Cindi Cook - Executive Administrative Assistant Kirk Meche - President and Chief Executive Officer David Schorlemer - Executive Vice President and Chief Financial Officer Todd Ladd - Executive Vice President and Chief Operating Officer.

Henry Shortess - Johnson Rice Tom Spiro - Spiro Capital Michael Melby - Gate City Capital Management.

Good morning and welcome ladies and gentlemen, to the Q2, 2017 Gulf Island Fabrication, Inc. Earnings Conference Call. [Operator Instructions]. 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, Melanie. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2017 Second 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 2, 2017.

The 10-K was included as part of the company's 2016 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 CEO sand 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. Good morning to all of our listeners. After my opening remarks, we will follow our standard format with David providing the breakdown of the financials, followed by Todd as he provides an update on existing projects. I will have closing comments before we open it up to our analyst for questions.

Yesterday afternoon, we announced our second quarter results for 2017. As stated in our press release, 2017 continues and will continue to be a challenging year for our company and this quarter’s result reflect these difficult times.

A significant adjustment to one of our complex projects within our shipyard division along with under utilization within our divisions put our financial results in a loss position for the quarter.

While we continue to receive awards for our shipyard group, construction on these projects will now start later this year and into 2018.\ Our task will be to complete our current projects with the quality and reliability Gulf Island has become known for.

While we have not received any bidding offers on the sale of our South Texas facilities, much interest has been expressed by several companies and we will continue to work with these potential buyers through our sales agent. Let me now turn the call over to David, who will provide our earnings and segmented breakdown.

David?.

Thanks, Kirk and good morning to everyone. Yesterday, we reported a net loss of $10.9 million on revenue of $45.9 million for the second quarter ended June 30, 2017, compared to net income of $5.5 million on revenue of $81.5 million for the second quarter ended June 30, 2016.

The decrease in revenue and corresponding gross loss, for the period, is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed Oil and Gas prices and the corresponding reduction in customer demand within all of our operating divisions.

At quarter end, the company posted a revenue backlog of $251 million and a labor backlog of approximately 1.1 million hours which is the highest backlog we’ve reported in over three years.

This compares to a revenue backlog of $113 million and a labor backlog of approximately 1.1 million hours in our prior quarter of this year which represents 122% increase sequentially quarter-over-quarter. Backlog includes formal commitments received through July 26, 2017.

Our backlog by segment at June 30, 2017, includes fabrication which represented $42.3 million, shipyards representing $196.4 million and services representing $13.3 million. Our corresponding book-to-bill ratio which is simply our incremental quarterly backlog of 138 million divided by our revenues for the quarter of $45.9 million is 3.0.

Now let me break down the segments of our company. For our fabrication division revenue was $14 million for the second quarter ended June 30, 2017 and $24.3 million for the same quarter of 2016. They own 42.2% on a comparable basis. Gross profit was $1.9 million for the quarter versus $3.9 million for the comparable quarter in 2016.

Operating income was $1.1 million compared to $2.7 million for the comparable quarter in 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of the depletion of our backlog in this division and the winding down of our South Texas facilities in preparation for their disposition.

We incurred holding cost of 1.2million during the quarter related to our South Texas facilities which are for sale. Year-to-date holding cost in South Texas were $2.5 million plus another $1.9 million in depreciation which was incurred during the first quarter.

We expect the ongoing quarterly holding cost of approximately 1 million per quarter related to these operations. For our shipyards division, revenue was $18.3 million for the quarter and $29.4 million for the same quarter of last year, for a decrease of 37.7% on a comparable basis.

Gross loss for the quarter was $13.9 million versus a positive gross profit of [$5.4] million for the comparable quarter in 2016. Operating loss was $14.8 million for the quarter with operating income of $4 million for the quarter ended June 30, 2016.

Our shipyards division has continued to experience cost overruns on contracts that were assigned to us in our shipyard acquisition of 2016. In particular we are working on two offshore vessels, in which we incurred losses during the quarter related to re-work and revised estimates to complete the construction projects.

We have also incurred a holding cost related to our completed vessel that was delivered on February 6, 2017. However the vessel was refused by a customer citing certain technical deficiencies. This customer was experiencing significant debt challenges and subsequently entered into a formal restructuring process.

As of June 30, 2017 approximately $4.6 million remains due and outstanding from our customer under this contract. The balance due to us for a second vessel upon completion will be approximately $4.9 million which will be invoiced upon reaching our delivery milestone once we recommence construction.

We have retained legal counsel to protect our claims of approximately $9.5 million under the contracts and are commencing arbitration for both vessels. Because these vessels have been completed or are substantially complete, we believe they have significant fair value and that we would be able to fully recover any amounts due to us.

Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimate able at this time although the arbitration process could take several months. For our services division, revenue was $15.4 million for the quarter and $28.7 million for the same quarter last year, for a decrease of 46% on a comparable basis.

Gross profit was $400,000 for the quarter versus gross profit of $4.9 million last year. Operating loss was $300,000 during the quarter compared to operating income of $4.1 million for the same quarter last year.

Gross profit and results of operations decreased over the comparable quarter due to completion of a large offshore campaign ongoing during the first half of 2016, along with weak industry conditions continuing during the first half of this year.

For the company as a whole, noncash depreciation and amortization expense for the quarter was $2.8 million, compared to $6.3 million for the second quarter of 2016. The decrease is primarily attributable to management classifying our South Texas assets as held for sale and suspending ongoing depreciation expense on February 23 of 2017.

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 for the shipyard and machinery and equipment for our fabrication division.

Asset dispositions of $2.1 million related to some older and smaller dry docks acquired in our shipyard acquisition offset capital expenditures to result in $700,000 of cash contributed during the quarter from investing activities.

We expect capital expenditures for the remainder of this year to be within a range of $2 million to $5 million primarily related to improvements at our facilities. As of June 30, 2017, we have $22.3 million in cash and remain debt-free with $4.6 million in letters of credit issued.

These LCs were temporarily cash collateralized as we transitioned banks during the quarter which left availability under our new revolver at $40 million.

Our cash decreased during the quarter by approximately $12.4 million, primarily related to the following; operating losses for the quarter of $16.3 million, progress on liabilities from assumed contracts in our shipyard acquisition we have significantly progressed these contracts which in turn as a result of an utilization of the working capital and settlement payments received during this year.

The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February of this year and our inability to collect $9.5 million in scheduled payments under these contracts.

We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts, and build up of costs for contracts in progress related to the customer in our shipyard division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of this year through the first half of next, partially offset by proceeds from the sale of two dry docks for $2.1 million.

As noted in our earnings release during the quarter on June 9, we successfully executed at a new $40 million credit agreement with Whitney Bank with improved flexibility to support our business.

The new revolver may be used for issuing letters of credit in or general corporate and working capital purposes providing the company with enhanced working capital flexibility to manage our business and respond to market opportunities as we continue to execute our business plan this year and in the coming year.

As we mentioned on the prior quarters call and in anticipation of the proceeds to be received from the sale of our South Texas assets, and in connection with our overall corporate strategic planning, we engaged advisors to assist in the development of our capital deployment plan to determine the appropriate use of proceeds from this transaction to maximise long term shareholder value.

Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipate a future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities and other options to return surplus resources to shareholders either through stock buybacks and/or special dividends.

We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long term value of the company and that are consistent with our strategy. 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 to everyone. I'll begin with our fabrication division. At our South Texas facilities, we continue more falling activities for this location along with evaluation of existing assets.

Our Louisiana fabrication facilities continue with module assembly for the actual [Indiscernible] project where continued delayed deliveries of owner furnished items is creating challenges for us in terms of steady utilization of labor within the facility.

Opportunity remains active for additional petrochemical and midstream module fabrication projects and other plant upgrades as well as offshore wind power projects on the Eastcoast and structures for Gulf of Mexico in overseas locations.

We continue to see these markets maturing in late 2017 and early 2018 due to the increased amount of bidding opportunities being presented. With our services division, we continue to feel the effects of challenges within the Oil and Gas all through our upstream sector and overall project activity and pricing are down significantly from last year.

However, relative to the first quarter, capital and maintenance spending by our core customers has increased with their traditional summertime construction campaigns.

Moving into the winter months later this year, we do expect the typical seasonal slowdown to occur and we continue to look for opportunities within onshore plant expansion and maintenance programs to offset the seasonal declines. Our shipyard division continues with fabrication of two MPSVs scheduled for delivery in 2018.

Additionally, the last two of six [tugboats] fabrication orders will deliver in August of 2017. We have placed orders for steel on the eight harbour commitments we were recently awarded last month. This work will take place at our Jennings Louisiana shipyard and work should begin at the end of the third quarter or possibly the beginning of the fourth.

Engineering for the research vessel for Oregon State University will commence shortly with primary fabrication work is not scheduled to start until the second quarter of 2018. I will now turn the call back over to Kirk for closing comments.

Kirk?.

Thank you, Todd. We remain focussed on managing our balance sheet and rebuilding backlog. During the second quarter, we were able to secure two important projects for our shipyards group. The first is a regional class research vessel for Oregon State University and the second is the award of the eight harbour tugs Todd spoke of.

These awards along with other small overboards provide us with a revenue backlog that is the highest the company has reported in over three years.

Given the recent awards we expect SG&A to increase in the coming quarters as we engage in hiring additional project management personnel in anticipation of storing these new contracts along with additional support required for other significant project opportunities with which we are currently bidding.

Emphasis will continue to be placed on opportunities outside the traditional Oil and Gas upstream sector and into picture chemical plant and construction and expansion as well as alternative energy solutions by our fabrication and service divisions.

And vessel construction projects for the river cruise and government and military sectors for our shipyard division. We look forward to converting many of these bidding opportunities into additional backlog in the coming quarters. Naomi, you may now open the line for questions from the analysts..

[Operator Instructions]. We'll take a question from [Indiscernible] with Milwaukee Institutional Asset Management..

Good morning, gentlemen. I appreciate your time..

Good morning..

You had a couple of big contracts wins since this is your last call congratulations on those, namely the tugs and the [OSC] renewal class research vessel, can you walk us through the accounting for those in your backlog please..

Yes, I think the accounting really is just reported in a backlog report, it doesn’t go into our balance sheet. We added approximately a little over $80 million on the harbor tug order, the additional $70 million on the research vessel and we have another I believe $15 million to $20 million that was related to some other projects, smaller projects.

That actually doesn’t go on the balance sheet or the P&L but it will show up in the coming quarters as we make progress on those contracts..

Perfect. Thank you.

And in terms of some of the LEEVAC contracts as you could consistently produce cost overruns, how much do we have left over through on those contracts?.

We have approximately, just a second – we’ve got another $55 million or $60 million is remaining on those projects..

All right, thank you. You discussed your sales pipeline a little bit, you said that there were increased bidding opportunities and interestingly you mentioned some offshore one projects. Can you elaborate a little bit on your pipeline in general and discuss the bidding environment..

Yes, J.P. This is Kirk. So when we look at our backlog and excuse me when we look at our bidding opportunities that we have chosen, we’ve seen a large amount of opportunities as we talk about petrochemical side of the business. There is a tremendous amount of plant expansions that are happening primarily in Louisiana but all over the U.S.

and so we’re looking into those backlog numbers, we have history associated with that type of projects and so when we look at our backlog, excuse me our bidding opportunities we see that that market represents nearly 50% of the remaining outstanding bids that we have within our sector right now.

And then again on top of that we talk about other markets which include government type bidding opportunities which represents probably about 25% of what we are looking at. And then again we talk about renewables; renewable section is probably a little bit close to 12% of what we are looking at in terms of bidding opportunities..

Fantastic.

It seems like it’s been a while since we’ve heard about the fabrication of any offshore oil and gas jackets, is there an opportunity for pickup in business in that area?.

I think there may be some although might be slight.

I think, when we look at what’s happening within oil and gas sector and we read the reports from some of the majors’ it looks like they have concentrated more of their efforts onshore as opposed to offshore and there is some talk about the shelf a little bit in terms of the few opportunities that may exist and if it’s shelf pipe related work it may be coming from overseas markets.

But certainly not much in terms of traditional upstream oil and gas and like when you look at the total bidding opportunities we have that sector represents less than about 5% of the total that we have for outstanding bids..

Okay. And then one final question. And this would pertain to South Texas facility for sale. We've recently observed some activity in that area pertaining to real estate notably in the past few weeks the sale of another property and Intracoastal Waterway that we thought was a somewhat distressed price.

Has there been any sales or any other indications that would cause you to reevaluate approximately $105 million that you have that held for sale?.

No. Actually when you look at that property I guess you got to look that in terms of geographic location. It was an Intracoastal Waterway system. Ours is located at the corner, an intersection and Intracoastal Waterway system and Corpus Christi ship channel.

So we have deepwater where our other property didn’t and you’re right, it probably was more of a distress sale than what we’ve got. So all indicators from what we are gathering including the amount of interest that we have on the property would not suggest that we’d have to look at trying to reduce what we think the property is worth.

So no, not that time..

Fantastic. That’s all from me. Thank you, guys..

Thank you for calling in..

[Operator Instructions] We’ll go next to Martin Malloy with Johnson Rice..

Hey, guys. Good morning. This is Henry Shortess. I’m Martin’s Associate. I’m filling in for him this morning..

I’m sorry, what is your name please..

Henry Shortess. I’m Martin’s Associate..

Yes. Good morning Henry..

Yes. I’m just filling in for him this morning..

Yes..

I’ll be brief here. I think question is kind of had touch one with the first caller. First question I had was how much is left on the vessel that increased costs in the second quarter.

I guess could be just some comfort that this would be the last of the increase cost to complete?.

Well, so again, I think David, you’re right. David had answered part of that question. I think he said that there was 50 million to 60 million left remaining to work on the project. And yes, we certainly hope that this is the last that the adjustments we made on the project.

We do have the luxury of having the first vessel deliver about six months prior to the second vessel. So we are applying learning curves to the second vessel that we experience in the first vessel, but again there’s no guarantee that this is a very large complex vessel that we’re trying to complete.

And again, so management has taken their best short in terms what we think is going to take to complete these vessels, given the time frame we have remaining..

And Henry just to add a little bit, we’ve got about 40 million of additional cost and 55 million of balance to bill..

Okay. Thanks. That’s helpful color. Next just the question, just venturing into non-oil and gas markets for projects.

Just kind of how important that will be for you guys going forward and what opportunities you’ll see out there that are on nontraditional I suppose?.

Well again, when we look at our matrix, our pie chart, if you want to call that in terms of bidding opportunities, the biggest sector of that is obviously the petrochemicals side of the business and again its represents greater than 50% of the bidding opportunities we have and the number is pretty large, not that we’re going to get all these projects, but its larger than we’ve ever seen within traditional oil and gas sectors for opportunities that exist for us.

And again, we talked about three competitive markets that we’re looking at, actually four. The first, the petrochemical, the second is the government and military options that or opportunities that are out there for us. The third is renewables which deals with offshore wind and/or alternative energy solutions.

And of course the fourth is a shipyard sector again when we talk about opportunity that may exist, river cruise vessels and what not..

A quick follow up on that.

Is there any update on the offshore wind project?.

Well, I don’t think there is much of an update. There are two companies that have been granted their permits to go and installed these units. We are working with both those customers. Again, its three locations.

We do think that there's some merit to one location and particular that may happen probably within a year or so, certainly the other ones are couple of years away, but there’s a lot of interest has being generated in terms of what the foundation look like, what are the opportunities to create jobs not only in Louisiana, but also in the state in which are benefiting from the power has been generated by these windmills.

And so as we kind of continue to look forward into what’s out there for us. There are other opportunities that do come into play with possibility of building Jones Act-compliant vessels to install and service these units.

And so, part of our shipyard opportunities in terms of bidding is coming from that sector as well as it relates to vessels to install..

Great. That’s all it from me. Have a great weekend..

Thanks, Henry. Thank you. Yep. Thank you, Henry..

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

Tom Spiro with Spiro Capital. Good morning..

Good morning, Tom..

I see you have a cash balance at the end of the quarter for about $22 million.

Do you expect that cash balance to grow or shrink over the next quarter or two?.

I think that we could have some moderate pressure on our cash balances over the next couple of quarters. But as I mentioned, we did have a number of things that have impaired our cash balance year to-date particularly related to two vessels that are in arbitration, that’s roughly $10 million that we would have had in our cash balance today.

In addition to that, we had some costs related to 2016 that were paid out in the first quarter. So I think that given where we are today and where were at our projects. We fell like we’re in good shape. It was very important for us to put in place credit agreement that would provide working capitals for us. And so I think we’re going to using that.

And the contracts that we put in place and are being awarded we have some frontloaded receipts that help support some of that work as we kick it off, so hopefully that answers your question..

Sure. Just a follow-up on the arbitration point, the 9.5 million, you mentioned that [party] of the arbitration is undergoing a financial restructuring.

If we won the arbitration is it likely we get the cash?.

Well, what you do when you go to the restructuring is contracts are evaluated and there are either assumed or rejected. In our case the contracts are assumed and the entirety of the contract survives. So in our contract we have very good provisions around arbitration and that arbitration process will have to proceed.

We have legal counsel that is working with us. We’ve identified an arbitrator on our side. We’re waiting for them to continue. And so that’s going to take some time,but….

So, Tom, this is Kirk. Yes. We do anticipate that on decisions from arbitrator, if we’re successful that the cash will be available for us to collect..

That’s helpful. Thanks. I’m sorry, go ahead..

We have a lane on the vessels, so that’s another key aspect to note..

Thank you. I think we have a lawsuit underway with respect to one of our clients who hasn’t paid.

If I got that right could you give us an update on that please?.

So, yes, that contract also has been – the court date has been set January of the next year. We’re in the discovery process. We have retained expert witnesses in that respect as well. So, there’s no change in that respect. We’re still aiming for our court date later part of January 2018..

I see. Thank you. And on the South Texas properties that are for sale, is it should turnout that the sales process is longer than we anticipate.

Is the property now [pastured] so that we can sort of hold it indefinitely at across to cash cost, the cash cost is about 1 million per quarter?.

Yes..

And do you feel an urgency to sell that or we prepare to take our time and if it cost us a $1 million a quarter for some period of time till we get what we think is a fair price for the property, so be it?.

I think its – we’re prepared to weight this thing out. Again, we think that we’ve got corner lot, and that there’s tremendous value within the facilities and especially with that area as it continues to push on with the petrochemical development.

And so we don’t see any signs of that market decrease, in fact we spoke our bidding opportunities and how much opportunities we have associated with that sector. So, we’re prepared. We’re going to hold out.

But there has been quite a bit of interest in the facilities and again we’re going to continue working that through our sales agent and hopefully at some point in time we get to a point where we get a decent offer on the facilities..

Well, thanks a lot. Good luck..

Thank you, Tom..

We’ll go next to [Indiscernible]..

Hey, Good morning everyone. I just have a quick follow-up on the backlog in the shipyard division. So the Oregon State vessel is for [17] -- the press release at least it was $17 million for one vessel with the option of one or two more I think Oregon State stated there was two more.

So can you just give us maybe a little color there on what are the contingency and what’s the time line for additional and then clarify the 17 million is just for the first one? And then just real quick if you can just give us little more color on the 80 million other backlog that you talked about in the shipyard division, the new contract, just who is client, what’s the time line, any contingency there for additional work? Just little more color on that? Thank you very much..

Okay. In regards to the state vessels, yes it’s a contract for one with an option for two more that options spreads over period of five years. Right now it’s an item for the second vessel that is contingent upon congressional approval. So that’s an item that we’ll go through that.

Not anything at this time where we know any further of its movement or where its gone, but again it would be up over the next five years and potentially the way it set it could be at any given time they could physical award two or just one or at any point in those five years they have an option on how they want to do it.

But again it is all contingent upon going through congressional approval time process. Okay. And on the tug, so G&H tugs is the other project that’s out there for the 80 million, so that is eight individual harbor tugs that we are building and those are being done in our Louisiana facility..

Thank you..

And we’ll go next to Michael Melby with Gate City Capital Management..

Good morning, gentlemen. My understanding was you had some additional heavy equipment at the Texas facility. Could you update us on the potential sale process of that equipment and perhaps the potential proceeds you see coming from that? Thank you..

Yes, Mike. So, the equipments that we have in the yard itself majority of it made up by some of our large cranes, these are items that were fairly new. They have purchased in the last five years for some of the bigger projects that we had completed in that facilities. And again they are up for sell.

We’d see the two big cranes roughly are about 17 million to 18 million of I think that 21 million total that we show right now in overall assets for sales, so that’s majority of it. We do have brokers that are out there trying to sale them. It’s on a worldwide market.

A lot of it just kind of a wait and see as to where the market is for those potential opportunities to sell the cranes. Again, those are not items that we are in any hurry to sell. We do have potential use where they could put back in service for other projects that would come up.

We don’t have those projects in hand yet, but again time will tell what the use of those vessels, and those piece of the equipment will be..

Got it. Thank you..

And now, we’ll conclude our question and answer session for today. I’d like to turn the conference back over to management for additional or closing remarks..

This will conclude our second quarter 2017 conference call. Again, thank you for joining us and we invite you to join us for our third quarter 2017 call in October of this year. .

Once again that does conclude today’s call. We thank you for your participation. You may now disconnect..