Good day, ladies and gentlemen, and welcome to today’s Gulf Island Fabrication, Inc. Second Quarter 2020 Earnings Call. A quick reminder that all participants will be in listen-only mode for the duration of the presentation and we will take questions following that. Another reminder is that this program is being recorded.
And at this time, I would like to turn the floor over to Ms. Cindi Cook for any – excuse me for opening remarks and introductions. Cindi, please go ahead, ma’am..
Thank you, Greg and good afternoon. I would like to welcome everyone to our second quarter 2020 teleconference. Our results were released this afternoon and a copy of the press release is available on our website at gulfisland.com. A replay of today’s call will be available on our website after 7:00 p.m. this evening.
Please keep in mind that the press release and certain comments on this call include forward-looking statements, and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our 2019 Form 10-K and subsequent SEC filings.
Please also note that management may reference EBITDA and backlog on this call, which are financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release. Today, we have Mr.
Richard Heo, President and CEO and Mr. Wes Stockton, Executive Vice President and CFO. Mr.
Heo?.
Thank you, Cindi. Good afternoon, everyone and welcome to our second quarter discussion of our results, business highlights and outlook. I’m happy to be here with you this afternoon, and I hope that each of you and your families are coping well with the ongoing uncertainty and associated challenges for the COVID-19 pandemic.
On today’s call, I will provide an update on the progress we are making in regard to our key initiatives, followed by an overview of our second quarter results and some of the factors underpinning our performance, including an update on the current business environment as well as the impact of the COVID-19 pandemic on our operations.
Wes will then discuss our second quarter results in greater detail as well as our backlog and liquidity position. We will then open up the call for questions and conclude with some closing remarks. First of all, I would like to thank all of our employees for their focus on the safety and well-being of themselves and coworkers at Gulf Island.
They all have demonstrated remarkable resilience and dedication in the light of the challenges and the distractions of COVID-19, Tropical Storm Cristobal and current social unrest. Most of our employees are craft professionals that work in very difficult and dangerous environments and do not have the luxury of working from home.
I am grateful for the contribution of these employees as a safety deliver on our commitments to our clients. A safe and healthy operating environment for our employees, customers and suppliers is our highest priority.
In regard to the second quarter, we continue to navigate through a difficult business environment due to the impact of the COVID-19 pandemic and oil price volatility. However, our project execution and associated results were generally consistent with our expectations heading into the quarter given the aforementioned challenges.
Overall, I am happy to see that our process improvement efforts are becoming further embedded in our culture, and we are seeing the benefits of instilling greater discipline and commercial management in our project financial results. I would now like to provide some commentary on our second quarter segment level results and accomplishments.
For the Fabrication & Services division during the quarter, we executed several quick turnaround projects in our jacket and deck project realized financial improvement as we earned project incentives by achieving an accelerated schedule requested by our clients.
This accomplishment, despite the challenging environment presented by COVID-19, highlights the team’s ability to meet our client commitments while delivering a quality product safely and on schedule.
We also realized improvements to project results on our paddlewheel river boat and subsea components projects, primarily related to the settlement of change orders and final project closeouts. These improvements reflect a more disciplined and enhanced approach to our project execution and commercial management.
While overall project execution was strong, the division continues to be challenged by a low level of backlog and the resulting underutilization of our facilities and resources.
During the quarter, we did make a concerted effort to bring back and retain both salaried overhead and hourly craft personnel to perform process improvements, special projects and maintenance and repairs in support of our operations.
We will continue to evaluate our resource needs in light of the economic impact of COVID-19 and oil price volatility on our end market. Sales and bidding activity for Fabrication & Services remained strong in the quarter.
However, final investment decisions on large key projects continue to be deferred due to the impact of COVID-19 and associated market uncertainty.
We are monitoring the market and targeting those opportunities where we can differentiate ourselves from our competitors while focusing on the opportunities that have the best chance of moving forward by our clients.
In spite of these headwinds, during the second quarter, we received several quick book and burn project awards, and we were awarded a project for mooring and breasting dolphins that contributed to our quarter end fabrication backlog. Further, our offshore and onshore services, has seen a slight pickup in activity.
However, the margins are below historical levels as many customers are requiring price concessions due to the weakness in oil and gas end markets. In our Shipyard Division, we completed and delivered our ice-breaker tug to our customer in New York.
The ice-breaker tug, the SEAWAY GUARDIAN made a 3-week voyage from Houma, Louisiana to Massena, New York on our own power, navigating through the impact of COVID-19 in a tropical storm along the East Coast. The vessel will be primarily used for buoy maintenance and ice management along the St. Lawrence Seaway.
We are proud to be part of this new history in which the SEAWAY GUARDIAN will be replacing a vessel that has been in service for over 60 years. During the quarter, we also completed our eighth harbor tug and expect completion of the ninth tug this month, and the tenth and final tug in the fourth quarter.
Our previous expectation was for a third quarter completion of the last vessel. Unfortunately, we experienced lower-than-anticipated labor productivity and a lower level of progress on the last 2 tugs due to the effects of the planned closure of Jennings facility and COVID-19 mitigation measures.
While our overall efforts to keep our employees safe and healthy from the impact of COVID-19 are working, social distancing requirements impacted the pace of work on the vessels as a significant amount of the remaining work scope is in confined space.
To promote the health and well-being of our employees, we had to reduce headcount in the vessels, which resulted in decreased productivity and extensions of schedule. Unfortunately, system delay in the final project’s completion will move the closing of the Jennings facility to the fourth quarter.
With respect to our Houma facility, as we attempt to increase headcount to support the execution of our historically high shipyard backlog, we are experiencing a greater degree of absenteeism for a variety of reasons, which include employees having concerns that they have symptoms of the virus, have family members or friends who have tested positive for COVID-19 or have overall apprehension due to COVID-19.
In addition, certain deliverables from third-party engineering firms supporting our shipyard projects have been delayed as a result of the COVID-19 pandemic, which is requiring us to re-sequence construction activities. We are regularly updating our clients regarding the impacts of COVID-19 and in the required work re-sequencing.
Separately, to support our headcount increases in Shipyard Division, our leadership team, including the human resources, is working diligently with the local and surrounding communities and using social media and other avenues to attract, recruit and retain talent during these challenging times.
On the sales front for the Shipyard Division, we remain disciplined and selective in the evaluation of opportunities given our significant backlog. We are targeting prospects with attractive margins for which the project schedules are complementary to the execution of our current backlog, including future demands on our resources.
I will now turn the call over to Wes to discuss our quarterly results in greater detail..
Thanks, Richard, and good afternoon, everyone. I will discuss our consolidated results, then provide some additional details regarding our segment results and conclude with a discussion of our backlog and liquidity.
Consolidated revenue for the second quarter of 2020 was $60 million compared to $78.6 million for the second quarter 2020 and $80.5 million for the second quarter 2019, representing a sequential and year-over-year decrease of approximately 24% and 25%, respectively.
The sequential decrease was primarily due to lower procurement activities on our research vessel and navy vessel projects, fewer harbor tug vessels under construction and the completion of our paddlewheel river boat project.
The decrease from the second quarter 2019 was also due to few of our harbor tug vessels under construction and completion of our paddlewheel river boat project, along with lower construction activities on our REIT vessel projects due to their temporary construction delay and lower onshore and offshore services activity.
These impacts were offset partially by increased revenue for our offshore jacket and deck project and increased construction and procurement activities for our navy vessel projects.
Consolidated net loss for the second quarter of 2020 was $5.5 million compared to net income of $5.9 million for the first quarter of 2020 and a net loss of $5.2 million for the second quarter 2019.
EBITDA was a loss of $3.4 million for the second quarter 2020 compared to EBITDA of $8.2 million for the trailing quarter and an EBITDA loss of $3 million for the year ago quarter.
Our consolidated loss for the second quarter 2020 was attributable to a low-margin backlog for our Shipyard Division, low revenue volume for our Fabrication & Services division and the partial underutilization of our facilities and resources, primarily for our Fabrication & Services division.
As a reminder, consolidated operating income for the first quarter 2020 reflected a $10 million gain for our Fabrication & Services division associated with the settlement of a contract dispute for a previously completed project. Now, let me provide some additional details regarding our quarterly results by operating segment.
For our Shipyard Division, revenue was $33.9 million for the quarter compared to $45.6 million for the first quarter of 2020 and $40.1 million for the second quarter of 2019.
The 26% decrease relative to the trailing period was primarily due to lower procurement activities on our research vessel and navy vessel projects and fewer harbor tug vessels under construction.
The 15% decrease compared to the second quarter of 2019 was also due to fewer harbor tug vessels under construction, completion of our ice-breaker tug and lower construction activity on our research vessel projects.
These impacts were offset partially by increased construction and procurement activities for our navy vessel projects and increased procurement activities for our 70 vehicle ferry project.
Operating loss for the quarter was $1.7 million compared to an operating loss of $1.9 million for the first quarter of 2020 and an operating loss of $3.6 million for the second quarter of 2019.
EBITDA was a loss of $922,000 for the second quarter of 2020 compared to an EBITDA loss of $1.1 million for the trailing quarter and an EBITDA loss of $2.5 million for the year ago quarter.
The operating loss for the second quarter of 2020 was due to a low-margin backlog, partial underutilization of the division’s facilities and project charges of $600,000 associated with our harbor tug projects. Project impacts were $1.2 million for the first quarter 2020 and $2.3 million for the second quarter 2019.
Absent the project impacts for each period, the increased loss for the second quarter of 2020 relative to both the trailing and year ago quarter was due to a lower margin project mix relative to the previous period. The utilization of the division’s facilities and resources was generally consistent between periods.
With the current period realizing increased utilization from construction activities on our navy vessel projects, offset partially by lower activity for our harbor tug and ice-breaker tug projects and the construction delays on our 3 research vessel projects.
As noted last quarter, construction activities for our research vessel projects have been suspended until we believe engineering has achieved a satisfactory level of completion to limit impact on construction activities.
For our Fabrication & Services division, revenue was $26.6 million for the quarter compared to $33.4 million for the first quarter 2020 and $40.7 million for the second quarter 2019.
20% decrease from the trailing period was primarily due to the completion of our paddlewheel river boat project, a 35% decrease from the second quarter of 2019 was also due to the completion of our paddlewheel river boat project along with lower onshore and offshore services activity, offset partially by increased revenue for our offshore jacket and deck and material supply projects.
Operating loss for the quarter was $1.4 million compared to operating income of $2.2 million for the first quarter of 2020 and operating income of $517,000 for the second quarter of 2019.
EBITDA was a loss of $206,000 for the second quarter 2020 compared to EBITDA of $11.5 million for the trailing quarter and EBITDA of $1.8 million for the year ago quarter.
The operating loss for the second quarter of 2020 was due to low revenue volume, the partial underutilization of the division’s facilities and resources and costs associated with retaining salary and hourly craft employees to perform process improvements, special projects and facility maintenance and repairs.
These impacts were partially offset by project improvements of $1 million for the division’s jacket and deck, paddlewheel river boat and subsea components projects.
While there were no material project impacts for the second quarter of 2019, the first quarter 2020 benefited from project improvements of $900,000 and a $10 million change order settlement.
Absent the project impacts for each period, the increased loss for the second quarter 2020 relative to the first quarter 2020 and the loss relative to income from the year ago period was primarily due to a lower margin project mix, lower revenue volume and reduced utilization of our facilities and resources, including higher costs associated with the previously mentioned retention of personnel.
Specifically, as it relates to utilization, our work hours for the second quarter 2020 were approximately 35% lower relative to the trailing period and approximately 50% lower year-over-year, with the lower utilization primarily due to the completion of our paddlewheel river boat project and lower onshore and offshore services activity, offset partially by higher activity for our jacket and deck project.
As Richard mentioned, we will continue to manage the division’s resource needs considering the challenged oil and gas market. Our corporate division operating loss for the quarter was $2.3 million with a similar operating loss for both the first quarter 2020 and second quarter 2019.
The comparable gross loss for the current quarter relative to the year-over-year period was due to our cost reduction initiatives and lower legal fees, offset by higher incentive plan costs due to the second quarter 2019, including the benefit of the partial reversal of incentive plan costs included in the first quarter 2019.
Next, I will provide a few comments regarding our quarter end backlog and liquidity situation. Total backlog was approximately $470 million at June 2020, representing a decrease of $30 million compared to March 2020 and an increase of $33 million from June 2019.
The decrease from March was due to revenue volume outpacing our new project awards for the Shipyard Division in the second quarter 2020. The year-over-year increase was due to the navy’s option exercises for its fourth and fifth vessels in the first quarter 2020.
And at quarter end, approximately 93% of our backlog was attributable to our Shipyard Division. This backlog excludes customer options for 3 additional vessels, which, if exercised, would approximate $200 million.
With respect to our liquidity, operating cash flow for the quarter was negative $3.8 million and our capital expenditures were $5.6 million, consistent with our expectations.
These cash flow uses were offset by the proceeds of our PPP loan during the second quarter, resulting in a cash and investment balance of $69 million and total debt of $10 million at quarter end. The proceeds of the loan were used only for permissible purposes with 94% attributable to payroll and benefit costs.
We are determining our loan forgiveness request based on current SBA guidelines, and we will submit our forgiveness application when the SBA begins accepting applications. Any portions of the PPP loan not forgiven, along with interest, will be repaid based on the terms of our loan and applicable program guidelines.
At quarter end, we have reflected the PPP loan net debt, with the debt classification based on the terms and conditions of our loan and the timing of required repayment absent any loan forgiveness.
We intend to reflect the benefit of any loan forgiveness if and when our loan forgiveness application is approved by the SBA, and we have reasonable assurance from the SBA that we have met the eligibility and loan forgiveness requirements of the program.
Regarding our credit facility, in August, we amended the facility to extend its maturity date from June 2021 to June 2022.
And at quarter end, we were in compliance with all our financial covenants with approximately $10 million of outstanding letters of credit and no borrowings on the facility, providing approximately $30 million of availability for additional letters of credit.
With respect to working capital, at quarter end, we continued to maintain $8.1 million of assets held for sale. And our working capital, excluding cash and investments, assets held for sale and the current portion of our PPP loan, was approximately breakeven.
We anticipate ongoing quarterly variability in our working capital requirements with an increase in our working capital for the remainder of 2020 of approximately $5 million to $10 million, which is consistent with our previous expectations.
Also consistent with our previous expectations, we currently anticipate our capital needs, which include contractual requirements for our projects with the U.S. Navy to be approximately $5 million to $6 million for the second half of 2020.
Lastly, with respect to expectations regarding EBITDA for the remainder of 2020, given the COVID-19 pandemic, crude oil price volatility and related market uncertainty, we will not be providing guidance at this time. This concludes our prepared remarks. Greg, you may now open the line for questions..
Thank you very much, sir. [Operator Instructions].
Guys, we have no questions. I will turn it over to Richard..
And apologies, we did have one come through. It looks like John Deysher with Pinnacle. Please go ahead, sir..
Hello, everyone..
Good afternoon, John..
Where do we start? The forgiveness of the PPP loan, some of our companies are submitting the paperwork starting this quarter.
When do you anticipate submitting yours?.
John, we will submit as soon as they start accepting applications. We are ready to do that..
And what’s the estimate as to when they are accepting them?.
We understand that in the next several weeks, the SBA will start accepting applications. That’s subject to change. But at this point, this is what we are hearing..
Okay. There was a $3 million receivable for billables that was billable upon the expiration of a warranty detailed in last quarter’s 10-Q.
What’s the status of that? Did you collect that?.
Yes, John. During the quarter, we actually build according to the terms, and that receivable was paid prior to quarter end..
Okay. So that’s in....
It’s included in our – it is..
Okay, alright. Good. Regarding the debt facility, were any of the covenants changed? The maturity was extended but there was several covenants that were detailed previously.
Did any of those change?.
No, sir. No changes to our covenants. There was a one minor change, the introduction of a minimum LIBOR floor of 1% for any borrowings. But absent that, the primary change to the facility was simply an extension of the facility through June of 2022..
Sorry, what was the minimum LIBOR again?.
Just 1%..
Okay.
Any change in the status of the MPSVs?.
No. No updates to provide at this time..
Alright. And the Board was reduced to 3 people.
Who are those three?.
Well, they were reduced, not 2, 3, people, but reduced by 3 folks..
Okay.
So who were the 3 that left the Board?.
Mr. Jack Laborde, Mr. Gregory Cotter and Mr. Christopher Harding..
Okay.
So you went from 7 to 4 board numbers sort of?.
From 9 to 6..
9 to 6 are good. Alright. Fine, thanks..
Thanks, John. .
Alright. Moving on, we have JP Geygan with Global Investment Corp..
Hey, good afternoon, gentlemen. Obviously, the bidding environment is quite challenged for a number of reasons that you discussed.
Can you talk about the bidding activity that you have participated in or that you anticipate participating in, in terms of the size? Any sort of color you can provide on the margins? Any sort of color you can provide on the end markets for that bidding activity? And then for the bids that you have either submitted or – well, submitted and are in consideration or submitted and another company has won the bid.
Can you provide any color about the feedback on bidders about Gulf Island?.
Yes. Good afternoon, Geygan. So I will address that. On the Shipyard side, it’s pretty easy. We are being very selective, as we pointed out on our talking points in terms of what we are going after. But I think you are probably more interested on the Fabrication & Services side of the business, which is correlated to the oil and gas industry.
On the Fabrication & Services side of the business, I would bucket – I would evaluate this way or I would consider it this way. I would bucket the 2 types of awards into large CapEx type projects and then the smaller book and burn type projects. The smaller book and burn type projects, of course, there are less volume.
We are seeing an uptick in the volume, but it’s still a relatively lower volume than historically we have seen, one. And two, the margins, obviously, are lower just because those oil – offshore oil and gas operators are struggling with financial challenges.
Now we are winning our fair share, and we are not losing any of the awards with the key clients that we have historically had good relationships with. The challenge that I see ahead of us today is more on the larger fabrication type of work. While that bidding activity still remains strong, strong being consistent to the first quarter of 2020.
What we are seeing is that those jobs are continuing to push to the right, and they are not reaching FID, final investment decision. And so we are continuing to bid the activity. We are continuing to estimate and bid the work. It’s just not getting awarded..
Okay, that’s helpful. For a period of time, there was some excitement about Gulf Island’s potential involvement in industries where you hadn’t previously done a substantial amount of work. At one point, wave energy was discussed. I would put offshore wind energy in that category, although I realize that you do have some experience in offshore wind.
As you think about your potential customers, are you really confining yourself to the onshore and offshore oil and gas and petrochemical industries and shipyards? Or are you looking outside of your traditional markets?.
Yes. I will take that one. So JP, we are really not looking too far outside the traditional markets. We are – as we have discussed in the past few quarters, the pivot to more of the onshore petrochemical and LNG markets and more specifically to capitalize on our geographic locations.
As we discussed, a lot of these larger petrochemical and LNG projects are being contemplated in Texas and Louisiana. So there’s quite a bit of activity there like we talked about. It’s just, again, the delays on FID of these capital projects..
And what we are seeing on the offshore side is the developments that are right out in front of us, look to be going on the mono power route, which – as opposed to a jacket foundation. And those are coming from overseas from Europe, very capital intensive, something that we are not really going to be able to participate in.
But if and when any developments go forward that do require that jacket foundation, which is something that we are accustomed doing, we will get an opportunity, but we don’t see any of those right in front of us..
Okay.
And as you think about how the business develops over the next several quarters or several years, how comfortable are you with your physical footprint right now, recognizing that you sold your South Texas yards a couple of years ago and you are closing the Jennings yard? And then how are you thinking about your capital structure and how it might enable you or restrict you from particular projects?.
What we find generally – typically, for the where we sit today, the capital requirements wouldn’t typically be significant. But because of the Navy awards, we had certain contractual commitments that did require some fairly capital – fairly significant capital.
Once that’s behind us, we will be – at this point, we think we will be back to more of our normal maintenance CapEx as opposed to the significant capital requirement we are seeing this quarter – we are seeing this year, I should say..
And then your question regarding capacity, I feel comfortable with the capacity that we have today, targeting the markets that we have discussed. JP, did we lose you? Hello..
Yes, that was all for me. Thanks for your time..
Okay. Actually, then we will move back to John. It looks like John Deysher with Pinnacle has a follow-up..
One follow-up, the share price is now trading at a substantial discount to net cash, and I was just wondering if there’s been any serious discussion at the Board level regarding buying back stock. I mean, that’s one of the things we judge, of course, management and the Board on its capital allocation.
And given the substantial discount, the shares are trading at the net cash.
Forget about book value or anything like that, but net cash, any serious discussion at the Board level regarding buybacks?.
John, I appreciate the question, and it’s something that does get talked about. We talked about it every quarter.
But at the same time, I will maybe pair it, what we have said in the past is this business and where we sit today, in particular, our balance sheet, we require a fairly strong balance sheet to compete and win these types of projects that we are – we have in front of us.
We do have a credit facility, but we do have a minimum cash requirement of $40 million. So – and we would expect that, that credit facility would largely be used for letters of credit as opposed to, for example, borrowing.
So at this point, it’s not being contemplated imminently, but it’s something that does get discussed at the Board level, as you can imagine..
Alright. Okay. So there is a minimum cash requirement of $40 million, and that’s what you are hoarding the cash for.
Okay, when are you going to be filing your 10-Q?.
We will file that sometime this evening. So it will be available – you will – or after this call. So it will be available either tonight or tomorrow morning before 8:00 a.m..
Okay, great. Good luck. .
Thanks..
Nothing further in the queue, then I would like to turn the floor back over to Richard. Sir, if you have any additional or closing remarks..
Alright. Thanks, Greg. The duration and the uncertainty of COVID-19 and the volatile oil prices will continue to be a headwind as we work to execute our backlog and secure new project awards.
However, we are continuing to proactively manage the variables that are within our control and are making progress on our key initiatives of being more disciplined in pursuing project opportunities, strengthening our management and functional leadership, enhancing our processes and procedures, improving resource utilization and centralizing key project resources.
We have made a lot of progress on the implementation of these initiatives, and we are seeing the results and the quality of our new project awards and project execution. I still believe that as the end markets recover, we will be well positioned to capture our share of the market and return Gulf Island profitability.
I want to thank everyone today on the call for your continued interest and support of Gulf Island, and I wish you well as we navigate together through these uncertain times. Thanks, Greg..
Ladies and gentlemen, once again, that does conclude our call today. We do thank you for joining us. You may now disconnect..