEMEX?

Andy Smith

We have roughly $110 million remaining on this contract. Some of that revenue bread is associated with procurement items which we have already been procured; you'll see on our balance sheet some work-in-process items. So, it's not really at risk, but we wait until we run it off, until we sort of gather completion on the project.

Brad Handler - Credit Suisse

Right. And just so I am clear on it, the go forward assumption is break even now, is that right?

Andy Smith

Correct. Correct.

Brad Handler - Credit Suisse

How much of the 110, how much is supposed to work off in Q4?

Andy Smith

All but 37 million of it.

Brad Handler - Credit Suisse

Okay. Cool. Can you refresh my memory on when the Dubai Petroleum contract starts?

John Reed

The contract has started but the actual offshore operations are April next year.

Brad Handler - Credit Suisse

Okay. So, I am just trying to think about the financial implications of having the 1200 in house until April. Presumably it's all cost burden or is there some cost recovery associated with the trial work?

Andy Smith

It's all cost burden until its working.

Brad Handler - Credit Suisse

Okay. How long does that contract run?

John Reed

Well actual offshore work for the (inaudible) 30 days.

Andy Smith

Yes, 30 days on the 1200. I think its total offshore work of about 60 days.

John Reed

Yes.

Andy Smith

Yes.

Brad Handler - Credit Suisse

Okay. And then more generally of your backlog, how much do you expect to work off in the fourth quarter, and I assume the balance of then the first half of 2011?

Andy Smith

Yes, the fourth quarter is not much more of the backlog running off in the fourth quarter other than the PEMEX projects. Yes maybe another 2 - $5 million and in the back half, the rest of it is going to be 2011 numbers.

Operator

Your next question comes from Michael Marino from Stephens Incorporation. Your line is open.

Michael Marino - Stephens Incorporated

Question on the Gulf of Mexico, could you help us out there? A lot of moving parts obviously with just the moratorium and things like that, but specific to Global, if you look at in 2011 you would think the P&A business would help, but I guess the asset sales, what kind of impact is that going to have on your revenue potential going forward in the Gulf? Is 2011 going to be a better year than 2010? I guess is what I'm getting at, just from a top line standpoint and then we can talk about margins later. But help us understand maybe kind of outlook in the Gulf as it relates to Global as it stands today.

Ashit Jain - Global Industries

With regards to the new construction projects, the permitting is still an issue. The permitting is still slow. So, with regards to the new construction projects, there is definitely a level of uncertainty out there. They are decommissioning and salvage type projects are continuing at the same pace in a way a little bit extra pace over the coming years. With the sale of some of the assets from Gulf of Mexico what we're looking at is, we have assets in different areas including Mexico that we will be looking at bringing in to Gulf to support the activities here. So, with regards to the fleet, the number of assets working in the Gulf could be the same number of assets that were working this year.

Michael Marino - Stephens Incorporated

Okay. So, you see a decent year in 2011 in the Gulf of Mexico?

John Reed

We think it will slowly increase and as the operators get use to the new permitting regulations get into a little better rhythm there with the BOEM and getting those permits through, we expect it slowly increases but not on a fast pace.

Michael Marino - Stephens Incorporated

Right, any difference in kind of margin if you're doing more decommissioning versus D&A. I mean versus new construction?

John Reed

So, far I think in this market there is not a lot of difference. We're all pretty depressed so there is not a significant difference in the margins.

Michael Marino - Stephens Incorporated

Okay. That's helpful. If I could ask a follow-up on the 1200, what's the visibility for that vessel in the Middle East beyond the initial project? Is that where you intend to stay?

John Reed

We'll go where the work is. And we're bidding it in four, five, six projects currently. Several of those in the Asia-Pac region, probably mostly in that region. So that's kind of our thinking it right now, but the vessels, high transit speed, so she can easily go to other regions on an economical basis and we'll be at the work where it is.

Michael Marino - Stephens Incorporated

Is the thought to keep that one in the eastern hemisphere and maybe the 1201 in the western hemisphere?

John Reed

I think the ideal situation would be have one in the east, one in the west; it will just be driven where the work is located.

Michael Marino - Stephens Incorporated

Right. Okay, makes sense. All right, well thank you very much.

Operator

Your next question comes from Brad Handler from Credit Suisse, your line is open.

Brad Handler - Credit Suisse

Hi, again. My first question were sort of so numeric, I figured I'd come back and ask a broader issue. John, I think you made a statement in your introductory remarks, I think you said the hiring to reposition the company was sort of where you were finished with it or it was where you wanted to be. Maybe you could come back to that and just talk more broadly about those repositioning efforts and where you think you are in the process.

John Reed

I think at the senior levels, we are where we want to be. We've brought in the people that were kind of on the list position wise and specifically that where you would like to and we have repositioned the people who were here into the new organization. So that part in that 85-90% done range. We've continued to fill in specific positions at lower levels. That will continue. But from a senior management level, I think we are where we need to be. We've gotten there probably a bit quicker than I thought we would. And that ties in very tightly with centralizing business acquisition and project management functions. So those go a bit hand-in-hand. You can't do one without the other. We're not there yet on centralization to the level we want to get to but we're certainly headed in that direction and making a lot of progress.

Brad Handler - Credit Suisse

Yes, they are probably more personnel changes involved in that part of the process? Or is it more about the financial tracking?

John Reed

It's a little of both. The process including the financial sub but the actual process and either bidding or execution activity and there will be personnel changes but that's probably not as bigger part right now as getting the process is correct.

Brad Handler - Credit Suisse

And as you've had a chance now to sort of assess what Global's capabilities are from a fleet perspective, and now obviously having many choices about rationalizing assets. If I understood strategically there was an element of look we'll help support people at our functions perhaps as it brings in effect the infrastructure to bring it from deep water into on shore locations right, there's sort of an efficiency model using your assets versus shallower water operations. Clarify that for me please, if I've gotten that wrong. And then if that was the strategy initially, that's kind of still how you are focused on the opportunities and does that still make sense in terms of the couple year horizon in terms of how you pursue work?

John Reed

Well I think our strategy all along on the rationalization is to make sure that we end up with a fleet that can't be profitable in a good market. And secondarily underlying that is that we need the shallow water fleet that can support deepwater as well meaning we can go from shallow to deep, but also standalone and make sure we still have enough both to generate top line revenue that we think requires for us to be sustainable profitable company. Does that answer your question?

Brad Handler - Credit Suisse

It does. So, that sounds like in a sense it hasn't changed, so that you're still moving, that's the plan, you are moving forward in that direction?

John Reed

Yes and again on the rationalization side, I think we're basically there. We don't really have plans to divest any other vessels or major vessels at least. So, I think we're in good shape there. So, we're just focused now on project execution.

Brad Handler - Credit Suisse

Got it. Okay. That's great, thank you.

Andy Smith

Thanks Brad. Before you get off the line, I want to clarify an answer I gave earlier. You asked about backlog run off in the fourth quarter. Of our backlog we expect about 115 of it to run off in the fourth quarter of that number about 75 is related to the Mexican projects. I want to make sure I was clear on that.

Brad Handler - Credit Suisse

No, I had gotten the impression it was a much smaller number.

Operator

Your next question comes from David Griffiths from Copia Capital. Your line is open.

David Griffiths - Copia Capital

I just have a couple of questions. What were the proceeds from your vessel sales during the quarter?

Andy Smith

Total proceeds for the vessel sales, $35 million.

David Griffiths - Copia Capital

$35 million. And then the gain was what was the book value of it?

Andy Smith

The gain was 23.3 million; there were a few little impairments in there about 500,000, so about $24 million.

David Griffiths - Copia Capital

And can you talk about the margins on the projects that you're bidding, say, the work that you're winning today and do you think that the lack of profitability on the two Mexican projects is due to the risk management pricing aspect of the projects, or was it weather or something exceptional? Just trying to get a sense of what I should be thinking about in terms of profitability on your projects going forward?

John Reed

I thin we don't see a lot of difference next year from this year, the exposure of the loss we're taking on the PEMEX projects specifically were probably in the mid-teens. On the execution side of the PEMEX project, it was the combination of things starting with (inaudible) where there were some estimates that were on and then on the actual physical execution side, we had some problems with (inaudible) things like that, that affect your off-shore operation and productivity. So those are things that we are addressing naturally but they can be addressed kind of earlier phase and the project itself was bid very tightly with a tight margin, but having mistakes being made has driven it to the loss pretty quickly. Didn't have a lot of fat there to play with.

David Griffiths - Copia Capital

Understandable. And then can you help me understand each quarter that the 1200 is in your fleet that it's not generating revenue, can you help me understand what kind of operating costs and depreciation will be on it on a quarterly basis so I can kind of figure out what loss I need to bake into the number?

Andy Smith

Operating cost on a quarterly basis is about $4.5 million of cash cost. Depreciation, yes it's an unit a production depreciation method. So we know we have to look at that based on the work that the kids put straight line, we're a thirty year period, 25 year period they're going to add $10 million to that in the quarter.

Operator

(Operator Instructions). And I am showing no further questions at this time.

Andy Smith

Okay, if there is no more question that concludes our call for today. I would like to thank everybody for joining us and for their continued interest in Global Industries. Thank you.

Operator

Thank you for participating in today's conference call. You may disconnect at this time.

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