Q2 2023 Gulf Island Fabrication Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Gulf Islands Conference call to discuss second quarter of 2023 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 MS. Cyndi Cook for opening remarks and introductions Cindy. Please go ahead.
Thank you and good afternoon, I would like to welcome everyone to our second quarter 20 twenty-three teleconference.
Results were released this afternoon and a copy of the press release is available on our website at Gulf Islands 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 would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our most recent 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 gas.
As required by F. C C 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 <unk>, President and C E O and Mr. West Stockton Executive Vice President and C. F O. Mr Huh.
Excellent.
Or afternoon, everyone and welcome to our second quarter results conference call I'm.
I'm happy to be here within 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.
A review of segment performance and and market trends and an update on the progress we've made under strategic initiatives initiatives West.
<unk> will discuss our second quarter results in greater detail will then open up the call for questions and then with closing remarks.
Are favorable strategic positioning and strong execution led to another period of solid financial and operational performance during the second quarter.
Highlighted by double digit organic growth and services and positive results and fabrication.
Remain encouraged by the favorable trends in our key in markets and the Gulf Coast region, and we continue to expect growth and services and small scale fabrication for the full year 2023.
In July we received the cancellation notice for our large fabrication project. While this is disappointing it was not a big surprise and will continue to look for ways to mitigate the impact in the short term.
More importantly, we remain encouraged by the bidding activity in the large fabrication market and are optimistic we'll be able to secure another large project or in the near term as we were pursuing several large fabrication project opportunities.
Now turning to our segment results first looking at the services Division, our second quarter revenue grew 10% driven by growth in our core offshore services business and contribution from spark safety.
While our volume growth is somewhat limited by our ability to increase headcount due to the tight labor conditions, we continued to reallocate resources to higher return opportunities.
As a result services EBITDA margin was up over 300 basis points from last year, which led to 40 per cent growth in operating income during the quarter.
The focus of our services business continues to be retaining our craft labor force and looking for opportunities to attract and developed a new talent.
We have been pleased with our ability to maintain our services head count, which currently stands at roughly 600 employees.
Despite what continues to be a very competitive labor market.
The demand trends for offshore services, and our core Gulf of Mexico market remain attractive driven by the favorable oil and gas market conditions are new safety spark safety product offering continues to gain traction in the market and has quickly become a material contributor to our services results.
With the success of spark safety and the favorable market trends, we continue to expect our services business to generate strong operating income growth in 2023.
Now moving into our fabrication division I'm extremely proud of our fabrication divisions performance and our second quarter results highlight the longer term opportunity for this business. We have a tremendous success growing are small scale fabrication business and this volume is now making a more significant.
<unk> to the fixed overhead of the overall division.
We remain well positioned to further grow are small scale fabrication business and continue to be excited about our position positioning in this business over the longer term while.
While the year over year comparisons in our small fab business may vary from quarter to quarter, we still expect four year growth in 2023.
While we were disappointed to receive the cancellation notice for our large fabrication project the bidding environment for the large projects continues to be favorable given the attractive and market trends and limited industry capacity and we continued to pursue several attractive project opportunities to mitigate the impact of the cancer.
Contract.
Project activity in markets, such as LNG, Petro Kim and energy transition remains robust and we're hopeful that a meaningful contract can be awarded in the second half of 2023.
It goes without saying, we will not chase backlog and we are committed to remaining disciplined and our pursuit of large contract awards, given the inflationary environment and labor challenges that we continue to face today.
Finally, turning to our shipyard division, we continue to make progress towards a safe wind down of our shipyard operations.
With respect to our <unk> 72 vehicle Ferry project for the Texas Department of transportation during the second quarter. We completed the construction of the vessel for the Texas Department of Transportation and successfully delivered her to a dry dock in Texas as a condition of the contract.
However in connection with the turnover activities of the vessel corrosion of the propeller blades was identified which may require replacement.
We are evaluating the cause of the corrosion on the blades and working with the customer to minimize the financial impact as we work toward final delivery and commissioning of the vessel.
We're hopeful that we can finalize the remaining obligations and closed the contract.
The third quarter.
With respect to our 240 vehicle ferry projects for the North Carolina Trent Department of Transportation, We received final customer acceptance of the first vessel. The last ferry is in the final outfitting stage, however, delivery and commissioning has been delayed due to sub contractor delays and mouth.
Functioning equipment, which has been ordered and we are awaiting delivery. Unfortunately to these due to these unfortunately delays we are now targeting completion delivery of the vessel in September .
Our lawsuit in North Carolina State Court seeking damages, resulting from the design flaws for the vessels and the resulting delays is ongoing which we look forward to pursuing and Ernest after our final contract obligations with North Carolina Department of Transportation are complete which is the delivery of.
The last vessel.
Turning to the empty SB lawsuit with Hornbeck, there has not been much movements since our last update we continue to progress towards trial, which is scheduled to begin October 16th 2023.
I'd like to wrap up my comments with a quick update on our progress against our strategic initiatives.
Our continued execution against our business transformation strategy is evident in the consistency and strength of our recent financial results.
We have built a stable and profitable services platform are small scale fabrication business is making a more significant contribution to the fixed overhead of the overall fabrication division and.
And we are well positioned to execute on large fab projects.
As a reminder, the key aspects for the second phase of our strategy are based on pursuing growth opportunities and you end markets as well as our traditional offshore markets.
Rowing and diversifying our services business.
Further strengthening project execution and expanding our skilled labor workforce.
Some of our recent progress on these initiatives include the following.
First in terms of our pursuit of project opportunity Asian traditional offshore markets as well as new growth in the markets. We continue to generate strong growth from our traditional small scale fabrication markets and we expect this momentum to continue.
In addition, as we have discussed.
We believe our strategic location at Homer and our track record of quality on time execution on complex projects positions us to take advantage of the favorable trends and new high growth verticals.
The bidding environment is very active and we hope to have used to share soon.
Second we continue to make progress on expanding our services business. We have worked hard to maintain our headcount by working with local technical schools to recruit and train our employees and offering retention incentives to ensure we minimized turnover given the competitive labor market and we continue to look for additional ways.
To expand and retain our skilled craft head count.
Our new spark safety offering continue this too.
To gain traction in the market and we have entered into several new MSA agreements.
With existing in your customers that will now give us opportunity to provide our new offering.
I am very excited about the new business and look forward to continuing to grow our services value offering to our customers.
Lastly, we remain mid to maintaining bidding disciplined in our large fabrication business as we pursue new awards, while we were.
Eager to replace our large fabrication project given the ongoing inflationary pressures and challenges with availability of skilled labor, we will not enter into an agreement that does not meet our return objectives and risk tolerances as.
As we continue to assess the overall return on the investment of our fabrication assets.
We are seeing challenges for our competitors that have taken on a fixed price contracts in this inflationary entitled vapor environment and as such we will continue to remain disciplined and.
In closing.
I'm encouraged by our second quarter results and I'm, even more excited about the future of Gulf Island.
When we set out on this journey a few years ago, we were focused on stabilizing the business, improving our processes and discipline and building a stable and profitable business and pursuing growth.
We've accomplished quite a bit over these last few years and through our teams hard work, we are well positioned for the future.
I will now turn the call over to us to discuss our quarterly results in greater detail.
Thanks, Richard and good afternoon, everyone I.
I will discuss our consolidated results and then provide some additional details regarding our segment results. We didn't in context, the factors mentioned by Richard and their impacts on the quarter.
Will that conclude with a discussion of our liquidity.
<unk> dated revenue for the second quarter of 2023 was $39.3 million, an increase of 95% from the second quarter of last year, driven by continued growth in small scale fabrication and growth for our services division, including the contribution of our new Spark safety business line.
Consolidated operating income for the second quarter was 749000, and EBITDA was $2.1 million.
Arkansas Holidayed results reflect the positive contributions from our services and fabrication divisions, all set my costs associated with our corporate division and legal and advisory fees and project losses attributable to our remaining shipyard operations.
Specifically for the services Division revenue for the second quarter of 2023 was 24 and a half million dollars, an increase of 10.3% compared to the same period last year.
The increase was driven by higher activity for the division score offshore services business as.
As well as incremental revenue associated with the smart safety business line, which commenced operations in the third quarter of 2022.
Services EBITDA for the second quarter was $3.8 million up 38% compared to the $2.7 million reported in the prior year period, owing are strong revenue growth in a more favorable project margin mix as we continue to shift resources to higher return opportunities given the tight labor market.
As a result, EBITDA margin was 15.4% for the second quarter of 310 basis points from the prior year period.
Given the strength of our end markets favorable competitive position and contribution of our spark safety business line, we expect year over year organic EBITDA growth in the third quarter of 2023, However, our third quarter results will likely be lower than in the second quarter of 2023 due to the timing of certain services project opportunities, including.
Adding spark safety.
For our fabrication division revenue for the second quarter of 2023 was $14.7 million, an increase of $3.9 million compared to the same period last year due primarily to hire small scale fabrication activity.
Fabrication EBITDA for the second quarter was $2.1 million versus $2.4 million for the prior year period ebay.
<unk> for the second quarter of 2022 included a gain of $3.4 million from the net impact of insurance recoveries and cost associated with damaged previously caused by Hurricane Ida.
Excluding the Ida impacts the improved results for 2023 were the result of higher revenue.
More favorable project margin mix and a decrease in the under recovery of our overhead costs.
The improvement in our recoveries was due to improve utilization of facilities and resources driven by higher small scale fabrication activity and recoveries of approximately $1.2 million associated with the divisions large fabrication project prior to its cancellation.
As a result of a large project cancellation, we expect our results in the third quarter to be lower relative to the second quarter as we work to mitigate the impacts of the cancellation on the remainder of 2023.
For our shipyard division revenue for the second quarter of 2023 was entirely related to our 70 vehicle ferry and 240 vehicle ferry projects.
Our loss for the quarter was primarily related to project charges, resulting from the impacts mentioned by Richard.
So holding costs and legal and advisory fees associated with our M. P. S V litigation and.
And the partial under recovery of overhead costs due to the under utilization of our resources as we'd wind down our shipyard operations.
For our corporate Division operating loss was $1.9 million for the second quarter of 2023 compared to $2 million for the prior year period with the decrease due to various cost savings.
With respect to our liquidity, we ended the second quarter with a cash and investment balance of approximately $40 million down roughly $5 million from the first quarter, owing primarily to anticipated working capital requirements for our services and small scale fabrication businesses and temporary working capital usage related to our cancelled.
Cancel fabrication project.
At June 30th we had total receivables.
$11.3 million related to the cancel project, representing a decrease of $4.2 million from our balance in March.
We are working with our customer regarding the timely payment of the remaining remaining outstanding amounts and continued to maintain a payment guarantee bonds from the customer as security for the remaining receivable balance.
This concludes our prepared remarks, operator, you may know open the line for questions.
Okay.
Okay.
Yeah.
Okay.
Question.
Global.
Okay.
Yep. Thank you good afternoon, guys I appreciate you taking my questions.
Jeff How're you good afternoon.
Can you talk a little bit about the Texas.
Vehicle, it's delivered or vessel has been delivered and the corrosion and the potential economic impact from that.
Yeah. So.
As we commented.
Prominent on our prepared remarks, it has been delivered to shipyard close by where the the the ferry will be operating as a condition of the turnover.
When when we dry doctored to inspect the whole again as a condition of the turnover we experience or saw some corrosion on the propellers. These corrupt the corrosion we are still troubleshooting the exact <unk>.
Cause of the corrosion.
There are there.
Some discussion right now with both the the the OEM.
The propeller blade manufacturer and also the owners engineer who.
[noise] specified the cathartic protection, the anodes and so we as the builder don't feel that we have responsibility, obviously and we're working with the customer but the contract. These boat contracts are a very specific in terms of.
Giving that new material and so that's really where where the whole point is we.
We expect.
Come to some conclusion here in the near future and the short near future and and in terms of the the magnitude of the cost.
It's hard to tell right now because we're again, where we said.
We don't think that there's any obligation from our side from a financial standpoint, but just to give you a frame of reference.
Propeller blades.
From an order of magnitude as in the ballpark of a million and a half to $2 million.
Alright, I appreciate that.
My My other question is with respect to your small business as opposed to large fan.
What are the economic characteristics that small size on a on a run rate versus getting a large piece.
Piece of business in there.
Can you clarify what you mean by run right are you talking about.
Yeah, I was hoping you would have.
You'll have a lot of turnover with a small projects and I'm just wondering about the frictional costumed having lots of little projects as opposed to one larger project and what the margin on the smaller projects looks like compared to the margin on a larger project.
Luckily the small projects are with a handful of customers. So it's not like we're dealing with each and every.
Small project is a different customer and so that that helps some decrease our some of our transaction costs and I think that's what maybe what you're alluding to.
We don't see really.
A material kind of additional cost to operate the small fab business.
And frankly.
We would like to have more.
The small.
Small fabrication project for the reasons, you laid out Jeff and that they're quicker book and burn.
So the risk profile from a schedule standpoint is lower than.
They tend to have a better margin just because of the customer has needs that are that are more kind of immediate and so we see higher margin profiles and those projects.
Germany, and overall perspective higher higher double digits is is more since we generally talked about the fab business being.
Hi single digits low double digit try it on a blended basis when you learn some of the bigger work with the smaller work tends to attract the.
Much more significant margin.
Yep.
No surprise appreciate it and last question regarding the spark safety.
That's on that new customer awards or.
Is there a supply and demand issue in other words, if you had more labor can you sell more than services.
No it's really not so because we're the new entrants into.
Into this market, Jeff it's really about.
Getting the customers comfortable with with our value proposition, we think we have a better mouse trap.
In terms of the safety added features that we put into our program. The customers are starting to recognize that and so you know.
The nice thing about that's Mark safety business as it is.
Less dependent on.
Labour head count meaning.
Most of our services businesses.
Craft hours driven whereas this is not right and so so we're really excited about what we've built here with bark safety and look forward.
Having that be a strong contributor to.
Our services growth.
Alright, I appreciate it good luck with the second half of the year.
Litigations gotta be frustrating for you guys, but it seems like you've made a lot of progress here. So congrats on the good numbers today and look for him or is this a year on phones.
Thank you very much.
Yeah.
Ask a question.
Yeah.
Mmm.
At this time I will have to call back.
Okay.
Max.
In closing I want to thank our customers and shareholders for their continued support as well as recognize our employees who continued to demonstrate a commitment to golf Island 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. Thank you.
Okay.
Finally conference call.
Uh-huh.
Goodbye.