Q1 2020 Earnings Call
Please standby.
Good day and.
Welcome, ladies and gentlemen to the Gulf Island fabrication.
First quarter 2020 earnings conference call.
Participants will be any in 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 Miss Cindy Cook for opening remarks and introductions Sunday. Please go ahead.
Thank you and good afternoon, I would like to welcome everyone to Gulf Island first quarter 2020 teleconference.
Well results were released this afternoon and a copy of the press release is available on our website at <unk> Gulf Island Dot Com.
A replay of todays call will be available on our website after seven P. M.
Please keep in mind that the press release in certain comments on this call include forward looking statement and actual results may differ materially.
We would like to refer everyone to the cautionary language included in our press release into the risks factors described in our 2019 form 10-K, and subsequent steps you see filing.
Please also note that management may reference EBITDA, adjusted EBITDA and backlog on this call, which are financial measures not recognized under U.S. gap.
As required by FCC rules and regulations. These non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release.
Today, we have Mr., Richard Huh, President and CEO.
And Mr. West often executive Vice President and CFO Mr. Huh.
Thank you Sandy good afternoon, everyone and welcome to our first quarter 2020 call to discuss our results business highlights and outlook I'm happy to be here with you to this afternoon I hope that you and all your families have been doing well coping with the challenges of covert 19 pandemic.
On today's call I'd like to discuss the actions were taken to address the impact of the cold in 19 pandemic on Galfan, followed by an update on the strategic initiatives, we began to implement the fourth quarter of 29 key from there.
We'll discuss the first quarter results and then conclude with the discussion on the current operating environment, given cobot 19, and the decline in oil prices.
Yes will then discuss first quarter results in greater detail as well as our liquidity position. We we'll then open things up for questions I'll wrap up with some closing remarks.
It's hard to believe that has only been two months since our last call 60 days, we've been faced with a very challenging in an unprecedented business environment due to the cold in 19 pandemic insignificant decline in crude oil prices.
Got to our operations, we've been fortunate to operate or facilities as we were deemed and essential serviced by the United States Department of Homeland Security.
While our utilization was impacted during the quarter by the mitigation efforts implemented to keep our employee safe and healthy overall, our efforts in response to the impact to covert 19, our business have been highly collaborative and well coordinated.
Even before the onset of the Louisiana government.
Ordered shutdown, we proactively focused on the health and safety of our employees subcontractors suppliers and customers early on we initiated measures that included a daily calls with our leadership team to identify and proactively address where possible the potential impact of code to 19, our employees and operations.
Let me highlight just a few of the actions, we've taken including monitoring employee temperatures prior to entering our facilities.
Employee wellness questionnaires.
Workplace distancing of employees, including allowing employees to work from home where appropriate.
Installation of hand, sanitizing stations in additional actions to sanitizer facilities.
And protocols for employees returning from absences.
These efforts are being complemented by more frequent leadership walk throughs in the yards to ensure compliance and employee wellness.
I'm very proud of our team's efforts in this very challenging environment, managing not only the operations in our yards, but the supply chain challenges for our projects, including the challenges of procuring our day to day items, such as cleaning supplies and face masks for the health and safety if our employees.
I will now provide an update on the progress we're making on some of our strategic initiatives discussed on our fourth quarter call in February.
We completed the consolidation of our fabrication Division and services division, which will improve efficiency and reduce our cost structure during the challenging environment.
While our results were impacted by facility under utilization in the quarter. Some of it related to co benign Q the consolidation will enable us to leverage the best practices and experience of the combined division and ultimately maximize resource utilization.
With respect to our Jennings facility. The core closure is on schedule for the third quarter 2020, and will further add to improving the efficiency of our operations as we move into 2021.
In addition to these previously announced actions to improve our utilization and reduce our cost structure. The Gulf Island Executive team has taken voluntary reduction and it's based compensation and we will reduce our board headcount by three members that are may meeting in order to support our cost savings initiatives.
We are complementing our consolidation efforts by also strengthening our leadership team and improving talent allocation ultimately increasing the death of art depth of our teams capabilities.
Importantly, we have also received positive client feedback regarding the initiatives. We have implemented and are focused on further strengthening our relationships with our customers and strategic partners. For example for the two separate projects that we moved from the fabrication division to the shipyard division or our custom.
Mers have positively responded to the new level of expertise and increased management communication.
Turning our attention to the first quarter results and accomplishments our results were generally consistent with our expectations.
With respect to our projects our pattern will riverboat and subsea components projects were completed this quarter and delivered a gross profit of approximately $900000 and an improvement compared to our cost forecast at year end 2019.
The improvements on the Riverboat project were largely attributable to the addition of the shipyard divisions expertise and finish the finishing in the commissioning of the vessel. In addition, we success successfully delivered the seventh and eighth Harvard Tugs in March and April in line with our cost forecast and we are on top.
Good to deliver the ninth and 10th vessels by the third quarter.
While we reported positive results on the previously mentioned projects during the quarter. We did experience cost increases on the first of our 240 vehicle very projects associated with residual quality challenges discussed last quarter.
This resulted in project charges of approximately $1.2 million into first quarter, the quality challenges, where the results of activities performed by our former fabrication division prior to transferring management and execution responsibility for the projects to our shipyard division. While this was disappointing we're not experiencing these same quality challenges.
On the second vessel.
With respect to our research vessel projects were continuing to work collaborative collaboratively with our customer as a customer works through the engineering phase of the projects in the interim construction continues to be on hold until engineering reaches a satisfactory level of completion to limit the construction impacts including rework.
We look forward to restarting construction later in the year.
Regarding our navy projects during the quarter, we continue to ramp up construction activities on the projects in the capital investments discussed last quarter associated with the erection sites and warehouse are progressing as planned also during the quarter, we increased our shipyard backlog as a result of options exercised by the US Navy for two additional towing.
So those savage salvage and rescue shifts.
While the expected margins on these projects are consistent with the prior option exercises. These awards put our shipyard backlog at an all time high and we'll add critical man hours to our backlog that will provide a strong base of work for a homeowner shipyard operations going into 2021 in 2022.
In addition, the further diversification of our shipyard divisions backlog away from the oil and gas will help us as we navigate through this challenging low oil price environment.
Despite the Chuck despite the progress on our initiatives completion of key projects as forecasted the New project Awards, primarily from the Navy recent recent events have created significant challenges to an already difficult market environment. During the first quarter. There has been historic declines in crude oil prices due to a decrease.
In demand, resulting from the economic impact of gold at 19.
This has been exasperated by a market share dispute between the world's largest oil worlds large oil producers.
As a result of the current market environment 2020 will be a challenging year for our newly integrated fabrication and services Division.
Let me provide some examples of how coven 19, and the decline in crude oil price has impacted our business since March.
A 10 million dollar fabrication project in our backlog was suspended and we experienced an immediate decrease in our onshore maintenance and offshore services activity.
Further in regard to our sales pipeline some of our customers have announced significant reduction in capital spending and others have announced the suspension of projects. Specifically, we had two eminent awards totaling $30 million in which we were in final negotiations that were put on hold and we believe we will see a significant reduction.
In onshore maintenance and offer services activity for the balance of the year.
While we are continuing to see bidding activity for large petrochemical and LNG projects in Texas, and Louisiana, We are watching the activity closely given continued market uncertainty.
Our consolidation of the former fabrication Division and services Division will help mitigate some of the impacts of recent events by enabling us to drive improved efficiency and reduced our cost structure.
Further we are taking actions to identify other efficiencies and we will take proactive actions to manage our business should the operating environment become even more challenging.
Our shipyard Division will also be face with challenges in 2020, but its backlog while low margin does provide a base load of work, we expect our resource utilization in the second quarter will be impacted by the delay in construction activities for our research vessels are coated 19 mitigation efforts, including workplace.
Distancing and head Count management, we do expect our work hours to ramp up in the second half of the year as we make progress on our Navy vessels. However, the potential ongoing impact was opened 19 continued to be uncertain and could have utilization impacts as the year goes on.
Finally during the quarter, we applied for and received a loan under the payroll protection program, which west will discuss in greater detail.
We are using the proceeds to retain and bring back employees, who have been laid off or furloughed and we hope to keep as many of our employees working as possible. During this uncertain time.
These employees are working on maintenance and small capital projects in our yards that we would not have from form or would have deferred in this current uncertain economic environment without the loan proceeds I will now turn the call over to west to discuss our quarterly results in greater detail.
Thanks, Richard and good afternoon, everyone.
The first provide a few key takeaways from the first quarter as Richard mentioned overall the quarter was generally in line with our expectations with two of our fabrication services Division projects completed with improved results versus our year end cost forecast.
Balance with the impact of cost increases on the first of our 240 vehicle ferry projects and the shipyard division as well as the under recovery of a portion of our overhead costs due to the underutilization of our facilities.
Our quarter results also benefited by 10 million from the settlement or customers be dispute for our previously completed project.
We ended the quarter with cash and investments 69 million and realize an increase in backlog due to the option exercises by the Us Navy.
Before I discuss our financial results in greater detail, let me discuss a few items driving our quarterly comparisons.
I'd like to note that as a result of the consolidation of our former fabrication Division and services Division, our three current reportable segments, our shipyard fabrication and services in corporate.
Accordingly operating results for our former fabrication Division and services Division for the first and fourth quarters of 2019 have been combined to conform to the presentation of our reportable segments for the first quarter 2020.
In addition, during the first quarter management and project execution responsibility for our 240 vehicle ferry projects.
Is transferred from our former fabrication division to our ship their division as a result revenue and operating results for the projects was reclassified from our former fabrication division to our shipyard division to conform to the presentation of these projects for the first quarter 2020.
Also with respect to my following discussion to quarterly operating results I will limit my comments. The comparison to first quarter 2020 results relative to first quarter 2019 results as comparisons for the trailing period or not meaningful due to our project charges and impairments recorded in the fourth quarter 2019.
So with that understanding let me provide some additional details of our quarterly results.
Consolidated revenue for the first quarter 2020 was 78.6 million compared to revenue for the fourth quarter 2019 of 79.4 million and revenue for the first quarter 2019 of 67.6, Million% to 16% year over year increase was due primarily to our three towing salvage and rescue ship projects within the show.
They're division.
Consolidated net income for the first quarter 2020 was 5.9 million or income per share or 39 cents compared to consolidated net loss of 3 million core diluted loss per share of 20 cents for the first quarter 2019.
Operating income of 5.9 million in the first quarter reflected a $10 million gain associated with the settlement of a contract dispute for a project completed in 2015, which is reflected in other income and expense net on our statement of operations.
Excluding this gain from the dispute settlement our loss for the first quarter 2020 was due to low margin backlog and the partial under utilization of our facilities in resources within our fabrication services Division.
And to a lesser extent within our ship their division.
Also excluding this gain for the first quarter 2020, our increased loss relative to the comparable period of 2019 was due to lower margin mix offset partially by improved overhead recoveries due to higher activity for our shipyard division.
Now let me provide some additional details regarding our quarterly results by operating segment.
For the shipyard Division revenue was 45.6 million for the quarter compared to $47.7 million for the fourth quarter 2019, and 37.4 million for the first quarter 2019.
The slight decrease in revenue relative to the trailing period was attributable to lower activity for our harbor target icebreaker type projects.
The 22% year over year increase was primarily due to our towing salvage and rescue ship projects associated with increased construction activity and procurement progress on engineered equipment manufactured by third parties.
Offset partially by lower revenue for our harbor type projects as we had fewer vessels under construction.
Operating loss for the quarter was 1.9 million compared to an operating loss of 904000 for the first quarter 2019.
EBITDA was a loss of $1.1 million for the first quarter 2020, compared to EBITDA of 205000 for the first quarter 2019.
Operating loss in EBITDA loss for the first quarter 2020 were primarily due to the previously mentioned charge of 1.2 million on the first of our 240 vehicle ferry projects, a low margin backlog and the partial under recovery of overhead costs, primarily due to construction delays for our three research vessel projects.
As noted last quarter construction activities for these projects have been since suspended until we believe engineering has achieved a satisfactory level completion to limit impacts on construction activities.
The increase in operating loss for the first quarter 2020 relative to the comparable period of 2019 was due to the previously mentioned project impact and a lower margin mix offset partially by improved overhead recoveries due to higher activity.
For the fabrication services Division revenue was 33.4 million for the quarter compared to 33.2 million for the fourth quarter 2019, and 30.6 million for the first quarter 2019.
The 9% year over year increase was primarily due to progress on our offshore docket jacket and deck projects offset partially by lower offshore services activity.
Operating income for the quarter was 10.2 million compared to an operating loss of 251000 for the first quarter 2019.
EBITDA was 11.5 million for the first quarter 2020, compared to EBITDA of 1 million for the first quarter 2019.
Hi rate operating income Amie and EBITDA for the first quarter 2020 reflect the previously mentioned gain of $10 million associated with the contract dispute settlement and project improvements of 900000 for our pattern will riverboat and steps the components projects, which were completed in the quarter.
These benefits were partially offset by a low margin backlog and partial under recovery of overhead costs due to the divisions low level of backlog.
Excluding the gain from the dispute settlement operating results for the first quarter 2020 were essentially breakeven compared to an operating loss for the first quarter of 2019, the improvement year over year was due to the previously mentioned project benefits as well as lower general and administrative expense related to cost reductions associated.
Combining the fabrication division and services division offset partially by a lower margin mix.
For the corporate Division operating loss for the quarter was 2.3 million compared to an operating loss of 2.1 million for the first quarter 2019.
The increase in operating loss relative to the comparable period of 2019 was due to higher legal and advisory fees.
Associated with customer disputes offset partially by lower incentive plan cost and other cost savings, including headcount reductions the impact of legal and advisory fees related to customer disputes totaled approximately 600000 for the quarter.
Now next I will provide a few comments regarding our quarter end backlog and liquidity situation.
Backlog totaled approximately 500 million at March 2020 represent an increase of 63 million compared to December 2019.
And an increase of 166 million from March 2019.
The trailing and year over year increases for you to the previously mentioned Navy option exercises and at quarter end approximately 95% of our backlog was attributable to our stuff there division.
This backlog excludes customer options for three additional vessels, which if exercised with approximately 200 million.
With respect to our liquidity operating cash flow for the quarter was breakeven and reflected our operating income resulting from the dispute settlement offset by an increase in working capital.
We ended the quarter with cash and short term investments investments of approximately 69 million and assets held for sale of 8 million and at quarter end, our working capital excluding cash and assets held for sale approximated negative 4 million.
Regarding our credit facility as previously disclosed in February we amended the facility to adjust our financial covenants and maintain our facility maturity date of June 2021.
At quarter end, we were in compliance with all our financial covenants and had approximately 10 million of outstanding letters of credit with no borrowings on the facility.
Providing approximately $30 million of availability for additional letters of credit or borrowings.
In addition in April we entered into a loan agreement and receive proceeds of 10 million in connection with the Paycheck protection program.
I'd like to provide you with some of the liquidity considerations that went into our decision to apply for the loan.
As discussed in previous quarters, given our recent losses, the size and long term duration of our project and the inherent risk in our business as strong balance sheet is paramount to our success.
We require strong liquidity in order to receive ongoing support from our bank and surety providers and maintain the confidence that our customers that we can satisfy our contractual commitments, while we had cash and investments of approximately 69 million at quarter end, we have a credit facility covenant that requires us to maintain a cash balance of 40 million.
Although we are allowed to borrow under the credit facility to satisfy the cash balance covenant and for potential other liquidity needs any borrowings on the facility will reduce our availability to were issued letters of credit in support of our projects, which will significantly impair our ability to win new work and return to profitability.
Further at quarter end, we had over 400 million of outstanding surety bonds. This bonding support and any future bonding support is dependent on our financial strength, which requires our cash and available credit capacity.
Lastly, as discussed on our previous call and consistent with our previous expectations. We currently anticipate our capital needs, which include contractual requirements for our projects with the Us Navy.
Approximately $10 million to $12 million for the remainder of the year and we anticipate an increase in our working capital for the remainder of 2020.
Of approximately $7 million to $12 million.
Given these other demands on our liquidity and a significant uncertainty in our business and industry created by the Covidien 19 pandemic and its impact on oil prices. The funds secured under the paycheck protection program are necessary support our ongoing operations and our workforce.
We will use the proceeds only to cover those costs that are permissible under the program, which are primarily payroll and benefit costs.
While we intend to seek loan forgiveness to the extent available under the program the amount of such loan that will prove to be forgivable is unknown at this time.
Any portion of alone that is not forgiven will be a term loan that bears interest at 1%.
This payable monthly beginning November 2020 matures in April 2022.
Now moving on with respect to our act to expectations regarding EBITDA for the remainder of 2020.
Given the cobot 19 pandemic record low crude oil prices and related market uncertainty, we will not be providing guidance at this time.
This concludes our prepared remarks, Lauren you may now open the line for questions.
Thank you the question answer session will be conducted electronically.
The question. Please so by pressing the star Kenny followed by the did you.
Hello.
You are using a speakerphone. Please make sure your mute function is turned off to larger signal to reach our equipment. We will proceed in the order that you Sigma Wes I will take as many questions as time permits.
Once again that is star one to ask a question.
For just a moment to allow everyone an opportunity to signal.
We'll take our first question from Don.
They share with pinnacle.
Hi, Thanks, John day share.
Hello, everyone, I hope, you're doing well and staying safe.
Thanks, John Thanks, John.
Just one question.
Projects such as.
You mentioned that 30 million dollar.
Project that was suspended in the wake of lower.
Oil and gas prices, what kind of project was that.
John those were to actually two projects for $30 million and they are fabrication projects and they they've just been suspended we expect that the market turns around and there is some certainty in the market the clients will come back to two.
To either rebid or continue on the negotiations that we were in pursuit of.
Okay.
And what exactly where you're going to fabricate.
The they were components to offshore production rigs.
Well offshore production works, okay. So the.
Not drilling rigs production rigs.
Thats right production.
Okay.
Okay, and you have not signed a contract with them.
But you might be invited to rebid is that correct.
That's correct so on both of those.
Prospects, we were and final negotiations, where we were working on agreement on the T's and C's.
But.
Windows.
When the combination of the coated 19 and crude oil prices happen.
They paused and about a week to week turnaround they they decided to suspend the project until they get better clarity on the market.
Okay, and it's one customer two projects is that right.
No two projects to customers new projects two separate two separate customers area.
Okay.
Got it thank you.
Well take our next question from JP Morgan with global value Investment Corporation.
Good afternoon JP.
Good afternoon, Im hoping you can comment on the bidding environment and how that's developed and what you're seeing recognizing that decision incredibly uncertain in fluid situation given.
Endemic but how the bidding environment has changed especially given your relationship with the government in your initiatives to depict the business.
So the bidding environment.
It's been impacted the most as you can imagine is on the oil and gas related business.
And.
The jobs that are longer term larger capex projects still are moving forward.
So we are seeing.
Bidding activity continue for the large LNG and petrochemical projects that would that we've been talking about now having said that we are seeing some paused on the LNG projects.
Here are some specific specific LNG projects have announced that they will be delaying their there.
If I'd of financial final investment decision.
But some of the smaller jobs that while we were calling quick book in Burns the smaller tens and 20 million dollar opportunities.
Those those up to those opportunities have been put on hold and so we are seeing a pause on on the activities associated with what we would call smaller book and burn pipe fabrication work.
On the services side, we talked about.
And at the ensure both inshore and offshore services component, we're seeing a material degradation in the not only the that bidding opportunities, but as you know a lot of that work is operated under a master services agreement. So that they are pretty quick quick book and burn.
Burn does some of those contracts have not only pause, but but.
The customers have also reduce the amount of scope that day.
But they have traditionally given us.
Can you comment on how your gross margin should develop given recent backlog additions or anticipated backlog additions.
At JP Lenny when you say develop I mean, the way it's going to manifest itself is.
I commented last quarter that.
At 85% of our backlog was a matter near breakeven.
In that of course included the projects, where we'd already fully accrued our losses.
Because of the Navy awards as we sit here today.
That number is are we have about 5% of our backlog that it continues to be in a loss position and about 75% that is at or near breakeven. Unfortunately that remaining backlog is also lower margin.
So as as it relates to the backlog going forward, we're going to continue to see challenges with with gross profit as that backlog burn burnt burns off in terms of the market and what we're looking at.
That remains to be seen a bit Richard comment a little bit more but.
As we looked at things two months ago.
On the fabrication services side, we were looking at.
Mid to higher single digit type gross profit for the that type of work that we were chasing.
As he mentioned a lot of that's been on put on put on hold until.
Since a lot to see how that goes in some customers are asking to rebid things now so.
I'm not as optimistic I don't think whereas optimistic about those types of margins on the new on the new awards, but but that remains to be seen isn't as the year goes on Richard getting that not that I think you've covered it.
Great and then finally, you settled with the customer for $10 million I presume that was with Walter oil, but you still have.
Issue with Hornbeck.
Two MPS fees that nothing completed or they've not taken delivery of yet.
Can you comment on the status of that.
Yes, not a whole lot.
The as you may have seen publicly hornbeck did announce their intent to file.
Chapter 11.
There are.
A restructuring to the chapter 11 process.
They have not filed yet.
One thing I'll just note that we do hold the first priority security interest and liens against the vessels.
Securing the obligations to us and and the vessels continued DNR possession. The absent that we're still we're just going through the through the legal process.
Great appreciate additional color. Thank you.
Okay.
And this concludes today's question and answer session. At this time I would like to turn the conference back over to Richard for additional comments.
Thank you Lauren.
In summary on the thank our employees for their efforts and safely delivering on our project commitments to our customers as well as the continued support of our customers and suppliers.
I feel that the recent obstacles that weve faced as a team have brought us closer im confident that the resilience in the dedication of our employees demonstrated in this unprecedented environment will make a stronger and help get us through a child.
US through the challenges ahead.
I'm pleased with the progress of the initiatives, we have implemented to date as we have made continued to improve our processes people and project execution, but we still have ways to go and look forward to leading the team to further build on our initiatives as we whether these challenging times.
We'll continue to focus on the things that we can control and ensure that we are taking care of our employees supporting our customers and delivering on our commitments to our shareholders I want to thank you for your continued interest of and supportive Gulf Island, and I wish you well as we all work to bring some level of Normandy backed into our daily lives. Thank you Laurie.
Thank you and that does conclude today's conference. We thank you for your participation you may now disconnect.
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Yeah.
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