Global Industries' CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 5.11 | About: Global Industries (GLBL-OLD)

Global Industries Ltd (NASDAQ:GLBL-OLD)

Q2 2011 Earnings Call

August 4, 2011 10:00 am ET

Executives

John Reed - CEO

Andy Smith - CFO

Ashit Jain - COO

Analysts

Marshall Adkins - Raymond James

Joe Gibney - Capital One

Michael Marino - Stephens

Graham Mattison - Lazard Capital Markets

Operator

Welcome to Global Industries' Second 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 would like to welcome everyone to Global Industries second 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 will 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 financial results and AJ to go through operating results, I want to update you regarding market developments.

As has been our practice over last several quarters, we have described our tender activity using two categories, namely bids in-house and outstanding, and bids expected in the next 90 days. Bids in-house and outstanding at the end of Q2 are $3.4 billion versus $3 billion at the end of Q1. Bids expected in the next 90 days are $1.8 billion versus $3.3 billion at the end of Q1.

I would caution that while this decrease looks large we maintain consistent tracking of our statistics and continue to monitor our 90-day look ahead window. However, if we look ahead an additional 30 days or 120 days in total, we have in addition identified approximately $2 billion of bids expected. I only point this out as it reinforces the inherent lumpiness of our business and that quarterly statistics may not give the entire picture.

Further, we have recently reviewed all our tenders that are currently in play and believe we are well-positioned in many and are hopeful that our backlog at the end of the year will be significantly higher than it was entering the year.

Bid margins will likely remain at historic lows, however, with the exception of line 58 and 59 we have experienced margin improvements of approximately 3 percentage points over as-bid margins and all projects in excess of $5 million in value since our 2010 focus on project execution excellence.

Turning to our specific market areas, the Gulf of Mexico continues to be hampered by the permitting process. Our installation schedules for awarded work have been pushed to the right by lack of permits in several cases involving both installation projects as well as removal projects. Although summer work season activity has picked up somewhat we expect that the overall slow pace will continue for the foreseeable future.

We are now entering the offshore execution phase of our first deepwater/SURF project Who Dat for LLOG. The project is located in 3,000 foot water depth and includes flexibles, rigids, export line, subsea manifolds and jumpers, and requires four of our floating assets for the offshore installation. Our enhanced engineering and project management capabilities will be fully utilized to give us the best opportunity for a safe and timely completion.

Now, looking to Mexico, PEMEX activity is set to accelerate with bid activity ramping up now and expected to continue through 2012. we anticipate a bid volume in excess of $1 billion for work expected to be completed in 2012. one of these projects is line 56 57 which we were awarded on July 22. offshore execution utilizing the G1200 will begin in November this year and the scope of work consists of installation of two pipelines plus significant diving activities.

Turning to Brazil, we entered into a memorandum of understanding [Outabreck] Oil & Gas to jointly participate in the rigid pipe lay and other subsea projects of interest to both companies in Brazil, the rest of Latin America and Angola. Global brings state of the art assets and expertise in pipe laying and subsea construction to pair with Outabreck's project management, supply chain management, fabrication and local content in Brazil. Outabreck is $32 billion company and is an established name in the market with historical relationships with Petrobras and Sonogal, and a focus on the growing subsea activities in Brazil and beyond. We believe the strengths that our combined companies can offer significantly enhances our ability to serve our clients and win projects in those regions.

As mentioned last quarter, we have now opened an office in Perth, Australia, to establish ourselves in that growing market. We are actively bidding for work in 2012, '13 and '14.

In Asia-Pacific, we continue to work on our Petronas 2012 scope of work now with our new 40% partner Puncak Oil & Gas. The scope of this year's campaign has increased with the award of work KPOC and New Field with a combined value of $40 million.

The G1200 successfully completed her first project for DPE off the coast of Dubai. She is now en route to the Gulf of Mexico and will execute the PEMEX line 56 57 project as mentioned earlier. The 1201 remains on schedule and budget and will be delivered in the third quarter of 2011.

Finally, we continue to look toward West Africa to develop future opportunities for these vessels primarily in Angola, Ghana and Equatorial Guinea.

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

Andy Smith

Thanks John. As I have in the past call, before I go through the income statement, I want to highlight the various issues which impacted the quarter. The second quarter continued to be negatively affected by low seasonal utilization of our construction fleet as well as the continued run off of projects with with or no gross margin.

During the quarter, we finalized the completion of line 59 and line 58 projects in Mexico and executed the majority of the offshore on the DPE job in Dubai. While both of these projects are still loss projects each experienced improvement in the second quarter. These turnarounds are representative of the emphasis we have placed on improving project management and should result in more consistent performance when market conditions improve.

As John noted, utilization in the quarter was negatively affected by permitting issues which pushed some of work to the right. Utilization for this quarter of our construction vessel the Global 1200, Hercules, [Hyden 2], Iroquois, Chickasaw, Comanche and the DLB264 was 32.9%. Our MSVs, the Orion, Commander, Pioneer and Challenger were utilized 50.7% of available days. We expect higher utilization for the third and fourth quarters of 2011.

In fact, based on our existing backlog our expectations for utilization of our construction assets are 42% and 35% from the third and fourth quarters respectively, while our MSVs are expected to be utilized 87% and 70% for the same respective quarters.

However, I would like to remind everyone that under-utilization of our vessels is a direct reduction of our gross margins and is highly dependent on the mix of under-utilized vessels.

As such the expected under-utilized of the Global 1200 will likely have a drag effect on our margins for the remainder of the year as we mobilize the vessel to the Gulf of Mexico and prepare it for, what we believe, will be a substantial campaign. This 2012 campaign will begin in late 2011 with line 56 and 57 project and we expect it to include other native projects sanctioned by PEMEX.

During the quarter, the company finalized the termination of the Titan 2 charter agreement and reached agreement with the vessel owner to be paid for improvements made to the vessel during the charter period. This agreement resulted in the $3.6 million gain which was offset by $5.5 million of further impairments on assets held for sale for which there has been any sale interest in some time.

Our tax rate for the quarter was 3.9%. during the quarter we recorded a non-cash valuation allowance of $9 million against some of our foreign tax credits and an additional non-cash valuation allowance against other deferred tax assets of $6.1 million, which decreased our tax benefit and, therefore, increased our net loss per share for the quarter.

Now, let me get to the income statement in a little more detail. Revenue for the second quarter of 2011 increased slightly to $132.9 million from $121.8 million in the second quarter of 2010. projects executed in the 2011 quarter while executed favorably against our expectations were still at historically low pricing. Overall, projects executing in the second quarter of 2011 versus the second quarter of 2010 contained average project profit margin 9 percentage points lower than a year ago.

Additionally, the introduction of the Global 1200 coupled with the low utilization of the fleet resulted in higher costs and higher under-absorption in the prior year's quarter. The combination of these issues resulted in a gross loss of $7.3 million in the second quarter of 2011 from a gross profit of $7.2 million in the second quarter of 2010.

In the second quarter, SG&A totaled $16.9 million, a decrease of $5 million over the same period last year reflecting our continued focus on costs and centralization of support functions.

Net interest expense of $1.7 million for the second quarter was approximately $400,000 higher than 2010's second quarter amount primarily due to a reduction in capitalized interest associated with the construction of our new build assets.

Other expense total $200,000 are primarily consists of the foreign exchange losses on forward contracts purchased to offset foreign currency needs on our significant capital expenditure items and specific foreign operations. As previously noted, our cashes very negatively affected by approximately $15 million of evaluation allowance recorded in the quarter.

Net loss attributable to common shareholders was $26.8 million or $0.24 per diluted share for the second quarter of 2011, compared to net income of $1.4 million or $0.01 per diluted share for the second quarter of 2010. During the quarter, we booked $85.7 million of new work and at June 30, 2011, our backlog stood at $201.3 million. As we discussed in last quarter's call, changes to the scope of the work on the Uberaba project for Petrobras, which represents approximately $90 million of our backlog, are currently been negotiated between Petrobras and Brazil's environmental licensing agency. We know expect this project this project to initiate in late 2011 and complete in 2012.

Our other work in the backlog is expected to execute in 2011. Also, June 30, the company is recorded an additional $114 million of bookings including $71 million for the line 56, 57 project which kicks off in the fourth quarter of this year. At June 30, our cash balance stood $187 million down sequentially from $248 million on March 31, including restricted cash used to secure our outstanding letters of credit and cash class project investments. Our cash balance is $245 million at June 30.

Looking ahead the company expects capital expenditure for the remainder of 2011 to be approximately $100 million with remaining payments on the Global 1200 and 1201 accounting for approximately $80 million of that amount.

As John mentioned earlier, we have a new partner in Malaysia in Puncak Oil & Gas. Finalized in early July their participation replaces our former 30% partner and is represented of the movement to higher local content in Malaysian offshore works. For the 40% interest Puncak paid approximately $24 million. Additionally, they retained a one year option to purchase the remaining 60% interest on additional $35 million. Our agreement with Puncak calls for exclusivity rights to partner on other Malaysian offshore works outside the scope of the current Petronas frame agreement. We expect the opportunity for Global and Puncak to sensibly partner on future deep water projects as significant and we were toward to work with our new partner.

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

Ashit Jain

Thank you, Andy, and good morning everyone. During the second quarter our project activities included work on two major construction projects in Mexico, three in Gulf of Mexico, one in Asia, and one in the Middle East. Besides the three major projects, the project activity in the Gulf of Mexico also included several smaller dated projects for our MSV fleet.

As John mentioned earlier, during the quarter we successfully completed our first project with the G1200 in Dubai. The project which included installation of two pipelines with the combined length of 54 km and a small platform was delivered to the client on schedule. Additionally due to good execution, the project delivered better than expected financial results.

The G1200 is currently on its way to Gulf of Mexico. Upon arrival in the Gulf of Mexico the G1200 will be utilized for some of the previously awarded projects, prior to mobilizing to Mexico to execute the recently awarded line 56 and 57 projects. The line 56 and 57 projects include installation of a 24 inch and an 8 inch pipeline in 70m water depth. The work is expected to start in November of this year and will involve 30 days for the G1200 and more than 100 days for the MSV Orion.

Back in the Gulf of Mexico, the permit delays have pushed the start of the both LLOG and McMoRan salvage project into the second half of this year. As we speak, the Hercules and MSV Orion have mobilized to the site to initiate the installation of flexible pipelines on LLOG project.

During the quarter, we continued discussions with the Petrobras on the start of the Uberaba project in Brazil. Our discussions have been delayed due to ongoing discussions between Petrobras and Brazil’s national environmental agency IBAMA. Additionally, Petrobras has requested us to evaluate significant additional work to be executed in conjunction with the Uberaba project. We expect to have an outcome of these discussions by the end of this quarter with a possible start date towards end of fourth quarter.

This concludes our prepared comments and we will now open the call for any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Marshall Adkins of Raymond James. You may ask the question.

Marshall Adkins - Raymond James

Good morning, gentleman. You went too early and you went too pretty fast at the bids and bids in house stuff would you just repeat that, so I can get it down.

John Reed

All right I will do that, Marshall. It's Johnny. I will just reread that section. As has been our practice over the last several quarters we have described our tender activity using two categories, namely bids in-house and outstanding and bids expected in the 90 days. Bids in-house and outstanding at the end of Q2 are $3.4 billion versus $3 billion at the end of Q1. Bids expected in the next 90 days are $1.8 billion versus $3.3 billion at the end of Q1.

And then I went on further to say that, if we just look ahead another 30 days instead of the 90-day period, we identified an additional $2 billion of bids expected. So bid expected in four months would be $3.8 billion.

Marshall Adkins - Raymond James

So, this read between the lines there, I mean its seems you guys are going to lag the recovery in the Gulf by 6 to 12 months, at least normally you do. And then it seems like so it's finally getting going again on the drilling side there. Does this mean that we are near the bottom and in terms of backlog and things turnaround the next quarter too?

John Reed

We certainly hope so. I think you are right about the lag, but in the Gulf that’s also dependent on the permitting issue as well. And that hasn’t really cleared up much. So, I am not sure how the fact of end other than we know its slower, but bid activity at least we still feel it’s very strong.

Marshall Adkins - Raymond James

And when you say permitting, you are talking both of drilling and the abandonment stuff?

John Reed

Yeah, all the way through to abandonment. We have awarded projects which did not have permits for abandonment.

Marshall Adkins - Raymond James

Okay. Address, obviously March has been crappy here for a while, in the bidding of stuff that's going on now, specifically stuff for the 1200 under the first project you had to bid just to get it going it, a bit of a loss, but going forward how do the margins in that backlog look?

John Reed

I think it depends on bid on which type of work we are bidding. On conventional work there still going to be these historical lows, I think they will be better when we can bid into deeper water market.

Marshall Adkins - Raymond James

Okay. And the project that you are doing in Mexico, would you classify this somewhere between those two?

John Reed

I would say it's at the same level as other conventional work.

Marshall Adkins - Raymond James

Okay, so lower level. Last question from me. Liquidity or covenants, obviously you are pulling down cash pretty quickly here, but it does require things to stabilizing is there thing any we should look at in terms of be concerned about in terms of covenants and liquidity for the six to nine months?

Andy Smith

No, I don’t think so. Certainly, we have got an sort of an advance in this week, arranged with our banks to be enable to sort of get cash collateral as our LC so that we didn’t have to worry about our covenant issues and that’s working well for us and from the banks right now, so I don’t think there's any issues.

Operator

Joe Gibney of Capital One, you may ask your question.

Joe Gibney - Capital One

Thanks, good morning. Andy, appreciate the color on percentage of backlog to roll off. I was just curious if you have that broken out for third quarter and fourth quarter, I understand all goes off in second half but do you have what the number will be in Q3?

Andy Smith

Yeah. The 2100 I think roughly 40% rolls off in third quarter and then another 20% of sale of what we had in June 30 for run off in fourth quarter and then lot of that Uberaba project will fall in 2012. Except that we have booked subsequent to the quarter, substantial portion in that will run off this year with, $30 million or $40 million in that probably running into next year.

Joe Gibney - Capital One

And just to confirm that number you probably kind of pass with $114 million in additional books?

Andy Smith

Yeah, 114.

Joe Gibney - Capital One

And 71 was line 56 and 57?

Andy Smith

Correct.

Joe Gibney - Capital One

Okay. And just in reference to the market opportunity in Mexico firming, John, I think you referenced $1 billion bid of that bottom market. How many jobs are you talking about down there, for pipe lay opportunities I think you referenced to possibility of same may be 10, you know its been running at a much lower pace than that over the last couple of years, its bit of a catch up here, but just you comment on that appreciating?

John Reed

Yeah. Its at least 10 probably tend toward 15, and a billion is probably on the conservative side in terms of value.

Joe Gibney - Capital One

Okay. And then one last from me, I will turn it over. You referenced West Africa and used to be opportunity quarters are expected part of the markets, so that 1200 and 1201. With the move than the opportunity you see with PEMEX now, do you still anticipate the 1200 probably staying in Mexico all year in 2012, what you targeted for West Africa for 1201 and do you think 1200 to move out to West Africa in 2012 timeframe?

John Reed

I would rather say that, rather than where she might go, it just to say that I think should go where we find the best opportunity. So, depending on how successful we are in Mexico, we stay longer or move somewhere else if it is a better opportunity.

Operator

Michael Marino of Stephens, you may ask your question.

Michael Marino- Stephens

Question, you kind of dig in on the bid side a little bit as earliest to the that work for the 1200 and 1201, I guess, John, you have talked about 10 to a dozen or so bids for those vessels collectively in call it plus or minus $80 million to $100 million range, is that still kind of the case, if that is the out work for those vessels may be increase a little bit? And also if you talk about who you bidding against? And do you feel like may be the competition starting to win some work now and your chances are getting better, may be you just describe how you feel about the prospect for those vessels?

John Reed

Well, I will go back a little bit to I think Marshall’s question, there is pretty much of bifurcated market in the conventional shallow water. There are still lot of players and keeping margins pretty low. On the other end, we are also bidding those opportunities now and less bidders more complex projects and better margins are available.

And I guess I would characterize it is that we do see more opportunity right now. It's hard to nail it down, the visibility still not that good. Bid volume is still I think high enough to generate more backlog but its very hard to pinpoint things like the effect of permits in the Gulf and kind of macro situation that the whole world seems to be in a little bit of malaise at the moment. So, the volumes there and were helpful but I wouldn’t want to get too far out of my (inaudible) and predicting in fact how that’s going to turn out.

Michael Marino - Stephens

Sure. Okay. In to follow up on I guess the work for the McMoRan and the Gulf, here you are officially working yet or you still waiting on permit there?

Ashit Jain

Michael, this is AJ. We completed long platform installation prior to going for LLOG. We are currently working on a LLOG project. The permit situation is still not all the structures have been permitted. So after we complete LLOG we have one or two structures to go to, at the moment.

John Reed

Just an aside, that was a removal, not an installation.

Ashit Jain

Yeah, that was a remove on McMoRan.

Michael Marino - Stephens

Would you expect the, I guess the Hercules to be pretty busy from now till year end?

Ashit Jain

Yes.

Michael Marino - Stephens

Okay. And just follow up on that, I guess the seasonality that you typically see in the Gulf, do you expect a little bit lesser that with 1200 being there in some capacity this year? And maybe talk a little bit much seasonality in the Gulf this year versus prior years?

Ashit Jain

On the 1200 side, we are looking at currently we are talking to show the clients for the existing project to utilize 1200 on those projects when it comes into the Gulf. Once that is completed we are going mobilize to Mexico in the month of November and be back here towards the end of year. Right now, our schedule is open for the 2012 and that’s were bidding actively in Mexico.

With regards to the MSV fleet, we do have, as Andy pointed out, utilization going into the fourth quarter. First quarter, we have seen some of the bids come in for first quarter, but the activity is going to remain low in the first quarter.

Operator

(Operator Instructions). Graham Mattison of Lazard Capital Markets, you may ask your question.

Graham Mattison - Lazard Capital Markets

Hi guys. You have covered bidding utilization in quite a bit detail. Just hoping may be quickly if you would give an update on the expected timing, with the 1201, the delivery schedule, when you might expect that to be on its first contract, and the remaining CapEx schedule in 1201 is good?

Andy Smith

Yeah. On CapEx, again I am just going to talk about cash outlays here. I don’t know that I have it and that’s really split between the 1200 and 1201, but remaining on the two vessels we have roughly $80 million of CapEx left to spend, cash out left to spend. And we expect all of that to be spent by the end of year. Traditionally, we have been -- we have sort of estimated on a pretty aggressive time line and we have it actually spent it as quickly as we thought we would. And so, it might bleed a little bit into 2012, but right now we are assuming that we will be spending about $80 million complete in both assets by the end of the year. There is a few remaining things coming up in the 1200, just needed to be paid for, but most of that for 1201.

John Reed

In terms of expectation for projects, we really don’t see significant opportunities before second quarter of 2012 for the 1201.

Graham Mattison - Lazard Capital Markets

But would it theoretically be ship-shaped by that time?

John Reed

Oh, yeah, she'd be completed. We are still on schedule to complete or physically be ready. But we just don’t see significant opportunities to put her to work until second quarter of 2012. Sure.

Operator

Gentleman, at this time I see no further question.

Andy Smith

Okay, if there is no more questions, that concludes the call for today. I would like to thank every body for joining us and your continued interest in Global Industries. And with that we will conclude the call.

Operator

This concludes today's conference. Thank you for your participation and you may disconnect at this time.

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