Q3 2022 Gulf Island Fabrication Inc Earnings Call

November 8, 2022

Greetings and thank you for standing by your conference will begin momentarily. Thank you for your patience and I ask that you. Please remain on.

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Good afternoon, ladies and gentlemen, and welcome to the Gulf Island Conference call to discuss the third quarter 'twenty 'twenty. Two 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 call over to MS. Cindi Cook for opening.

Mark's deductions Cindy Please go ahead.

Thank you and good afternoon, I would like to welcome everyone to our third quarter 2022 Telecom thing.

Our results were released 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 17. This evening. Please.

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 would 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 Hart, President and CEO and Mr. West Stockton Executive Vice President and CFO Mr hub.

Thank you Sandy and good afternoon, everyone welcome to our third 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.

I'll review, our segment performance and the market trends and an update on the progress we've made on our strategic priorities.

Fox will then discuss our third quarter results in greater detail.

We will then open up the call for questions and end with some closing remarks.

During the quarter, we continued to successfully execute on our strategic transformation highlighted by another quarter of solid results for our services division and small scale fabrication business.

The award of a large offshore fabrication contract and the continued wind down of our shipyard business.

We're very pleased by our quarterly performance and uncertain that these solid results would not have been possible without the focused execution by our team on our strategic initiatives over the last two years.

It is very encouraging to see our plan continued to successfully play out and I'm excited about the opportunities ahead.

Now turning to our segment results.

First looking at our services Division it was another strong quarter and the outlook for the business remains encouraging given the favorable trends in the offshore market in the Gulf of Mexico, and the continued tight labor availability.

Our third quarter services revenue grew over 140% and EBITDA was up nearly 170% compared to the same period in 2021.

Driven by continued solid results from the acquisition and integration of VSS strong activity in the offshore services market, which benefited our legacy services business and a more favorable business mix.

We're now coming up on the one year anniversary of the DSS acquisition and I am extremely pleased with the performance of the business during the first year under Gulf Island.

The acquisition doubled our services workforce and was a key component that has enabled us to quickly build the expanded services platform that we are benefiting from today.

The momentum from our services business continues to build and we are seeing strong utilization for our expanded craft workforce.

Increasing cross selling opportunities and.

Our new strategic partnership opportunities to further grow the services business.

I could not be more excited by the success, we have experienced in the first year with DSS and look forward to continued expansion of our services platform.

At the end of the day the services business is all about our people. So I am very proud of our strong workforce, which is comprised of some of the most dedicated and skilled craft professionals in the industry.

Their relentless focus on safety and quality is being recognized by our clients providing us opportunities for growth.

We continue to focus on retaining these important team members as well as finding creative ways to <unk>.

Further grow our head count given the favorable demand backdrop.

We are working with local trade schools to ensure we are involved in the training and development of the next generation of craft professionals, while exploring outside our traditional geographic regions and end markets for additional craft personnel.

I'm happy to report that we have been awarded grants from the incumbent worker training program from Louisiana as well as the skills development fund from Texas to help us train and continue to advance the skills of our craft professionals.

Our focus will continue to be on the recruitment and retention of our employees to support our anticipated growth.

As we have discussed on previous calls.

A key part of our strategic transformation has been to expand and grow our services business and we have looked to accomplish this by diversifying our offshore services customer base, increasing our offshore services offerings and expanding our services business to include higher value added solutions. The VSS acquisition helped stellar.

Our progress and we have made other important strides towards this objective as well and I'd like to highlight a couple of these initiatives.

First we continue to pursue strategic partnerships to diversify our customer base, including potential opportunities to partner with original equipment manufacturers to provide critical services to our customers along the Gulf coast and partnerships with engineering companies to provide turnkey solutions for key end markets.

Second in an effort to add to our services offering in the third quarter of 2022, we launched a new business line called Spark safety, which provides welding unit closures that create a safe environment for welding cutting and burning and live production locations.

As a value added solution that our customers utilize the reduced safety risks associated with certain routine maintenance without the need to shut down operations importantly, we can use our existing infrastructure and craft professionals to provide those key service.

I'm excited to share that in October we received our first award from a strategic customer, which I fully expect to be the first of many.

We are very excited by the opportunities for our services business and believe our expanded platform is very well positioned to take advantage of the favorable end market trends.

Now moving onto our fabrication division.

We are excited by the growing momentum in our services business. The highlight of the quarter was clearly the signing of a large fabrication contract for an offshore project in the Gulf of Mexico.

This was the key driver behind our strong growth in New project awards during the quarter.

With third quarter fabrication bookings growing to $117 million up from $12 million in the second quarter, 2022, and $6 million in the year ago period.

We are limited as to what we can discuss around the award at the request of our customer, but I can tell you that we believe the contract is consistent with our business strategy and financial objectives based on our key resources strategic locations and expertise in the fabrication of offshore structures where car.

<unk> off island is uniquely positioned to successfully support our customer on this important project and potential future opportunities as well.

We are excited by the New award and are pleased that our decision to remain patient and disciplined in the pursuit of large contracts has paid off that said we are not stopping here.

We remain encouraged by the project activity in the LNG market and Gulf Coast region more broadly.

This large award provides us a stable base of backlog through 2023, which will provide us additional flexibility to be selective on new awards.

In addition to our success in the large fabrication market, we continue to see robust activity in our small scale fabrication business, which was the key driver behind our third quarter fabrication segment revenues nearly doubling from the year ago period.

The strong growth in the quarter was a function of the favorable end market trends.

<unk> subsea structures and pull through fabrication work from our services customers and we expect continued growth in our small scale fabrication business for the foreseeable future.

Finally, continuing to our shipyard division, we continue to make progress toward an efficient and safe wind down of our shipyard operations.

With respect to our 70 vehicle ferry projects for the Texas Department of transportation.

Construction phase of the ferry is substantially finished and the ferry is in the water for the final outfitting stage, we expect to commence sea trials in November and consistent with our previous expectations are targeting delivery by the end of the year IMAX.

I'm excited to see this area in service as the routes in Galveston, Texas is one that our family has realized in the past.

Looking forward to being a passenger on this quality ferry.

With respect to our 240 vehicle ferry projects, where the North Carolina Department of transportation, our teams continue to make progress.

We had previously anticipated completion of the vessels in the third and fourth quarters of 2022, However, as discussed on our previous call. We encountered performance issues. During our July sea trials for the first vessel and entered into a change order with the customer for modifications to the propulsion.

To rectify the performance issues, which resulted in greater than anticipated construction delays for both vessels.

<unk> successfully completed the modifications for the first vessel in the third quarter and completed sea trials in October .

The vessel is now in route to North Carolina, and we anticipate final acceptance trials and delivery of the vessel to be completed in November .

Further we're targeting the completion and delivery of the final vessel in the first quarter 2023.

The lawsuit in North Carolina State Court regarding the original design flaws for the vessels and the resulting delays is still pending.

As a result of the completion delays were the final North Carolina Ferry, we now anticipate the wind down of our shipyard operations to be completed in the first quarter 2023.

With respect to our NPS fee dispute discovery and trial preparation in connection with the lawsuit continues in anticipation of trial, which is scheduled for March 2023.

In closing I'm very pleased with our third quarter financial performance and I'm, even more excited about the future opportunities for our business.

As mentioned previously I believe the success, we have seen in recent quarters and our strong positioning as we look into 2023 and beyond are a direct result of our team's buy in and focus on executing on our strategic plan in all phases of our strategic transformation strategy momentum.

MS building across each of our key businesses and we are well positioned to take advantage of the attractive market dynamics.

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

Thanks, Richard Good afternoon, everyone I will discuss our consolidated results and then provide some additional details regarding our segment results putting in context, the factors mentioned by Richard and their impact on the quarter.

I'll, then conclude with a discussion of our liquidity.

Consolidated revenue for the third quarter 2022 was $39 6 million an increase of 102% from the third quarter of 2021 with a year over year increase attributable to strong growth in both our services and fabrication divisions.

Consolidated operating income for the third quarter was 654000, and EBITDA was $1 9 million. Our consolidated results reflect a positive contribution from our services and fabrication divisions.

All set by costs associated with our corporate division and losses attributable to our retained shipyard operations.

Specifically for the services Division.

For the third quarter 2022 was $22 6 million, an increase of $13 3 million or 143% compared to the third quarter of 2021 inch.

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

Services EBITDA for the third quarter was $2 8 million or 12, 3% of revenue up from $1 million or 11, 2% of revenue for the prior year period.

Operating results for the quarter benefited from a more favorable project mix for our legacy services business and the contribution of the VSS acquisition.

We expect fourth quarter services revenue to decline compared to the third quarter as a result of a typical seasonal factors associated with our business such as winter weather in the year end holiday season, which impacted our billable work hours.

However, we anticipate continued strong results on a year over year basis and relative to the third quarter after giving effect to these seasonal factors.

Further based on the strength of our end market trends and our favorable competitive position. We expect continued organic growth and strong operating results for the divisions for 2023.

For our fabrication division revenue for the third quarter 2022 was $15 4 million, an increase of $7 3 million or 90% compared to the third quarter of 2021.

The increase was primarily due to strong growth in small scale fabrication work offset partially by the completion of several larger fabrication projects that were in progress in the prior period.

Fabrication EBITDA for the third quarter was $2 9 million versus 374000 for the prior year period.

Operating results for the quarter benefited from facility fees to reserve a portion of our fabrication capacity in connection with our large fabrication contracts and included a gain of $1 3 million from insurance recoveries associated with damaged previously caused by hurricane items.

Offsetting these positive items for the quarter was the continued impact of low volume levels and the under utilization of the division's facilities and resources.

However, while our volume levels continued to be below capacity.

Division's utilization for the third quarter was almost 50% higher than the trailing quarter.

And over 25% higher than the prior year period due to the increase in our small scale fabrication work.

We expect utilization levels for the fourth quarter to be comparable to the third quarter and anticipate a similar contribution associated with facility reservation fee for our large fabrication project, which is not expected to ramp up until early 2023.

For our shipyard division revenue for the third quarter 2022 was entirely related to our ferry project, which as discussed by Richard Richard are nearing completion.

Our loss for the quarter was related to vessel holding costs and legal and advisory fees associated with our <unk>.

For our corporate division our loss for the quarter included a charge of approximately 500000 associated with a noncash impairment of our corporate office lease asset, resulting from a third party sublease arrangement.

The sublease will benefit our future cash flows that will partially offset our lease cost for the facility for the duration of early.

With respect to our liquidity, we ended the third quarter with a cash and investments balance of $38 million, which was modestly below our expectations due to a higher than anticipated increase in project working capital.

The increase was associated with higher revenue for our fabrication business and payment delays from one of our large services customers. This.

This customer change billing platforms, which called billing delays and impacted the customer's ability to process payments on a timely basis.

We anticipate improvement in our project working capital during the fourth quarter and expect to exit the year with a cash balance in excess of $40 million.

This concludes our prepared remarks.

Operator, you May now open the line for questions.

Thank you.

And if you would like to register for a question. Please first one followed by the four on your telephone keypad right now Youll hear three pronged to acknowledge our request to question has been answered and you would like to withdraw your registration. Please press the one followed by the three one.

One moment please for the first question.

Okay.

And the first question comes.

From the line of Tony Christ with Odyssey Investors. Please proceed with your question.

Congratulations.

It seems like.

You guys have Kurt.

Turning to touch on the ground so to speak.

Good afternoon. Thank you Ed is the right way.

Couple of things.

<unk>.

Wasn't clear did the did the dismissal of the government money, you didnt count that towards sales or didn't count towards sales.

Government money what are you what are you referring to there.

<unk>.

I think towards sub mentioned a few million dollars that was dismissed from the government.

And am I wrong about that.

No that would have been related to that was a year ago. So in the third quarter.

This time period, okay great.

You you don't I know, we had a loss for the quarter, but can you talk a little bit about that and give a little bit detail.

What do you about was what it was attributable to again, if you don't mind. Please.

Yes, Tony so for the on a consolidated basis.

Our results were impacted by the ongoing carry costs of the shipyard operations. So that was a drain result.

We also had we also had a gain from insurance recoveries those essentially were a wash for the quarter.

Absent those items.

Our or inclusive of those items because they were essentially a wash our operating income for the quarter was right around 600000. So it was actually positive operating income or EBITDA for the quarter was right at $1 9 million.

Okay, and if you convert that into a per share.

Number.

Number one do you have.

Right.

Thank you.

Pardon Tony.

Tony right at <unk>.

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Very good now.

One other comment one other thing that didn't that out there was we did have a noncash impairment.

Right at half a million dollars. That's also in that number so absent that impairment.

Net income was hovering around $1 million one.

Okay.

Well scale, we can look at it it was positive earnings right.

That's right.

Great.

Big step.

Uh huh.

Okay.

Hi.

You can't finally, you can't.

Give us any more color on the size of the.

The size of the structural contract we were awarded.

Our Kenya.

Not specifics around that particular award, but what we can tell you is our new awards for the quarter, which was inclusive of that award was right at $139 million for the quarter.

And specifically for our fabrication Division New awards were right at $117 million for the quarter.

Okay, 100 or 139.

For the quarter includes over awards, two and then.

What were the New awards, the New awards.

Yes Consolidated awards, Tony were $139 million that includes awards for our services and fabrication Division.

And specifically for our fabrication division, which includes the large shop fabrication project, our new awards for the quarter were $117 million.

That's great.

Boy.

So.

Dramatic difference and finally are you able to give any.

Guidance.

Four.

The second quarter.

Either sales or <unk>.

<unk> EBITDA or.

Or even earnings.

If you want.

If you would.

Yeah, we're not we're not going to provide that for the four for next quarter, but I'd encourage you. If you would if you go back and listen to the prepared remarks, we gave some indication of what Q4 might look like relative to the third quarter.

Okay.

Alright, great.

Great.

And particularly Tony we think we will have another strong quarter.

Quarter for services, we do typically have some seasonality impacts in the first and fourth quarters of each year.

The winter Winter weather and then you have a holiday season that impacts it but absent the impacts of that we're expecting another another strong quarter for services.

In the fourth quarter and then fabrication.

All other things equal, we're expecting consistent utilization levels.

In the fourth quarter compared to what we just ran and in a similar benefits from.

The facility fee that we're receiving for this large project.

Okay.

We're looking good going into 'twenty three.

Thanks.

Okay well. Thank you. Thank you guys keep it up keep up the good work.

Thank you Tony.

Yes.

And the next question comes from the line of Martin Lorenson Private Investor. Please proceed with your.

Hello from Germany.

Thank you for taking my questions.

Hey, good afternoon partner.

I have a few questions if I may.

The first one being on the balance sheet, how will your working capital requirements evolve.

Over the foreseeable future, particularly with the.

The shipyard to ongoing on and delaying.

Yes.

We don't expect a significant impact on working capital for the remainder of the shipyard wind down we've disclosed.

Youll see in our 10-Q, which we'll file later on.

This afternoon <unk>.

Got about 1 million to 1 million $5 of the remaining.

Shipyard liabilities to fund.

Now we may see a temporary increase in working capital just turning to the the final wind down but ultimately any amounts that are de will be paid and we think that the ultimate wind down will be in that range I just mentioned.

For the rest of our business, our small fab projects tend to carry with them a working capital requirement. So as we continue to grow our small fab business, we'll have some working capital creep on our large fabrication work, we try to do our best team.

Terms that keep us close to cash flow neutral.

Igniting that those can have some fairly high working capital impacts. So we regard that the contract around that for working capital neutrality.

Alright. Thank you that's helps so.

Some freeing up on the small shop side.

Sure.

And can you can you. Please elaborate on your restricted Covenant agreement that is currently precluding you from.

Paying any dividends or repurchase.

<unk> is being stock.

Can we expect that to be eliminated next year.

Yes that will be eliminated whenever the hornbeck.

When we have final resolution of our NPS fee dispute.

So.

On the timing of that that's right yes.

Whenever we get whenever we get resolution.

On that dispute.

Where that goes in.

Our surety once our surety who.

Issued a bond associated with that project.

Once they're relieved that their liability or obligation.

Alright.

And then finally I know.

Most of your business is U S based of course, but have you seen any uptick in international orders any interest.

We are seeing some uptick and interest in what we call RF skews and industry request for quote.

Outside of the U S.

As you know.

In Germany.

There are capacity issues, especially around wind development.

And so we are seeing some.

Potential immediate work.

Result of capacity constraints that that Europe European fabrication facilities are going through.

Alright, thank you.

Is it from me thank you very much.

Keep up the good work alright.

Alright, Thank you Martin.

And the next question comes from the line.

David Wright with Henry investment.

One moment.

And good afternoon, Steve with your question.

Thank you good afternoon.

With respect to the the offshore fabrication contracts can you can you tell us when.

Work will commence on that and how the revenues will book over the next several quarters.

Yes.

Good afternoon. So so we are already initiated work on the contract, obviously, but a meaningful burn of ours.

Don't anticipate that until the engineering is complete and we are targeting.

That kind of ramp up of material labor hours in the shop sometime in the first quarter.

And then you would anticipate how long to complete the contract from there.

Yes, the customer schedule.

Basically has aligned out completing.

By 2023, so within 12 months.

So could we model accretive our bottling would we say that.

The engineering is what percent of the total and then could we take whatever we speculate the balance station right it over four quarters.

No no.

It's actually simpler than that because really the engineering is not done by us it's done by the customer. So if you want to model it.

You could kind of bell curve model it.

Across 12 months, starting in sometime in the first quarter.

Okay, that's great well, thanks for taking my question.

Thanks, Dave.

And as a reminder to register floor question press. The one followed by the before on your telephone keypad right now.

There are no further questions at this time I will now turn the conference back to rich.

In closing I want to thank our customers and shareholders for their continued support as well as recognize our employees who continue to demonstrate our commitment to golf on a success.

For those on the call. Thanks again for your interest and I look forward to speaking with you on our third quarter results conference call and updating you on our progress be safe and take care.

That does conclude today's conference. We thank you for your participation and ask that you. Please disconnect your line.

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Q3 2022 Gulf Island Fabrication Inc Earnings Call

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