Q1 2022 Gulf Island Fabrication Inc Earnings Call

Please standby.

Good afternoon, ladies and gentlemen, and welcome to the Gulf Island Conference call to discuss first quarter 2022 results all participants will be in a listen only mode for the duration of the call. This call is being recorded at this time I would like to turn the floor over to Mrs.

Cindi Cook for opening remarks and introductions.

Cindy Please go ahead.

Thank you and good afternoon, I would like to welcome everyone to our first quarter 2022 telecom backup power.

Our results were believed this afternoon and a copy of the press release is available on our website at Gulf Island Dot Com.

A replay of today's call will be available on our website. After seven P. M. This evening.

Please keep in mind that the press release and certain comments on this call include forward looking statements and actual results may differ materially.

We'd like to refer everyone to the cautionary language included in our press release and to the risk factors described in our 2021 Form 10-K and subsequent SEC filings.

Please also note that management May reference EBITDA, New project awards and backlog on this call, which are financial measures not recognized under U S. GAAP.

As required by SEC rules and regulations to the extent used these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release.

Today, we have Mr. Richard Hough, President and CEO and Mr. Wes Stockton Executive Vice President and CFO Mr. Huh.

Thank you Sandy.

Good afternoon, everyone and welcome to our first quarter results conference call I'm happy to be here with you. This afternoon and I hope that each of you and your families are continuing to stay healthy and safe.

During today's call I'll provide key takeaways from the quarter and update on segment performance and end market trends and update on the progress we've made on our strategic priorities.

We will then discuss our first quarter results in greater detail.

And then open up the call for questions and conclude with some closing remarks.

Overall, the first quarter results were consistent with our expectations as strong revenue and profit growth in our newly formed services segment and another quarter of strong project execution offset by continued low volume levels associated with large projects fabrication work.

Vacation backlog remains at low levels, we're encouraged by the recent tightening and market conditions. We are witnessing for large project fabrication additions.

Additionally, we made good progress on the wind down of our shipyard business and made continued advancements on our strategic initiatives.

Specifically for our services Division, we have quickly built a strategic platform that is well positioned to take advantage of favorable end market trends, while also bringing stability to our overall business our.

Our first quarter services revenue more than doubled while EBITDA more than tripled as we generated strong organic growth in our legacy services business driven by the strength of our end markets and benefited from solid results in our first quarter contribution from the DSS acquisition.

I'm very pleased with the integration of the DSS business as we are seeing strong utilization of our expanded craft workforce and opportunities for pull through fabrication work from our expanded.

Customer base.

We have made organizational changes to combine all of our services business to bring stronger collaboration and accountability I am happy with the progress we've made in a very short time frame and excited about the possibilities for future revenue synergy opportunities.

As in market trends and our services business continues to strengthen with rising energy prices. Our customers are moving forward with projects that have been delayed and pushed out in recent years.

With an expanded portfolio of services offerings.

<unk> customer base and it worked for us of skilled craft labor that doubled in size. Following the acquisition. We are now seeing the strength of this combination.

We're also leveraging the strong foundation for pull through fabrication work for our fabrication Division.

For example, we are seeing more awards for fabricated materials for our services customers, including subsea fabricated structures that help operators optimize oil and gas production.

Subsea structures range from simple pipe connectors to entire subsea process systems were recently awarded subsea jumpers, which youre short pipe connectors that are used to transport production fluid between two subsea components.

I am very excited about the end market trends and our ability to capture our market share with support from our services business.

Moving onto our fabrication division, we had another solid quarter of execution with most project performing better than they are as old estimates.

Volumes remain challenged overall, but we continue to see good activity in our small scale fabrication business supported by pull through fabrication work from our services customers as previously mentioned.

Given the favorable end market trends in energy, our deep customer relationships and strategic location as well as our ability to benefit from a pull through fabrication work from our services customers. We expect continued momentum and demand for small scale fabrication.

With.

Respect to larger fabrication work, we highlighted on our last call our commitment to taking a measured and disciplined approach when bidding on large projects given the risks inherent in these long term fixed price contracts and that has not changed.

Activity in the large fabrication market continues to improve with early decision is being made on a number of large LNG projects, but through the end of the first quarter, we were still seeing excess capacity in the market, resulting in unattractive pricing dynamics, however, with announcements of <unk> for key LNG.

Projects in the Gulf Coast, and rising energy prices, we are beginning to see a noticeable tightening and fabrication capacity.

The industry is quickly coming to grips with this dynamic and we are having much more constructive conversations with our potential customers.

We are encouraged by the evolving trends in the large project fabrication market and believe our solid base of skilled craft or force strategic location and a strong history of execution positions us to take advantage of these improving industry dynamics.

We have yet to sign any large fabrication orders I believe our patients may soon be rewarded.

For our shipyard Division, we continue to focus on efficient and safe wind down of our shipyard operations.

Our 70 vehicle Ferry project for the Texas Department of Transportation was 86% complete at the end of the first quarter and remains on track to be completed in the third quarter of 2022.

The ferry is substantially finished with the construction phase and it is in the water.

We are pre testing the piping system and moving into the operating phase, which will be followed by sea trials and commissioning.

We continue to work collaboratively with Texas Department of transportation to ensure that we maintain our budget and schedule.

With respect to our 240 vehicle ferry projects our teams continue to make good progress outweigh.

Notwithstanding the many challenges associated with previously discussed vessel design deficiencies.

At March 31, the second vessel was approximately 96% complete and is forecast to be completed in the second quarter 2022, and the first vessel was approximately 77% complete and is forecast to be completed in the third quarter of 2022.

As we previously disclosed in January during sea trials for the second vessel one of the propulsion systems unexpectedly shut down, causing the vessel to veer off course, and run aground causing damage to the whole.

We recorded a charge of $100000 associated with our deductible for our insurance coverage for the incident.

We believe the system shutdown was due to the design deficiencies and are currently working through a change order with the customer to make modifications to the vessel to fix the problems that resulted in the propulsion system shutdown.

We remain focused on safely and efficiently completing our remaining shipyard obligations and we believe we are on track to successfully complete the wind down of the shipyard business by the end of the third quarter.

Once complete we look forward to redeploying these resources and focusing 100% of our time and energy on profitably growing our remaining businesses.

I am happy with the progress, we're making on our strategic transformation strategy as we have made important advancements on a number of key initiatives during the quarter.

Our new growth end markets are seeing robustness that gives me confidence that we will end the year with some large fabrication awards.

Further out we continue to see increased inquiries and bidding activity with customers focused on energy transition and renewable energy, while larger opportunities in the U S. When would likely not materially impact our backlog until the back half of 2023. We're also seeing momentum in the in this end market is.

Well.

Lastly, as the labor supply market continues to be a challenge we are seeing more opportunities outside of the oil and gas sector, where our customers are looking to reduce risk with a modular concept by moving fabrication into a more controlled environment like our yard in Homa, Louisiana.

We will continue to evaluate these opportunities and pursue those where the risks and benefits align with our company objectives.

In closing I am encouraged by our first quarter progress, we're continuing to see solid trends in our services and small scale fabrication businesses and we're encouraged by the recent trends in the large project fabrication market. There is still work to be done, but I'm very encouraged by our end market trends and <unk>.

We've we are well positioned to succeed in each of our businesses.

I will now turn the call over to Wes to discuss our quarterly results in greater detail.

Thanks, Richard and good afternoon, everyone.

I will discuss our consolidated results and then provide some additional details regarding our segment results.

And in context, the factors mentioned by Richard and their impact on the quarter I will then conclude with a discussion of our liquidity.

Please note that unless otherwise specified all financial information referenced relates only to our continuing operations.

Before getting into the details I want to highlight the change to our segment reporting mentioned by Richard.

To reflect the growth in our services platform effective in the first quarter, we split our former fabrications and services segment into two separate segments.

Accordingly, our new reportable segments, our services fabrication shipyard and corporate are.

Our services segment includes all of our offshore and onshore services work performed at customer facilities.

Including offshore platforms, which is generally performed on a time and materials basis.

Our fabrication segment includes all fabrication work performed onsite at our own facilities, including pull through fabrication work to support the services segment.

This work is generally performed on a fixed price basis.

The shipyard Division and corporate division are unchanged from prior reporting.

Shared resources and cost to benefit more than one operating division are allocated amongst the operating divisions.

We have provided tables in our press release that recast quarterly and annual segment results for 2021 for the new reportable segments.

So with that backdrop I'll provide some additional details regarding our quarterly results.

Consolidated revenue for the first quarter 2022 was $28 7 million an increase of 21% from the first quarter 2021, with a year over year increase attributable to our services Division.

Consolidated operating loss for the first quarter was $5 million and EBITDA was a loss of $3 7 million. Our consolidated results reflect a positive contribution from our services Division.

Set by the under recovery of our overhead costs for our fabrication division.

Costs associated with our corporate division and losses attributable to our retained shipyard operations.

Specifically for the services Division revenue for the first quarter 2022 was $20 7 million, an increase of 175% compared to the first quarter 2021 the.

The increase was driven by organic growth in our legacy offshore services business and the contribution from the DSS acquisition.

Services EBITDA for the first quarter was $1 5 million, representing a $1 1 million increase from the prior year period.

Operating results for the quarter benefited from an improved margin mix and the acquired business. We expect continued strong operating results for this division in the second quarter.

For our fabrication division revenue for the first quarter 2022 was $5 6 million a decrease of 52% compared to the first quarter of 2021.

The decrease was due to the completion of our larger fabrication projects, partially offset by higher small scale fabrication activity.

Fabrication EBITDA for the first quarter was a loss of $2 $1 million versus EBITDA of $1 5 million for the prior year period.

Operating results for the first quarter were impacted by our low volume levels and the underutilization of the division's facilities and resources.

The division's utilization for the first quarter was comparable to the trailing quarter was almost 60% lower than the prior year period.

We expect utilization levels to continue to be challenged in the second quarter with potential improvement as we move into the second half of the year based on the strength of our small scale fabrication work.

With respect to our liquidity, we ended the quarter with a cash balance of $43 million, which was consistent with our expectations, reflecting the anticipated impact of the post acquisition working capital increase for the DSS business and partial satisfaction of liabilities associated with our shipyard operations.

At the end of March we had $6 2 million of net liabilities attributable to our shipyard operations and we expect to satisfy most of these liabilities over the next six months as we complete our active shipyard contracts and wind down our shipyard operations.

These obligations exclude future vessel holding costs and legal expenses associated with our ongoing NPS needs.

Finally, turning to our outlook for 2022, we continue to be encouraged by the demand for offshore services and strong small scale fabrication activity and are becoming increasingly optimistic about large scale fabrication opportunities.

However, given our current low backlog levels for our fabrication Division. We anticipate continued near term underutilization of our facilities and resources, which will result in operating losses for the second quarter.

With respect to our liquidity, we are forecasting to exit the second quarter with a cash balance of approximately $40 million, reflecting the anticipated impact of operating losses for the quarter and the partial satisfaction of the previously referenced liabilities for our shipyard operations offset partially by anticipated insurance receipts associated with.

Hurricane Ike claims.

This concludes our prepared remarks, operator, you may now open the line for questions.

Thank you if you would like to signal with questions. Please press star one.

One on your Touchtone telephone.

Joining us today using a speaker phone. Please make sure. Your mute function is turned off July your signal to reach our equipment.

It is star one if you would like to signal with questions Star one.

Our first question will come from Martin Malloy with Johnson Rice.

Good afternoon.

<unk>.

Hey, Mark.

Hi, Thank you for.

Okay.

Breaking out the services segment that will be helpful to see.

It reflected like this.

My first question.

You mentioned you expect to book several large fabrication awards by the end of this year could you maybe talk a little bit more about that.

Type of fabrication Awards do you expect to book.

Yes. These are associated with some of the large LNG announcements that you've heard Marty.

It's.

The types of jobs that we've been talking about for the past year year.

And.

Associated with the F E.

You have heard announced here recently.

Okay.

Okay, that's great.

And then.

In terms of.

Floating LNG or offshore not necessarily floating but.

This came out and talked about.

Doing I think now with the total of.

Two train.

Louisiana six trains up because Texas is what they hope to do are you seeing others.

Interested in that market.

As a result of these and.

<unk> by new fortress are pursuing similar.

Strategies that maybe new fortress has kind of opened up.

Our concept.

Others might be pursuing.

We haven't seen other projects.

More specifically kind of in the territories that we follow here in the U S follow new fortress Energy's path I mean, they've got it interesting philosophies on this fast LNG that youre talking about but we have not seen the.

Is that you are seeing are more land based.

Projects that in Texas, and Louisiana that are that are making up and or limited notice to proceed.

On certain projects so before synergies a unique concept and we are following that project closely.

Okay and then my final question was just about your commentary about the Gulf Coast Regional.

Fabrication capacity being challenged to satisfy the growing demand.

Is that because of labor constraints in certain areas or is it because some of the fabrication yards.

Maybe arent there anymore that were there.

15 years ago, some of that capacity can you maybe talk a little bit more about that.

Yes, I think it's a combination of both right. It really is.

The limitation on capacity as it relates to the asset the facilities. So there's a lot of the businesses have.

Or they are no longer there or they've been merged with other companies and then more specifically I think the big challenges that a lot of these fabrication yards are in close proximity to each other and so what happens is that the demand for and supply of labor becomes very constrained we have a benefit.

<unk> and humbled, Louisiana, where we don't have that.

That same competitive pressure as it relates to other fabricators or steel structure of applicators.

That we have to compete with so we're in a unique position and that's one of the things that we've talked about.

On our previous calls is that we want to.

Sure.

And make sure that we capture the value associated with our asset and not only that geographic presence close to the Gulf coast close to the Mississippi River, but more importantly, our dedicated labor pool, we've got about 200.

Fabrication employees today.

That are in our Houma yard.

And thats been pretty consistent and so.

We are going after the customers that value that consistency in our ability to to get head counts and a stable productive manner to make sure that their projects are on schedule and on budget.

Okay.

Alright, great well, thank you very much I'll turn it back.

Thanks, Martin Thanks, Marty.

As a reminder, if you would like to signal with questions. Please press star one on your Touchtone telephone.

Star One we'll pause for just a moment.

And this concludes today's question and answer session. At this time I would like to turn the conference back over to Mr. Hatch for any additional comments.

In closing I'd like to thank our customers and shareholders for their continued support as well as recognize our employees who continue to demonstrate our commitment to Gulf Island success for those on the call. Thanks again for your interest and I look forward to speaking with you on our second quarter results conference call and updating you on our progress be safe and take care.

Thank you.

Thank you.

It does conclude today's conference we do thank you for your participation have an excellent day.