Cindi Cook - Executive Administrative Assistant Kirk Meche - President & CEO Jeff Favret - EVP, CFO, Treasurer & Secretary Todd Ladd - EVP & COO.

Jeff Geygan - Global Value Investment Corporation John Deysher - Pinnacle Tom Spiro - Spiro Capital Tim Curro - Value Holdings Michael Melby - Gate City Capital Management.

Good morning and welcome ladies and gentlemen to the Q2 2016 Gulf Island Fabrication Incorporated Earnings Conference Call. All participants will be in a 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 Ms. Cindi Cook for opening remarks and introductions.

Cindi, please go ahead..

Thank you, Vicky. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2016 second quarter teleconference. Please keep in mind that any statements made in this conference that are not statements of historical fact are considered forward-looking statements.

These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements.

These factors include the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the company's ability to obtain them, and other details that are described under cautionary statements concerning forward-looking information and elsewhere in the company's 10-K filed March 9, 2016.

The 10-K was included as part of the company's 2015 Annual Report filed with the Securities and Exchange Commission earlier this year. The company assumes no obligation to update these forward-looking statements. Today, we have Mr. Kirk Meche, President and CEO; Mr. Jeffrey Favret, our Chief Financial Officer; and Mr.

Todd Ladd, our Chief Operating Officer. Mr.

Meche?.

Thank you, Cindy and good morning to all of our listeners. After my opening remarks, Todd will provide an update on existing projects and Jeff will take us through the financial details. Yesterday for the second quarter 2016, we reported a net income of $5.5 million or $0.37 diluted earnings per share on revenue of $81.5 million.

Our cash stands at $50.1 million with zero debt and working capital is $75.6 million. Our consolidated revenue backlog stands at $157.5 million with a labor backlog of 1.3 million man hours including commitments received through July 28, 2016. Each of our segment and divisions reported good revenue at respectable gross profit margins for the quarter.

These positive margins are reflection of the cost cutting reductions implemented since the beginning of the year along with highly experienced personnel outperforming man hour estimates on completed jobs. Opportunities within the shipyard sector for river towboats, river cruise ships and general repairs associated with dry docking remain good.

Our services group remains busy with offshore hook-up and commissioning work along with insured municipal projects, however, we expect this year a slow decrease over the next few quarters as these projects conclude. Our large fabrication yard continues to operate below capacity levels.

Fabrication opportunities are present for petrochemical plant upgrades along with wind projects on the East Coast and small structures for overseas locations. But these projects still have a way to go in terms of awarding any significant work. We expect these markets to mature later this year into 2017.

The market downturn as it relates to oil and gas sector continues to be challenging with no immediate indications for a turnaround. We will continue to evaluate opportunities to dispose of assets that are not expected to provide sufficient long-term value. I will now turn the call over to Todd who would discuss our existing projects.

Todd?.

Thanks, Kirk and good morning everyone. I'll start with our fabrication division. Our South Texas facilities continues with fabrication of a jacket and associated piles bound for Trinidad with delivery set for the fourth quarter of this year.

We also carry on with fabrication of the tendon support in buoys while the Hess Stampede project, which is scheduled for delivery early 2017, as well as fabrication of suction piles destined for our Gulf of Mexico project.

Our Louisiana facilities remain active with work associated with the fabrication and assembly of various onshore plant piping modules along with power required for a river offloading terminal scheduled for delivery in the third quarter of 2016.

The fabrication of alternative energy projects continue with the receipt of modules and equipment for assembling a prototype electrical generating vessel due for delivery in the late fourth quarter of 2016.

Our services division remains active with installation support, upgrades and ongoing maintenance work for various offshore locations within the Gulf of Mexico. Onshore plant expansions and maintenance have continued to contribute to a large part of the services divisions work load.

Within the various locations of our shipyard division, we continue with fabrication of a river towboat scheduled for delivery in the third quarter of 2016 as well as fabrication of four OSVs now scheduled for delivery at various timeframes in the year 2017 and 2018.

Our dockside vessel conversion work remains active and our six dry docks continue to be busy with opportunities for work going forward. I'll now turn the call over to Jeff..

Thank you, Todd. As Kirk highlighted, we have one of the strongest quarters in recent history with net income of $5.5 million or $0.37 per share on revenue of $81.5 million compared to net income of $1.4 million or $0.09 per share on revenue of $84.3 million for the same quarter 2015.

Our quarterly results were driven by outstanding performances within each of our reporting segments. Specifically for our fabrication division revenue was $24.3 million for the second quarter 2016 and $48.4 million for the 2015 quarter down 49.8% on a comparable basis.

Gross profit was $3.8 million or 15.8% for the quarter versus $210,000 or less than one half of 1% for the comparable quarter and operating income was $2.2 million compared to a loss of $2 million for the 2015 quarter.

What is particularly noteworthy is that our fab group was able to achieve these results despite continuing lower levels of the utilization for both the Texas and Louisiana yards, due to the prolonged downturn in the oil and gas market.

The fabrication segment performance is in-part due to the impact of our ongoing cost reduction efforts that we discussed now for several quarters, but also as Kirk mentioned earlier in the call due to project management and production efficiencies that we were able to realize as we restructure our workforce to a leaner more experienced mix of the yard personnel.

For our shipyard division revenue was $29.4 million for the quarter and $14.8 million for the 2015 quarter for an increase of 99% on a comparable basis. Revenue for the quarter included a $1.5 million non-cash amortization of deferred revenue related to values assigned to contracts acquired in the LEEVAC transaction.

Gross profit was $5.4 million or 18.4% for the quarter versus gross profit of $1.6 million or 11.1% for the comparable quarter 2015 and operating income was $3.4 million and $1.2 million for the quarters ended June 30, 2016 and 2015 respectively.

So the legacy LEEVAC operations contributed $17.4 million of revenue a net income of $1.5 million for the quarter. We noted a solid performance within our shipyard segment as we begin to see the anticipated positive impacts of our LEEVAC integration efforts.

For our services division revenue was $28.7 million for the quarter and $22.7 million for the 2015 quarter for an increase of 26.3% on a comparable basis. The increase in revenue relative to the comparable quarter is due to revenue generated from two large offshore services projects that Todd discussed earlier.

Gross profit was $4.8 million or 16.8% for the quarter versus gross profit of $4.0 million or 17.4% for the comparable quarter and operating income was $3.5 million and $2.9 million for the quarters ended June 30, 2016 and 2015 respectively.

Gross profit and results of operations improved over the comparable quarter due to the overall higher activity levels for the two offshore campaigns resulting in improved utilization for our workforce.

Our services segment results were also positively impacted by the implementation of cost cutting measures during the fourth quarter 2015 and throughout the first half of 2016.

Consolidated revenue backlog was $157.5 million with 1.3 million hours remaining to work at June 30, 2016 compared to $197.1 million and 1.7 million hours remaining to work at March 31, 2016.

Of the backlog at quarter end, we expect to recognize revenue of approximately $134.4 million during the remainder of 2016 and $23.1 million in 2017 not including change orders, scope growth or new contracts that may be awarded.

On a segment by segment basis backlog and fabrication represented $41.1 million shipyard represented $93.9 million and services represented $22.5 million at June 30, 2016. Capital expenditures for the quarter was $2.6 million primarily for work performed in connection with the expansion of one of our existing dry docks and maintenance CapEx.

We expect capital expenditures for the remainder of 2016 to be at or near $4.3 million primarily related to dry dock expansion work. And lastly, as Kirk mentioned our balance sheet remains strong with $50.1 million in cash and zero debt with $20 million available under our line of credit.

We continue to maintain a conservative capital structure as we navigate through the current oil and gas downturn. Operator, you may now open the line for question..

Thank you. [Operator Instructions] We'll take our first question from Jeff Geygan with Global Value Investment Corporation..

Hey, good morning, gentlemen, very nice quarter.

Can you hear me?.

Hello Jeff..

Yes..

Okay. We got you. Good morning, Jeff..

Yes. Good morning. Thank you. Nice quarter..

Thank you..

Todd, I was a little bit curious you mentioned a prototype electric generation vehicle; can you elaborate on what that is?.

Yes. It's an item that we're building and again it is prototype, it is information there that's kind of confidential because of just what they're doing and things that we can't say a whole lot about.

But it is an alternative energy type source that someone has put into the market they're trying to put something together that could be again another potential source of trying to develop alternative energy not a whole lot I can say but the details of it.

But, it could be something that again everybody out there is trying to figure out what they can do for the future and helping the country get alternative energy another project we're looking at that's got some potential for us to be part of being a first going forward..

Yes. Jeff, this is Kirk. Just to expand a little bit on it, it is a project that is bound for the North Sea and primarily this prototype, if this is successful would be marketed in that area and off the West Coast of United States..

Interesting.

Did it represent a significant revenue opportunity for us?.

Well, it could. As Todd said, this is the prototype model and actually it's a project that we're picking up from another fabricator that was -- I guess in some respect struggling to complete the entire scope of work. So, the owners contacted us, we're moving that work to Houma, Louisiana where we'll complete the segment there.

And again, if it's successful, we were hoping that this can lead just like the offshore wind projects, this could lead to 50 or 100 or even more of these units. And then as Todd said, a pretty sizeable project, this is not just, a couple of 100 tons, this is of couple of 1000 ton units.

So, yes, this is nice work and we're excited to be a part of it, and it was a last minute call we got and we were able to work out details, and again, we're pretty excited to be part of the project and hopefully this thing will be successful and we can be the premier fabricator as it goes forward..

Yes, very interesting. Congratulations, good luck on it..

Thank you..

From time-to-time you mentioned capacity and utilization, I don't recall that you broken out by segment those ratios, is it possible to do so just to give a sense of what -- where you would be capacity constraint relative to where you are today?.

Yes, Jeff. We generally don't do that. And the reason is that, forecasting especially in this current environment is so challenging. That's -- as we go out the next quarter, two quarters, three quarters, things can change very dramatically. And so, we typically don't provide that..

Understood.

And is the delivery of the four OSVs, has that delivery schedule changed?.

Well, the first two have not changed Jeff. And we are in discussions with the owner for the other two vessels in terms of looking that possibly moving the delivery day out some.

Not dramatically, but just, in order to try and, I guess move some of the curves within our own workforce as well as maybe some cash flow from the owner standpoint that we are in discussions with them. But, we're, like I said, we're in discussions with them and hope that there will some resolution on that very shortly..

Fantastic. And last question Kirk, you mentioned, the disposable of some assets.

Can you give us any sense of the magnitude or scale of those disposables, then presumably that can continues contribute to you very solid balance sheet?.

Well, it does. And so, I don't know that there is anything particular we want to talk about on this call. We look at -- we have a lot of equipment facilities, we got big cranes, we have rollers and what not.

And so, in particular we're looking heavily at the cranes and so, with these big cranes in the facilities, there were other opportunities for these cranes to be utilized in a different segment which might be part of the petrochemical industry.

And so, while the value of the cranes are up and there may not be any long-term work for these big cranes, we're looking at trying to move a few of these cranes and whether we lease them or we sell them is something that management is looking at currently..

Great. Well, I appreciate your time. Good luck going forward and I'll hop off here..

Thanks Jeff..

Thanks Jeff..

[Operator Instructions] We'll go next to John Deysher with Pinnacle..

Hi, good morning and nice quarter..

Thank you, John. Good morning..

I was just curious back to the OSVs delivery schedule. You said it hasn't changed in 2017.

Can you remind us again when those first two are scheduled to be delivered in 2017 roughly?.

Yes. We have one -- one of them is actually going to be in the first quarter 2017 and the other is going to be into the latter part of the second quarter..

Okay, the second quarter. And I'm looking at my notes from the prior call and it's not all four of them are going to be delivered in 2017, but now somewhere pushed out to 2018.

What's the rough timeframe in terms of potential deliveries in 2018?.

Those will probably be very early in the first quarter of the 2018, with the second one in the second quarter of 2018. So, the first one is almost in 2017, its 2017, 2018, it's so close on January 1 and the second one as I said, it could be the second quarter of 2018. And again, is what we're looking at now, nothing has been executed in that respect.

We still have some conversations we're talking with owners on. So, again, and it's a mutual agreement that we're trying to work through that's going to help both companies. This is not the result of any, negative impact on the project or anything like that.

It's just something that both companies are coming together and realizing that with this market downturn and really no immediate relief in sight that it probably could help both companies as we go forward..

Understood.

All four of them going to the same customer?.

No. We have two different customers..

Two different customers, 2017 group is going to one customer and the 2018 group is going to another customer?.

Correct..

Okay, good.

And those customers are not in any kind of financial distress that would cause them to push out delivery dates?.

Absolutely not, absolutely not. Again, this is a mutual agreement that we're talking amongst the two companies. So, no there is no implications for any type of worry in terms of financial stress or anything like that with these companies..

Okay. That's encouraging. And in terms of the overall cost reductions which you mentioned a couple of times in the remarks, are we where we want to be there, obviously you're always looking to reduce cost, but in terms of kind of the cost structure as to -- the anticipated revenue base.

As most of that been accomplished at this point or are there major chucks of cost reductions going forward?.

Again, we're always looking to reduce our cost and see how we can be more efficient. We will say that there is definitely more that's to come. We're continuing down a path kind of how we outlined in different stair stepping through different items that we want to do for restructuring and how we're doing this.

And as we see the work that's coming in from others, it kind of changes the mix of crafts and who we have. So, it's an item that we're continuing to work. We do have some more in front of us that we want to implement. So that is a continued effort..

Is it significant, the amount, dollar amounts?.

The big item that we have, it's no one big significant item, it's a lot of smaller items. But again, our main focus is to try and make sure that we're competitive against the other smaller companies where we're having to get down and pick up work that traditionally what would have been something that typically would go to much smaller companies.

And what we were trying to get in that market and just making sure we can stay competitive with them..

Yes. John, I would add that, we made significant headway as we emphasized in the comments little bit earlier and as Todd said, there is more to go, I think in particular, we're only two quarters into the LEEVAC acquisition.

And so I think there is some work to be done to further implement those guys in and get them into the fault year and say there is little bit more work to be done there..

Is that going to be accomplished by year end do you think, in terms of the total integration of LEEVAC?.

Certainly by year end, yes..

Okay, good. And then, finally, just a brief accounting question, in the deferred revenue comments, 1.5 million in this quarter and 2.7 year-to-date, is that right? Yes. How does that flow through the income statement, you indicated that it's included in the revenues, but in terms of flowing through the income statement.

How much of that say 1.5 million hits gross profit? I just want to make sure where it stands?.

Well, it hits. Yes. Sure, John. Yes, well, so it hits the revenue line, so it's recognized as revenue and the entire amount of deferred revenue that was valued at the date of acquisition, it's still a preliminary evaluation.

But, that entire amount gets recognized over the life of those four contracts that we acquired ratably as we progress those contracts..

Okay. So it's subject to the same cost of goods sold and SG&A that the rest of the business is, it doesn't….

Yes. It's subject to the same revenue recognition as any other contract in our businesses, which as we progress labor hours based on estimated labor hours. We recognize revenue ratably based on that ratio..

Okay.

So it doesn't skew profitability one way or the other?.

No, it doesn't, but it is but we highlighted because, it is non-cash..

Okay, good. Thanks very much..

Thank you, John..

We'll go next to Tom Spiro with Spiro Capital..

Tom Spiro, Spiro Capital, good morning..

Good morning. Tom..

Hi, Tom..

Kirk, difficult times in our industry, I'm curious whether over the last couple of quarters we've seen much consolidation among the other players, do you expect to see much consolidation?.

I guess the short answer is yes, we do expect -- continue to see some consolidation amongst the players. But I don't know at what point we peaked out when consolidation of all these companies and what not.

But certainly there is, I guess from a perspective -- of our perspective, we don't see as much as what's happening in the first and second quarter going forward. But again, if price of oil continues to remain low there will be a lot of opportunities out there.

And so yes, Tom, I think there could be still be some out there, it will be quite a magnitude we saw, but that's kind of difficult for us to really put a definitive answer on..

Was there a lot in the last couple of quarters, I mean, you are suggesting there was?.

Well, we know there was some consolidation with some of the customers we were dealing with and we continue to hear that there is some consolidation amongst some of those players. Now, remember some of those players were smaller players in the oil and gas industry.

We're not talking about the big boys, but certainly cash flow means a lot to those guys, price of oil affects their bottom lines, there was a lot of data on the books from those companies. So, we did see some..

There is a lot of calculation out there about the timing of consolidation within the marketplace. And there is a lot of wait and see kind of an attitude going on. We're like everyone else. We're hearing things but we wouldn't speculate as to what was that overall timing is. No one really has -- I don't take a strong bead on what the overall timing is..

Well, you may not be like everyone else because you got cash on the balance sheet, so, are you looking?.

We are always opportunistically looking for opportunities that are out there. Yes, absolutely..

With the LEEVAC transaction, we picked up the facility on Lake Charles, Kirk, could you give us your current thinking about the opportunities there generally and particularly with respect to L&G?.

Well, yes. And so its primary location was deepwater something that we were after in terms of trying to market ship repair and so that marketplace that area that we picked in Lake Charles with LEEVAC, shouldn't lend itself to it. So we are strategizing on -- in terms of dry docks.

And will dry dock makes sense down there in order to support that market? We know that as Lake Charles gets increasingly busy with implementation of the petrochemical modules and whatnot, this could be a lot of ship traffic in that area. So, we are preparing ourselves in the last couple of quarters we talked about extension of our dry docks.

We're going to look at that dry dock in terms of extension. It's almost going to be 400 foot in length. There maybe a possibility to bring that dry dock to Lake Charles or dry dock of similar size to Lake Charles to service the market that traditionally has not been serviced.

It was more -- smaller tugs, deepwater tugs and whatnot, but we're going to go after a little bit bigger marketplace..

I'm no LNG expert, but the articles I read these days suggest the outlook is actually not very good because prices are so low these days..

Well, that maybe true in some of the projects, but they are projects within the Lake Charles area that have been sanctioned and we know that projects are moving forward..

Michigan project especially..

Yes..

I see, I see. That's helpful. Thank you and -- lastly just a financial question, we have a nice cash balance today.

Do you expect that cash balance to grow, to shrink as we finish off the last couple of quarters of the year?.

That's a tough call Tom. I mentioned a little bit earlier about how difficult the outlook is as we look out over the next several quarters. There is a lot of stuff that we're bidding on. But, there is -- on the other hand the offshore market just isn't there and it is not there yet and probably won't be for the next several quarters.

So, we might expect a little bit of use of cash in operations but it's really hard to speculate at this point..

I see, I see.

Are we continuing to shrink the staff?.

Well, we haven't shrunk the staff in some time Tom. We did a pretty concentrated effort at the beginning of the year. We've had a little bit of attrition since then. But for the most part, we've been able to maintain the staff that we had after we've done our first major cost cutting effort in terms of personnel.

But as Jeff and Todd alluded to, we still have some areas we need to take a look at as we start to consolidate efforts with LEEVAC transaction over to go filing.

But again, if work picks up and we will see those numbers come up slightly, but we've been very fortunate to maintain our management staff which includes our project management staff and all of our accounting staffs. So we've been very fortunate to continue to hold on those experienced people..

Thanks a lot..

Thank you, Tom..

We'll go next to Tim Curro with Value Holdings..

Good morning..

Good morning, Tim..

G&A expenses, were there any one-off items or special charges in the second quarter?.

No, there were not, no. I wouldn't refer to any particular one-off charges..

Okay.

Why did G&A increase from the first quarter?.

There was a slight pick up over the first quarter related to bonuses and accrual of bonuses for the performance that we're seeing thus far. So that's one of the primary pick ups..

Can you give us an idea of what run rate we should expect for the second half?.

I would say that the run rate would be something that looks a little bit closer to the first quarter. But I'm cautious in saying that, because we typically don't like to forecast out. But, probably something closer to the fourth quarter rather than the second quarter -- first quarter, I need to say rather than the second quarter..

Sure, okay, cautious because there might be more bonuses or accruals or just general uncertainty?.

It's general uncertainty..

General uncertainty..

All right. Thank you very much..

You bet..

[Operator Instructions] And we'll take our next question from Michael Melby with Gate City Capital Management..

Good morning, gentlemen. And congrats on the strong results..

Thank you. And good morning, Michael..

I was curious if you could elaborate a little bit more on the River Cruise ship industry in the United States. From the press I read, I've read, it seems to be picking up, I'm curious given the LEEVAC acquisition both your overall view on the industry and maybe your competitive position within the United States? Thanks..

Okay. Well, I guess, I'll talk first about the competitiveness that we believe that we have. Certainly there is a lot of shipyards out there and everybody is trying to get as much work as they can and bringing LEEVAC and experienced folks on, it will have experienced building river cruise ships.

And so, I think from a competitive nature standpoint, we can be as competitive as anyone else along the Gulf Coast. And certainly, I think more competitive than anybody on East or West Coast.

So, I think we're very well positioned especially with -- I guess the merger of the two companies in some respect with LEEVAC as well as the Gulf Island shipyards folks.

The equipment we bring together from the automation side to compete with these other competitors as well as the big cranes, the overhead cranes, the shafts and whatnot, lend itself to a lot of labor saving devices that we think or make us more competitive.

Now, from the market standpoint on the cruise industry side, all we can tell you is what we hear, there still seems to be some activity in terms of folks who want some pricing on that. Well it eventually come to a point where there are going to actually pull the trigger and have that, we're not sure.

But we're hearing like you that there is an increasing interest in terms of trying to have the cruise ships on the Mississippi River. But again, that's, just a little bit of speculation on our part and certainly want to be very hopeful as it goes forward, we want to build these vessels.

And, but again, at the end of day there is a lot of economics that depend on it, include what's happening with the world and whatnot from terrorism standpoint and whatnot. So, it's still viable segment that we're chasing..

Thanks.

And your current OSV production schedule will that inhibit in anyway your ability to move forward with the large cruise line contract?.

No. Not at all, given our capacity where we are and again we move people across our different divisions, we definitely have ample capacity, no problem on that end..

Yes. Michael and just one more note on that. Just to think about it, the OSV vessels that we're currently fabricating actually it is five of them. We're in a stage now where the vessels are either in the water, being ready for sea trials or at a point where the structural completion is out of the shops and on the ways.

So certainly there is some vacancy within the shops to handle any work we would pick up from this point going forward..

Got it. Thanks.

I'm just curious if there was any update on the loss, did you have outstanding or your ability to collect that?.

Well, we're still pursuing every legal option we have on it. I would rather not disclose the position we're in now. But, we have positioned ourselves such that we are still pursuing all of our rights underneath the contract..

Got it. Thanks for your help. And best of luck going forward..

Thank you, Michael..

Thanks Mike..

This concludes today's question-and-answer session. At this time, I would like to turn the conference back over to today's speakers for any additional comments..

We'd like to thank everyone for listening to our second quarter 2016 conference call and your interest in Gulf Island Fabrication. I want to recognize every employee within our company for an outstanding job in reducing costs and focusing on job performance while maintaining the highest level of safety standards.

This strong quarter is a result of the hard work of all of our employees. We invite everyone to join us for our third quarter conference call in October. Thank you. And have a nice day..

This does conclude today's conference. We thank you for your participation..