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Executives

Deborah Knoblock - Corporate Secretary and IR

Kerry Chauvin - President and CEO

Robin Seibert - CFO

Analysts

Jim Rollyson - Raymond James

Herb Bookbinder - Wachovia

Michael Marino - Johnson Rice

Gulf Island Fabrication Inc (GIFI) Q4 2007 Earnings Call February 28, 2008 10:00 AM ET

Operator

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Inc. 2007 fourth quarter earnings release conference call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded.

At this time, I would like to turn the conference over to Mrs. Deborah Knoblock for opening remarks and introductions. Deborah, please go ahead.

Deborah Knoblock

I would like to welcome everyone to Gulf Island Fabrication's 2007 fourth quarter teleconference.

Please keep in mind that any statements made in this conference that are not statements of historical facts are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements. These factors include the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the company's ability to obtain them and the other details that are described under "Cautionary Statements Concerning Forward-looking Information" and elsewhere in the company's 10-K filed March 16, 2007. The 10-K was included as part of the company's 2006 annual report filed with the Securities and Exchange Commission earlier this year. The company assumes no obligations to update these forward-looking statements.

Today, we have Mr. Kerry Chauvin, President and CEO and Mr. Robin Seibert, our CFO. I will turn the conference over to Robin Seibert.

Robin Seibert

Thank you, Deborah. I would like to review the press release. The press release consists of two pages: the first page has text; the second page is a income statement table form. I would like to review the second page first.

For the quarter ended December 31, 2007, compared to 2006 our revenue was $100.9 million compared to $76 million, cost of revenue was $84.7 million compared to $69 million. The gross profit was $16.2 million versus $7 million, which is a gross margin of 16% versus 9.2%. General and administrative expenses were $2.5 million versus $2.4 million.

Other, which is interest expense, interest income was $74,000 compared to $276,000. Income before taxes was $13.8 million, compared to $4.9 million. Income taxes were $4.9 million compared to $1.2 million and net income was $8.9 million versus $3.7 million, which gave us basic earnings per share of $0.62 versus $0.72.

Diluted earnings per share of $0.62 versus $0.26, those were based on weighted average shares of $14.2 million versus $14 million for basic against the weighted adjusted shares, average was $14.3 million compared to $14.2 million.

Depreciation and amortization was $3.7 million versus $3.2 million, and during the quarter we had a dividend $0.10 compared to $0.075 for the quarter ended December of 2006.

For the 12 months ended December 31, 2007, compared to 2006 our revenues were $472.7 million compared to $312.2 million. Our cost of revenue was $415.9 million, compared to $273.8 million. Gross profit was $56.8 million versus $38.4 million, which is a gross margin of 12% compared to 12.3%.

General and administrative expenses were $10.3 million compared to $9.1 million. Operating income was $46.5 million versus $29.3 million. Other interest and expense was $374,000 compared to $1.2 million. In the year ended December of '06, we had actually sold our ownership interest in MinDOC and that was about a million dollars that’s why the 2006 other is much greater than the 2007.

Our income before taxes was $46.9 million versus $30.4 million. Income tax was $15.7 million versus $9.1 million. Net income was $31.2 million versus $21.3 million. Earnings per share basic was $2.20 versus $1.54. Diluted earnings per share was $2.18 versus $1.53. The weighted average shares to compute those was $14.2 million versus $13.8 million. The adjusted weighted average shares was $14.3 million versus $13.9 million. Depreciation and amortization was $14.1 million versus $12.5 million. During the year, we declared dividends of $0.40 compared to $0.30.

If you go to the first page with the text, it shows the company had a revenue backlog of $330.4 million and a man-hour backlog of 3.7 million man-hours remaining to work. A summary of selected balance sheet data includes; cash, cash equivalents and short-term investments at December 31, 2007 were $24.6 million compared to $10.3 million for '06.

Total current assets were $135.7 million versus $96.1 million. Property, plant and equipment net was $188.8 million compared to $155.4 million. Total assets were $325.2 million versus $252.8 million.

Current liabilities were $78.4 million compared to $40.2 million. We didn't have any debt at the end of the year of 2007, nor we had any debt at the end of the year of 2006. Shareholders equity was $228.9 million compared to $200.8 million. Total liabilities and shareholders equity was $325.2 million compared to $252.8 million.

Other information, included in our sales for the year ended December of 2007, deepwater represented 78% of our contract sales compared to 57% for '06. And our foreign sales included in our sales number for '07, represented 24% compared to 7% for 2006.

In the quarter ended December '07, our tax rate was 35.8% compared to 24.2% for the quarter of '06. Mainly because in 2006, we had a lot of federal and state job hiring credits that were for the GO Zone projects, and hurricane relief projects and those expired in mid '07. And the tax rate for the year ended 2007, was 33.5%, compared to 29.9%.

In 2008, we expect our tax rate to be approximately 34%. We anticipate depreciation in 2008, based on our current expenditures to be about $4 million a quarter. During the quarter ended December of 2007, the company worked 916,000 man-hours that compared to 828,000 man-hours for the quarter of '06. The total man-hours worked for 2007 were 3.6 million, that compares to 3.3 million for the year ended 2006.

The deepwater backlog at the end of '07, $185.4 million or 56% represented deepwater $62.6 million or 19% represented foreign. We anticipate approximately $243.9 million of run out of backlog in '08 and then the remainder of $86.5 million thereafter. Capital expenditures for 2007 were $46.9, that compares to $27.6 for '06 and our Board of Directors have approved a capital budget for 2008 of approximately $20.9 million.

I'd now like to open it up to questions, from the analyst, please. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will go first to Jim Rollyson with Raymond James.

Jim Rollyson - Raymond James

Good morning, guys.

Kerry Chauvin

Good morning, Jim.

Robin Seibert

Good morning, Jim.

Jim Rollyson - Raymond James

Hey Kerry, you've been talking for three, four quarters now about backlog potential and just more of a timing being the question mark and obviously it look like, you picked up some this quarter. Can you maybe you just kind of layout how -- what the outlook is today and I know, you usually don’t get too specific, but maybe talked about, what kind of work you have actually picked up, this last quarter?

Kerry Chauvin

Okay. Sure, Jim. Basically, we picked up several ground water tow boats to build. As you remember, we've always said, we wanted to get into another type of business that would take care of the valleys in our labor curve as we move from one large project to another large project. We've managed to pick up several of these particular vessels and in fact, we picked up nine, relatively small boats that we plan to work over the next three years. With some -- of course these projects all have pretty good escalation clauses for our labor and material. But that was a big part of the pickup of our backlog. We're still awaiting a couple of deep-water projects that possibly could be awarded in 2008, as well as there is a very few, but a few shallow water projects. We're looking at that may come to pass probably in the second quarter. So, we really didn't enhance to any great extent our deep-water backlog, you might say, but we're working on that.

Jim Rollyson - Raymond James

Would you suppose, the hold up is, I mean there is certainly lot of activity going on around the world on the deep-water side, just a lag effect from all that, that just hadn’t gotten into engineering in your side of business?

Kerry Chauvin

Jim, I think that, some of that’s true, but our clients are also saying the inability to secure the deep-water drilling rigs are really causing them some problems on some of these fields. So, we're seeing some delays because of not being able to get rigs to do the exploratory and drilling to see what they really have and come up with a concept. I don’t know if it has any relevance, but it's a topic under business, every year has been an election year, you normally have some slowdowns and after the election, we normally see a pickup, specifically in the Gulf of Mexico. So, we would anticipate that towards the middle of the year, we would see a better bidding activity than what we have seen recently.

Jim Rollyson - Raymond James

That’s helpful. On the tow boats, originally you talked about getting into shipyard and refinery type works. So, it sounds like you, started making progress there. You also had said before, you thought maybe, initially margins might be a little bit lower than your traditional work, just kind of going up the learning curve. How you feel about margins for this work, relative to what you guys normally do?

Kerry Chauvin

Well, we trying to build the same margins at least that we have performed in the fabrication side of the business. But of course we have some good people we have hired that have a lot of experience in this type of work and we just have to wait and see how well they do on these particular projects. But we would anticipate a learning curve on the first one or two vessels, and then we should get back to maximum efficiency after that.

And also on the refinery, in petrochemical side, these projects have continued to move further in to the year. We have bid two of those projects that we are under consideration for and we are just waiting any day to see whether or not they are going to be awarded to us or someone else. So we are waiting on those two projects. We are all talking about some other projects in the petrochemical side of the business. So we are looking at it, we are still pretty positive about it. But it just remains to be seen who is going to get awarded these projects.

Jim Rollyson - Raymond James

All right. One last question from me, just margins this quarter were pretty strong and usually you guys are traditionally down a bit in the fourth quarter with seasonal aspects of your business. Can you maybe about what drove the strength this quarter?

Kerry Chauvin

Well two things. One is we have had a couple of quick turnaround type projects that we were able to bid higher margins than we normally do in a longer-term project. So that really assisted us, the weather was good during the fourth quarter. And actually there is three things. The third thing is the, we had more labor in the fourth quarter than what we have seen previous in the year where we had a lot of material flow through. Our P&L, there was a greater percentage of labor in this particular quarter. So that really helped when you are looking at percentages for margins.

Jim Rollyson - Raymond James

Thanks, Kerry. Appreciate it.

Kerry Chauvin

Okay. Jim. Thank you.

Operator

Thank you. (Operator Instructions). We will go next to Herb Bookbinder with Wachovia.

Herb Bookbinder - Wachovia

Hi guys. Kerry, can you explain it, at what point you would release specifically a contract award. These bulk orders are probably pretty significant, but maybe and then if you look at them individually they were not big enough to justify releasing. But did you receive these contracts all in one lump-sum or separately and why didn’t you make a release on this and at what point did you decide when to release certain contracts?

Kerry Chauvin

Herb you are right about it, there was several customers that we received these orders from and the aggregate on each set of boats did come to the threshold that we normally use around $40 million now.

Herb Bookbinder - Wachovia

$40 million, but this used to be $20 million?

Kerry Chauvin

Now where we have bigger projects that are more inline with our businesses than our increased revenues, so that we said, let go up to $40 million to be a real kind of a better number for us to use.

Herb Bookbinder - Wachovia

Okay. As far as, any MinDOC jobs around, can you explain what where we are with that, I know you don’t release it, but can you give us an update on that?

Kerry Chauvin

Well, the first MinDOC project that we're doing now is going quite well, the graving dock is just about complete, we have two sections of the existing MinDOC on the contract into the graving dock. We should have several other sections going into graving dock within the next 60 days and of course that delivers around the end of the summer of this year.

As far as, any other MinDOC of course we're promoting the MinDOC as well as even a sales call or whatever is out there that we can bid on. But we don’t specifically have a contract for a second MinDOC at this point in time. We have priced, I need to say a second MinDOC, but there is no award on that at this point in time.

Herb Bookbinder - Wachovia

Okay. What is the labor situation these days, the use of outside labor versus what you were doing last year, which I think that problem you were talking about as being pretty significant, we don't mention it now. The fact that you're not mentioning it a good sign, or is it still as prevalent as it was before?

Kerry Chauvin

Well, we've probably reached the peak on contract labor. And we should, we actually have seen in the first quarter this year that contract labor beginning to diminish and we would see that happening as we go through the first half of the year. And hopefully, we can stop relying probably in the second quarter on the high use of contract labor.

Herb Bookbinder - Wachovia

Sure.

Kerry Chauvin

Right now, we have over 500 contract labors in our various facilities.

Herb Bookbinder - Wachovia

Right. Lastly, my understanding is that you did some work for International Shipholding on putting some, I guess, an additional deck on a couple of their ships. Is that true, and is that the kind of work that you might do in the future, or is that a one-shot deal?

Kerry Chauvin

Well, we will do any of that type of that work in the future, and that was done a couple of years ago. That is kind of history. I think it was probably in 2005 or early 2006, we did that particular work. There's just not a lot of that work out there, but if it comes to pass, we'll be glad to do it. Right now, we are doing besides the tow boats we mentioned, we're doing some mid-body supply boat section for Edison's West. Apparently, their shipyards are pretty full with work and they needed to subcontract some mid-bodies. At this point in time, we had been working on that during the last quarter, and we will be continuing to work on it through the first quarter as well into the second quarter.

Herb Bookbinder - Wachovia

Okay. Last question, in terms of the capacity utilization, some of your key competitors, do you sense that you're starting to see some of that capacity being used up, or is there still plenty of excess capacity out there?

Kerry Chauvin

Well, considering we haven't had a lot of bids out there recently, I think we may see some capacity come open with some of our competitors. We're not sure, but I would venture to say there would be some capacity coming up which could make future bids more competitive.

Herb Bookbinder - Wachovia

Okay. But in terms of what you're bidding on now some of these larger jobs, you don't sense a significant amount of price competition that are causing you to make some real cutbacks in much of getting in margin?

Kerry Chauvin

Well, we are not cutting back, but yeah, there probably will be some pressure on the pricing on these projects.

Herb Bookbinder - Wachovia

Okay. All right. Thanks a lot and keep up the good work.

Kerry Chauvin

Sure.

Operator

(Operator Instructions). We will go next to Michael Marino with Johnson Rice.

Michael Marino - Johnson Rice

Good morning, Kerry.

Kerry Chauvin

Good morning, Mike.

Michael Marino - Johnson Rice

I apologize if I ask a repeat question. I was dropped for a second. But could you give an update on the Chevron negotiations as it relates to the Tahiti SPAR and topside sitting at the dock?

Kerry Chauvin

Well, I can't comment too much on that Mike. All our negotiations are pretty much done with Chevron and Technip on that particular project. But I can't give you any specifics on it. In fact, the hull should be selling away probably as we speak, either today or tomorrow.

Michael Marino - Johnson Rice

Okay. All right. But was there any benefit from those negotiations in the fourth quarter?

Kerry Chauvin

Well, yes, there was some. How significant it was, I really don't think it was all that significant.'

Michael Marino - Johnson Rice

Okay.

Kerry Chauvin

There was definitely some ups in the negotiations, because normally you wouldn't take any profit on those negotiations until you complete them. So we have completed them and we took some profits on it, but it's not as significant as you probably trying to point out.

Michael Marino - Johnson Rice

Okay. And the backlog showed some nice growth. Does this give you more confidence in maybe the back half of '08 now that you've managed to, I guess previously you'd indicated that you had enough backlog to keep you through the first half of this year, and now with the growth, are you I guess more comfortable with you are being at better capacity levels through the end of the year, or how long does this work?

Kerry Chauvin

Mike, I think we're more comfortable going well into the third quarter, but we have not filled our book of business yet for the end of the third quarter and the fourth quarter.

Michael Marino - Johnson Rice

Okay. That's helpful. And then maybe one final question. Could you put some maybe dollar figures around those downstream bids that you have outstanding?

Kerry Chauvin

It's very difficult, Mike, because there are many options in these particular bids where these are smaller modules and they could put so many in our facility, maybe so many in another facility, or just not do some or do them in the plants. So there is still a lot of options on these particular projects, but I would see a rough -- it would be a very rough range, would be anywhere from $40 million to maybe $80 million.

Michael Marino - Johnson Rice

Okay. Thank you. That's helpful.

Kerry Chauvin

Okay.

Michael Marino - Johnson Rice

All right. Thank you, Kerry. I'll get back in queue.

Kerry Chauvin

Okay, Mike.

Operator

Thank you. And at this time, I would like to give everyone one final opportunity to signal for question. (Operator Instructions) Thank you. And with no additional questions in the queue, I would like to thank everyone for participating on today's Gulf Island Fabrication 2007 fourth quarter earnings release conference call.

If you would like to listen to a replay of today's conference, one will be available beginning today, February 28th at 12:00 am Central, 1:00 pm Eastern, and run until March 13, 2008, also at 12:00 am Central and 1:00 pm Eastern. The telephone number to dial in for the replay is 888-203-1112. If you do need a toll number for that conference that number is 719-457-0820. Please reference the replay code as 6367416. Again, we do thank everyone for participating on today's conference call. You may disconnect.

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