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Global Industries, Ltd. (NASDAQ:GLBL-OLD)

Q4 2010 Earnings Conference Call

February 24, 2011, 10:00 am ET

Executives

Andy Smith – CFO

John Reed – CEO

Ashit Jain – COO

Analysts

Marshall Atkins [ph]

Joe Gibney – Capital One

Craig Gilbert – Linden Advisors

Graham Mattison – Lazard Capital Markets

Operator

Welcome to Global Industries fourth 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, any objections; 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 like to now turn the meeting over to Mr. Andy Smith. Sir, please begin.

Andy Smith

Thank you and good morning. I would like to welcome everyone to the Global Industries fourth 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 the 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. Good morning and welcome to our call. Before, I turn it back over to Andy for our financial results and AJ to go through our operating results; I want to update our progress against strategic initiatives. As reported last quarter, our core team of executives is in place and our personnel efforts are now focusing on filling positions in project management engineering and supply chain to further strengthen our project execution.

Our vessel divestiture program is essentially complete and any further divestitures will be on a case-by-case basis as the character of our project transitions towards deep water. With respect to project execution we have taken remedial steps to stem the losses we have soared [ph] in the third quarter on our PEMEX Line 59 and 58 projects, and those efforts have been successful with no further deterioration noted. In addition our strong effort on another projects particularly in The Gulf of Mexico and Asia-Pacific resulted in our best quarter of EBITDA performance.

To improve business acquisition; we have added some senior personnel with broad experience in pipelay installation and a good customer contact base to enhance our targeting of projects and increase our WAM percentages. Looking forward, we have segregated our dollar bid volume statistics into bids in house and outstanding and bids expected in next 90 days to give a clear picture of the future market situation.

Bids in house and outstanding have increased from $1.7 billion in November last year to $2.6 billion in January this year. Bids expected in the next 90 days stand at $3.9 billion indicating a growing bid volume to come. The most active region continues to be Asia-Pacific followed by the Middle East.

Turning to The Gulf of Mexico; activity continues to remain low although some permits have been approved. However in our North American subsea and offshore construction segments, we have delivered positive operating results, thanks to high utilization of some of our MSVs primarily on work not driven by buffer [ph] meeting. We continue to believe the upturn in the Gulf will be slow but increasing over the course of 2011.

Lastly, we have successfully completed the mission equipment trials on the G1200 and are prepared and mobilized to our first project on April 1, this year. Our first project is for Dubai Petroleum establishments and we will utilize both the pipelay capability and structural capability as the scope of work also includes the design, fabrication and installation of small fixed 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 both the G1200 and G1201 worldwide including now projects in Australia where we (inaudible) have been establishing our presence. Finally we are also looking towards West Africa to develop future opportunities for these vessels primarily in Engova, Ghana and Equatorial Guinea.

With that, I will turn it back over to Andy.

Andy Smith

Thanks John. Before I begin I want to direct anyone who has not seen the corrected press release which we issued late last night. Subsequent to the issuance of our earnings release an adjustment was proposed by our auditor’s national office which took a narrow view of the need for evaluation allowance to be recorded against the deferred tax assets arising out of our Mexican operation.

The company still believes the company will open that we realize the benefits of this deferred tax assets. However, the adjustment was proposed by our auditor, we felt obligated to make a change and re-issue the press release.

Note that this entry which effectively increased income tax expense in the period and reduced the carrying value of our deferred tax assets, is a non-cash item which should reverse of our Mexican operation return to profitability before the net operating loss carry forward period of 10 years expires. I apologize for any confusion this may have caused.

For the fourth quarter of 2010, consolidated revenues were $150 million compared with $146.3 million for the same quarter last year. Gross profit was $20.1 million for the fourth quarter compared to $8.6 million for the same quarter last year.

Net loss attributable to common shareholders was $47.9 million or $0.42 per diluted share for the fourth quarter of 2010 compared to net loss of $5.3 million or $0.05 per diluted share for the fourth quarter of 2009.

I like to spend some time on items included in the fourth quarter results which requires special comments. First; during the quarter as result of our periodic asset impairment test, we recorded a $43.8 million impairment of the book value of the Hercules DLB vessel. Contributing to the impairment, this reduced visibility of the project opportunities in The Gulf of Mexico resulting from the difficult market conditions as of 2010 Gulf oil spill.

Also during the quarter, the company made the decision to terminate the chartered agreement on the Titan II vessel, which has been used primarily in our Latin American segment servicing the Mexico market. With the determination in the chartered agreement, our write-down of improvements of vessel of $7.9 million was recorded as an impairment in the fourth quarter.

We also had other miscellaneous asset impairments of $1 million for a total impairment cost of $52.7 million for the quarter. Offsetting impairments, the company finalized the sale of the DLB-332, resulting in a $7.3 million gain in the fourth quarter. As John mentioned the G1200 sea trials have been successfully completed. In conjunction with the start up of with this vessel, the company incurred a one-time start-up cost of $2.4 million in the fourth quarter for supplies and spares.

Finally, the late adjustment to the income taxes which I previously described reduced net income $12.9 million in the fourth quarter. Excluding the impairments gain on the sale of the 332, G1200 start-up costs and income tax and valuation allowance; net income for the quarter would have been $1 million or $0.01 per share.

As to future vessel sales; we expect to finalize the sale of the Cherokee in the first quarter of 2011 for the expected gain of $9.5 million. We do not foresee any other major impairments of vessel sales in the immediate future, but we will continue evaluate our operations both onshore and offshore and make any necessary changes which can improve the marketability of our fleet and/or the efficiency of our operations.

Now let me get to the income statement. Revenue for the fourth quarter of 2010 increased slightly to $150 million from $146.3 million in the fourth quarter of 2009. As compared to the 2009 quarter, increased revenue in Latin America of approximately $41 million, more than offset declining revenue in the other three segments.

The Latin America revenue increases are primarily attributable to the ongoing Line 59 and 58 projects in Mexico and the completion of the DSV charter in Brazil. The Line 59 and 58 projects are expected to complete in the first quarter of 2011.

Gross margin increased to $20.1 million in the fourth quarter of 2010 from $8.6 million in the fourth quarter of 2009 primarily as a result of improving performance on projects at or near completion during the quarter. Quarter’s gross profit also included the $2.4 million of startup expense for supplies and spares in the Global 1200.

Excluding the startup cost, the Company’s gross profit for the fourth quarter would have been $22.5 million or 15% of revenue which reflects the positive contribution of project close-outs during the quarter.

In the fourth quarter; SG&A totaled $17.9 million, an increase of $4.4 million over the same period last year. Several items make the year-over-year comparisons of SG&A difficult. First the 2010 amount includes an accrual of $1.3 million related to severance and retirement benefits while the 2009 amount was favorably affected by the reversal of amounts accrued under the company annual bonus plan of $2.8 million.

Normalizing for these amounts, SG&A for the fourth quarter of 2010 would be $16.6 million and 2009 would be $16.3 million for a quarter-to-quarter variance of $300,000. Interest expense of $2.4 million for the fourth quarter was approximately $700,000 improved from the 2009 fourth-quarter amount reflecting the increase percentage of capitalized interest associated with the construction of the Global 1200 and 1201.

Interest income declined approximately $200,000 year-over-year to $239,000 as a result of lower returns on our available cash. Other expenses totaled $824,000 and primarily consisted of foreign exchange losses. During the quarter we booked $46.3 million in the newest work. And at December 31, 2010 our backlog stood at $170.8 million.

Our scope of work under our frame agreement with Petronas was not received in the fourth quarter and as such was not included in a year-end backlog. We have since received our initial base scope of work which we estimated to be valued at approximately $60 million for 2011.

At December 31, our cash balance stood at $353 million up sequentially from $322 million at September 30 primarily as a result of cash received for vessel sales and good working capital management. During the quarter, we spent $44.8 million on capital expenditures and remaining commitments on the Global 1200 and 1201 were approximately $130 million at December 31.

As we noted in our previous call, we were unable to meet certain of the covenants contained in our revolving credit facility in the third quarter of 2010. We have since amended our revolving credit facility to allow the company at its discretion to satisfy covenants through either traditional compliance or cash collateralization of the amount of letters of credit outstanding.

This amended facility give the company additional flexibility to satisfy its covenants during this period of limited visibility. As of February 21, the company had $24.9 million of letters of credit outstanding.

Finally, as we have noted in past calls, the company has been transitioning from a regional operating structure to a more centralized approach which focuses on global opportunities for our vessels. As our fleet capabilities and mobility have improved, we will manage these assets centrally from Houston and continue to streamline our operations to provide an efficient cost structure which fits our revenue opportunity.

In conjunction with this effort beginning in the first quarter of 2011, we will report our result in two new segments, construction and installation services and other offshore services.

Construction and installation services will capture project work performed on a fixed price or unit price basis where the company takes responsibility for managing a project scope which may include material procurement, third party subcontractors, and includes a substantial project management effort.

Other offshore services will include our diving operations and day rate (inaudible) materials and cost [ph] plus work. We feel this re-structuring of our operations and importantly our reporting provides a better understanding of the risks and opportunities involved in our business. In conjunction with the change of reporting segments, we will reissue re-segmented historical financial results prior to or concurrent with our first quarter earnings release.

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. Just to give you a quick update on our project activity. During the fourth quarter, our project activities included work on two major construction projects in Mexico, two projects in Asia, Middle East and one in Brazil. The project activity in US Gulf included several smaller day rate projects for our dive support vessels fleet.

The overall utilization of vessels in the fourth quarter was 52% as compared to 41% during the fourth quarter of 2009. Line 59 and 58 projects in Mexico for which we have booked losses during third quarter, continued to perform as per the recovery plan without further deterioration.

At the end of fourth quarter, the Line 59 project was approximately 85% complete and the Line 58 project was approximately 70% complete. Both these projects are expected to be completed during the first quarter. We are reasonably confident that these projects will be completed as per the recovery plan.

As mentioned earlier by Andy, the financial results for the fourth quarter were positively impacted from favorable closeouts of DGI and Petronas projects in Southeast Asia and the DSV charter contract in Brazil. The favorable closeout of these projects was the result of good project execution and change order management.

Following on from Johnny’s comments on our newest work, we took delivery of the Global 1200 during the fourth quarter and since then have successfully completed the operational sea trials that involved installation of a large diameter pipeline offshore Malaysia. We are currently preparing the vessel for its first assignment in Middle East due to start during second quarter this year.

Also, the construction of our second vessel Global 1201 continues as per the plan and within budget. We expect to take delivery of the vessel during third quarter of this year. With that, I will turn the call back to Andy.

Andy Smith

Thank you coordinator, we are ready for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Marshall Atkins [ph]. Your line is open.

Marshall Atkins

Good morning guys. The – give me some color on the bidding activity. Have we seen any pickup at all particularly in the international markets with the resurgence of obviously low prices here and what looks to be a new build out of offshore drilling rigs?

John Reed

Marshall, this is John. Yes, the bidding activity as I have mentioned seems to be increasing. Certainly, the dollar bid volume that we had seen over the last several months is increasing pretty strongly. It is driven heavily by work in Southeast Asia and Australia. So, there is – it looks to be an increasing market.

Marshall Atkins

Can you give us just – are we talking, is it up 10% or 50% versus say a quarter ago?

John Reed

I would say about 20%.

Marshall Atkins

Alright that’s good.

John Reed

Yes.

Marshall Atkins

How about Mexico? Lot of swirling currents there, hearing a lot of different things going on there, seems like they are slowing down like spending on land. What is the offshore side look like?

John Reed

It looks like it is going to pick up primarily next year, fourth quarter and 2012.

Marshall Atkins

Okay. So, maybe end of this year, but really more it is an 2012 event.

John Reed

Yes, we are anticipating getting into a head year bid cycle event late this year.

Marshall Atkins

Okay. Last question, this one is the toughest. Obviously Gulf of Mexico has been hurt by the lack of permitting. Can you give us any sense or your gut feel on how that plays out over the coming year?

John Reed

I just gut feel Marshall, I think that we will see some increase, there is bound to be some pent up demand for small things as well as large things that may be needed more dependent on permitting. I think everybody increases and thinks that the permitting will begin to increase over the year, but I think there is some pent up demand as I said smaller projects call out work that did not get down last year that…

Marshall Atkins

Shallower stuff, I would guess.

John Reed

Yes shallower, not all shallow, but lot of that that will get released, I think in a pretty robust fashion. That’s a gut feel.

Marshall Atkins

Okay. But, really it sounds like, before we get to a more normalized state, you think in 2012.

John Reed

I think so, yes.

Marshall Atkins

Okay. Great thank you.

John Reed

Thanks Marshall.

Operator

Our next question comes from Joe Gibney from Capital One. Your line is open.

Joe Gibney – Capital One

Thank you, good morning.

Andy Smith

Good morning Joe.

Joe Gibney – Capital One

Andy I was wondering if you could give the backlog disposition by region; apologize if I missed it?

Andy Smith

Yes, I’ve got it here. North America is very small between the construction and subsea divisions we were looking at about $21 million. Latin America, I am sorry was – missed reading this, its $3.9 million. Latin America is $134.1 million and then Asia Pacific Middle East is $32.8 million.

Joe Gibney – Capital One

Alright so far and just a small mechanical question, just what was your protection cum number in North America’s CDX, your asset (inaudible) impairments was a clean pretax margin number?

Andy Smith

Hang on one second. Let me pull it out. $44 million – a net loss of $44 million, make sure I understand your question Joe. You want to know what the pretax profit was for North America OCD and subsea.

Joe Gibney – Capital One

Correct.

Andy Smith

After the impairment.

Joe Gibney – Capital One

Correct. You referenced it being sort of mixed in Asia and [ph] Middle East and North America…

Andy Smith

$2 million.

Joe Gibney – Capital One

I’m sorry, say again.

Andy Smith

$2 million.

Joe Gibney – Capital One

Okay. Thank you. And last one, just any visibility on your backlog for your expectations kind of next sequential quarter or in the mid first half of the year?

Andy Smith

We would expect that the remainder of the Line 59 and Line 58 will runoff in the first quarter. That is probably about $35 million and then we have got some projects starting in Brazil which should increase – which should contribute a little bit to the first quarter. So, I would say in the first quarter of what is in backlog right now, we are probably looking at about $65 million burning off in the first quarter and then the rest of it starts to bleed out in the rest of the year.

Joe Gibney – Capital One

Helpful, I appreciate it. Thank you.

Andy Smith

Okay. Thank you.

Operator

(Operator instructions) And Craig Gilbert from Linden Advisors, your line is open.

Craig Gilbert – Linden Advisors

Yes, good morning any more color – hi, any more color you can give on south-east Asia? May be the competitive landscape or the supply demand that you seeing out there?

John Reed

This is John, Craig. The competitive side, there are lots of competitors, a lot of regionalized competitors in the shallow water conventional market. On the other side when you include Australia, that's a little more complex deeper water market and the competitive landscape is a little more favorable and with the introduction of the G1200, we are beginning to get to that market and overall volume is very good as I mentioned earlier it's about 50% of our bid volume.

Craig Gilbert – Linden Advisors

50%, Okay.

John Reed

Yes, it seems to be increasing, so it's an active area but that also draws lots of competition.

Craig Gilbert – Linden Advisors

And that is primarily shallow water stuff?

John Reed

It's both, it's a mix. Shallow and deep

Craig Gilbert – Linden Advisors

Okay, thanks very much.

John Reed

Thanks.

Operator

Graham Mattison from Lazard Capital Markets, your line is open.

Graham Mattison – Lazard Capital Markets

Hi, good morning guys.

John Reed

Good morning.

Graham Mattison – Lazard Capital Markets

We – looking at the Global 1201, can you expect that to come out of the odd in this third quarter. When do you expect that to start work? Would it be following a similar schedule as the 1200 where it starts instead of April next year?

John Reed

Well, we are bidding the vessel now. I can't give you anything specific on when it would start, our preference is the day it is ready obviously, but there is bidding activity and all I can say at this point is there are opportunities for it in 2012. So we are actively pursuing those.

Graham Mattison – Lazard Capital Markets

Okay, got it, I was just thinking in terms (inaudible) would it need two trials and additional equipment and what not before it would it be able to – would it be sort of the first-quarter of 2012.

John Reed

Well, it would be ready hopefully in the fourth quarter of this year it would be actually ready to work.

Graham Mattison – Lazard Capital Markets

Okay great. Thank you very much.

Andy Smith

Thank you.

John Reed

Thanks.

Operator

(Operator instructions) I show no questions at this time.

Andy Smith

Okay, if there are no more questions, then we will conclude our call for today. I would like to thank everyone for joining us and for the continuing interest in Global Industries. Thank you very much.

Operator

Thank you for your participation today, you may disconnect at this time.

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