GIFI - NASDAQ

Good afternoon, ladies and gentlemen, and welcome to Gulf Island's Conference Call to Discuss the Third Quarter 2022 Results. All participants’ will be in listen-only mode for 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 remarks and introductions. Cindi, please go ahead.

Thank you, and good afternoon. I would like to welcome everyone to our third quarter 2022 teleconference. Our results were released this afternoon, and a copy of the press release is available on our website at gulfisland.com. A replay of today's call will be available on our website after 7:00 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 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 Heo, President and CEO; and Mr. Wes Stockton, Executive Vice President and CFO. Mr. Heo?

Thank you, Cindi, 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, a review of segment performance and end market trends and an update on the progress we have made on our strategic priorities. Wes will then discuss our third quarter results in greater detail. We'll 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 I'm certain 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 continue 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 DSS, 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 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 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 further grow our headcount, 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 offering, and expanding our Services business to include higher value-added solutions. The DSS acquisition helped accelerate our progress, and we have made other important strides towards this objective as well. Now 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 enclosures that create a safe environment for welding, cutting and burning in live production locations. This is a value-added solution that our customers utilize to reduce 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 this 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 on to our Fabrication Division. While 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 of 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 location and expertise in the fabrication of offshore structures, we are confident Gulf 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, and 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, including 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 towards an efficient and safe wind down of our shipyard operations. With respect to our 70-vehicle ferry project for the Texas Department of Transportation, the construction phase of the ferry is substantially finished, and the ferry is in the water for the final outfitting stage. We expect to commence the trial in November, and consistent with our previous expectations, are targeting delivery by the end of the year. I'm excited to see the ferrying service as the root in Galveston, Texas is one that our family has utilized in the past. I'm looking forward to being a passenger on this quality ferry. With respect to our two 40-vehicle ferry projects where the North Carolina Department of Transportation, our teams continue to make progress. We have previously anticipated completion of the vessel in the third and fourth quarters of 2022. However, as discussed on our previous call, we encountered performance issues during our July sea trial for the first vessel and entered into a change order with the customer for modifications to the propulsion system to rectify the performance issues, which resulted in greater-than-anticipated construction delays for both vessels. We successfully completed the modifications for the first vessel in the third quarter and completed sea trials in. 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 regarding the original design flaws for the vessels and the resulting delays is still pending. As a result of the completion delays for 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 MPSV 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 is 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 will 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 2021, with the year-over-year increase attributable to strong growth in both our Services and Fabrication Division. Consolidated operating income for the third quarter was $654,000, and EBITDA was $1.9 million. Our consolidated results reflect a positive contribution from our Services and Fabrication Divisions, offset by costs associated with our corporate division and losses attributable to our retained shipyard operations? Specifically for the Services Division, revenue for the third quarter of 2022 was $22.6 million, an increase of $13.3 million or 143% compared to the third quarter 2021. The increase was driven by the DSS 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 DSS acquisition. We expect fourth quarter Services revenue to decline compared to the third quarter as a result of the typical seasonal factors associated with our business, such as winter weather and the year-end holiday season, which impacts our billable work hours. However, we anticipate continued strong results on a year-over-year basis and relative to the third quarter after giving effects 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 division for 2023. For our Fabrication Division, revenue for the third quarter of 2022 was $15.4 million, an increase of $7.3 million or 90% compared to the third quarter 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 $374,000 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 contract and included a gain of $1.3 million from insurance recoveries associated with damage previously caused by Hurricane Ida. Offsetting these positive items for the quarter was the continued impact of low volume levels and the underutilization of the division's facilities and resources. However, while our volume levels continue to be below capacity, the 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 fees 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 projects, which, as discussed by Richard, are nearing completion. Our loss for the quarter was related to vessel holding costs and legal and advisory fees associated with our MPSV dispute. For our Corporate Division, our loss for the quarter included a charge of approximately $500,000, associated with the noncash impairment of our corporate office lease assets resulting from a third-party sublease arrangement. The sublease will benefit our future cash flows as it will partially offset our lease cost for the facility for the duration of our lease. With respect to our liquidity, we ended the third quarter with a cash and investment 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 customer changed billing platform, which caused billing delays and impacted the customers' 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.

[Operator Instructions] And the first question comes from the line of Tony Christ with Odyssey Investors. Please proceed with your question.

Congratulations. A couple of things. It wasn't clear, did the dismissal of the government money, you didn't count that towards sales? Or did it count towards sales?

Government money, what are you referring to there?

The PP, I think there was some mention of a few million that was dismissed from the government? Or am I wrong about that?

No, that would have been related to -- that was about a year ago. So in the third quarter of 2020.

Okay. That's not this time period. Okay. Great. And 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 of detail what the amount was and 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 in the result, right? We also had a -- we also had a gain from insurance recoveries. Those essentially were a wash for the quarter. Absent those items -- or inclusive of those items because they were essentially a wash, our operating income for the quarter was right about $600,000. So it was actually positive operating income. And our EBITDA for the quarter was right at $1.9 million.

Okay. And if you convert that into a per share number, what do you have?

Right at $0.04.

Pardon?

Tony, right at $0.04.

$0.04? Very good.

Now include one other comment, one other thing that didn't net out there was we did have a noncash impairment of right at $0.5 million. It's also in that number. So absent that impairment, our net income was hovering around $1.1 million.

Okay. Well, still, we can look at it as positive earnings, right?

That's right.

Great. A big step. Okay. I -- 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? Or can you?

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. $139 million for the quarter, includes other rewards, too. And then what were the new awards? The new awards were...

Consolidated awards, Tony, were $139 million. That includes awards for our Services and Fabrication Divisions. And specifically for our Fabrication Division, which includes the large fabrication project, our new awards for the quarter were $117 million.

That's great. Boy, that's a dramatic difference. And finally, are you able to give any guidance for the second quarter, in either sales or EBITDA or even earnings, if you wanted -- if you would?

Yes. We're not going to provide that 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. All right. I'll do that.

Particularly, Tony, we think we have another strong quarter for Services. We do typically have some seasonality impacts in the first and fourth quarters of each year just due to the winter weather, and then you have a holiday season that impacts it. But absent the impacts of that, we're expecting 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 then have similar benefits from the facility fee that we're receiving for this large project.

And the next question comes from the line of [Martin Lorentzon], a Private Investor. Please proceed with your question.

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 shipyard rent going 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 -- you'll see in our 10-Q, which we'll file later on this afternoon, that we've got about $1 million to $1.5 million of remaining shipyard liabilities to fund. Now we may see a temporary increase in working capital just through to the final wind down, but ultimately, any amounts that are due 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 tried to do our best to have terms that keep us close to cash flow neutral. Recognizing that those can have some fairly high working capital impact, so we do our best to contract around that for working capital neutrality.

All right. That helps. So some freeing up on the small fab side. And can you please elaborate on your restrictive covenant agreement that is currently precluding you from paying any dividends or repurchasing 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 MPSV dispute. So that remains to be seen on the timing of that. That's right.

So March.

Well, whenever we get resolution on that dispute, whichever way that goes, and we -- our surety -- once our surety who issued the bond associated with that project, once they're relieved of their liability or obligation.

All right. 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 in interest in our -- what we call RFQs in the industry, request for quote, outside of the U.S. As you know, being in Germany, that there are capacity issues, especially around wind development. And so we are seeing some potential immediate work as a result of capacity constraints that European fabrication facilities are going through.

And the next question comes from the line of David Wright with Henry Investment. Please proceed with your question.

With respect to the offshore fabrication contract, can you tell us when work will commence on that, and how the revenues will book over the next several quarters?

Yes. So we already initiated work on the contract, obviously. But meaningful burn of hours, we don't anticipate that until the engineering is complete, and we're 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 it lined out completing by 2023, so within 12 months.

So could we model -- if we were modeling, would we say that the engineering is what percent of the total? And then could we take whatever we speculate the balance is and rate 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.

[Operator Instructions] There are no further questions at this time. I will now turn the conference back to Richard.

In closing, I want to thank our customers and shareholders for their continued support as well as recognize our employees who continue to demonstrate a commitment to Gulf Island's 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.