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Global Industries, Ltd. (NASDAQ:GLBL)

Q1 2011 Earnings Call

May 5, 2011 10:00 AM ET

Executives

Andy Smith – SVP and CFO

John Reed – CEO

Ashit Jain – COO and SVP, Asia Pacific & India

Analysts

Joe Gibney – Capital One Southcoast

Martin Malloy – Johnson Rice

Michael Marino – Stephens

Graham Mattison – Lazard Capital

Operator

Welcome to Global Industries first 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 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 now like to turn the meeting over to Mr. Andy Smith. Sir, please begin.

Andy Smith

Thank you. Good morning. I’d like to welcome everyone to Global Industries first quarter 2011 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

Good morning and welcome to our call. Before I turn it back over to Andy for financial results and AJ to go through operating results, I want to update you on our progress against one of our key initiatives.

One of our core efforts has been to strengthen our project management and engineering. We’ve increased our engineering personnel by approximately 20% over the last year, giving us more depth to prepare tenders for submission and projects for execution. We will diligently continue to build on our technical strength and competence as this capability is key to our future success on larger and more complex projects.

Turning to the market, we have opened an office in Perth, Australia to pursue projects there primarily for the G1200, or 1201 as the requirements are generally well suited for their capabilities. We expect that the market in Australia will remain very active for the foreseeable future and establishing a presence there is mandatory to increase our participation.

We are actively pursuing prospects for the G1200 and G1201 with a total value of approximately $1 billion. However, the bulk of this value is for work beginning in 2012 and beyond.

Looking at the other market areas, we see the Gulf of Mexico slowly increasing as we stated before. However, the pace will mirror the permitting speed.

We were awarded two significant projects in the quarter; namely, a platform removal contract from McMoRan in the subsea pipeline and a flow line installation project for LLOG at 3,000 foot water depth. However, both are experiencing permitting delays.

In the Asia Pacific region, we have begun our second work season for Petrobras under our three year term agreement and continue to actively bid in the region. In Latin America, we see a large volume of work with PIMEX on the horizon, albeit again, mainly for 2012.

In general, our markets remain difficult for the remainder of 2011 and we don’t expect significant opportunities until 2012.

As stated in our last quarter call, we have segregated our dollar bid volume statistics into bids in house and outstanding and bids expected in the next 90 days to give a clearer picture of the future market situations.

Bids in house and outstanding have increased from $2.6 billion in January this year to $3.0 billion at the end of March. Bids expected in the next 90 days stand at $3.3 billion, down from $3.9 billion last quarter, however still considered a good indicator of growing activity. The most active region continues to be Asia Pacific followed by the Middle East.

Lastly, we have mobilized the G1200 to our first project and are laying pipe as we speak. The project is for Dubai Petroleum establishment and will utilize both our pipe lay capability and structural capability as the scope of work also includes the design, fabrication and installation of a small fixed structure.

The G1201 remains on schedule and budget and will be delivered in the third quarter of 2011. Finally, we’re also looking toward West Africa to develop future opportunities for these vessels, primarily in Angola, Ghana and equatorial Dubai.

We are completing our market survey including onsite investigations and development of our strategy for market re-entry. With that, I’ll turn it back over to Andy.

Andy Smith

Thanks John. As we noted in the last call, the company, in conjunctions with its transition from a regional operating structure to a more centralized approach, has begun to report its results in two new segments; construction and installation services and other offshore services.

Construction and installation services captures 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, time and materials are cost plus. We feel this restructuring of our operations and most importantly, our reporting, provides a better understanding of the risks and opportunities involved in our business.

As I have in the past calls, before I go through the income statement, I would like to highlight the various issues which impacted the quarter. The first quarter was negatively affected by low seasonal utilization of our construction fleet as well as the continued runoff of projects with little or no gross profit.

Of our $70 million in revenue in the first quarter of 2011, $41.1 million was attributable to the continuation of our line 59 and line 58 projects, which as you recall, became loss projects in the third quarter of 2010. These projects are now substantially complete.

Another major ongoing project during the quarter was our project in the Middle East installing a structure and pipeline for Dubai Petroleum, which is the first project utilizing the Global 1200. Originally bid utilizing the DLB 332, we substituted the Global 1200 in an effort to get this vessel working and establish positive track record of success.

The substitution of vessels, though incrementally cash flow positive to the company, results in a gross profit from this project being slightly negative. The combination of no profitability from these jobs and the low seasonal utilization of our other construction assets resulted in the steep losses for the quarter.

Utilization for this quarter of our construction vessels, the Global 1200, Hercules, Titan II, Iroquois, Chickasaw, Comanche and the DLB 264, was 12%. Our MSV’s, the Orion, Commander, Pioneer and Challenger were utilized 39% of available days.

With our backlog exiting the first quarter at $248.4 million all of which is expected to be executed in 2011, we expect higher utilization for the second, third and fourth quarters of 2011. In fact, based only on our existing backlog, our expectations for utilization of our construction assets are 40%, 32% and 6% for the second, third and fourth quarters respectively, while our MSV’s are expected to utilized 27%, 22% and 0% for the same respective quarters.

Note that our MSV’s generally work on quick turnaround jobs that aren’t highly driven by extended backlog commitments. Also during the quarter, the company finalized the sale of the Cherokee, resulting in a $9.3 million gain.

Now let me get to the income statement in a little more detail. Revenue for the first quarter of 2011 decreased to $70 million from $106.8 million in the first quarter of 2010. During the quarter, the company had four ongoing construction projects as compared to nine in the prior year’s quarter, which resulted in lower utilization of our vessels and lower absorption of the indirect costs of these vessels.

Additionally, the combined profit for three of these projects, the L59, L58 and Dubai Petroleum projects was slightly above breakeven. A combination of these issues resulted in gross loss increasing to $20.8 million in the first quarter of 2011 from $4.2 million in the first quarter of 2010.

In the first quarter, SG&A totaled $16.9 million, a decrease of $600,000 over the same period last year. The 2010 amount included a onetime stock compensation amount of $3 million, while the 2011 amount reflects an increase in compensation for relocated employees in conjunction with the company’s centralization effort as well as a full quarter of compensation of benefits for the company’s senior management team, many of whom came on board at the end of, or subsequent to the first quarter of 2010.

Interest expense of $2.5 million for the first quarter was approximately $400,000 improved from the 2010 first quarter amount primarily as a result of the reversal of interest expense accrued on uncertain tax positions, which expired during the quarter.

Interest income increased approximately $200,000 year over year to $475,000. Other income totaled $806,000 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.

As we have seen from time to time in the past, we recorded tax expense for the quarter despite a pre-tax loss. This unusual tax situation results from the mix of expected earnings contribution from various worldwide tax jurisdictions throughout the year and losses due to underutilization of our vessels in lower no tax jurisdictions, which provide little or no tax benefit.

Net loss attributable to common shareholders was $33.9 million or $0.30 per share for the quarter compared to net loss of $21.4 million or $0.19 per diluted share for the first quarter of 2010.

During the quarter we booked $147.6 million of new work and at March 31, 2011 our backlog stood at $248.4 million. Changes to the scope of work on the Uberaba project for Petrobras, which represents $90 million plus of our backlog are currently being negotiated between Petrobras and Brazil’s environmental licensing agency. This poses some risk that this project may be delayed until 2012. A decision should be made within the next 60 days. All other work in the backlog is expected to execute in 2011.

At March 31, our cash balance stood at $245 million, down sequentially from $350 million on December 31. However, in accordance with our amended credit facility, we have $27.9 million at March 31 classified as restricted cash as it collateralizes our outstanding letters of credit. Another $22 million is classified as marketable securities as the investment maturities exceed 90 days.

Combining these amounts, the company had approximately $295 million of cash, restricted cash and marketable securities on March 31. The decline of approximately $60 million from December 31 was primarily the result of the company’s loss for the quarter and approximately $21 million of capital expenditures during the quarter.

Looking ahead, the company expects capital expenditures for the remainder of 2011 to be approximately $140 million with the remaining payment on the Global 1200 and 1201 accounting for $111 million.

I’d like now to give a little more perspective around what we may see as we continue through 2011 and into 2012. The market for our services in every region around the world remains highly competitive with many competitors willing to take overly onerous terms at breakeven or lower pricing.

Our backlog, while it has increased, is at very modest profitability levels consistent with 2010 levels and as I noted earlier, the risk that $90 million plus of this backlog will slip to the 2012 work season as a result of permitting issues in Brazil is a realistic possibility. We are diligently working with our customer to resolve these issues so that we may complete the work this year, but cannot at this time guarantee that we will be successful.

Additionally, while our bids outstanding remain near the $3 billion mark, work that would be executed in 2011 totals only 30% or approximately $900 million of that amount.

Given the competitive nature of the current market, it is highly unlikely that we will win a majority of this work and what we do win can be assumed to have profitability levels consistent with our current backlog.

On the positive side, we have booked early in the year a reasonable amount of utilization for some of our construction and MSV assets, particularly in the Gulf of Mexico. These awards, while solid, still depend on the ability of our customers to obtain the requisite permits, which has been a difficult process for everyone in the industry.

We hope that framing the outlook for 2011 in this way gives everyone the proper appreciation of the company’s and industry’s current challenges and while 2011 will no doubt be a difficult year, our balance sheet remains relatively healthy and we continue to be optimistic about the prospects for 2012 and beyond.

I will now turn it over to AJ for comment on our operations during the quarter.

Ashit Jain

Thank you Andy. During the first quarter, our project activities included work on four major construction projects in Mexico, Brazil, Asia and Middle East. With the exception of the Mexico projects which involve offshore construction work, the activities on the other projects include engineering and architectural construction work with little offshore activity. The project activity in US Gulf of Mexico included several smaller projects for our MSA fleet.

As Andy indicated the utilization of our major construction vessels in the first quarter was 12% as compared to 16% during the first quarter of 2010. During the same time, the utilization of our MSA fleet was 39%. That’s compared to 56% in the corresponding period last year. The utilization was negatively impacted due to the lack of project activity.

Additionally, two of our construction vessels, namely Chickasaw and Hercules, were in dry dock during the quarter.

A quick update on line 59 and line 58 projects in Mexico, at the end of first quarter, line 59 project was approximately 99% complete. During the quarter, we experienced further weather and climate related delays. We expect to complete the offshore activities on line 59 project, which at this moment involves closing our (inaudible) works by end of May.

Also during the quarter all construction activities on line 58 project were completed as per the revised schedule.

As John mentioned earlier, since the close of the quarter, the G1200 has normalized to start work on its first project in Dubai. The vessel is currently on job site installing first of two pipelines, 12 inch pipeline approximately 27 kilometers long. Upon completion of this pipeline, the 1200 will install a six inch pipeline on sand line followed by a small platform.

The construction of our second vessel, G1201 continues as per plan and within budget. G1201 is currently offshore performing vessel sea trials. Upon completion of these sea trials the vessel will go back to shipyard to finish commissioning and punch list items. We expect to take delivery of the vessel during third quarter of this year.

As mentioned earlier, during the quarter we booked McMoRan subsea removal and LLOG flow line projects. LLOG project, which involves installation of several pipelines on subsea infrastructure in 3,000 feet water is scheduled to start during this quarter and will utilize our pipe vessel Hercules gig saw and two MSV’s; namely Orion and Challenger.

We are currently carrying out engineering and planning to be onboard these projects. As John mentioned earlier, both these projects are still awaiting permits.

This concludes our prepared comments and we’ll open the call for any questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question today comes from Joe Gibney with Capital One Southcoast. Your line is now open.

Joe Gibney – Capital One Southcoast

Thank you. Good morning.

John Reed

Hello Joe.

Joe Gibney – Capital One Southcoast

Just curious on the sequential revenue burn expectations. Andy, you indicated you burned through most of this backlog this year. What’s your visibility here on 2Q revenue burn out of backlog?

Andy Smith

I would expect about 40% of the backlog to run off in 2Q.

Joe Gibney – Capital One Southcoast

40%. That’s helpful. And you ran through the vessel utilization numbers pretty quickly. I apologize. If you could repeat that as well. I think you said 12% utilization on the barges, 39% MSV’s and that the year over year comp was 16% and 56% respectively. Do you have the fourth quarter number as well for those?

Andy Smith

I don’t know if I have it handy.

Joe Gibney – Capital One Southcoast

Okay.

Andy Smith

I don’t have it handy here Joe. Sorry about that.

Joe Gibney – Capital One Southcoast

That’s no problem. I can follow up with you. Last one for me, you mentioned the Perth, Australia potential prospective market for the 1200 and 1201 but you’re also looking at re-entry into West Africa and Angola, Ghana, (inaudible). Curious, just kind of cost here maybe as you look at maybe reentering those markets you guys have spent a lot of time centralizing the fleet here in Houston. Just kind of curious what kind of cost expectations to kind of maybe reenter West Africa a little bit more.

John Reed

Joe, this is John. Well initially this is going to be business development efforts. We don’t at this point envision setting up full operations, so the cost will be pretty minimal. You know setting up office, making contacts, putting people on the ground, which will cost something, but if you’re referring to kind of reversing centralization, that’s not the idea at all.

Andy Smith

What I would say is these aren’t project offices. These are really just BD efforts to maintain that presence and then as we get work, we would obviously staff up locally and then as the work completes, we would draw back.

Joe Gibney – Capital One Southcoast

Understood. Okay. That’s helpful. I appreciate it. Thanks. I’ll turn it back.

Operator

Our next question today comes from Martin Malloy, Johnson Rice. Your line is now open.

Martin Malloy – Johnson Rice

Yes, could you talk about the timing of when these, when you might hear back on some of the bids outstanding that you have. The number has gone up since the last quarterly call that you had and I think we’ve only had one press released award.

John Reed

Yes, several of these bids are larger bids in international arenas and they’re going to take a while to develop the answer. Probably I would say in the third quarter we’ll hear on some of the larger things outstanding. Gulf of Mexico we expect to hear any day on a few short term things for this work season, but that’s as we said, driven primarily by their ability to obtain the permits.

Martin Malloy – Johnson Rice

Okay. And could you talk about the permitting issues in the Gulf of Mexico, what you’re seeing there. Is there the potential that this delays past the second quarter are seen on these two projects?

Ashit Jain

Marty, this is AJ. There is a possibility that the LLOG project may move a little bit to the right. Expectation is still that most of the project will start in Q2, but again, the client expects to hear something back by end of end week. We’ll have a better idea then.

Martin Malloy – Johnson Rice

Okay. Thank you.

John Reed

Thanks.

Operator

Our next question today comes from Michael Marino with Stephens. That line is now open.

Michael Marino – Stephens

Good morning guys.

John Reed

Morning Michael.

Michael Marino – Stephens

Question on the outlook for the 1200 and 1201. I was wondering if you could help us kind of figure out how many bids you’re working for these vessels and what the kind of potential is. I mean is it you’ve got one or two opportunities out there for these guys or is it 10 to 12 jobs that you’re potentially looking at award for.

John Reed

I can’t give you an exact number but I could get pretty close. It’s probably more in that 10 to 12 range. For example, five of 13 bids that we’re actively working on this month, in March were for the G1200 and G1201, and there’s at least that many more since then that are active as well.

Michael Marino – Stephens

What’s kind of the average size for these projects?

Ashit Jain

$60 million approximately.

John Reed

Well it’s a wide range. It goes all the way up to $600 million plus and down to $30 million. You know if you take that average, it may not be that indicative of the jobs. I would say kind of the median is $100 million.

Michael Marino – Stephens

Okay, that’s helpful. And just to kind of just shift gears a little bit, Mexico, if you could kind of update us on what you’re seeing there and if there’s anything that’s potential for 2011 there.

John Reed

There are two small jobs potential for 2011 and one larger job that would start in 2011 and finish in ‘12. They are ramping up their bid activity. We do expect to see quite a number of bids before the end of the year, so there is more activity than last year for sure.

Michael Marino – Stephens

And just one final kind of big picture question maybe for AJ. If you talk to your customers, I’m curious if their tone has shifted any in the last three months as we kind of open up the year. Is there any more urgency maybe to get some of this stuff finally awarded or?

Ashit Jain

Well Michael, the clients, they want to move forward as quick as possible. Gulf is restricted quite a bit by the permitting issues. Internationally most of our clients are process driven and they have to work through their internal processes, which generally takes anywhere up to the bid, anywhere between two to three months before an award comes in. But definitely their tone is on an urgency side.

Michael Marino – Stephens

Thank you. That’s helpful.

Operator

Our next question today comes from Graham Mattison with Lazard Capital. That line is now open.

Graham Mattison – Lazard Capital

Hi, good morning guys.

John Reed

Morning.

Andy Smith

Morning.

Graham Mattison – Lazard Capital

I wonder if you could comment a little bit more on the competitive markets out there, the competitive dynamics. If you maybe compare the level of competition you’re seeing out right now versus what it was maybe six and twelve months ago and do you have any thoughts of when that might change just as more projects start to move into the construction phase.

John Reed

Well generally, there’s definitely an oversupply of vessels compared to vessel day demand, particularly on the lower end of the market. That really hasn’t changed. It’s probably intensified in the sense that the longer the downturn goes, particularly on the lower end of the market, the tougher the competition gets.

As we now have the opportunity to bid for the deeper and more complex projects with the 1200 and the 1201, the competition field narrows down, still very competitive as people want to get their utilization up, but much better atmosphere for us to bid in in terms of margin.

Graham Mattison – Lazard Capital

Thank you. And then just one question on CapEx. If you look out to 2012, I realize it’s quite early, but what would be the sort of CapEx outlook for 2012 and on without the 1200 and 1201?

John Reed

You know, I think well even with the 1200 and the 1201, I think that we’ll look at CapEx including dry dock, probably $35 million to $50 million on an annual basis.

Graham Mattison – Lazard Capital

Got it. All right. Great. Very helpful. Thank you very much.

John Reed

Thanks Graham.

Operator

Our next question today comes from Martin Malloy with Johnson Rice. That line is now open.

Martin Malloy – Johnson Rice

Just a follow up question on the 1200. Is it too early in this project off the coast of Abu Dhabi to talk about its performance and also will there be any need to bring it back into the shipyard after this project is completed?

Ashit Jain

Marty, this is AJ. We spent after the vessel came out of shipyard; we spent quite a bit of time getting the vessel ready for this project. We’ve done a sea trial with the vessel. As of today, the vessel has already laid about 50% of the first pipeline so about 30 kilometers of the first pipeline and cautiously I must state that the performance of the vessel has exceeded our expectations to date.

Martin Malloy – Johnson Rice

Okay. And so no need for the vessel to go back to the shipyard after this project’s done?

Ashit Jain

No.

Martin Malloy – Johnson Rice

Thank you.

Operator

At this time I’m showing no further questions in queue.

Andy Smith

Okay, well thank you everybody for calling in. We look forward to talking to you next quarter. Thank you operator.

Operator

Thank you. That concludes today’s conference. Thank you for your participation.

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