Cindi Cook - Executive Administrative Assistant Kirk Meche - President, Chief Executive Officer, Secretary, Director David Schorlemer - Chief Financial Officer, Executive Vice President of Finance, Treasurer Todd Ladd - Chief Operating Officer, Executive Vice President.

Martin Malloy - Johnson Rice John Deysher - Pinnacle Sam Schaefer - Global Value Investment Corp.

Good morning and welcome ladies and gentlemen to the Q4 2016 Gulf Island Fabrication Inc. earnings conference call. All participants will be in a listen-only mode for the duration of the presentation. This conference 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 Lauren. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2016 fourth quarter teleconference. Please keep in mind that any statements made in this conference that are not statements of historical facts, 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 last year. The company assumes no obligation to update these forward-looking statements. Today, we have Mr. Kirk Meche, President, CEO and Director, Mr.

David Schorlemer, our Executive Vice President and Chief Financial Officer and Mr. Todd Ladd, our Executive Vice President and Chief Operating Officer. Mr.

Meche?.

Thank you Cindi and good morning to all of our listeners. After my opening remarks, we will follow a revised format with David providing a breakdown of the financials followed by Todd as he provides an update on existing projects. I will have closing comments before we open up to it the analysts for questions.

Yesterday afternoon we announced our fourth quarter and year-end results for 2016. The net loss for the quarter 2016 four was a result of three primary factors. The first is continued weakness in the oil and gas industry, which continues to affect much of our customer base.

The second is the temporary suspension of one of our projects in our fabrication division for an alternative power generation unit. And the third is cost associated with completion of several offshore vessels as we come to the final stages of delivery. Now let me break down of each of these statements into further detail.

The market downturn, as it relates to the offshore oil and gas sector, continues to be challenging with no immediate indications for a turnaround.

While there are several factors that may indicate a positive trend in oil and gas market environment, we don't anticipate any real movement in the near future as it relates to offshore investment and related project activity.

With this, we will continue to rationalize our assets and evaluate actions that can position the company favorably in the current and anticipated market conditions. We can do this by relocating our assets and/or pursuing other markets that value our fabrication expertise and capability.

We have done this successfully with our work in the petrochemical and alternative energy industries. As we announced in our earnings release yesterday, our Board of Directors approved our plan to consolidate all of our fabrication operations in South Texas with our fabrication operations in Houma, Louisiana.

This will include the sale of our Aransas Pass and Ingleside, Texas properties. These properties are currently underutilized and represent excess capacity within our fabrication division.

We are working to wind down all fabrication activities in these locations and we are relocating remaining backlog and workforce to our Houma fabrication yard as necessary. We do not expect the sale of these properties to impact our ability to service our deepwater customers nor operate our fabrication division.

During this quarter, one project for our fabrication yard at Louisiana was put on hold by the owner. This was done in an effort to further engineering analysis and address constructability issues that have been identified. It is not clear as to when or if this project will be restored.

With this, we had expenses associated with maintaining our workforce to meet our obligations for the booked work which will kick off first quarter 2017 in addition to general maintenance and repair of our facilities. Our shipyard division experienced cost overruns on several projects remain incomplete but one in particular.

This was due to improper management of items that needed to be completed prior to delivering. We completed and tendered for delivery the vessel on February 6, 2017.

Our customer for this vessel along with an additional OSV to be delivered in May of this year, recently announced in their earnings release their efforts to restructure their balance sheet. Upon our tender of delivery, our customer alleged certain technical deficiencies associated with the vessel.

We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contract. As of February 6, 2017 approximately $4.5 million remain due and outstanding for our customer under this contract.

We continue to hold discussions with our customer in an effort resolve this matter and intend to protect our rights under the contract and recover the remaining balance owed to us. As of February 6, 2017, the balance due to us for the second vessel was approximately $4.9 million and no default has occurred under the terms of this contract.

Thirdly and lastly, additionally during this quarter, we consolidated our shipyards in Houma, which included moving all work out of our rented shipyard facilities into our own facilities in Houma west yard.

This had a cost impact to us during this quarter, but we believe this was necessary to improve productivity long range, reduce risk associated with delivery and reduce duplicative efforts and cost. Lastly, I want to focus on the annual figures.

In a very challenging market, one which we have not witnessed in over 30 years and with the addition of a new company through our acquisition of LEEVAC, we reported a net income of $3.5 million or $0.24 diluted earnings per share while remaining debt free with over $51 million in cash at year-end.

We believe this to be a huge win for our company and it was a direct result of the cost-cutting measures we implemented early in 2016 along with the hard work and dedication of our managers and employees. I will expand upon this in my closing comments.

Let me now turn the call over to David who will provide a more detailed earnings as segmented by date.

David?.

Thanks Kirk and good morning to everyone. Yesterday, we reported a net loss of $3.6 million on revenue of $55.5 million for the fourth quarter ended December 31, 2016, compared to a net loss of $14.7 million on revenue of $55 million for the fourth quarter ended December 31, 2015.

For the years ended December 31, 2016 and 2015, the company reported net income of $3.5 million on revenue of $286 million compared to a net loss of $25 million on revenue of $306 million, respectively. This represents a significant recovery in earnings of almost $29 million in spite of a 6.5% decrease in revenues year-over-year.

The company had a revenue backlog of $133 million and a labor backlog of approximately 1.3 million hours at December 31, 2016 including commitments received through February 22, 2017, compared to a revenue backlog of $181.2 million and a labor backlog of 1.6 million hours reported as of September 30, 2016.

We expect to recognize revenue from our backlog of approximately $130.4 million and $2.6 million during the years 2017 and 2018, respectively, not including change orders, scope growth or new contracts that may be awarded.

To give some further perspective, our backlog at December 31, 2015 was $232 million, of which $112 million was related to the LEEVAC acquisition, leaving legacy operations at $120 million. Now let me break down the segments of our company.

For our fabrication division, revenue was $18.2 million for the fourth quarter ended December 31, 2016 and $14.1 million for the same quarter 2015, up 29% on a comparable basis. Gross profit was $0.6 million or 3.5% for the quarter versus a loss of $23.5 million for the comparable quarter in 2015.

Operating loss was $1.0 million compared to a loss of $26.4 million for the comparable quarter in 2015.

During the year ended December 31, 2015, we incurred contract losses of $24.5 million related to a decrease in the contract price due to final weight re-measurements and our inability to recover certain cost on disputed change orders related to a large deepwater project which was delivered in 2015.

The increase in revenue as compared to the same quarter in 2015 is primarily due to improved profitability of projects in our South Texas facilities, offset by continued effects of the downturn in the oil and gas sector and a discontinued project as Kirk mentioned earlier.

For our shipyards division, revenue was $22.9 million for the quarter and $12.4 million for the same quarter in 2015 for an increase of 84.7% on a comparable basis. Revenue for the quarter included a $1.1 million non-cash amortization of deferred revenue related to values assigned to contracts acquired in the LEEVAC transaction.

Gross profit for the quarter was negative $2.0 million versus positive gross profit of $2.6 million for the comparable quarter of 2015. Operating loss was $3.9 million for the fourth quarter 2016 with operating income of $2.2 million for the quarter ended December 31, 2015.

Integration of the legacy LEEVAC operations with our existing shipbuilding operations is now largely complete and combined within the segment. Profitability was negatively impacted by project management reconciliation of near-term delivery of vessels along with weak repair demand and unfavorable industry conditions.

As Kirk mentioned earlier, we have a customer in which we have a disagreement regarding a recent delivery of an LSV and an additional vessel which is pending completion and remains in progress. We continue to monitor our work performed in relation to our customer status and its ability to pay under the terms of these contracts.

Because these vessels have been completed or are substantially complete, we believe that they have significant fair value and that we would be able to fully recover any amounts due us should we be required to do so. Based on our valuation today, we do not believe that any loss on this contract is probable or estimateable at this time.

For our services division, revenue was $15.2 million for the quarter and $29.4 million for the same quarter in 2015 for a decrease of 48.3% on a comparable basis. Gross profit was $1.2 million for the quarter versus gross profit of $3.3 million for the comparable quarter in 2015.

Operating loss was $0.3 million for the quarter compared operating income of $2.1 million for the same quarter in 2015. Gross profit and results of operations decreased over the comparable quarter due to one of our large offshore campaigns coming to a successful completion, along with weak industry conditions.

Our backlog by segment at December 31, 2016 includes fabrication, which represented $65.4 million, shipyards representing $59.8 million and services represented $7.8 million. Backlog includes commitments received through February 22, 2016, which Todd will expand on later in our call.

Depreciation for the quarter was $6.2 million compared to $6.5 million for the fourth quarter of 2015. Depreciation for the full year was $25.4 million in 2016 versus $26.2 million in 2015.

As Kirk mentioned and as part of our ongoing facility rationalization process, we are consolidating our South Texas operations with our fabrication operations in Houma, Louisiana. This consolidation will include some asset transfers and dispositions and the sale of selected properties including those listed by Kirk earlier.

Beginning in our first quarter 10-Q, those assets held for sale will be presented in current assets on the balance sheet and depreciation expense will be suspended. This will reduce annual depreciation expense related to our South Texas fabrication operations by approximately $13.6 million.

Now these savings will be offset by our ongoing costs associated with maintaining the facilities which we are evaluating today. Capital expenditures for the quarter were $1.4 million, primarily for continuing work performed in connection with the expansion of one of our existing dry docks and repairs to our bulkhead in Houma, Louisiana.

Total capital expenditures for the year were $6.8 million which were offset by proceeds from the sale of equipment of $6.5 million. We expect capital expenditures in 2017 to be within a range of $8 million to $12 million, primarily related to improvements at our facilities. With respect to our capital structure.

In December, we entered into a two-year $40 million amended and restated credit facility with our current lenders that will continue to be secured by substantially all of our assets. The amended credit facility will allow us to use the full $40 million facility for both letters of credit and borrowings.

Given the historically low levels of borrowing under our credit facility and our cash position, we requested a reduction in the amount of available credit under our revolver from $80 million to $40 million to decrease the commitment fees payable on the undrawn portions of the facility.

We currently have no borrowings outstanding and $7.7 million in letters of credit as of year-end. Including our cash position and availability under our revolver, we currently have $83.5 million of liquidity. As of February 17, our cash position was $44 million with total liquidity of $76 million.

I will now turn the call over to Todd who will provide an update on our operations and major projects.

Todd?.

Thanks David and good morning everyone. I will begin with our fabrication division. Our South Texas facilities have successfully completed and delivered a jacket and associated piles for a project bound for Trinidad.

We continue with fabrication of the tendon support buoys for the Hess' Stampede project, which is scheduled for completion in the first quarter of 2017. Miscellaneous fabrication associated with plant expansion projects in the Corpus Christi area continue but should be completed shortly.

A plan for selling and mothballing our South Texas properties has been approved by our Board and we will begin this process immediately. Our Louisiana based fabrication facilities is delivering piles for a river offloading terminal during the quarter.

As Kirk mentioned earlier, the fabrication of a prototype power generating vessel has been partially suspended pending further engineering analysis. We have commenced efforts to safely secure this project until further instructions. We are hopeful this work will start up once again in early to mid 2017 but there are no guarantees on this timing.

Opportunities remain for additional petrochemical projects and other plant upgrades as well as offshore wind power projects on the East Coast and small structures for overseas locations. We expect these markets to mature later into 2017.

With our services division, completing a large offshore upgrade project and with a cyclical wintertime slowdown in the offshore maintenance sector, we have begun shifting our focus and our crews to onshore plant expansions and maintenance.

Work remains weak given our client's hesitancy to start new projects and their continued evaluation of CapEx budgets. Our shipyard division continues with fabrication of three OSVs scheduled for delivery at various timeframes in 2017 and 2018. One OSV was tendered for delivery recently to one of our customers after completing sea trials.

Additionally, work associated with new fabrication and conversion of barges continue at our Houma facilities with delivery set for first and second quarter of 2017. Marine repair work continues at our Lake Charles and Houma facilities for both drydocking and pier-side work. I will now turn the call back to Kirk for closing comments.

Kirk?.

Okay. Thank you Todd. As I mentioned before, I am very pleased with how our company was able to perform in a very challenging market, while at the same time integrating the LEEVAC Shipbuilding acquisition into out operations.

We have significantly expanded our capabilities along the Gulf Coast and in the petrochemical complex which we expect to yield result well into the future. Opportunities remain within the shipyard business for river push boats, river cruise vessels and general repairs associated with drydocking.

But vessels remain stacked and vessel owners are not preparing to return to market yet. We rightsized our yard operations and are streamlining our corporate and administrative operations to withstand what may be another year of challenging market conditions in our industry and to be prepared with an ensuing recovery.

We continue to evaluate business opportunities to expand our market presence, service portfolio and leverage the expertise we have in the fabrication, shipyards and services division.

The new administration brings with it a desire to expand manufacturing, refinery construction and infrastructure projects with a heavy bias towards American workers and local employment. While Gulf Island is very well suited to facilitate a ramp up, these projects do take time to develop.

We are cautiously optimistic that American-made fabrication will enable our company to expand in the future. Lauren, you may now open the lines for questions from analysts..

[Operator Instructions]. Our first question comes from Martin Malloy with Johnson Rice..

Good Morning..

Hi Marty. Good Morning.

How are you?.

Good. I am just trying to get some perspective here on the properties being sold or up for sale.

Can you talk maybe perhaps a little bit about what the potential uses for the property might be? And also if there is any other equipment, cranes and such, that might be sold to generate cash?.

Well, yes, sure Marty. And again, our objective is not to generate cash. Again, we have plenty of liquidity. But again, as we emphasized, it's facilities that's underutilized at the current timeframe and with no immediate prospects, I think this might be the time to look at the facilities itself.

So that marketplace down there is pretty hot, to tell you the truth. There is a lot of petrochemical expansion in the facilities on an area.

These facilities, because of its location on a deepwater Corpus Christi ship channel as well as intersection of a coastal waterway system, may lend itself very nicely to future markets associated with petrochemical, LNG and whatnot. We have had some interests and conversations with potential buyers. So again, we are going to see what it generates.

Certainly, it's going to be not just a local event for us .We are going to put this thing out there and see what we generate.

But again, as it relates to your second part of the question with assets, any of the equipment that can be used within our existing facilities, certainly those assets will be moved to existing facilities through our shipyard, fabrication and services division.

And anything that can't, we are going to look at the possibility of putting those assets for sale as well, which may include some of the big cranes that we have, in particular..

And then on the delayed fabrication project, I believe you said it was in Houma, is that going to negatively impact results here going forward in the first quarter? And as such, are you still carrying some costs associated with that potentially coming back?.

Well, as Todd said the majority of the cost associated with the shutdown of the project was taken in the fourth quarter. There maybe a little bit in the first quarter as we secure the project to safely be stored in the facilities for what maybe a couple of quarters. But the majority of that cost has been in the fourth quarter. But there will be some.

And as we said, in an effort to maintain that labor force, what we did was, we kept everyone employed in the facilities. We did some much needed maintenance upgrades to our facilities in preparation for the work that we have associated with the petrochemical that we announced last quarter. And certainly that is beginning to ramp up as we speak.

So there was a small timeframe there that we didn't have a whole lot of work in the facilities, but I am happy to tell you that it's starting to ramp back up in the Houma facilities..

And just to try to get a better idea of the core earnings going forward after the sale or the production of assets here with the South Texas properties being put up for sale, what was the unabsorbed fixed cost associated with those properties last year?.

David, I don't --.

I don't know if I can give you a hard number on that. I know that the business contributed pretty significantly to our earnings. What I will say is that, that project activity could be handled by our Houma facilities.

So I don't think we prepared to give you what our cash burn up for that operation is going to be as we mothball and maintain it for the year. But can certainly get back to you and let you know on a later call..

Okay. And then just my last question is looking out as far as potential new awards outside of your traditional offshore oil and gas area.

Timing of the wind energy projects sounds like it might be later second half of 2017 and maybe any update you could give us in terms of the module bidding environment as well as an update on the river cruise boats?.

Sure, Marty. So as it relates to the petrochemical side of the business, you are right. There are plenty of opportunities that we have currently in-house projects that we bid and projects certainly that are in-house to bit.

We see that as a very strong market and it was one of the deciding factors as we looked at all of our assets, what was being utilized what was out there for future of the work.

Certainly if we are fortunate to get in a position where we sell the facilities down in South Texas, that may enable us to either expand what we have in current locations or look for alternative locations that may better suit the petrochemical side of the business. And the second part on wind, you are right.

When you look at the major projects associated with wind, they are a few years out. There is one project in particular that we are engaged in. That project could have some late start in the first quarter of 2018.

But we are out there soliciting and marketing our services as we look to the future of the wind industry as it exists on the East Coast of U.S. And lastly, I am sorry. You had a question about the river cruise vessels. Certainly the opportunity still exists out there. We still are having conversations with a few of the customers out there.

There has been no indication that the projects will not go forward. Again, as everything else though, projects have a tendency to move a little bit to the right. So we are still engaged in conversations with couple of owners associated with those vessels..

Great. I will get back in queue. Thank you..

Okay. Thank you, Marty..

Our next question comes from John Deysher with Pinnacle..

Hi. Good morning..

Good morning..

Following up on the South Texas properties, what's the timeline there in terms of having the equipment moved, putting it up for sale? I think you indicated that as of March 31, it was going to be booked on the balance sheet as a discontinued operation.

Does that imply that everything will have been shifted at that point and those properties will be marketed for sale? Or what is the exact timeline at this point?.

Well, I guess the answer to a part of the question is yes. So what will happen is that the facilities will be put up for sale immediately. We are currently negotiating with a couple of different brokers as we speak. So we anticipate that to happen sooner rather than later.

The equipment itself, we have already been in the process of moving equipment along with our employees at different locations. That will continue on. That has been an ongoing process and is not something new to us. But we may get a little more aggressive with some of the other equipment in the facilities.

But again, the mice part about this is there is quite a bit of equipment that can be utilized in our existing business, just transfer it from one location to the next..

Okay.

But is all that going to be complete by March 31?.

No. I think the process of transferring the equipment out of the facilities, in my opinion, it is going to take maybe two quarters to get that completed. As you can imagine, there is a lot of equipment, lot of material, lot of supplies and whatnot that we are dealing with. And again, the decision was made yesterday by our Board of Directors.

So Todd has the task of trying to orchestrate all those moves..

Okay. And related to that, is there going to be the first quarter or second quarter charges related to this closure? I know it's nonrecurring..

Yes. We evaluated that at year-end and we did not believe there is any impairment at the point of executing a transaction and ultimately will determine what appropriate gain or loss will be charged. But we won't know that until the time of the transaction..

The time of the transaction meaning?.

When we actually transact..

Yes. What's the final sale price compared to what we have as net book value..

Okay.

But there is not going to be any labor related charges or anything like that?.

Well, as we said earlier, you know there will be a cost associated with mothballing the facilities, but we believe that to be offset with the cancellation of the depreciation at the facilities..

Which is going to be $13.6 million per year?.

Well, $13.6 million is the depreciation that we had last year. Some of that equipment, if we move that equipment to other facilities will be absorbed by the facilities, but a significant portion of the vast majority of that will be suspended..

Okay. So let's just be clear here.

What do you think the costs are going to be for what you anticipate doing but ignore the depreciation that you think might offset it, what's going to be the cost of the transfers and the ultimate shutdown of those properties?.

Sure, John. So obviously the first part of the answer is going to be the timing associated with how long that we have to mothball the facilities. But taking a snapshot and ballpark number based on fixed costs that cannot go away just because we put asset up for sale would probably be in the range of about $7 million to $8 million..

Is that per year or per quarter?.

Yes. Per year..

Okay. So we can annualize that to be about $2 million per quarter or so. Okay. All right. That's helpful.

Now to the wind and wave energy project, which I think is the one that's been suspended, how much do you have of costs embedded in that project right now that you have not been paid for?.

Well, everything's current on payments. There are two outstanding invoices that are not due for payment yet and I believe that's probably in the $2 million to $2.5 million range. But we don't anticipate any problems with that. It's a good relationship we have with this owner in terms of shutting the project down.

Again, as we said, it was due to them wanting to do further analysis on this unit and looking at tolerance associated with it for fabrication and whatnot. So there are no disputed amounts under this contract as we speak now and they are current on their payments to us..

Okay.

And that $2 million to $2.5 million, when is that going to be due?.

I think it's two different invoices and they are due over the next 30 to 60 days..

30 to 60, okay. So fairly soon. Okay. All right. Good. Thank you very much..

Okay. Thank you John..

[Operator Instructions]. We will take our next question from Sam Schaefer with Global Value Investment Corp..

Hi. Thank you for taking my questions this morning..

Hi. Good morning Sam..

I believe most of the Texas questions have been answered. So I am going to move to a different subject.

Regarding the project that was put on hold, is it still included in the backlog?.

No. Those numbers are not included in our backlog..

Okay.

And then for the second customer dispute, sorry, the new customer dispute regarding that $4.5 million for the OSV, has there been a lawsuit filed with that?.

There has not been a lawsuit filed but we do have security interest in the vessel..

Okay. I am sorry. To go back to the last question for the backlog that was pulled out from the results of that project.

How much was that backlog?.

It was not even material, quite honestly. Majority of the work that was associated with it was basically some T&M work we had to complete the project on. So any backlog that was taken out or any backlog that may remain is so insignificant that it didn't really affect the numbers..

Okay. And then one last question here. Would you be willing to provide an update on the Walter lawsuits? I believe last call you were expecting a ruling to come down shortly. Just any update on that would be great..

Sure. So yes, we had a favorable ruling from the Judge as it relates to Gulf Island. He ruled that the lawsuit was valid. A court date has been set for early part of 2018 and so we are in the process of obtaining documents as well as scheduling depositions and obtaining expert witnesses on our side..

Great. Thank you very much..

Welcome, Sam..

We will take a follow-up question from John Deysher with Pinnacle..

Actually my question was just answered. So thank you very much..

Okay. Thank you..

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

All right. This will conclude our fourth quarter 2016 conference call. Again, thank you for joining us and we invite you to join us for our first quarter 2017 call in April. Have a great day..

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