Cindi Cook - IR Kirk Meche - CEO, President & Director David Schorlemer - CFO, Executive VP of Finance & Treasurer Todd Ladd - COO and EVP.

James Geygan - Global Value Investment John Deysher - Bertolet Capital LLC Dale Geurts - Alloy Capital.

Good morning, and welcome, ladies and gentlemen, to the Q4 2017 Gulf Island Fabrication 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, Gina. Good morning. I would like to welcome everyone to Gulf Island Fabrication's 2017 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 Statement 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 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 our listeners. Yesterday afternoon, we announced our fourth quarter results for 2017. 2017 was a challenging year for our company, and this quarter's results reflect these difficult times.

Underutilization within our divisions, along with an adjustment to one of our complex projects within our Shipyard division, put our financial results in a loss position for the quarter and year-end. I will provide additional color on the shipyard project later in the call.

The backlog numbers continue to improve with awards within our Services division and our Shipyard division. It should be noted that the majority of these projects will not start until the end of the second or early third quarter 2018.

Hurricane Harvey made landfill -- landfall to the northeast of our South Texas facilities near Corpus Christi, and with that, we experienced wind damage to majority of the buildings in both yards.

We received approximately $6 million in advance payments from our insurance underwriters prior to year-end and expect to resolve all claims by the end of the second quarter of 2018. During the fourth quarter 2017, we executed a purchase option agreement with Buckeye Pipe Line Co.

for our Texas South Yard located in Ingleside for a purchase price of $55 million. This purchase option agreement provides an option period for the buyer to perform due diligence, which ends no later than April 25, 2018, with an additional 30-day period if requested by Buckeye, along with the obligation to pay additional earnest money.

Buckeye has contractual right to exercise the purchase agreement any time during this period. We continue to receive interest on our North Yard facilities, with several site visits commencing. I also want to provide some color on the resolution of one of the legal issues we had outstanding last quarter.

This was related to the nonacceptance of 2 offshore supply vessels that were completed and ready for delivery but our customers cited design deficiencies. As I mentioned in last quarter's discussion, the new CEO of this company and I had a meeting to discuss a possible resolution.

I'm happy to report that we resolved that dispute, and the owner is taking delivery of the first vessel. And we are in the process of completing the final phases of outfitting for the second vessel. Delivery of the second vessel will occur in the second quarter of this year.

It should be noted that the owner is extremely pleased with working shipment performance of this first vessel. We're also in discussions to secure additional work from this customer as it relates to dry stacking of vessels and future work including dry docking and repairs.

I appreciate his efforts and ability to get this matter resolved quickly, and we look forward to mutually beneficial relationship with this customer in the future.

Unfortunately, with respect to our other outstanding legal matter of nonpayment of charge -- change orders associated with a large offshore production jacket built by our Fabrication division in 2017, we have not made any headway on discussions with this customer. Trial dates have been set, and discovery has begun.

Now on to the matters relating to our shipyard and construction delivery of 2 MPSVs in progress. During the last quarter of 2017, we started the process of reevaluating electrical and power cable pulling efforts we were performing.

It came to our attention that electromagnetic interference, along with harmonic distortion, has been experienced in vessels of this class within the industry. It should be noted that these vessels are some of the most technologically sophisticated vessels in the world.

Therefore, in order to mitigate construction risk associated with these vessels, we will take the time and effort to evaluate the cable routing and separation for power and communications, along with performing additional engineering to ensure that we are meeting contractual and applicable regulatory performance criteria for these vessels, along with delivering a quality product to our customers.

With this, the delivery of the vessels have been pushed beyond the contractual delivery dates, and thus, it puts us in a possible position to incur liquidated damages. We have included the maximum liquidated damages amounts for each vessel in the fourth quarter's results.

We will reserve all our rights under the contract as we work with our customer to complete these vessels. I will now turn the call over to David, who will provide details on our earnings and segment breakdowns.

David?.

Thanks, Kirk, and good morning to everyone. Yesterday, we reported a net loss of $24.3 million on revenue of $37.3 million for the fourth quarter ended December 31, 2017, compared to a net loss of $3.6 million on revenue of $55.5 million for the fourth quarter ended December 31, 2016.

The results were negatively impacted primarily by the significant loss of $23.9 million at our shipyard related to construction contracts of 2 MPSVs. Additionally, we incurred approximately $7.3 million in noncash impairments related to asset impairments of certain inventory at our fabrication yards and assets in our Shipyard division.

The loss related to the MPSV construction contracts at our Shipyard division and the noncash asset impairments resulted in a combined unfavorable impact of $31.2 million.

The decrease in revenue and corresponding gross loss for the period is also attributable to an overall decrease in awards experienced in our facilities as a result of depressed oil and gas prices and a corresponding reduction in customer demand within all of our operating divisions.

The company had a revenue backlog of $222.6 million and a labor backlog of approximately 1.5 million hours at December 31, 2017, compared to a revenue backlog of $133 million and a labor backlog of 1.3 million hours reported as of December 31, 2016.

Backlog includes formal commitments received through February 26, 2018, which Todd will expand on later in our call. Our backlog by segment at December 31, 2017, included, Fabrication which represents $15.8 million, Shipyards representing $184 million and Services representing $23.2 million. Now let me break down the segments of our company.

For our Fabrication division, revenue was $15.4 million for the fourth quarter ended December 31, 2017, and $18.2 million for the same quarter 2016, down 15.8% on a comparable basis. Gross loss was $2.2 million for the quarter versus a gross profit of $0.7 million for the comparable quarter in 2016.

Operating loss was $9.8 million compared to a loss of $0.2 million for the comparable quarter last year.

The decrease is attributable to an increase in ETC or estimate to complete for final completion of petrochemical modules of approximately $3 million and an overall decreasing work experienced in our fabrication yards, with no additional backlog booked for this division.

Additionally, asset impairments totaled $6.7 million related to inventory write-downs in this division. For our Shipyards division, revenue was $0.9 million for the quarter and $22.9 million for the same quarter of 2016. LDs or late delivery charges on the MPSV contracts totaling $11.2 million were recognized during the quarter.

This is a direct reduction in Shipyard revenues for the quarter. Gross loss for the quarter was $25.8 million versus gross loss of $1.9 million for the comparable quarter of 2016. Operating loss was $27.5 million versus operating loss of $3.1 million for the quarter ended December 31, 2016.

Our Shipyards division has continued to experience cost overruns on contracts, as noted by Kirk earlier, which includes provisions to our estimates to complete the MPSV contracts of approximately $12 million. Combining with the LDs recognized and the increased ETCs, these account for a total of $23 million in operating loss for the quarter.

During December, we did resolve our outstanding legal matter with the customer who accepted delivery of the completed OSV and paid the remaining balance of $4.6 million less LDs of $233,000. Additionally, the customer paid for work completed on the second vessel, and work to complete outfitting was recommenced.

The second vessel is expected to be delivered in the second quarter of 2018. For our Services division, revenue was $21.7 million for the quarter and $15.2 million for the same quarter in 2016 or an increase of 42.3% on a comparable basis.

Gross profit was $2.2 million for the quarter versus gross profit of $1.3 million for the comparable quarter in 2016. Operating income was $1.5 million during the quarter compared to operating income of $0.4 million for the same quarter in '16.

Gross profit and results of operations increased over the comparable quarter due to improved activity relative to last year. Noncash depreciation and amortization expense for the quarter was $2.8 million compared to $6.2 million for the last quarter of 2016.

The decrease is primarily attributable to classifying our South Texas asset as assets held for sale and suspending ongoing depreciation expense on February 23, 2017. During the quarter, we recognized a tax benefit of $13.9 million, which reduced our net loss.

Capital expenditures for the quarter were $391,000, primarily for continuing work performed in connection with the expansion of one of our existing dry docks for the shipyard and facility improvements at our Fabrication division.

We expect capital expenditures for 2018 to be within a range of $2 million to $8 million, primarily related to improvements at our facilities but dependent on potential projects, our liquidity and financial performance.

As of December 31, 2017, we had $9 million in cash and no balances outstanding on our revolver, with $5.5 million in letters of credit issue. Availability under our revolver was $34.5 million at year-end. As of February 23, 2018, we had $10 million outstanding under our revolver and $9 million in cash, with only $2.5 million in LCs issued.

During the quarter, our cash decreased by approximately $9 million, primarily related to the following, operating losses for the quarter in excess of noncash depreciation, amortization, impairment and stock expense of approximately $26.5 million; partially offset by positive changes in working capital of $12.9 million, primarily increases in liabilities and partially offset by insurance proceeds of $4.5 million.

As Kirk mentioned earlier, we received a total of $6 million in 2017. An additional advance of $2.2 million has been approved by underwriters, which we are collecting now. We have additional amounts pending and hope to have a global settlement resolved before midyear.

As noted in our earnings release, on February 26, 2018, we amended our revolving line of credit by reducing our minimum tangible net worth covenant threshold to $185 million.

The company has implemented several actions to preserve liquidity and minimize expenses, including suspending our dividend, focusing on the disposition of underutilized assets, increasing backlog and improving contract execution. 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'll begin with our Fabrication division. Mothballing activities for our South Texas locations continue along with the valuation of the existing assets. Our Louisiana fabrication facility continues to perform work on the Axiall, Lotte project.

This project has commenced scheduled deliveries of modules, with completion planned for early 2018. With our Services division, we have secured additional backlog for domestic and foreign destinations but margins remain tight. We will continue to look for opportunities within the offshore and onshore plant expansions and maintenance programs.

Our Shipyard division continues with fabrication of the 2 MPSVs scheduled for delivery in 2019. Work continues on the 8 brown water tugs at our Jennings location, and engineering for the research vessel for Oregon State University and the icebreaker-class vessel for St.

Lawrence Seaway continues, with fabrication not scheduled to commence until the second quarter of 2018. I'll now turn the call back over to Kirk for closing comments.

Kirk?.

Thank you, Todd. 2018 will continue to challenge our divisions with booked work having been awarded on a very competitive basis, along with the majority of this work awarded not ramping up until later this year. However, we continue to look for ways to diversify our business and remain active with potential markets, which include offshore wind energy.

With that, we have received a memorandum of understanding from EEW, a leading international manufacturer of large-diameter steel pipe and experienced offshore wind participant, for one of the large offshore wind projects along the East Coast.

Contract signing is contingent upon EEW's signing of a definitive contract with its customer for this offshore wind project. This award should be known in the second quarter of this year. We have also signed a strategic partnership agreement with EEW for future wind projects in the U.S.

And as a final note, we continue to work with SeaOne Caribbean to continue with engineering for their project in Gulfport and Colombia. We have hired several staff employees along with a senior vice president of our newly formed EPC group. We will also be bringing in a partner for this project, with specific details to come within the second quarter.

We look forward to supporting SeaOne on this significant project, with efforts towards executing a definitive contract this year. Gina, you may now open the line for questions from analysts..

[Operator Instructions]. And we'll take our first question from JP Geygan of Global Value Investment Corp..

Kirk, the Hornbeck vessels have proven to be quite a persistent drag, and now it looks like you're looking at a 2019 delivery.

Can you provide some qualitative comments on how you might disposition these vessels if it's -- deliver them as the contract stipulates or otherwise disposition them and if you intend to deliver them, what kind of costs and revenues that might imply?.

Well, we fully intend to deliver the vessels. The cost that you see that we've incurred for the quarter, which was $11.3 million, is the cost associated with delivering those vessels staggeredly through 2019. Again, there was some concern as it related to cable separation with power as well as communications.

There were some issues in the class not associated with this company in particular, but this type of vessel. So with that being said, we had to take a hard look at exactly the cable routing that we were doing within the vessel.

What we don't want to do is produce a vessel, at the end of the day, that, quite frankly, won't meet the specifications nor regulatory body requirements or worse than that, there's some issues as it goes offshore and the exposure becomes even greater than that.

So our best course of action on this one was to, as we said, regroup ourselves, take a hard look at the engineering aspect of this vessel, ensure ourselves that the vessel is in compliance. And so with that being said, the delivery dates of the vessels have been pushed out..

Just to add to that, JP, we still have almost $43 million in outstanding billings for the vessel as we continue to meet milestones over the course of the year, and that does include the reduction due to the LDs that we recognized, which I think are still in some question.

And then we have approximately $40 million of additional cost to be incurred as we complete those vessels. So still some positive cash flows to be had here, but certainly less than what we had hoped in prior quarters..

Okay, that's helpful. You guys are running a little low on cash compared to where you've run previously. You had a shelf filing in November that was quite open-ended.

Do you intend to raise any equity?.

I think in the event of being able to secure some additional specific contracts and have greater visibility to future earnings, I think that certainly would be a possibility. I think what we'll be doing in the meantime is continue to focus on our management plan, which we've communicated before, in the disposition of underutilized assets.

We do, as you know and as Kirk mentioned, have a purchase option in place for one of those assets, a significant property in South Texas. We have additional interested parties evaluating our North Yard.

So we certainly expect that, over the course of the year, we'll be able to convert that into cash, along with other equipment that we have a number of interested parties in as well. So we're going to be focusing on that, focusing on conserving cash. We do have a revolving line of credit, which we'll be leaning on as well..

I believe you're holding your North and South Texas yards for sale for roughly $100 million, $105 million.

When you say disposition of other underutilized assets, is there a significant amount that we might expect would be sold in excess of that amount?.

Yes. This is Kirk. So yes, we have equipment currently within that facility that has about a $20 million value as well. And that does not include any one of our other divisions that we may have some assets that we may look at trying to dispose of.

But I think, just a number as a placeholder, again, about $20 million of equipment that we're looking to move and sell..

And to clarify, that's in addition to the $100 million or $105 million that you're holding the land for sale for?.

No, that's included..

The book value is roughly $100 million, which includes all that..

Okay. It sounds like you have some exciting opportunities ahead of you. Congratulations on moving ahead with SeaOne, and then your partnership with EEW is very promising.

Can you talk about how that might affect your pipeline in terms of dollars and over what period that work might be performed?.

Well, let's see. So first of all, when we talk about the offshore wind market and what's happened along the East Coast, certainly, the actual story of fabrications of those projects will probably be about a couple of years out.

But what will happen is as there is a push to have tremendous amount of local content within each one of those developments, as I said, we partnered up with EEW to look at strategic locations along the East Coast.

So with that being said, there will be some commitments from the owners in terms of trying to help us establish facilities up and down the East Coast as well as provide some additional infrastructure to both our companies.

So you could see some revenues being generated through those projects through 2018, although the bulk of it won't be until we start actual fabrication, which might be later in 2019. As it relates to SeaOne, again, we're moving forward with the project. We're hoping to have contract execution sometime in the second quarter of this year.

We have staffed up within our organization to assist SeaOne with ongoing engineering efforts as well as just -- again, just trying to organize the project itself due to the size of the project. And then on top of that, we've -- as I said, we've partnered up with a company, and I'm going to give you more specific details in the next couple of weeks.

We've agreed verbally. I don't have anything in writing, so I didn't want to disclose that just yet, although SeaOne is aware of the partnership that we're going to form. And I think that will generate some revenue. Again, as it relates to supporting staff, that has to continue on with the process prior to contract execution.

But from a fabrication standpoint, I think the earliest you might see some fabrication will be fourth quarter this year, but the majority of the fabrication will start very early, beginning of 2019..

And we'll take our next question from John Deysher of Pinnacle..

Kirk, did you talk at all about the Walker trial and what the status of that is? I think it was going to trial in January. I got on the call a little bit late, so sorry if it had been addressed. Maybe you can just summarize it for me..

Sure, John. So you're right, it was originally scheduled for the very beginning of this year. As we got into discovery, both sides made a decision to extend that date. We were hoping it was a little bit earlier than what we got, but of course, you're always subject to the dockets of the court system.

So the earliest we get on a docket was October this year. And so we continue to speak with these guys with no -- I guess, no meaningful discussions at this point in time to report to you. But we still are in the process of speaking with them. But as I said in the call earlier, discovery has been done, and depositions are getting ready to start on this.

So we're full steam ahead on this thing, and we still feel very confident on our position going forward, although we give no guarantee as to the outcome because it is subject to a court ruling..

Okay, understood. And the potential sale of the South Yard, I guess, they have until May 25, at the outside, for $55 million.

If that closes, is that a cash transaction?.

Yes..

It is cash, okay. All right. Good. Okay, that's positive. And in terms of vessels that are actually going to be delivered hopefully in 2018, we've got the other Tidewater vessel. We've got 4 of the harbor tugs.

Were there any other vessels that are scheduled to be delivered in 2018?.

No. John, I think that's it. Now with the other project being pushed to 2019, those are the vessels that are scheduled for delivery as we speak now..

John, this is Todd. So nothing new on new construction. But again, we do continue to receive and deliver vessels that come in for pier-side repair work both in Houma and our Lake Charles facility..

Yes. And John, one other note on that as well. I don't know if you caught this during the opening remarks I had, but as it relates to Tidewater specifically, you know that we have an agreement in place. They took delivery of the first vessel. And so with that, we also are continuing efforts with them to dry stack some of their vessels.

That work is commencing shortly, if it hasn't commenced already. And again, I think that provides -- one, it provides monthly income. But in addition to that, hopefully, these vessels will go back to work sooner rather than later.

But nonetheless, once they do go back to work, we'll be in a position to do some additional work for these guys, utilizing our dry dock and look for inspections and painting and whatnot of these vessels. So we think it was a win-win on both companies' part. And again, we've very good working relationship with that company going forward..

Okay. That's encouraging.

How many vessels potentially are we talking about there?.

Well, we're looking at -- right now, I think there's a proposal out there for 8, but we've heard more. They could be as much as 12 or 15 vessels. But we have lots of land so....

Yes. No, that's good. They're actually -- I've seen the land.

When would that start if it does come to fruition?.

If the first boat has not gotten there as we speak now, John, it'll be a couple of days from now. I believe one of the vessels might be in our facilities, but I didn't get that update this morning..

Okay. Good.

And I guess, finally, in terms of the 4 tugs that are going to be delivered in 2018, what was the timing of those again?.

It's in the third and fourth quarter, yes..

Okay.

So like two in the third and two in the fourth or something like that?.

I think it was one in the third and three in the fourth..

Yes. The first vessel was a little bit unique in terms of some firefighting equipment that was added to it. So Todd's right. I think one was in the third quarter and remain -- and the three behind it was in fourth quarter of this year. And by the way, just to add a little good news on top of that.

The owner is very satisfied with the work that's being performed by our Jennings location and, in fact, has solicited some additional pricing on some additional vessels. Again, at this point, we're only in discussions with them. There's nothing definitive.

But the good news is he's very pleased with the work and quality and workmanship that is being performed in that shipyard..

And we'll take our next question from Dale Geurts of Alloy Capital..

I just was hoping you could give some more color around the potential for SeaOne if it all comes to fruition in the sense of some magnitude of revenue and the margin for that type of business going forward relative to business that you've done in the past..

So in terms of revenue, the project continues to evolve, obviously, as we continue to do our engineering efforts. And SeaOne continues to, I guess, look utilization within the Gulfport facility.

So from a revenue standpoint, I think when you guys are thinking of this project, it could be anywhere between a $3 billion and $5 billion project as it moves forward.

As it relates to margins, we have not gotten into any discussions with the owner as of this time in terms of margins, profit margins as well as any other type of margin, so I don't want to put anything out there just yet in terms of what we expect. But again, when you look at revenue side, this is a very, very large project.

That, quite honestly, is one of the reasons why we brought our partner in. It is a huge project, and the partner we brought in has a lot of experience in dealing with this type of petrochemical modules as well as very strong balance sheet. And he's not a competitor of ours.

He's actually a subcontractor of ours, so it makes it a very unique but very good relationship as we try and get this project secured for SeaOne..

I got you. So that $3 billion to $5 billion sort of range, that would be flowing through you guys as a general contractor.

You'd be looking at -- we'd be looking at sort of taking that whole number over time, not just a small fraction of that hitting your revenue base?.

I think to answer your question, it's going to depend on the structure of our partnering agreement, for one. And then I think what you should expect is that there will be some revenues flowing through our EPC division at a particular margin.

And then certainly, we expect to be loading up our Fabrication and Services divisions for actual work performed at what we would expect would be normalized types of margins there. But those numbers will be a smaller component because we won't be able to do all of the work. We're going to be required to bring in a variety of other subcontractors.

So that's it..

Right, but basically, for us to be thinking about this, it's -- while large, it's a typical contract, can get broken up the same way other contracts get broken up, depending on skill sets, timing, facilities, all that jazz?.

Yes..

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

Again, we like to thank everyone for joining us this morning and your interest in our company..

This concludes today's call. Thank you for your participation. You may now disconnect..

Thank you, Gina..